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Realty Income Corp. 10-Q Summary: Period Ended September 30, 2001

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2001, and the nine months ended on that date. Realty Income Corporation ("Realty Income") operates as an equity Real Estate Investment Trust (REIT) focused on acquiring and leasing freestanding, single-tenant retail properties under long-term net leases. As of September 30, 2001, the Company owned a portfolio of 1,082 retail properties in 46 states, approximately 98.0% of which were leased. The Company also operates a subsidiary, Crest Net Lease, which acquires properties for resale, primarily to buyers utilizing tax-deferred exchanges.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenue increased 3.8% to $30.3 million for the quarter and 4.1% to $89.4 million for the nine months, driven primarily by property acquisitions in 2000 and 2001.
• Profitability: Net income available to common stockholders increased 49.5% to $14.8 million for the quarter and 36.0% to $41.9 million for the nine months. This significant increase was largely due to higher gains on the sale of investment properties ($8.9 million in the first nine months of 2001 vs. $1.8 million in 2000).
• Interest Expense: Interest expense decreased by $2.1 million for the quarter and $2.1 million for the nine months compared to the prior year periods. This reduction resulted from lower average outstanding debt balances and declining interest rates following Federal Reserve rate cuts.
• Impairment Charges: The Company recorded a $1.05 million provision for impairment losses on properties held for sale during the first nine months of 2001, compared to none in the prior year.

Guidance, Outlook, and Management Commentary

• Capital Markets: The Company raised approximately $155.6 million in net proceeds from two common stock offerings in May and October 2001. These proceeds were used to repay borrowings under its $200 million acquisition credit facility.
• Distributions: Realty Income increased its monthly distribution to common stockholders to $0.18875 per share in October 2001, marking the 16th consecutive quarterly increase. The annualized yield was approximately 7.9% based on the November 12, 2001 stock price.
• Portfolio Strategy: Management continues to actively manage the portfolio, selling properties to reinvest proceeds at higher returns or to enhance credit quality. The Company anticipates receiving up to $50 million in proceeds from property sales over the next 12 months.
• Liquidity: As of November 12, 2001, the Company had $177.0 million of borrowing capacity available on its credit facilities. Total debt represented approximately 21.1% of total market capitalization.
• Risks: Forward-looking statements are subject to risks including general economic conditions, interest rate fluctuations, tenant defaults, and the Company's continued qualification as a REIT.

Investor Verification Checklist

• Gain on Sales Volatility: Verify the sustainability of net income growth, as it was significantly boosted by one-time gains on property sales ($8.9 million in 9M 2001 vs. $1.8 million in 9M 2000).
• Impairment Provisions: Review the $1.05 million impairment charge recorded on properties held for sale to assess potential future write-downs.
• Debt Maturity Profile: Confirm the maturity schedule of the $230 million in fixed-rate notes and the $97.5 million in variable-rate credit facility borrowings.
• Lease Expirations: Analyze the lease expiration table, noting that 5.8% of annualized rent expires in 2002 and 5.6% in 2003, to evaluate renewal risks.
• FFO vs. Distributions: Confirm that Funds From Operations ($55.5 million for 9M) continue to exceed distributions paid to common stockholders ($46.9 million for 9M) to support the dividend policy.