O

Realty Income Corp. 10-Q Summary: Period Ended June 30, 2007

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2007, and the six months ended on that date. Realty Income Corporation is an equity Real Estate Investment Trust (REIT) focused on acquiring and leasing freestanding, single-tenant retail properties under long-term net leases. As of June 30, 2007, the company owned 1,998 properties across 48 states with an occupancy rate of 98.6%. The portfolio includes 108 different retail chains. The company also operates a taxable REIT subsidiary, Crest Net Lease, Inc., which acquires properties for resale.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenue increased 26.6% to $70.5 million for the quarter and 26.1% to $139.6 million for the six months, driven primarily by 322 properties acquired in 2006 and 46 properties acquired in 2007.
• Profitability: Net income available to common stockholders rose 27.1% for the quarter and 30.5% for the six months compared to the prior year periods.
• Discontinued Operations: Significant gains were recognized from the subsidiary Crest. In the first six months of 2007, Crest sold 31 properties for $69.5 million, resulting in a gain of $6.6 million, compared to a $1.4 million gain in the same period of 2006.
• Acquisitions: The company invested $98.3 million in 46 new retail properties during the first six months of 2007, compared to $146.2 million in 48 properties in the same period of 2006.
• Interest Expense: Interest expense increased slightly due to higher average outstanding debt balances, partially offset by lower average interest rates on new issuances.

Guidance, Outlook, and Risks

• Dividend Policy: The company increased its monthly common stock distribution to $0.12775 per share in July 2007, marking the 39th consecutive quarterly increase. The annualized yield was approximately 6.5% based on the July 30, 2007 stock price.
• Capital Strategy: Management maintains a conservative capital structure. Total debt was approximately 25.2% of total market capitalization as of July 30, 2007. The company has a $300 million unsecured credit facility with no outstanding balance as of late July 2007.
• Outlook: The company anticipates selling investment properties to generate between $10 million and $35 million in proceeds over the next 12 months to reinvest in new acquisitions. It expects to continue its policy of monthly distributions.
• Risks: Key risks include tenant defaults, fluctuations in interest rates, access to capital markets, and general economic conditions. The company has no off-balance sheet arrangements or variable interest entities.
• Credit Ratings: In April 2007, Moody's upgraded the company's senior unsecured debt rating to Baa1 and preferred stock rating to Baa2, both with stable outlooks.

Investor Verification Checklist

• FFO vs. Distributions: Verify that FFO ($95.3 million for six months) continues to exceed cash distributions to common stockholders ($76.9 million) to ensure dividend sustainability.
• Debt Maturity Profile: Review the maturity schedule of the $920 million in notes payable, noting $100 million due in November 2008 and $20 million due in January 2009.
• Discontinued Operations Volatility: Assess the impact of Crest's property sales on net income, as these gains are non-recurring and classified as discontinued operations.
• Occupancy Trends: Monitor the 98.6% occupancy rate and the 27 properties currently available for lease to gauge portfolio stability.
• Interest Rate Exposure: Confirm the impact of rising LIBOR on the variable-rate credit facility, although the facility was unutilized at the end of the period.