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Realty Income Corp. 10-Q Summary: Period Ended September 30, 2002

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, for Realty Income Corporation, a Maryland corporation operating as an equity Real Estate Investment Trust (REIT). The Company focuses on acquiring and owning freestanding retail properties leased to regional and national chains under long-term net leases. As of the reporting date, the portfolio consisted of 1,199 properties with an occupancy rate of 98.2%.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenue increased 17.1% ($5.1 million) for the quarter and 15.2% ($13.3 million) for the nine-month period compared to 2001, driven primarily by acquisitions in 2001 and 2002.
• Profitability: Net income available to common stockholders rose 31.4% for the quarter and 22.5% for the nine-month period. Excluding gains on property sales, net income increased 36.6% (quarter) and 39.1% (nine months).
• FFO Expansion: FFO increased 23.9% for the quarter and 25.8% for the nine-month period, reflecting strong operational performance.
• Interest Expense: Interest expense decreased 2.6% for the quarter and 16.4% for the nine-month period due to lower average interest rates (down 85 basis points for the quarter) and reduced average outstanding balances.
• Portfolio Activity: The Company invested $115.5 million in 100 new properties during the first nine months of 2002. Conversely, it sold 25 investment properties for $15.9 million, recognizing a gain of $5.5 million.

Guidance, Outlook, and Risks

• Capital Markets: In October 2002 (subsequent to period end), the Company secured a new $250 million credit facility at LIBOR + 100 basis points, replacing previous facilities and lowering borrowing costs.
• Distributions: The monthly distribution to common stockholders was increased to $0.19375 per share in October 2002, representing an annualized yield of approximately 6.9%. The Company maintains a policy of monthly distributions.
• Outlook: Management anticipates receiving up to $50 million in proceeds from property sales over the next 12 months to fund new acquisitions. The Company expects to continue its strategy of acquiring freestanding, single-tenant retail properties.
• Risks: Key risks include tenant defaults, interest rate fluctuations, general economic conditions, and the Company's continued qualification as a REIT. The filing notes that forward-looking statements are subject to uncertainties regarding growth strategies and market trends.
• Accounting Changes: The Company adopted FASB Statement No. 142 (Goodwill) and No. 144 (Disposal of Long-Lived Assets) in 2002, resulting in the cessation of goodwill amortization and changes in how discontinued operations are reported.

Investor Verification Checklist

• Debt Maturity Profile: Verify the terms of the new $250 million credit facility and the maturity dates of the $230 million in fixed-rate notes (2007, 2008, 2009).
• Occupancy Trends: Monitor the 21 unleased properties (1.8% vacancy) and the timeline for re-leasing or selling them.
• FFO vs. Distributions: Confirm that AFFO continues to cover monthly distributions, noting the current coverage ratio is approximately 1.26x for the nine-month period.
• Acquisition Yield: Review the 10.4% initial weighted average contractual lease rate on new 2002 acquisitions to ensure it remains accretive to existing portfolio yields.
• Discontinued Operations: Assess the impact of the $4.956 million income from discontinued operations on the nine-month net income, as this is non-recurring.