10-K 1 a15-23382_110k.htm 10-K

Table of Contents

 

GRAPHIC

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2015

 

Commission File Number 1-13374

 

REALTY INCOME CORPORATION

(Exact name of registrant as specified in its charter)

 

Maryland

 

33-0580106

(State or Other Jurisdiction of

 

(IRS Employer

Incorporation or Organization)

 

Identification Number)

 

11995 El Camino Real, San Diego, California, 92130

(Address of Principal Executive Offices)

 

Registrant’s telephone number, including area code: (858) 284-5000

 

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

 

Title of Each Class

 

Name of Each Exchange
On Which Registered

Common Stock, $0.01 Par Value

Class F Preferred Stock, $0.01 Par Value

 

New York Stock Exchange

New York Stock Exchange

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

At June 30, 2015, the aggregate market value of the Registrant’s shares of common stock, $0.01 par value, held by non-affiliates of the Registrant was $10.4 billion based upon the last reported sale price of $44.39 per share on the New York Stock Exchange on June 30, 2015, the last business day of the Registrant’s most recently completed second fiscal quarter.

 

At January 29, 2016, the number of shares of common stock outstanding was 250,538,261 and the number of shares of Class F Cumulative Redeemable Preferred Stock outstanding was 16,350,000.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III, Items 10, 11, 12, 13, and 14 incorporate by reference certain specific portions of the definitive Proxy Statement for Realty Income Corporation’s Annual Meeting to be held on May 17, 2016, to be filed pursuant to Regulation 14A. Only those portions of the proxy statement which are specifically incorporated by reference herein shall constitute a part of this annual report.

 



Table of Contents

 

REALTY INCOME CORPORATION

 

Index to Form 10-K


 

PART I

 

Page

 

Item 1:

Business

 

 

 

 

 

 

 

The Company

2

 

 

Recent Developments

3

 

 

Dividend Policy

5

 

 

Business Philosophy and Strategy

6

 

 

Property Portfolio Information

12

 

 

Forward-Looking Statements

19

 

Item 1A:

Risk Factors

19

 

Item 1B:

Unresolved Staff Comments

30

 

Item 2:

Properties

30

 

Item 3:

Legal Proceedings

30

 

Item 4:

Mine Safety Disclosures

30

 

 

 

 

PART II

 

 

 

Item 5:

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

31

 

Item 6:

Selected Financial Data

32

 

Item 7:

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

 

 

 

General

33

 

 

Liquidity and Capital Resources

33

 

 

Results of Operations

40

 

 

Funds from Operations Available to Common Stockholders (FFO)

46

 

 

Adjusted Funds from Operations Available to Common Stockholders (AFFO)

47

 

 

Impact of Inflation

48

 

 

Impact of Recent Accounting Pronouncements

48

 

Item 7A:

Quantitative and Qualitative Disclosures About Market Risk

48

 

Item 8:

Financial Statements and Supplementary Data

50

 

Item 9:

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

79

 

Item 9A:

Controls and Procedures

79

 

Item 9B:

Other Information

80

 

 

 

 

PART III

 

 

 

Item 10:

Directors, Executive Officers and Corporate Governance

80

 

Item 11:

Executive Compensation

80

 

Item 12:

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

80

 

Item 13:

Certain Relationships, Related Transactions and Director Independence

80

 

Item 14:

Principal Accounting Fees and Services

80

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15:

Exhibits and Financial Statement Schedules

81

 

 

 

 

SIGNATURES

 

87

 

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PART I

 

Item 1:                                  Business

 

THE COMPANY

 

Realty Income, The Monthly Dividend Company®, is an S&P 500 real estate company with the primary business objective of generating dependable monthly cash dividends from a consistent and predictable level of cash flow from operations. Our monthly dividends are supported by the cash flow from our property portfolio. We have in-house acquisition, portfolio management, asset management, credit research, real estate research, legal, finance and accounting, information technology, and capital markets capabilities. Over the past 47 years, Realty Income has been acquiring and managing freestanding commercial properties that generate rental revenue under long-term net lease agreements.

 

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

 

We seek to increase earnings and distributions to stockholders through active portfolio management, asset management and the acquisition of additional properties.

 

Generally, our portfolio and asset management efforts seek to achieve:

 

·                  Contractual rent increases on existing leases;

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

·                  Optimum exposure to certain tenants and markets through re-leasing vacant properties and selectively selling properties;

·                  Maximum asset-level returns on properties re-leased and/or sold;

·                  Optimum value of the existing portfolio by enhancing individual properties, pursuing alternative uses, and deriving ancillary revenue; and

·                  Investment opportunities in new asset classes for the portfolio.

 

At December 31, 2015, we owned a diversified portfolio:

 

·                  Of 4,538 properties;

·                  With an occupancy rate of 98.4%, or 4,467 properties leased and 71 properties available for lease;

·                  Leased to 240 different commercial tenants doing business in 47 separate industries;

·                  Located in 49 states and Puerto Rico;

·                  With over 76.0 million square feet of leasable space; and

·                  With an average leasable space per property of approximately 16,750 square feet; approximately 11,550 square feet per retail property and 216,550 square feet per industrial property.

 

Of the 4,538 properties in the portfolio, 4,519, or 99.6%, are single-tenant properties, and the remaining are multi-tenant properties. At December 31, 2015, of the 4,519 single-tenant properties, 4,448 were leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 10.0 years.

 

Our ten senior officers owned 0.2% of our outstanding common stock with a market value of $30.6 million at January 29, 2016. Our directors and ten senior officers, as a group, owned 0.3% of our outstanding common stock with a market value of $46.5 million at January 29, 2016.

 

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

 

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

 

In January 2016, we had 132 employees, as compared to 125 employees in January 2015.

 

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

 

RECENT DEVELOPMENTS

 

Increases in Monthly Dividends to Common Stockholders

We have continued our 47-year policy of paying monthly dividends.  In addition, we increased the dividend five times during 2015, and two times during 2016.  As of February 2016, we have paid 73 consecutive quarterly dividend increases and increased the dividend 84 times since our listing on the NYSE in 1994.

 

 

 

Month

 

Month

 

Dividend

 

Increase

 

2015 Dividend increases

 

Declared

 

Paid

 

per share

 

per share

 

1st increase

 

Dec 2014

 

Jan 2015

 

$ 0.1834167

 

$ 0.0003125

 

2nd increase

 

Jan 2015

 

Feb 2015

 

0.1890000

 

0.0055833

 

3rd increase

 

Mar 2015

 

Apr 2015

 

0.1895000

 

0.0005000

 

4th increase

 

Jun 2015

 

Jul 2015

 

0.1900000

 

0.0005000

 

5th increase

 

Sep 2015

 

Oct 2015

 

0.1905000

 

0.0005000

 

 

 

 

 

 

 

 

 

 

 

2016 Dividend increases

 

 

 

 

 

 

 

 

 

1st increase

 

Dec 2015

 

Jan 2016

 

$ 0.1910000

 

$ 0.0005000

 

2nd increase

 

Jan 2016

 

Feb 2016

 

$ 0.1985000

 

$ 0.0075000

 

 

The dividends paid per share during 2015 totaled approximately $2.2714167, as compared to approximately $2.1916254 during 2014, an increase of $0.0798, or 3.6%.

 

The monthly dividend of $0.1985 per share represents a current annualized dividend of $2.382 per share, and an annualized dividend yield of approximately 4.3% based on the last reported sale price of our common stock on the NYSE of $55.79 on January 29, 2016. Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will be in any future period.

 

Acquisitions During 2015

During 2015, we invested $1.26 billion in 286 new properties and properties under development or expansion, with an initial weighted average contractual lease rate of 6.6%. The 286 new properties and properties under development or expansion are located in 40 states, will contain approximately 6.2 million leasable square feet, and are 100% leased with a weighted average lease term of 16.5 years. The tenants occupying the new properties operate in 21 industries and the property types consist of 87.3% retail and 12.7% industrial, based on rental revenue.  During 2015, none of our real estate investments caused any one tenant to be 10% or more of our total assets at December 31, 2015.

 

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

 

In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return.  When the lease does not provide for a fixed rate of return on a property under development or expansion, the estimated initial weighted average contractual lease rate is computed as follows: estimated net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs. Of the $1.26 billion we invested during 2015, $45.8 million was invested in 35 properties under development or expansion with an estimated initial weighted average contractual lease rate of 9.7%.  We may continue to pursue development or expansion opportunities under similar arrangements in the future.

 

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Portfolio Discussion

Leasing Results

At December 31, 2015, we had 71 properties available for lease out of 4,538 properties in our portfolio, which represents a 98.4% occupancy rate based on the number of properties in our portfolio.  Since December 31, 2014, when we reported 70 properties available for lease out of 4,327 and a 98.4% occupancy rate, we:

 

·                  Had 283 lease expirations;

·                  Re-leased 253 properties; and

·                  Sold 29 vacant properties.

 

Of the 253 properties re-leased during 2015, 216 properties were re-leased to existing tenants, seven were re-leased to new tenants without vacancy, and 30 were re-leased to new tenants after a period of vacancy.  The annual rent on these 253 leases was $37.46 million, as compared to the previous rent on these same properties of $37.12 million, which represents a rent recapture rate of 100.9% on the properties re-leased during 2015.

 

At December 31, 2015, our average annualized rental revenue was approximately $13.31 per square foot on the 4,467 leased properties in our portfolio.  At December 31, 2015, we classified ten properties with a carrying amount of $9.8 million as held for sale on our balance sheet.  The expected disposal of these properties does not represent a strategic shift that will have a major effect on our operations and financial results.

 

Investments in Existing Properties

In 2015, we capitalized costs of $11.5 million on existing properties in our portfolio, consisting of $748,000 for re-leasing costs, $7.6 million for recurring capital expenditures and $3.2 million for non-recurring building improvements.  In 2014, we capitalized costs of $6.0 million on existing properties in our portfolio.

 

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

 

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

 

At-the-Market (ATM) Program

In September 2015, we established an “at the market” equity distribution program, or our ATM program, pursuant to which we can offer and sell up to 12,000,000 shares of common stock to, or through a consortium of banks acting as our sales agents by means of ordinary brokers’ transactions on the NYSE or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices.  During 2015, we issued 714,301 shares and raised approximately $36.3 million under the ATM program.

 

New Credit Facility

In June 2015, we closed on a $2.25 billion unsecured credit facility, or our new credit facility. Our new credit facility is comprised of a $2.0 billion revolving credit facility and a $250 million five-year unsecured term loan. As of December 31, 2015, $1.76 billion was available on our new credit facility to fund additional acquisitions and for other general corporate purposes.

 

Inclusion in S&P Indices

In January 2015, we were added to the S&P High Yield Dividend Aristocrats® index. In April 2015, we were added to the S&P 500 index and are one of 26 REITs, and the only net lease REIT included in this index.

 

Issuance of Common Stock

In April 2015, we issued 5,500,000 shares of common stock.  After underwriting discounts and other offering costs of $1.4 million, the net proceeds of $276.4 million were used to repay borrowings under our previous $1.5 billion unsecured credit facility.

 

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In October 2015, we issued 11,500,000 shares of common stock, including 1,500,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares.  After underwriting discounts and other offering costs of $22.0 million, a portion of the net proceeds of $517.1 million was used to repay borrowings under our new credit facility and the remaining portion was used for other general corporate purposes, including acquisitions.

 

Dividend Reinvestment and Stock Purchase Plan

Our Dividend Reinvestment and Stock Purchase Plan, or the DRSPP, provides our common stockholders, as well as new investors, with a convenient and economical method of purchasing our common stock and reinvesting their distributions.  The DRSPP also allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions.  The DRSPP authorizes up to 26,000,000 common shares to be issued.  In 2013, we revised our DRSPP so that we would pay for a majority of the plan-related fees, which were previously paid by investors, and to institute a waiver approval process, allowing larger investors or institutions, per a formal approval process, to purchase shares at a small discount, if approved by us. During 2015, we issued 7,608,354 shares and raised approximately $363.0 million under the DRSPP, of which 7,413,207 shares and $353.7 million was raised under the waiver approval process.

 

Net Income Available to Common Stockholders

Net income available to common stockholders was $256.7 million in 2015, compared to $227.6 million in 2014, an increase of $29.1 million. On a diluted per common share basis, net income was $1.09 in 2015, as compared to $1.04 in 2014, an increase of $0.05, or 4.8%. Net income available to common stockholders for 2014 includes a non-cash redemption charge of $6.0 million on the shares of Class E preferred stock that were redeemed in October 2014, which represents $0.03 on a diluted per common share basis. This charge is for the excess of redemption value over the carrying value of the Class E preferred stock and represents the original issuance cost that was paid in 2006.

 

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

 

Gains from the sale of properties during 2015 were $22.2 million, as compared to gains from the sale of properties of $42.1 million during 2014.

 

Funds from Operations (FFO) Available to Common Stockholders

In 2015, our FFO increased by $89.5 million, or 15.9%, to $652.4 million, compared to $562.9 million in 2014.  On a diluted per common share basis, FFO was $2.77 in 2015, compared to $2.58 in 2014, an increase of $0.19, or 7.4%.  Our FFO in 2014 included a non-cash redemption charge of $6.0 million on the shares of Class E preferred stock that were redeemed in October 2014, which represents $0.03 on a diluted per common share basis.

 

Adjusted Funds from Operations (AFFO) Available to Common Stockholders

In 2015, our AFFO increased by $85.3 million, or 15.2%, to $647.0 million versus $561.7 million in 2014. On a diluted per common share basis, AFFO was $2.74 in 2015, compared to $2.57 in 2014, an increase of $0.17, or 6.6%.

 

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

 

Dividend Policy

Distributions are paid monthly to holders of shares of our common stock and Class F preferred stock if, and when, declared by our Board of Directors.

 

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

 

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In order to maintain our status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our taxable income (excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our taxable income (including net capital gains). In 2015, our cash distributions to preferred and common stockholders totaled $560.3 million, or approximately 136.9% of our estimated taxable income of $409.4 million. Our estimated taxable income reflects non-cash deductions for depreciation and amortization. Our estimated taxable income is presented to show our compliance with REIT dividend requirements and is not a measure of our liquidity or operating performance.  We intend to continue to make distributions to our stockholders that are sufficient to meet this dividend requirement and that will reduce or eliminate our exposure to income taxes. Furthermore, we believe our funds from operations are sufficient to support our current level of cash distributions to our stockholders. Our cash distributions to common stockholders in 2015 totaled $533.2 million, representing 82.4% of our adjusted funds from operations available to common stockholders of $647.0 million. In comparison, our 2014 cash distributions to common stockholders totaled $479.3 million, representing 85.3% of our adjusted funds from operations available to common stockholders of $561.7 million.

 

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

 

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

 

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

 

Distributions in excess of earnings and profits generally will first be treated as a non-taxable reduction in the stockholders’ basis in their stock, but not below zero. Distributions in excess of that basis generally will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 23.8% of the distributions to our common stockholders, made or deemed to have been made in 2015, were classified as a return of capital for federal income tax purposes. We estimate that in 2016, between 20% and 35% of the distributions may be classified as a return of capital.

 

BUSINESS PHILOSOPHY AND STRATEGY

 

Investment Philosophy

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

 

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Diversification is also a key component of our investment philosophy.  We believe that diversification of the portfolio by tenant, industry, geography, and, to a certain extent, property type leads to more predictable investment results for our shareholders by reducing vulnerability that can come with any single concentration.  Our investment efforts have led to a diversified property portfolio that, as of December 31, 2015, consisted of 4,538 properties located in 49 states and Puerto Rico, leased to 240 different commercial tenants doing business in 47 industries. Each of the 47 industries represented in our property portfolio individually accounted for no more than 10.9% of our rental revenue for the quarter ended December 31, 2015.  Since 1970, our occupancy rate at the end of each year has never been below 96%.  However, we cannot assure you that our future occupancy levels will continue to equal or exceed 96%.

 

Investment Strategy

Our investment strategy is to act as a source of capital to regional and national tenants by acquiring and leasing back their real estate locations. When identifying new properties for investment, we generally focus on acquiring the real estate tenants consider important to the successful operation of their business. We generally seek to acquire real estate that has the following characteristics:

 

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

·                  Properties that are in significant markets or strategic locations critical to generating revenue for regional and national tenants (i.e. they need the property in which they operate in order to conduct their business);

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

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

·                  Properties with real estate valuations that approximate replacement costs;

·                  Properties with rental or lease payments that approximate market rents; 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 future rent increases.

 

We seek to invest in industries in which several, well-organized, regional and national tenants are capturing market share through the selection of prime locations, service, quality control, economies of scale, strong consumer brands, and advertising. In addition, we frequently acquire large portfolios of single-tenant properties net leased to different tenants operating in a variety of industries.  We have an internal team dedicated to sourcing such opportunities, often using our relationships with various tenants, owners/developers, and advisers to uncover and secure transactions.  We also undertake thorough research and analysis to identify what we consider to be appropriate property locations, tenants, and industries for investment. This research expertise is instrumental to uncovering net lease opportunities in markets where we believe we can add value.

 

In selecting potential investments, we look for tenants with the following attributes:

 

·                  Tenants with reliable and sustainable cash flow;

·                  Tenants with revenue and cash flow from multiple sources;

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

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

 

From a retail perspective, our investment strategy is to target tenants that have a service, non-discretionary, and/or low-price-point component to their business.  We believe these characteristics better position tenants to operate in a variety of economic conditions and to compete more effectively with internet retailers.  As a result of the execution of this strategy, over 90% of our annualized retail rental revenue is derived from tenants with a service, non-discretionary, and/or low price point component to their business.  From a non-retail perspective, we target industrial properties leased to Fortune 1000, primarily investment grade rated companies.  We believe rental revenue generated from businesses with these characteristics is generally more durable and stable.

 

After applying this investment strategy, we pursue those transactions where we can achieve an attractive investment spread over our cost of capital and favorable risk-adjusted returns.

 

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Underwriting Strategy

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

 

In order to be considered for acquisition, properties must meet stringent investment and credit requirements. The properties must generate attractive current yields and the tenant must meet our credit criteria. We have established a four-part analysis that examines each potential investment based on:

 

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

·                  Industry, company, market conditions, and credit profile;

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

·                  The importance of the real estate location to the operations of the tenants’ business.

 

Prior to entering into any transaction, our research department conducts a review of a tenant’s credit quality.  The information reviewed may include reports and filings, including any public credit ratings, financial statements, debt and equity analyst reports, and reviews of corporate credit spreads, stock prices, market capitalization, and other financial metrics.  We conduct additional due diligence, including additional financial reviews of the tenant and a more comprehensive review of the business segment and industry in which the tenant operates.  We continue to monitor our tenants’ credit quality on an ongoing basis by reviewing the available information previously discussed, and providing summaries of these findings to management.  We estimate that approximately 44% of our annualized rental revenue comes from properties leased to investment grade rated companies or their subsidiaries.  At December 31, 2015, our top 20 tenants represent approximately 55% of our annualized revenue and eight of these tenants have investment grade credit ratings or are subsidiaries of investment grade companies.

 

Asset Management Strategy

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

 

We regularly review and analyze:

 

·                  The quality of the underlying real estate locations;

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

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

 

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

 

·                  Generate higher returns;

·                  Enhance the credit quality of our real estate portfolio;

·                  Extend our average remaining lease term; or

·                  Decrease tenant or industry concentration.

 

At December 31, 2015, we classified ten properties with a carrying amount of $9.8 million as held for sale on our balance sheet. For 2016, we intend to continue our active disposition efforts to further enhance our real estate portfolio and anticipate $50 to $75 million in property sales in 2016.  We intend to invest these proceeds into new property acquisitions, if there are attractive opportunities available. However, we cannot guarantee that we will sell properties during 2016 at our estimated values or be able to invest the property sale proceeds in new properties.

 

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Capital Philosophy

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

 

Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,” which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common and preferred stockholders, primarily through cash provided by operating activities, borrowing on our new credit facility and periodically through public securities offerings.

 

Conservative Capital Structure

We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At December 31, 2015, our total outstanding borrowings of senior unsecured notes and bonds, term loans, mortgages payable and credit facility borrowings were $4.85 billion, or approximately 26.6% of our total market capitalization of $18.22 billion.

 

We define our total market capitalization at December 31, 2015 as the sum of:

 

·                  Shares of our common stock outstanding of 250,416,757, plus total common units outstanding of 648,386, multiplied by the last reported sales price of our common stock on the NYSE of $51.63 per share on December 31, 2015, or $12.96 billion;

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

·                  Outstanding borrowings of $238.0 million on our new credit facility;

·                  Outstanding mortgages payable of $637.7 million, excluding net mortgage premiums of $9.1 million;

·                  Outstanding borrowings of $320.0 million on our term loans; and

·                  Outstanding senior unsecured notes and bonds of $3.65 billion, excluding unamortized original issuance discounts of $13.3 million.

 

Impact of Real Estate and Credit Markets

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

 

Universal Shelf Registration

In December 2015, we filed a shelf registration statement with the SEC, which is effective for a term of three years and will expire in December 2018. This replaced our prior shelf registration statement.  In accordance with SEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock, or depositary shares, and (6) any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these 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.

 

$2.0 Billion Revolving Credit Facility

In June 2015, we entered into a new $2 billion unsecured revolving credit facility, which replaced our $1.5 billion credit facility that was scheduled to expire in May 2016. The initial term of our new credit facility expires in June 2019 and includes, at our option, two six-month extensions. Our new credit facility has a $1.0 billion accordion expansion option.  Under our new credit facility, our current investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 0.9%, with a facility commitment fee of 0.15%, for all-in drawn pricing of 1.05% over LIBOR. The borrowing rate is subject to an interest rate floor. We also have other interest rate options available to us under our new credit facility. Our new credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.

 

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At December 31, 2015, we had a borrowing capacity of $1.76 billion available on our new credit facility and an outstanding balance of $238.0 million.  The interest rate on borrowings outstanding under our new credit facility, at December 31, 2015, was 1.2% per annum.  We must comply with various financial and other covenants in our credit facility.  At December 31, 2015, we remain in compliance with these covenants. We expect to use our new credit facility to acquire additional properties and for other general corporate purposes. Any additional borrowings will increase our exposure to interest rate risk.

 

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

 

Cash Reserves

We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our properties.  We intend to retain an appropriate amount of cash as working capital.  At December 31, 2015, we had cash and cash equivalents totaling $40.3 million.

 

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

 

Credit Agency Ratings

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

 

Based on our current ratings, the current facility interest rate is LIBOR plus 0.9% with a facility commitment fee of 0.15%, for all-in drawn pricing of 1.05% over LIBOR.  Our new credit facility provides that the interest rate can range between: (i) LIBOR plus 1.55% if our credit rating is lower than BBB-/Baa3 or unrated and (ii) LIBOR plus 0.85% if our credit rating is A-/A3 or higher.  In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which range from: (i) 0.3% for a rating lower than BBB-/Baa3 or unrated, and (ii) 0.125% for a credit rating of A-/A3 or higher.

 

We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions.  If our credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease. The credit ratings assigned to us could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies and we cannot assure you that our ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, a rating is not a recommendation to buy, sell or hold our debt securities, preferred stock or common stock.

 

Notes Outstanding

As of December 31, 2015, we had $3.65 billion of senior unsecured note and bond obligations, excluding unamortized original issuance discounts of $13.3 million.  All of our outstanding notes and bonds have fixed interest rates. Interest on all of our senior note and bond obligations is paid semiannually.

 

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Mortgage Debt

As of December 31, 2015, we had $637.7 million of mortgages payable, all of which were assumed in connection with our property acquisitions.  Additionally, at December 31, 2015, we had net premiums totaling $9.1 million on these mortgages.  We expect to pay off the mortgages payable as soon as prepayment penalties have declined to a level that would make it economically feasible to do so.  During 2015, we made $198.4 million of principal payments, including the repayment of 13 mortgages in full for $191.0 million.

 

Term Loans

In June 2015, in conjunction with entering into our new credit facility, we entered into a $250 million senior unsecured term loan maturing June 30, 2020.  Borrowing under this term loan bears interest at LIBOR, plus 0.95%.  In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest rate on this term loan at 2.67%.

 

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

 

No Unconsolidated Investments

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

 

Corporate Responsibility

We are committed to providing an engaging, diverse, and safe work environment for our employees, to upholding our corporate responsibilities as a public company operating for the benefit of our shareholders, and to operating our company in an environmentally conscious manner. As The Monthly Dividend Company®, our mission is to provide monthly dividends to our shareholders that increase over time. How we manage and use the physical, financial and talent resources that enable us to achieve this mission, demonstrates our commitment to corporate responsibility.

 

Social Responsibility and Ethics. An extension of our mission is our commitment to being socially responsible and conducting our business according to the highest ethical standards. Our employees are awarded compensation that is in line with those of our peers and competitors, including generous healthcare benefits for employees and their families; participation in a 401(k) plan with a matching contribution by Realty Income; competitive paid time-off benefits; and an infant-at-work program for new parents. Our employees have access to members of our Board of Directors to report anonymously, if desired, any suspicion of misconduct by any member of our senior management or executive team. We also have a longstanding commitment to equal employment opportunity and adhere to all Equal Employer Opportunity Policy guidelines. We apply the principles of full and fair disclosure in all of our business dealings, as outlined in our Corporate Code of Business Ethics. We are also committed to dealing fairly with all of our customers, suppliers, and competitors.

 

Realty Income and our employees have taken an active role in supporting our communities through civic involvement with charitable organizations and corporate donation. Focusing our impact on social and environmentally sustainable areas our non-profit partnerships have resulted in 600 employee volunteer hours, employee and corporate donations to fund local affordable housing, educations services to at-risk youth, funding local foodbanks, and toys for under-served children. Our dedication to be a responsible corporate citizen has a direct and positive impact in the communities in which we operate and contributes to the strength of our reputation and our financial performance.

 

Corporate Governance. We believe that a company’s reputation for integrity and serving its shareholders responsibly is of utmost importance. We are committed to managing the company for the benefit of our shareholders and are focused on maintaining good corporate governance.  Practices that illustrate this commitment include:

 

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

·                  Our Board of Directors is elected on an annual basis;

·                  We employ a majority vote standard for uncontested elections;

 

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

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

 

Environmental Practices.  Our focus on conservationism is demonstrated by how we manage our day-to-day activities at our corporate headquarters.  At our headquarters, we promote energy efficiency and encourage practices such as powering down office equipment at the end of the day, implementing file-sharing technology and automatic “duplex mode” to limit paper use, adopting an electronic approval system, and carpooling to our headquarters. With respect to technology, recycling and reuse practices, we encourage the use of recycled products and the recycling of materials during our operations. Cell phones, wireless devices and office equipment are recycled or donated whenever possible. In addition, our headquarters was constructed according to the State of California energy efficiency standards (specifically following California Green Building Standards Code and Title 24 of the California Code of Regulations), with features such as an automatic lighting control system with light-harvesting technology, a Building Management System that monitors and controls energy use, an energy-efficient PVC roof and heating and cooling system, and drought-tolerant landscaping with recycled materials.

 

The properties in our portfolio are net leased to our tenants who are responsible for maintaining the buildings and are in control of their energy usage and environmental sustainability practices.  We remain active in working with our tenants to promote environmental responsibility at the properties we own.

 

PROPERTY PORTFOLIO INFORMATION

 

At December 31, 2015, we owned a diversified portfolio:

 

·                  Of 4,538 properties;

·                  With an occupancy rate of 98.4%, or 4,467 properties leased and 71 properties available for lease;

·                  Leased to 240 different commercial tenants doing business in 47 separate industries;

·                  Located in 49 states and Puerto Rico;

·                  With over 76.0 million square feet of leasable space; and

·                  With an average leasable space per property of approximately 16,750 square feet; approximately 11,550 square feet per retail property and 216,550 square feet per industrial property.

 

At December 31, 2015, of our 4,538 properties, 4,467 were leased under net lease agreements. A net lease typically requires the tenant to be responsible for monthly rent and certain property operating expenses including property taxes, insurance, and maintenance. In addition, our tenants are typically subject to future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases.

 

At December 31, 2015, our 240 commercial tenants, which we define as retailers with over 50 locations and non-retailers with over $500 million in annual revenues, represented approximately 95% of our annualized revenue.  We had 279 additional tenants, representing approximately 5% of our annualized revenue at December 31, 2015, which brings our total tenant count to 519 tenants.

 

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Industry Diversification

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

 

 

 

 

Percentage of Rental Revenue(1)

 

 

 

For the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

For the Years Ended

 

 

 

December 31,

 

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

 

 

2015

 

 

2015  

 

2014  

 

2013  

 

2012  

 

2011  

 

Retail industries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apparel stores

 

2.0%

 

 

2.0%

 

2.0%

 

1.9%

 

1.7%

 

1.4%

 

Automotive collision services

 

0.9

 

 

1.0

 

0.8

 

0.8

 

1.1

 

0.9

 

Automotive parts

 

1.5

 

 

1.4

 

1.3

 

1.2

 

1.0

 

1.2

 

Automotive service

 

1.9

 

 

1.9

 

1.8

 

2.1

 

3.1

 

3.7

 

Automotive tire services

 

2.8

 

 

2.9

 

3.2

 

3.6

 

4.7

 

5.6

 

Book stores

 

*

 

 

*

 

*

 

*

 

0.1

 

0.1

 

Child care

 

2.0

 

 

2.0

 

2.2

 

2.8

 

4.5

 

5.2

 

Consumer electronics

 

0.3

 

 

0.3

 

0.3

 

0.3

 

0.5

 

0.5

 

Convenience stores

 

8.8

 

 

9.2

 

10.1

 

11.2

 

16.3

 

18.5

 

Crafts and novelties

 

0.5

 

 

0.5

 

0.5

 

0.5

 

0.3

 

0.2

 

Dollar stores

 

8.8

 

 

8.9

 

9.6

 

6.2

 

2.2

 

-

 

Drug stores

 

10.9

 

 

10.6

 

9.5

 

8.1

 

3.5

 

3.8

 

Education

 

0.3

 

 

0.3

 

0.4

 

0.4

 

0.7

 

0.7

 

Entertainment

 

0.5

 

 

0.5

 

0.5

 

0.6

 

0.9

 

1.0

 

Equipment services

 

0.1

 

 

0.1

 

0.1

 

0.1

 

0.1

 

0.2

 

Financial services

 

1.3

 

 

1.3

 

1.4

 

1.5

 

0.2

 

0.2

 

General merchandise

 

1.5

 

 

1.4

 

1.2

 

1.1

 

0.6

 

0.6

 

Grocery stores

 

2.8

 

 

3.0

 

3.0

 

2.9

 

3.7

 

1.6

 

Health and fitness

 

8.4

 

 

7.7

 

7.0

 

6.3

 

6.8

 

6.4

 

Health care

 

1.0

 

 

1.0

 

1.1

 

1.1

 

-

 

-

 

Home furnishings

 

0.7

 

 

0.7

 

0.7

 

0.9

 

1.0

 

1.1

 

Home improvement

 

2.5

 

 

2.4

 

1.7

 

1.6

 

1.5

 

1.7

 

Jewelry

 

0.1

 

 

0.1

 

0.1

 

0.1

 

-

 

-

 

Motor vehicle dealerships

 

1.6

 

 

1.6

 

1.6

 

1.6

 

2.1

 

2.2

 

Office supplies

 

0.3

 

 

0.3

 

0.4

 

0.5

 

0.8

 

0.9

 

Pet supplies and services

 

0.7

 

 

0.7

 

0.7

 

0.8

 

0.6

 

0.7

 

Restaurants - casual dining

 

3.7

 

 

3.8

 

4.3

 

5.1

 

7.3

 

10.9

 

Restaurants - quick service

 

4.5

 

 

4.2

 

3.7

 

4.4

 

5.9

 

6.6

 

Shoe stores

 

0.5

 

 

0.5

 

0.1

 

0.1

 

0.1

 

0.2

 

Sporting goods

 

1.7

 

 

1.8

 

1.6

 

1.7

 

2.5

 

2.7

 

Theaters

 

5.0

 

 

5.1

 

5.3

 

6.2

 

9.4

 

8.8

 

Transportation services

 

0.1

 

 

0.1

 

0.1

 

0.1

 

0.2

 

0.2

 

Wholesale clubs

 

3.7

 

 

3.8

 

4.1

 

3.9

 

3.2

 

0.7

 

Other

 

*

 

 

*

 

*

 

0.1

 

0.1

 

0.1

 

Retail industries

 

81.4%

 

 

81.1%

 

80.4%

 

79.8%

 

86.7%

 

88.6%

 

 

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Table of Contents

 

Industry Diversification (continued)

 

 

 

Percentage of Rental Revenue(1)

 

 

For the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

For the Years Ended

 

 

December 31,

 

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

Dec 31,

 

 

 

2015

 

 

2015  

 

2014  

 

2013  

 

2012  

 

2011  

 

Non-retail industries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

1.1

 

 

1.1

 

1.2

 

1.2

 

0.9

 

0.5

 

Beverages

 

2.5

 

 

2.7

 

2.8

 

3.3

 

5.1

 

5.6

 

Consumer appliances

 

0.5

 

 

0.6

 

0.5

 

0.6

 

0.1

 

-

 

Consumer goods

 

1.0

 

 

0.9

 

0.9

 

1.0

 

0.1

 

-

 

Crafts and novelties

 

0.1

 

 

0.1

 

0.1

 

0.1

 

-

 

-

 

Diversified industrial

 

0.9

 

 

0.8

 

0.5

 

0.2

 

0.1

 

-

 

Electric utilities

 

0.1

 

 

0.1

 

0.1

 

*

 

-

 

-

 

Equipment services

 

0.3

 

 

0.4

 

0.5

 

0.4

 

0.3

 

0.2

 

Financial services

 

0.4

 

 

0.4

 

0.4

 

0.5

 

0.4

 

0.3

 

Food processing

 

1.2

 

 

1.2

 

1.4

 

1.5

 

1.3

 

0.7

 

General merchandise

 

0.3

 

 

0.3

 

0.3

 

-

 

-

 

-

 

Government services

 

1.2

 

 

1.2

 

1.3

 

1.4

 

0.1

 

0.1

 

Health care

 

0.6

 

 

0.7

 

0.7

 

0.8

 

*

 

*

 

Home furnishings

 

0.2

 

 

0.2

 

0.2

 

0.2

 

-

 

-

 

Insurance

 

0.1

 

 

0.1

 

0.1

 

0.1

 

*

 

-

 

Machinery

 

*

 

 

0.1

 

0.2

 

0.2

 

0.1

 

-

 

Other manufacturing

 

0.7

 

 

0.7

 

0.7

 

0.6

 

-

 

-

 

Packaging

 

0.8

 

 

0.8

 

0.8

 

0.9

 

0.7

 

0.4

 

Paper

 

0.1

 

 

0.1

 

0.1

 

0.2

 

0.1

 

0.1

 

Shoe stores

 

0.2

 

 

0.2

 

0.8

 

0.9

 

-

 

-

 

Telecommunications

 

0.6

 

 

0.7

 

0.7

 

0.7

 

0.8

 

0.7

 

Transportation services

 

5.5

 

 

5.3

 

5.1

 

5.3

 

2.2

 

1.6

 

Other

 

0.2

 

 

0.2

 

0.2

 

0.1

 

1.0

 

1.2

 

Non-retail industries

 

18.6%

 

 

18.9%

 

19.6%

 

20.2%

 

13.3%

 

11.4%

 

Totals

 

100.0%

 

 

100.0%

 

100.0%

 

100.0%

 

100.0%

 

100.0%

 

 

*              Less than 0.1%

 

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

 

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Property Type Composition

The following table sets forth certain property type information regarding Realty Income’s property portfolio as of December 31, 2015 (dollars in thousands):

 

 

 

 

 

Approximate

 

Rental Revenue for

 

Percentage of

 

 

 

Number of

 

Leasable

 

the Quarter Ended

 

Rental

 

Property Type

 

Properties

 

Square Feet

 

December 31, 2015

(1)

Revenue

 

Retail

 

4,378

 

50,592,800

 

$

199,518

 

79.0%

 

Industrial (2)

 

101

 

21,871,200

 

32,423

 

12.8

 

Office

 

44

 

3,403,200

 

15,329

 

6.1

 

Agriculture

 

15

 

184,500

 

5,330

 

2.1

 

Totals

 

4,538

 

76,051,700

 

$

252,600

 

100.0%

 

 

(1)                 Includes rental revenue for all properties owned by Realty Income at December 31, 2015.  Excludes revenue of $63 from properties owned by Crest and $68 from sold properties that were included in continuing operations.

 

(2)                 Includes 14 Industrial properties formerly classified as Manufacturing properties which represent approximately 2% of rental revenue for the quarter ended December 31, 2015.  These properties are principally distribution facilities used for light assemblage, processing, and/or storage.  We re-classified these properties to our Industrial category to better reflect their use and to clarify the categorization of our properties.

 

 

Tenant Diversification

The following table sets forth the largest tenants in Realty Income’s property portfolio, expressed as a percentage of total rental revenue at December 31, 2015:

 

Tenant

 

Number of Properties

 

% of Rental Revenue

 

 

 

 

 

Walgreens

 

176

 

6.9%

FedEx

 

39

 

5.2%

Dollar General

 

524

 

4.6%

LA Fitness

 

46

 

4.2%

Dollar Tree / Family Dollar

 

457

 

4.2%

Circle K / The Pantry

 

302

 

3.0%

AMC Theaters

 

20

 

2.7%

BJ’s Wholesale Clubs

 

15

 

2.6%

Diageo

 

17

 

2.4%

Regal Cinemas

 

23

 

2.1%

GPM Investments / Fas Mart

 

217

 

2.1%

Rite Aid

 

68

 

2.0%

Northern Tier Retail / SuperAmerica

 

134

 

2.0%

Life Time Fitness

 

9

 

2.0%

CVS Pharmacy

 

56

 

1.9%

TBC Corporation

 

149

 

1.7%

Walmart / Sam’s Club

 

19

 

1.3%

NPC International

 

202

 

1.3%

FreedomRoads / Camping World

 

18

 

1.2%

Smart & Final

 

36

 

1.1%

 

-15-



Table of Contents

 

Service Category Diversification for our Retail Properties

The following table sets forth certain information regarding the 4,378 retail properties included in the 4,538 total properties owned by Realty Income at December 31, 2015, classified according to the business types and the level of services they provide at the property level (dollars in thousands):

 

 

 

Number of

 

Retail Rental Revenue

 

Percentage of

 

 

 

Retail

 

for the Quarter Ended

 

Retail Rental

 

 

 

Properties

 

December 31, 2015

(1)

Revenue

 

Tenants Providing Services

 

 

 

 

 

 

 

Automotive collision services

 

49

 

$

2,367

 

1.2%

 

Automotive service

 

236

 

4,826

 

2.4

 

Child care

 

206

 

5,040

 

2.5

 

Education

 

15

 

863

 

0.4

 

Entertainment

 

10

 

1,188

 

0.6

 

Equipment services

 

2

 

310

 

0.2

 

Financial services

 

118

 

3,256

 

1.6

 

Health and fitness

 

87

 

21,232

 

10.7

 

Health care

 

26

 

1,093

 

0.6

 

Theaters

 

45

 

12,691

 

6.4

 

Transportation services

 

2

 

229

 

0.1

 

Other

 

8

 

70

 

*

 

 

 

804

 

53,165

 

26.7

 

Tenants Selling Goods and Services

 

 

 

 

 

 

 

Automotive parts (with installation)

 

63

 

1,504

 

0.8

 

Automotive tire services

 

186

 

7,124

 

3.6

 

Convenience stores

 

762

 

22,210

 

11.1

 

Motor vehicle dealerships

 

22

 

4,047

 

2.0

 

Pet supplies and services

 

13

 

735

 

0.4

 

Restaurants - casual dining

 

298

 

8,714

 

4.4

 

Restaurants - quick service

 

498

 

11,463

 

5.7

 

 

 

1,842

 

55,797

 

28.0

 

Tenants Selling Goods

 

 

 

 

 

 

 

Apparel stores

 

28

 

5,067

 

2.5

 

Automotive parts

 

78

 

2,170

 

1.1

 

Book stores

 

1

 

104

 

*

 

Consumer electronics

 

7

 

803

 

0.4

 

Crafts and novelties

 

11

 

1,175

 

0.6

 

Dollar stores

 

981

 

22,120

 

11.1

 

Drug stores

 

293

 

26,119

 

13.1

 

General merchandise

 

71

 

3,666

 

1.8

 

Grocery stores

 

70

 

7,110

 

3.5

 

Home furnishings

 

59

 

1,744

 

0.9

 

Home improvement

 

54

 

5,605

 

2.8

 

Jewelry

 

4

 

175

 

0.1

 

Office supplies

 

9

 

765

 

0.4

 

Shoe stores

 

2

 

176

 

0.1

 

Sporting goods

 

32

 

4,390

 

2.2

 

Wholesale clubs

 

32

 

9,367

 

4.7

 

 

 

1,732

 

90,556

 

45.3

 

Total Retail Properties

 

4,378

 

$

199,518

 

100.0%

 

 

*  Less than 0.1%

 

 

(1)

Includes rental revenue for all retail properties owned by Realty Income at December 31, 2015.  Excludes revenue of $53,085 from non-retail properties, $63 from properties owned by Crest and $68 from sold properties that were included in continuing operations.

 

-16-



Table of Contents

 

Lease Expirations

The following table sets forth certain information regarding Realty Income’s property portfolio regarding the timing of the lease term expirations (excluding rights to extend a lease at the option of the tenant) on our 4,448 net leased, single-tenant properties as of December 31, 2015 (dollars in thousands):

 

Total Portfolio(1) 

 

Initial Expirations(3)

 

Subsequent Expirations(4) 

 

 

 

 

 

 

 

Rental

 

 

 

 

 

Rental

 

 

 

 

 

Rental

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

Revenue

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

for the

 

 

 

 

 

for the

 

 

 

 

 

for the

 

 

 

 

 

Number

 

 

 

Quarter

 

% of

 

 

 

Quarter

 

% of

 

 

 

Quarter

 

% of

 

 

 

of Leases

 

Approx.

 

Ended

 

Total

 

Number

 

Ended

 

Total

 

Number

 

Ended

 

Total

 

 

 

Expiring

 

Leasable

 

Dec 31,

 

Rental

 

of Leases

 

Dec 31,

 

Rental

 

of Leases

 

Dec 31,

 

Rental

 

Year

 

Retail

 

Non-Retail

 

Sq. Feet

 

2015 

(2)

Revenue

 

Expiring

 

2015

 

Revenue

 

Expiring

 

2015

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

146

 

-

 

913,200

 

$

3,315

 

1.3%

 

63  

 

$

1,295

 

0.5%

 

83

 

$

2,020

 

0.8%

 

2017

 

202

 

1

 

2,040,400

 

5,987

 

2.4

 

54  

 

2,559

 

1.0

 

149

 

3,428

 

1.4

 

2018

 

298

 

9

 

3,892,100

 

12,182

 

4.9

 

170  

 

8,431

 

3.4

 

137

 

3,751

 

1.5

 

2019

 

248

 

10

 

3,878,400

 

13,359

 

5.4

 

174  

 

11,143

 

4.5

 

84

 

2,216

 

0.9

 

2020

 

184

 

12

 

4,180,700

 

13,110

 

5.3

 

114  

 

10,709

 

4.3

 

82

 

2,401

 

1.0

 

2021

 

252

 

13

 

5,579,900

 

15,849

 

6.3

 

184  

 

13,933

 

5.6

 

81

 

1,916

 

0.7

 

2022

 

233

 

17

 

7,456,000

 

15,104

 

6.0

 

220  

 

14,308

 

5.7

 

30

 

796

 

0.3

 

2023

 

353

 

20

 

6,458,700

 

21,920

 

8.8

 

358  

 

21,028

 

8.4

 

15

 

892

 

0.4

 

2024

 

193

 

12

 

4,168,500

 

11,504

 

4.6

 

195  

 

11,222

 

4.5

 

10

 

282

 

0.1

 

2025

 

322

 

16

 

5,556,000

 

20,347

 

8.2

 

311  

 

19,595

 

7.9

 

27

 

752

 

0.3

 

2026

 

243

 

3

 

3,141,500

 

11,469

 

4.6

 

234  

 

11,124

 

4.5

 

12

 

345

 

0.1

 

2027

 

491

 

3

 

5,443,000

 

20,453

 

8.2

 

460  

 

19,064

 

7.6

 

34

 

1,389

 

0.6

 

2028

 

287

 

5

 

5,986,900

 

16,193

 

6.5

 

283  

 

15,930

 

6.5

 

9

 

263

 

*

 

2029

 

396

 

4

 

6,488,200

 

19,469

 

7.8

 

371  

 

19,193

 

7.7

 

29

 

276

 

0.1

 

2030

 

80

 

11

 

1,703,100

 

11,474

 

4.6

 

80  

 

11,319

 

4.5

 

11

 

155

 

0.1

 

2031 - 2043

 

361

 

23

 

7,467,400

 

37,706

 

15.1

 

342  

 

37,216

 

14.9

 

42

 

490

 

0.2

 

Totals

 

4,289

 

159

 

74,354,000

 

$

249,441

 

100.0%

 

3,613  

 

$

228,069 

 

91.5%

 

835

 

$

21,372

 

8.5%

 

 

*             Less than 0.1%

 

(1)          Excludes 19 multi-tenant properties and 71 vacant properties. The lease expirations for properties under construction are based on the estimated date of completion of those properties.

 

(2)          Excludes revenue of $3,160 from 19 multi-tenant properties and from 71 vacant properties at December 31, 2015, $68 from sold properties included in continuing operations and $63 from properties owned by Crest.

 

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

 

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

 

-17-



Table of Contents

 

Geographic Diversification

The following table sets forth certain state-by-state information regarding Realty Income’s property portfolio as of December 31, 2015 (dollars in thousands):

 

 

 

 

 

 

 

Approximate

 

Rental Revenue for

 

Percentage of

 

 

 

Number of

 

Percent

 

Leasable

 

the Quarter Ended

 

Rental

 

State

 

Properties

 

Leased

 

Square Feet

 

December 31, 2015

(1)

Revenue

 

Alabama

 

149

 

99%

 

1,220,600

 

$

4,093

 

1.6%

 

Alaska

 

3

 

100

 

275,900

 

681

 

0.3

 

Arizona

 

109

 

98

 

1,611,600

 

6,227

 

2.5

 

Arkansas

 

54

 

100

 

797,400

 

1,749

 

0.7

 

California

 

167

 

100

 

5,273,700

 

24,773

 

9.8

 

Colorado

 

70

 

99

 

1,003,000

 

3,999

 

1.6

 

Connecticut

 

24

 

91

 

534,900

 

2,502

 

1.0

 

Delaware

 

18

 

100

 

93,000

 

495

 

0.2

 

Florida

 

329

 

99

 

3,976,700

 

14,693

 

5.8

 

Georgia

 

239

 

99

 

3,348,000

 

10,396

 

4.1

 

Hawaii

 

--

 

--

 

--

 

--

 

--

 

Idaho

 

12

 

100

 

87,000

 

739

 

0.3

 

Illinois

 

161

 

99

 

4,578,500

 

13,337

 

5.3

 

Indiana

 

145

 

100

 

1,456,700

 

6,955

 

2.8

 

Iowa

 

38

 

95

 

2,936,000

 

4,004

 

1.6

 

Kansas

 

90

 

98

 

1,643,400

 

4,166

 

1.6

 

Kentucky

 

61

 

98

 

1,023,000

 

3,744

 

1.5

 

Louisiana

 

91

 

99

 

1,029,500

 

3,098

 

1.2

 

Maine

 

10

 

90

 

145,300

 

889

 

0.4

 

Maryland

 

35

 

100

 

861,300

 

4,485

 

1.8

 

Massachusetts

 

82

 

96

 

760,400

 

3,482

 

1.4

 

Michigan

 

148

 

99

 

1,537,200

 

5,797

 

2.3

 

Minnesota

 

155

 

99

 

1,376,800

 

8,215

 

3.3

 

Mississippi

 

132

 

98

 

1,608,200

 

4,116

 

1.6

 

Missouri

 

139

 

96

 

2,810,000

 

8,621

 

3.4

 

Montana

 

4

 

100

 

67,100

 

190

 

0.1

 

Nebraska

 

37

 

100

 

780,400

 

2,815

 

1.1

 

Nevada

 

22

 

100

 

413,000

 

773

 

0.3

 

New Hampshire

 

19

 

100

 

315,800

 

1,475

 

0.6

 

New Jersey

 

70

 

99

 

697,400

 

4,339

 

1.7

 

New Mexico

 

30

 

100

 

293,200

 

883

 

0.3

 

New York

 

90

 

99

 

2,422,600

 

12,310

 

4.9

 

North Carolina

 

155

 

99

 

2,120,900

 

6,778

 

2.7

 

North Dakota

 

7

 

100

 

66,000

 

136

 

0.1

 

Ohio

 

235

 

97

 

6,013,000

 

13,711

 

5.4

 

Oklahoma

 

128

 

99

 

1,532,100

 

4,015

 

1.6

 

Oregon

 

27

 

100

 

593,400

 

2,040

 

0.8

 

Pennsylvania

 

148

 

99

 

1,854,500

 

7,332

 

2.9

 

Rhode Island

 

4

 

100

 

157,200

 

809

 

0.3

 

South Carolina

 

137

 

99

 

996,000

 

4,659

 

1.8

 

South Dakota

 

13

 

100

 

152,100

 

274

 

0.1

 

Tennessee

 

221

 

96

 

2,769,700

 

7,538

 

3.0

 

Texas

 

449

 

98

 

8,298,200

 

23,401

 

9.1

 

Utah

 

17

 

100

 

890,500

 

1,975

 

0.8

 

Vermont

 

5

 

100

 

98,000

 

482

 

0.2

 

Virginia

 

143

 

98

 

2,893,300

 

7,543

 

3.0

 

Washington

 

42

 

98

 

690,800

 

2,882

 

1.1

 

West Virginia

 

13

 

100

 

272,500

 

979

 

0.4

 

Wisconsin

 

53

 

100

 

1,598,000

 

3,635

 

1.4

 

Wyoming

 

4

 

100

 

49,600

 

221

 

0.1

 

Puerto Rico

 

4

 

100

 

28,300

 

149

 

0.1

 

Totals\Average

 

4,538

 

98%

 

76,051,700

 

$

252,600

 

100.0%

 

 

 

(1)            Includes rental revenue for all properties owned by Realty Income at December 31, 2015.  Excludes revenue of $63 from properties owned by Crest and $68 from sold properties that were included in continuing operations.

 

-18-



Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

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

 

·                  Our anticipated growth strategies;

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

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

·                  Our intention to re-lease vacant properties;

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

·                  Future expenditures for development projects.

 

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

 

·                  Our continued qualification as a real estate investment trust;

·                  General business and economic conditions;

·                  Competition;

·                  Fluctuating interest rates;

·                  Access to debt and equity capital markets;

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

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

·                  Impairments in the value of our real estate assets;

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

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

·                  Acts of terrorism and war.

 

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

 

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

 

Item 1A:                         Risk Factors

 

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

 

-19-



Table of Contents

 

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

We face competition in the acquisition and operation of our properties. We expect competition from:

 

·                  Businesses;

·                  Individuals;

·                  Fiduciary accounts and plans; and

·                  Other entities engaged in real estate investment and financing.

 

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

 

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

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

 

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

·                  Inability to retain existing tenants and attract new tenants;

·                  Oversupply of space and changes in market rental rates;

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

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

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

·                  Deterioration of physical condition of our properties.

 

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

 

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

 

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

 

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Seventy-one of our properties were available for lease or sale at December 31, 2015, all of which were single-tenant properties. At December 31, 2015, forty-six of our properties under lease were unoccupied and available for sublease by the tenants, all of which were current with their rent and other obligations. During 2015, each of our tenants accounted for less than 10% of our rental revenue.

 

For 2015, our tenants in the “drug store” industry accounted for approximately 10.9% of our rental revenue. A downturn in this industry, whether nationwide or limited to specific sectors of the United States, or a change in legislation relating to prescription drugs, could adversely affect tenants in this industry, which in turn could have a material adverse effect on our financial position, results of operations, our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions on our common stock, including the common stock offered hereby, and preferred stock.

 

Individually, each of the other industries in our property portfolio accounted for less than 10% of our rental revenue for 2015. Nevertheless, downturns in these industries could also adversely affect our tenants, which in turn could also have a material adverse effect on our financial position, results of operations and our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions on our common stock, and preferred stock. In addition, we may in the future make additional investments in the “drug store” industry, which would increase this industry’s percentage of our rental revenues, thereby increasing the effect that such a downturn in this industry would have on us.

 

In addition, some of our properties are leased to tenants that may have limited financial and other resources, and therefore, they are more likely to be adversely affected by a downturn in their respective businesses or in the regional, national, or international economy.

 

Furthermore, we have made and may continue to make selected acquisitions of properties that fall outside our historical focus on freestanding, single-tenant, net lease locations in the United States. We may be exposed to a variety of new risks by expanding into new property types and/or new jurisdictions outside the United States and properties leased to tenants engaged in non-retail businesses. These risks may include limited experience in managing certain types of new properties, new types of real estate locations and lease structures, and the laws and culture of any non-U.S. jurisdiction.

 

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

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

 

·                  Our knowledge of the contamination;

·                  The timing of the contamination;

·                  The cause of the contamination; or

·                  The party responsible for the contamination of the property.

 

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

 

The presence of hazardous substances on a property may adversely affect our ability to lease or sell that property and we may incur substantial remediation costs or third party liability claims. Although our leases generally require our tenants to operate in compliance with all applicable federal, state, and local environmental laws, ordinances and regulations, and to indemnify us against any environmental liabilities arising from the tenants’ activities on the property, we could nevertheless be subject to liability, including strict liability, by virtue of our ownership interest. There also can be no assurance that our tenants could or would satisfy their indemnification obligations under their leases. The discovery of environmental liabilities attached to our properties could have an adverse effect on our results of operations, our financial condition, or our ability to make distributions to stockholders and to pay the principal of and interest on our debt securities and other indebtedness.

 

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

 

It is possible that our insurance could be insufficient to address any particular environmental situation and/or that, in the future, we could be unable to obtain insurance for environmental matters at a reasonable cost, or at all. Our tenants are generally responsible for, and indemnify us against, liabilities for environmental matters that arise during the lease terms as a result of tenants’ activities on the properties. For properties that have underground storage tanks, in addition to providing an indemnity in our favor, the tenants generally are required to meet applicable state financial assurance obligations, including maintaining certain minimum net worth requirements, obtaining environmental insurance, or relying upon the state trust funds where available in the states where these properties are located to reimburse responsible parties for costs of environmental remediation.  However, it is possible that one or more of our tenants could fail to have sufficient funds to cover any such indemnification or to meet applicable state financial assurance obligations, and thus we may still be obligated to pay for any such environmental liabilities.

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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

 

Even if we qualify for and maintain our REIT status, we may be subject to certain federal, state, and local taxes on our income and property. For example, if we have net income from a prohibited transaction, that income will be subject to a 100% tax. In addition, our taxable REIT subsidiaries, including Crest, are subject to federal and state taxes at the applicable tax rates on their income and property.  Any failure to comply with legal and regulatory tax obligations could adversely affect our ability to conduct business and could adversely affect the market price of our capital stock and the value of our debt securities.

 

Distribution requirements imposed by law limit our flexibility.

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

 

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

 

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

 

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

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

 

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

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

 

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

We intend to incur additional indebtedness in the future, including borrowings under our new $2.0 billion unsecured revolving credit facility. At December 31, 2015, we had $238.0 million of outstanding borrowings under our revolving credit facility, a total of $3.65 billion of outstanding unsecured senior debt securities (excluding unamortized original issuance discounts of $13.3 million), $320 million of borrowings outstanding under a senior unsecured term loan and approximately $637.7 million of outstanding mortgage debt (excluding net premiums totaling $9.1 million on these mortgages). To the extent that new indebtedness is added to our current debt levels, the related risks that we now face would increase. As a result, we are and will be subject to risks associated with debt financing, including the risk that our cash flow could be insufficient to make required payments on our debt. We also face variable interest rate risk as the interest rates on our revolving credit facility and some of our mortgage debt are variable and could therefore increase over time.  We also face the risk that we may be unable to refinance or repay our debt as it comes due. Given past disruptions in the financial markets and the ongoing global financial crisis, we also face the risk that one or more of the participants in our revolving credit facility may not be able to lend us money.

 

In addition, our revolving credit facility, our term loan facilities, and mortgage loan documents contain provisions that could limit or, in certain cases, prohibit the payment of dividends and other distributions on our common stock and preferred stock.  In particular, our revolving credit facility and our $250 million term loan facility, both of which are governed by the same credit agreement, provide that, if an event of default (as defined in the credit agreement) exists, neither we nor any of our subsidiaries (other than our wholly-owned subsidiaries) may make any dividends or other distributions on (except distributions payable in shares of a given class of our stock to the stockholders of that class), or repurchase or redeem, among other things, any shares of our common stock or preferred stock, during any period of four consecutive fiscal quarters in an aggregate amount in excess of the greater of:

 

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

·                  The minimum amount of cash distributions required to be made to our stockholders in order to maintain our status as a REIT for federal income tax purposes and to avoid the payment of any income or excise taxes that would otherwise be imposed under specified sections of the Code on income we do not distribute to our stockholders,

 

except that we may repurchase or redeem shares of our preferred stock with the net proceeds from the issuance of shares of our common stock or preferred stock. The credit agreement further provides that, in the event of a failure to pay principal, interest or any other amount payable thereunder when due or upon the occurrence of certain events of bankruptcy, insolvency or reorganization with respect to us or with respect to one or more of our subsidiaries that in the aggregate meet a significance test set forth in the credit agreement, we and our subsidiaries (other than our wholly-owned subsidiaries) may not pay any dividends or other distributions on (except for (a) distributions payable in shares of a given class of our stock to the stockholders of that class and (b) dividends and distributions described in the second bullet point above), or repurchase or redeem, among other things, any shares of our common stock or preferred stock. If any such event of default under the credit agreement were to occur, it would likely have a material adverse effect on the market price of our outstanding common stock and preferred stock and on the market value of our debt securities, could limit the amount of dividends or other distributions payable on our common stock and preferred stock or prevent us from paying those dividends or other distributions altogether, and may adversely affect our ability to qualify, or prevent us from qualifying, as a REIT. Likewise, one of our subsidiaries is the borrower under our $70.0 million term loan facility and that facility requires that this subsidiary maintain its consolidated tangible net worth (as defined in the term loan facility) above a certain minimum dollar amount and comply with certain other financial covenants. This minimum consolidated tangible net worth covenant may limit the ability of this subsidiary, as well as other subsidiaries that are owned by this subsidiary, to provide funds to us in order to pay dividends and other distributions on our common stock, including the shares of common stock offered hereby, and preferred stock and amounts due on our indebtedness. Any failure by this subsidiary to comply with these financial covenants will, and any failure by this subsidiary to comply with other covenants in our $70.0 million term loan facility may, result in an event of default under that facility, which could have adverse consequences similar to those that may result from an event of default under our revolving credit facility as described above.

 

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

 

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

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

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

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

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

 

If we default under a credit facility, loan agreement or other debt instrument, the lenders will generally have the right to demand immediate repayment of the principal and interest on all of their loans and, in the case of secured indebtedness, to exercise their rights to seize and sell the collateral.

 

In addition, we have 16,350,000 shares of Class F preferred stock outstanding, the holders of which are entitled to receive, before any dividends are paid on our common stock, monthly dividends, when, as and if authorized by our board of directors and declared by us, at the rate of $1.65625 per annum per share. As a result, we are subject to risks associated with preferred stock financing, including the risk that our cash flow will be insufficient to pay dividends on our preferred stock.

 

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

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

 

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

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

 

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

·                  The market for similar securities issued by other REITs;

·                  General economic and financial market conditions;

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

·                  Changes in legal and regulatory taxation obligations;

·                  Litigation and regulatory proceedings;

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

·                  Changes in our credit ratings; and

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

 

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

 

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

 

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

 

·      Adverse changes in general or local economic conditions;

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

·      Changes in interest rates and operating expenses;

·      Competition for tenants;

·      Changes in market rental rates;

·      Inability to lease properties upon termination of existing leases;

·      Renewal of leases at lower rental rates;

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

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

·      Uninsured property liability;

·      Property damage or casualty losses;

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

·      The need to periodically renovate and repair our properties;

·      Development oriented activities;

·      Physical or weather-related damage to properties;

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

·      Acts of terrorism and war; and

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

 

Real estate property investments are illiquid; therefore, the company may not be able to dispose of properties when desired or on favorable terms.

Real estate investments are relatively illiquid. Our ability to quickly sell or exchange any of our properties in response to changes in economic and other conditions will be limited. No assurances can be given that we will recognize full value, at a price and at terms that are acceptable to us, for any property that we are required to sell for liquidity reasons. Our inability to respond rapidly to changes in the performance of our investments could adversely affect our financial condition and results of operations.

 

Our acquisition of additional properties may have a significant effect on our business, liquidity, financial position and/or results of operations.

We are engaged in the process of identifying, analyzing, underwriting, and negotiating possible acquisition transactions. We cannot provide any assurances that we will be successful in consummating future acquisitions on favorable terms or that we will realize the benefits that we anticipate from such acquisitions. Our inability to consummate one or more acquisitions on such terms, our failure to adequately underwrite and identify risks and obligations when acquiring properties, or our failure to realize the intended benefits from one or more acquisitions, could have a significant adverse effect on our business, liquidity, financial position and/or results of operations, including as a result of our incurrence of additional indebtedness and related interest expense and our assumption of unforeseen contingent liabilities in connection with completed acquisitions.

 

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

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

 

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

 

In addition, although we obtain title insurance policies of our properties to protect us and our properties against unknown title defects (such as claims of ownership, liens or other encumbrances), there may be certain title defects that our title insurance will not cover. If a material title defect related to any of our properties is not adequately covered by a title insurance policy, we could lose some or all of our capital invested in and our anticipated profits from such property, cause a financial misstatement or lead to reputational damage to the company.

 

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

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

 

Litigation risks could affect our business.

From time to time, we are involved in legal proceedings, lawsuits, and other claims. An unfavorable resolution of litigation may have a material adverse effect on our business, results of operations and financial condition. Regardless of its outcome, litigation may result in substantial costs and expenses and significantly divert the attention of management.

 

Property taxes may increase without notice.

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

 

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We depend on key personnel.

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

 

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

Natural disasters, terrorist attacks, other acts of violence or war, or other unexpected events may negatively affect our operations, the market price of our capital stock and the value of our debt securities. There can be no assurance that events like these will not occur or have a direct impact on our tenants, our business or the United States generally.

 

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

 

We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and maintenance of records, which may include personal identifying information. Although we have taken steps to protect the security of the data maintained in our information systems, our security measures may not be able to prevent the systems’ improper functioning, or the theft of intellectual property, personal information, or personal property, such as in the event of cyber-attacks. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, result in theft of company assets, damage our reputation, subject us to liability claims and could adversely affect our business, financial condition and results of operations.

 

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

Over the last several years, the United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks and debt securities to fluctuate substantially and the spreads on prospective debt financings to widen considerably. In addition, the ongoing global financial crisis (which includes concerns that certain European countries may be unable to pay their national debt) has had a similar effect. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases have resulted in the unavailability of certain types of financing. Unrest in certain Middle Eastern countries and resultant fluctuation in petroleum prices have added to the uncertainty in the capital markets.  Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing at reasonable terms, which may negatively affect our ability to make acquisitions. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of financing or difficulties in obtaining financing. These events in the stock and credit markets may make it more difficult or costly for us to raise capital through the issuance of our common stock or preferred stock or debt securities. These disruptions in the financial markets also may have a material adverse effect on the market value of our common stock, preferred stock and debt securities, the income we receive from our properties and the lease rates we can charge for our properties, as well as other unknown adverse effects on us or the economy in general.

 

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

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

 

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

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

 

Inherent limitations of internal controls over financial statements and safeguarding of assets may adversely impact our financial condition and results of operations.

Our internal controls over financial reporting and our operating internal controls may not prevent or detect financial misstatements or loss of assets because of inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to financial statement accuracy and safeguarding of assets. Any failure of these internal controls could result in decreased investor confidence in the accuracy and completeness of our financial reports, civil litigation or investigations by the NYSE, the SEC or other regulatory authorities, which may adversely impact our financial condition and results of operations.

 

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

The Financial Accounting Standards Board, or FASB, in conjunction with the SEC, has several key projects on their agenda that could impact how we currently account for our material transactions, including lease accounting and other convergence projects with the International Accounting Standards Board. At this time, we are unable to predict with certainty which, if any, proposals may be passed or what level of impact any such proposal could have on the presentation of our consolidated financial statements, our results of operations and our financial ratios required by our debt covenants.

 

Our business could be negatively affected as a result of actions of activist stockholders and shareholder advisory firms.

Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. If we become engaged in a process or proxy contest with an activist stockholder in the future, our business could be adversely affected, as such activities could be costly and time-consuming, disrupt our operations and divert the attention of management and our employees from executing our business plan. Additionally, perceived uncertainties as to our future direction as a result of stockholder activism or actual or potential changes to the composition of our Board of Directors or management team may lead to the perception of a change in the direction of our business, instability or lack of continuity, which may be exploited by our competitors, cause concern to current or potential sellers of properties, tenants and financing sources, and make it more difficult to attract and retain qualified personnel. If potential or existing sellers of properties, tenants or financing sources choose to delay, defer or reduce transactions with us or transact with our competitors instead of us because of any such issues, then our results of operations could be adversely affected. Similarly, we may suffer damage to our reputation (for example, regarding our corporate governance or stockholder relations) or brand by way of actions taken or statements made by outside constituents, including activist investors and shareholder advisory firms, which could adversely affect the market price of our common stock and preferred stock and the value of our debt securities, including the notes, resulting in significant loss of value, which could impact our ability to access capital, increase our cost of capital, and decrease our ability to acquire properties on attractive terms.

 

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Our charter contains restrictions upon ownership of our common stock.

Our charter contains restrictions on ownership and transfer of our common stock intended to, among other purposes, assist us in maintaining our status as a REIT for United States federal and/or state income tax purposes. For example, our charter restricts any person from acquiring actual or constructive ownership of more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock. These restrictions could have anti-takeover effects and could reduce the possibility that a third party will attempt to acquire control of us, which could adversely affect the market price of our common stock.

 

Item 1B:        Unresolved Staff comments

 

There are no unresolved staff comments.

 

Item 2:           Properties

 

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

 

Item 3:           Legal Proceedings

 

We are subject to certain claims and lawsuits in the ordinary course of business, the outcome of which cannot be determined at this time. In the opinion of management, any liability we might incur upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.

 

Item 4:           Mine Safety Disclosures

 

None.

 

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PART II

 

Item 5:                                   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

A. Our common stock is traded on the NYSE under the ticker symbol “O.” The following table shows the high and low sales prices per share for our common stock as reported by the NYSE, and distributions declared per share of common stock for the periods indicated.

 

 

 

Price Per Share

 

 

 

 

 

 

of Common Stock

 

 

Distributions

 

 

 

High

 

Low

 

 

Declared (1)

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

First Quarter

 

$

52.41

 

$

45.65

 

 

$

0.5675000

 

Second Quarter

 

48.88

 

43.15

 

 

0.5690000

 

Third Quarter

 

52.66

 

44.23

 

 

0.5705000

 

Fourth Quarter

 

55.54

 

47.95

 

 

0.5720000

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

$

2.2790000

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

First Quarter

 

$

45.11

 

$

37.01

 

 

$

0.5468126

 

Second Quarter

 

44.98

 

40.21

 

 

0.5477501

 

Third Quarter

 

45.83

 

40.56

 

 

0.5486876

 

Fourth Quarter

 

49.65

 

40.71

 

 

0.5496251

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

$

2.1928754

 

 

(1) Common stock cash distributions are declared monthly by us based on financial results for the prior months.  At December 31, 2015, a distribution of $0.191 per common share had been declared and was paid in January 2016.

 

B.  There were 10,051 registered holders of record of our common stock as of December 31, 2015. We estimate that our total number of shareholders is over 354,000 when we include both registered and beneficial holders of our common stock.

 

C.  During the fourth quarter of 2015, 225 shares of stock, at a price of $49.61, and 18,645 shares of stock, at a price of $51.63, were withheld for state and federal payroll taxes on the vesting of employee stock awards, as permitted under the 2012 Incentive Award Plan of Realty Income Corporation.

 

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Table of Contents

 

Item 6:         Selected Financial Data

(not covered by Report of Independent Registered Public Accounting Firm)

(dollars in thousands, except for per share data)

 

 

As of or for the years ended December 31,

 

2015

 

2014

 

2013

 

2012

 

2011

 

Total assets (book value)

 

$

11,865,870

 

$

11,012,622

 

$

9,924,441

 

$

5,429,348

 

$

4,404,492

 

Cash and cash equivalents

 

40,294

 

3,852

 

10,257

 

5,248

 

4,165

 

Total debt

 

4,841,486

 

4,930,947

 

4,166,840

 

2,869,853

 

2,040,284

 

Total liabilities

 

5,312,537

 

5,371,523

 

4,503,083

 

3,016,554

 

2,149,638

 

Total equity

 

6,553,333

 

5,641,099

 

5,421,358

 

2,412,794

 

2,254,854

 

Net cash provided by operating activities

 

692,303

 

627,692

 

518,906

 

326,469

 

298,952

 

Net change in cash and cash equivalents

 

36,442

 

(6,405

)

5,009

 

1,083

 

(13,442

)

Total revenue

 

1,023,285

 

933,505

 

780,209

 

484,581

 

413,544

 

Income from continuing operations

 

284,855

 

269,140

 

180,613

 

141,895

 

140,659

 

Income from discontinued operations

 

-

 

2,800

 

65,670

 

17,257

 

16,373

 

Net income

 

284,855

 

271,940

 

246,283

 

159,152

 

157,032

 

Preferred stock dividends

 

(27,080

)

(37,062

)

(41,930

)

(40,918

)