ITEM 1: BUSINESS - -----------------
THE COMPANY ===========
Realty Income Corporation ("Realty Income" or the "Company") is a fully integrated, self-administered and self-managed Real Estate Investment Trust ("REIT") and the nation's largest publicly-traded owner of freestanding, single-tenant, retail properties diversified geographically and by industry and operated under triple-net lease agreements. As of February 1, 1996, the Company owned a diversified portfolio of 686 properties located in 42 states with over 4.6 million square feet of leasable space. Over 99% of the Company's properties were leased as of February 1, 1996. Unless otherwise indicated, information regarding the Company's properties is as of February 1, 1996.
Realty Income adheres to a focused strategy of acquiring freestanding, single-tenant, retail properties leased to national and regional retail chains under long-term, triple-net lease agreements. The Company typically acquires, and then leases back, retail store locations from retail chain store operators, providing capital to the operators for continued expansion and other purposes. The Company's triple-net lease agreements generally are for initial terms of 15 to 25 years, require the tenant to pay a minimum monthly rent and all property operating expenses (taxes, insurance and maintenance), and provide for future rent increases based on increases in the consumer price index or additional rent calculated as a percentage of the tenant's gross sales above a specified level.
Since 1970, Realty Income has acquired and leased back to national and regional retail chains over 630 properties (including approximately 20 properties that have been sold) and has collected in excess of 98% of the contractual rent obligations on those properties. Realty Income believes that the long-term ownership of an actively managed, diversified portfolio of retail properties leased under long-term, triple-net lease agreements will produce consistent, predictable income and the potential for long-term capital appreciation. Management believes that long-term leases, coupled with tenants assuming responsibility for property expenses under the triple-net lease structure, generally produce a more predictable income stream than many other types of real estate portfolios. As of February 1, 1996, the Company's single-tenant properties were leased pursuant to leases with an average remaining term (excluding extension options) of approximately 9.2 years. See "Properties." The Company was formed on September 9, 1993 in the State of Delaware. Realty Income commenced operations as a REIT on August 15, 1994 through the merger of 25 public and private real estate limited partnerships with and into the Company (the "Consolidation"). Each of the partnerships was formed between 1970 and 1989 for the purpose of acquiring and managing long-term, triple-net leased properties. The partnerships historically made regular monthly cash distributions to investors. Realty Income pays a regular monthly distribution to its stockholders.
The Company is a fully integrated real estate company with in-house acquisition, leasing, legal, financial underwriting, portfolio management and capital markets expertise. The seven senior officers of the Company, who have each managed the Company's properties and operations for between five and 26 years, owned approximately 3.9% of the Company's outstanding common stock, par value $1.00 per share (the "Common Stock") as of March 15, 1996.
Realty Income has 34 employees as of March 1, 1996.
RECENT DEVELOPMENTS ===================
Since the Consolidation, the Company has implemented its growth plan, which is intended to increase the Company's revenue and funds from operations ("FFO") per share. FFO is defined in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. As part of its growth plan, from the date of the Consolidation through February 1, 1996, the Company acquired 63 additional triple-net leased retail properties with an aggregate initial annual contractual base rent of approximately $7.9 million.
INCREASE IN MONTHLY DISTRIBUTION. In August 1995, the Company increased its monthly distribution to $0.155 per share from $0.15 per share, representing an increase of 3.3%. The Company has paid distributions of $0.155 per share in August 1995 through February 1996. The February 1996 distribution was paid on January 26, 1996 and a special distribution of $0.23 per share was also paid in January 1996. The monthly distribution of $0.155 per share represents a current annualized distribution of $1.86 per share, and an annualized distribution yield of approximately 8.6% based on the last reported sale price of the Company's Common Stock on the New York Stock Exchange ("NYSE") on February 27, 1996. Although the Company expects to continue its policy of paying monthly distributions, there can be no assurance that the current level of distributions will be maintained by the Company or as to the actual distribution yield for any future period. See "Distribution Policy."
MERGER OF THE ADVISOR COMPANY. Prior to August 17, 1995, the day-to-day operations of the Company were managed by R.I.C. Advisor, Inc. (the "Advisor Company") pursuant to an advisory agreement. In order to create a fully integrated company and more closely align the interests of management with the interests of the Company's stockholders, the Advisor Company was merged with and into Realty Income on August 17, 1995 (the "Merger"). Pursuant to the Agreement and Plan of Merger dated April 28, 1995 (the "Merger Agreement"), the outstanding shares of the Advisor Company's common stock were converted into 990,704 newly issued shares of Realty Income Common Stock. As a result of the Merger, the employees of the Advisor Company became employees of the Company, and the Company became a fully integrated, self-administered and self-managed REIT.
ACQUISITION OF 63 TRIPLE-NET LEASED, RETAIL PROPERTIES. Since the Consolidation, the Company has increased the size of its portfolio through a strategic program of acquisitions. The Company has acquired 63 additional properties (the "New Properties"), and selectively sold five properties, increasing the number of properties in its portfolio by 9.2% from 628 properties at August 15, 1994 to 686 properties as of February 1, 1996. Of the New Properties, 61 were occupied as of February 1, 1996 and the remaining two were pre-leased and under construction pursuant to contracts under which the tenants have agreed to develop the properties (with development costs funded by the Company) and to begin paying rent when the premises open for business. The New Properties were acquired for an aggregate cost of approximately $70.7 million (including the estimated development costs of the two properties under construction), are located in 20 states, will contain approximately 655,900 leasable square feet and are 100% leased under triple-net leases, with an average initial lease term of 16.4 years. The weighted average annual unleveraged return on the cost of the New Properties (including the estimated cost of properties under construction) is estimated to be 11.3%, computed as estimated contractual net operating income (which in the case of a triple-net leased property is equal to the base rent or, in the case of properties under construction, the estimated base rent under the lease) for the first year of each lease, divided by total acquisition and estimated development costs. No assurance can be given that the actual return on the cost of the New Properties will not differ from the foregoing percentage. In addition to acquiring the New Properties, at February 1, 1996 the Company had entered into purchase agreements to acquire three additional properties for an aggregate cost of approximately $2.6 million.
VARIABLE SENIOR NOTE REDEMPTION. On February 15, 1996, the Company announced its intent to redeem all of its outstanding variable rate senior notes due 2001 (the "Notes"). The Notes will be redeemed at par plus accrued interest to the date of redemption, which is scheduled for March 29, 1996.
$130 MILLION UNSECURED ACQUISITION CREDIT FACILITY. In November 1994, the Company obtained a $100 million, three-year, revolving, unsecured acquisition credit facility (the "Acquisition Credit Facility") from The Bank of New York, as agent, and several major U.S. and non-U.S. commercial banks. In December 1995, the Company negotiated several modifications to the credit facility including (i) an increase in borrowing capacity to $130 million from $100 million; (ii) a reduction in the initial interest rate to London Interbank Offered Rate ("LIBOR") plus 1.25% from LIBOR plus 1.375%; and (iii) an extension of the credit facility from November 1997 to November 1998. The Acquisition Credit Facility has been used to fund a portion of the property acquisitions completed since the Consolidation and is anticipated to continue to be used to acquire triple-net leased, retail properties.
LISTING OF THE COMMON STOCK ON THE NYSE. The Common Stock was authorized for listing on the NYSE under the symbol "O" and commenced trading on the NYSE on October 18, 1994.
BUSINESS OBJECTIVES AND STRATEGY ================================
GENERAL. The Company's primary business objective is to generate a consistent and predictable level of FFO per share and distributions to stockholders. Additionally, the Company generally will seek to increase FFO per share and distributions to stockholders through both internal and external growth, while also seeking to lower the ratio of distributions to stockholders as a percentage of FFO in order to allow internal cash flow to be used to fund additional acquisitions and for other corporate purposes. The Company pursues internal growth through (i) contractual rent increases on existing leases; (ii) rental increases at the termination of existing leases when market conditions permit; and (iii) the active management of the Company's property portfolio, including selective sales of properties. The Company generally pursues external growth through the acquisition of additional properties under long-term, triple-net lease agreements with initial contractual base rent which, at the time of acquisition, is in excess of the Company's estimated cost of capital.
INVESTMENT PHILOSOPHY. Realty Income believes that the long-term ownership of an actively managed, diversified portfolio of retail properties under long-term, triple-net lease agreements should produce consistent, predictable income and the potential for long-term capital appreciation. Under a triple-net lease agreement, the tenant agrees to pay a minimum monthly rent and all property expenses (taxes, maintenance, and insurance) plus, typically, future rent increases based on increases in the consumer price index or additional rent calculated as a percentage of the tenant's gross sales above a specified level.
The Company believes that long-term leases, coupled with the tenants assuming responsibility for property expenses, produce a more predictable income stream than many other types of real estate portfolios, while continuing to offer the opportunity for capital appreciation.
INVESTMENT STRATEGY. In identifying new properties for acquisition, Realty Income focuses on providing expansion capital to middle market retail chains by acquiring, then leasing back, their retail store locations. The Company classifies retail tenants into three categories: venture, middle market, and upper market. Venture companies are those which typically offer a new retail concept in one geographic region of the country and operate between five and 100 retail outlets. In general, these retail chains are thinly capitalized and are in the process of solving distribution, marketing, concept, geographic adaptation, and other problems associated with a new, growing company. Middle market retail chains are those which typically have 100 to 500 retail outlets, operations in more than one geographic region, success through one or more economic cycles, a proven, replicable concept, and an objective of further expansion. The upper market retail chains typically consist of companies with 500 or more stores which operate nationally in a mature retail concept. They generally have strong operating histories and access to several sources of capital.
Realty Income focuses on acquiring properties leased to emerging, middle market retail chains which the Company believes are more attractive for investment because: (i) they generally have overcome many of the operational and managerial obstacles that tend to adversely affect venture retailers; (ii) they typically require capital to fund expansion but have more limited financing options compared to upper market retailers; (iii) historically, they generally have provided attractive risk-adjusted returns to the Company over time, since their financial strength has in many cases tended to improve as their businesses have matured; (iv) their relatively large size compared to venture retailers allows them to spread corporate expenses among a greater number of stores; and (v) compared to venture retailers, middle market retailers typically have the critical mass to survive if a number of locations have to be closed due to underperformance.
ACQUISITION STRATEGY. Realty Income seeks to invest in industries that are dominated by independent local operators and in which several well organized regional and national chains are capturing market share through service, quality control, economies of scale, mass media advertising, and selection of prime retail locations. The Company executes its acquisition strategy by acting as a source of capital to regional and national retail chain stores in a variety of industries by acquiring, then leasing back, their retail store locations.
Relying on executives from its acquisitions, portfolio management, finance, accounting, operations, capital markets, and legal departments, the Company undertakes stringent research and analysis in identifying appropriate industries, tenants, and property locations for investment. In selecting real estate for potential investment, the Company generally will seek to acquire properties that have the following characteristics:
* Freestanding, commercially zoned property with a single tenant;
* Properties that are important retail locations for national and regional retail chains;
* Properties that are located within attractive demographic areas relative to the business of their tenants, with high visibility and easy access to major thoroughfares;
* Properties that can be purchased with the simultaneous execution or assumption of long-term, triple-net lease agreements, providing the opportunity for both current income and future rent increases based on increases in the consumer price index or through the payment of additional rent calculated as a percentage of the tenant's gross sales above a specified level; and
* Properties that can be acquired at or below their appraised value at prices generally ranging from $300,000 to $10 million.
PORTFOLIO MANAGEMENT STRATEGY. The active management of the property portfolio is an essential component of the Company's long-term strategy. The Company continually monitors its portfolio for changes that could affect the performance of the industries, tenants, and locations in which it has invested. Realty Income's executive committee meets at least monthly to review industry and tenant research, due diligence, property operations and portfolio management. This monitoring typically includes ongoing review and analysis of: (i) the performance of various tenant industries; (ii) the operation, management, business planning, and financial condition of the tenants; (iii) the health of the individual markets in which the Company owns properties, from both an economic and real estate standpoint; and (iv) the physical maintenance of the Company's individual properties. The portfolio is analyzed on an ongoing basis with a view towards optimizing performance and returns.
While the Company generally intends to hold its triple-net leased properties for long-term investment, the Company believes that opportunities may exist to increase FFO through the active management of its portfolio of triple- net lease properties. The Company intends to pursue a strategy of identifying properties
that may be sold at attractive prices where the reinvestment of the sales proceeds is expected to generate a higher cash flow to the Company. While the Company intends to pursue such a strategy, it will only do so within the constraints of the rules regarding REIT status.
CAPITAL STRATEGY. The Company utilizes its $130 million, unsecured Acquisition Credit Facility as a vehicle for the short-term financing of the acquisition of new properties. When outstanding borrowings under the Acquisition Credit Facility reach a certain level (generally in the range of $50 to $100 million), the Company intends 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 convertible Preferred Stock, debt securities or convertible debt securities. However, there can be no assurance that the Company will be able to effect any such refinancing or regarding the terms on which any such refinancing may be accomplished. The Company believes that it is best served by a conservative capital structure, with a majority of its capital consisting of equity. As of December 31, 1995, the Company's total indebtedness was approximately 4.9% of its total assets.
COMPETITIVE STRATEGY. The Company believes that to utilize its investment philosophy and strategy most successfully, it must seek to maintain the following competitive strategy:
* SIZE OF INVESTMENT PROPERTIES: The Company believes that smaller ($300,000 to $10,000,000) retail triple-net leased properties represent an attractive investment opportunity in today's real estate environment. Due to the complexities of acquiring and managing a large portfolio of relatively small assets, the Company believes that these types of properties have not experienced significant institutional participation or the corresponding yield reduction experienced by larger income producing properties. The Company believes the less intensive day to day property management required by triple-net lease agreements, coupled with the active management of a large portfolio of smaller properties by the Company, is an effective investment strategy.
* INVESTMENT IN NEW INDUSTRIES: While specializing in smaller properties, the Company will seek to further diversify its portfolio among a variety of industries. The Company believes that diversification will allow it to invest in industries that are currently growing and have characteristics the Company finds potentially profitable. These characteristics include, but are not limited to, industries dominated by local operators where national and regional chain operators can gain substantial market share and dominance through more
efficient operations, as well as industries taking advantage of major demographic shifts in the population base. For example, in the early 1970s, Realty Income targeted the fast food industry to take advantage of the country's increasing desire to dine away from home, and in the early 1980s, it targeted the child day care industry, responding to the need for professional child care as more women entered the work force.
* DIVERSIFICATION: Diversification of the portfolio by industry type, tenant and geographic location is key to the Company's objective of providing predictable investment results for its stockholders. As the Company expands it will seek to further diversify its portfolio.
* MANAGEMENT SPECIALIZATION: The Company believes that its management's specialization in small properties operated under triple-net lease agreements is important to meeting its objectives. The Company plans to maintain this specialization and will seek to employ and train high quality professionals in this specialized area of real estate ownership, finance and management.
* TECHNOLOGY: The Company intends to stay at the forefront of technology in its efforts to efficiently and economically carry out its operations. The Company maintains a sophisticated information system that allows it to analyze its portfolio's performance and actively manage its investments. In addition, the Company maintains record-keeping on an optical disc storage and retrieval system which gives it ready access to records on a cost efficient and timely basis. The Company believes that technology and information based systems will play an increasingly important role in its competitiveness as an investment manager and source of capital to a variety of industries and tenants.
PROPERTIES ==========
As of February 1, 1996, the Company owned 686 properties in 42 states consisting of 135 after-market automotive retail locations, 319 child care centers, 36 convenience stores, 4 home furnishings stores, 177 restaurant facilities and 15 other properties. Of the 686 properties, 627 or 91% are leased to national or regional retail chain operators; 35 or 5% are leased to franchisees of retail chain operators; 20 or 3% are leased to other tenant types; and four or less than 1% are available for lease. Over 97% of the properties were under triple-net lease agreements. Triple-net leases typically require the tenant to be responsible for substantially all property operating costs including property taxes, insurance, maintenance and structural repairs. The Company's net-leased retail properties are primary retail locations of national and regional retail chain store operators. The properties average approximately 6,800 square feet of leasable retail space on approximately 42,400 square feet of land. Generally, buildings are single-story properties with adequate parking on site to accommodate peak retail traffic periods. The properties tend to be on major thoroughfares with relatively high traffic counts and adequate access, egress and proximity to a sufficient population base to constitute a sufficient market or trade area for the retailer's business.
As of February 1, 1996, Realty Income owned a diversified portfolio of 686 properties in 42 states consisting of over 4.6 million square feet of leasable space. The following table sets forth certain geographic diversification information regarding these properties:
(1) Does not include percentage rents (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level), if any, that may be payable under leases covering certain of the properties. Annualized base rent is calculated by multiplying the monthly contractual base rent as of February 1, 1996 for each of the properties by 12.
The following table sets forth certain information regarding the Company's properties as of February 1, 1996, classified according to the business of the respective tenants:
(1) Approximate total number of retail locations operated by each tenant (including both owned and franchised locations), based on information provided to the Company by the respective tenants.
(2) Does not include percentage rents (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level), if any, that may be payable under leases covering certain of the properties. Annualized base rent is calculated by multiplying the monthly contractual base rent as of February 1, 1996 for each of the properties by 12.
Of the 686 properties, 676 are single-tenant properties with the remaining properties being multi-tenant properties. As of
February 1, 1996, 672 or over 99% of the single-tenant properties were triple-net leased pursuant to leases with an average remaining lease term (excluding extension options) of approximately 9.2 years. The following table sets forth certain information regarding the timing of lease expirations on the Company's 672 triple-net leased, single tenant retail properties:
(1) The table does not include ten multi-tenant properties and four vacant, unleased properties owned by the Company. The average remaining lease term for all leases on the Company's properties, excluding the multi-tenant properties, is approximately 9.2 years. The lease expirations for two properties under construction are based on the estimated date of completion of such properties.
(2) Does not include percentage rents (i.e., additional rent calculated as a percentage of the tenant's gross sales above a specified level), if any, that may be payable under leases covering certain of the properties. Annualized base rent is calculated by multiplying the monthly contractual base rent as of February 1, 1996 for each of the properties by 12.
DESCRIPTION OF LEASING STRUCTURE. As of February 1, 1996, over 97% of the Company's properties were leased pursuant to triple-net leases. In most cases, the leases are for initial terms of from 15 to 20 years and the tenant has an option to extend the initial term. The leases generally provide for a minimum base rent plus future increases based on increases in the consumer price index or additional rent based upon the tenant's gross sales above a specified level (i.e., percentage rent). Where leases provide for rent increases based on increases in the consumer price index, such increases permanently become part of the base rent. Where leases provide for percentage rent, this additional rent is typically payable only if the tenant's gross sales for a given period (usually one year) exceed a specified level, and then is typically calculated as a percentage of only the amount of gross sales in excess of such level. In general, the leases require the tenant to pay all real property taxes, insurance, and expenses of maintaining the property.
Description of Industries - -------------------------
The Company's investments in properties at February 1, 1996 were concentrated in five major industries: after-market automotive parts and service stores, child care, convenience stores, home furnishings stores and restaurants. In addition, the Company owns three mixed-use light industrial business parks.
THE AFTER-MARKET AUTOMOTIVE PARTS AND SERVICE INDUSTRY AND TENANTS. The motor vehicle and parts after- market industry is comprised of various parts producing firms and retail outlets providing parts, service and repair to automobiles throughout the country. The Company has selectively invested in the following sectors of the after-market automotive industry: auto parts and accessories stores, lubrication services and tire stores.
Auto Parts and Accessories. The Company believes Northern Automotive is one of the largest operators of retail after-market auto parts stores in the nation based on number of stores. The Company began investing in Northern Automotive stores in 1987 and currently owns 79 Northern Automotive properties located in 14 states. Based on information provided by Northern Automotive, the Company believes it is the largest owner of Northern Automotive properties.
Lubrication Services. Based upon industry reports, the Company believes that the quick lube market is a growing segment of the motor oil business. The Company began investing in Jiffy Lube International, Inc. ("Jiffy Lube") in 1985 and currently owns 24 Jiffy Lube locations in eight states.
Tire Stores. With approximately 294 outlets as of February 1, 1996, the Company believes Discount Tire Stores is one of the largest independent retail tire sales operation in the nation. The Company began investing in Discount Tire Stores in 1990 and currently owns 18 Discount Tire Stores properties located in five states.
THE CHILD CARE INDUSTRY AND TENANTS. According to the U.S. Bureau of Labor Statistics, the number of children under age six with mothers in the labor force grew from 6.5 million in 1980 to 9.6 million in 1993. Fueled by the increase in the number of women in the workplace, child care has grown into a national industry.
The Company believes that child day care remains a highly fragmented industry, with only three chains operating in excess of 500 centers. The Company's child care properties are geographically diversified, with properties leased to the three largest operators (based on number of locations) of child day care centers in the United States: La Petite Academy in 27 states, Children's World Learning Centers in 18 states, and KinderCare Learning Centers in eight states.
THE CONVENIENCE STORE INDUSTRY AND TENANTS. As the supermarket replaced the neighborhood grocery store, the convenience store industry emerged to provide a convenient neighborhood location for the purchase of a limited selection of high use items. The industry today is adapting to a new concept with the combination of a gas station and a traditional convenience store. The integration of the two businesses on one location gives newer convenience stores a competitive advantage over older, single-concept stores. As a result, traditional convenience store chains are beginning to sell gas at their locations while certain petroleum companies are adding convenience stores to their traditional gas stations.
The Company currently owns 36 convenience store properties with 18 leased to Dairy Mart Convenience Stores, Inc., 14 leased to The Pantry, three operated as 7-ELEVEN'S, and one to another tenant. The Company is actively seeking to expand its participation in the convenience store industry through additional acquisitions.
THE HOME FURNISHINGS INDUSTRY AND TENANT. According to the U.S. Bureau of the Census Current Business Reports, the U.S. furniture stores total estimated retail sales were approximately
$17.7 billion for the first six months of 1995, a 6.9% increase over estimated retail sales for the last six months of 1994. The industry is segmented into a number of different niches that compete with one another. The Company believes the largest segments include conventional furniture stores, specialty stores, specialty furniture stores, manufacturers' gallery stores, vertically integrated furniture stores, department stores, general merchandise discounters, and catalog retailers. The Company believes that historically, the conventional furniture store segment was dominated by numerous local, independent retailers operating in a fragmented market. The Company believes that in recent years regional and national retail chains have been taking market share from independent operators through more efficient operations, distribution, marketing, advertising and lower prices.
The Company owns four home furnishing retail store properties which are leased to Levitz Furniture Corporation, one of the nation's largest home furnishings retailers.
THE RESTAURANT INDUSTRY AND TENANTS. According to industry estimates cited in Standard & Poor's Industry Surveys--Leisure Time Basic Analysis, spending for food prepared outside the home has grown steadily for most of the past two decades. The Company currently owns a total of 177 restaurant properties, 133 of them leased to five leading restaurant chains. All five of the Company's major restaurant tenants, Golden Corral, Taco Bell, Sizzler, Hardees and Whataburger, were ranked by NATION'S RESTAURANT NEWS among the top 100 restaurant companies for 1994 based on sales volume.
Matters Pertaining to Certain Properties and Tenants - ----------------------------------------------------
As of February 1, 1996, the Company's four largest tenants were Children's World Learning Centers, La Petite Academy, Golden Corral and Northern Automotive, which accounted for approximately 25.6%, 18.0%, 12.8% and 9.1%, respectively, of the Company's rental revenue for the year ended December 31, 1995.
Four of the Company's properties were vacant as of February 1, 1996 and available for lease. Three of the vacant properties were previously leased to restaurant operators. One of the vacant properties was formerly leased to a child care operator.
As of February 1, 1996, 16 of the Company's properties which were under lease, were vacant and available for sublease by the tenant. Fifteen of these properties (nine restaurants, three automotive stores, two day care and one medical building) were available for sublease and had tenants who were current with their rent and other lease obligations. The other property, a
restaurant, has a tenant who is delinquent with respect to rent payments.
As of February 1, 1996, 17 of the Company's properties had been sublet to tenants in different industries than the original tenant. At February 1, 1996, all of these tenants were current with their rent and other lease obligations.
For a nine month period in 1992, the Company granted temporary rent concessions to Northern Automotive with respect to certain of its leases. Northern Automotive resumed paying full rent on all of its leases in December 1992 and is currently repaying the concessions previously granted.
Development of Certain Properties - ---------------------------------
Of the 63 New Properties acquired by the Company since the Consolidation, 53 were completed properties occupied by the tenant at the time of acquisition while the remaining 10 properties were parcels of undeveloped land acquired for development. In the case of undeveloped land, the Company typically enters into an agreement with a prospective tenant pursuant to which the tenant retains a contractor to construct the improvements on the property and the Company funds the costs of such development. The tenant is contractually obligated to complete the construction on a timely basis, generally within eight months after the Company purchases the land, to pay construction cost overruns to the extent they exceed the construction budget by more than 5% and, in some cases, to obtain a completion bond. The Company also enters into a lease with the prospective tenant at the time the Company purchases the land, which generally requires that the tenant begin paying base rent, calculated as a percentage of the Company's acquisition cost for the property, including construction costs and capitalized interest, when the premises open for business. As of February 1, 1996, eight of the Company's leased and operating New Properties had been developed through Company funding and the Company was funding the development of two additional New Properties. The total acquisition and estimated development costs for these two properties is $1.5 million, of which $1.0 million had not been funded as of February 1, 1996. The Company will continue to seek to acquire land for development under similar arrangements.
DISTRIBUTION POLICY ===================
Distributions are paid to the Company's stockholders on a monthly basis if, as and when declared by the Company's Board of Directors. In order to maintain its tax status as a REIT, the Company is generally required to distribute annually to its
stockholders at least 95% of its taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain). The Company intends to make distributions to its stockholders which are sufficient to meet this requirement.
Future distributions by the Company will be at the discretion of its Board of Directors and will depend on, among other things, its results of operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended (the "Code"), its debt service requirements and such other factors as the Board of Directors may deem relevant. In addition, the Acquisition Credit Facility contains financial covenants which could limit the amount of distributions payable by the Company in the event of a deterioration in the results of operations or financial condition of the Company, and which prohibit the payment of distributions on the Common Stock in the event that the Company fails to pay when due (subject to any applicable grace period) any principal of or interest on borrowings under the Acquisition Credit Facility.
Distributions by the Company to the extent of its current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary income. Distributions in excess of such earnings and profits generally will be treated as a non-taxable reduction in the stockholders basis in its stock to the extent of such basis, and thereafter as a gain from the sale of such stock. Approximately 4.7% of the distributions made or deemed to have been made in 1995 were classified as a return of capital for federal income tax purposes, the Company is unable to predict the portion of 1996 or future distributions which may be classified as a return of capital since such amount depends on the Company's taxable income for the entire year.
In connection with the Merger, the Company was treated as having acquired the accumulated earnings and profits of the Advisor Company (the "Acquired Earnings"). In order to maintain its status as a REIT, the Company was required to make or be deemed to have made distributions sufficient to eliminate the Acquired Earnings prior to December 31, 1995. To meet this requirement, the Company declared in December 1995 a $0.155 per share regular distribution paid on January 15, 1996, a $0.155 per share regular distribution paid on January 26, 1996 (in lieu of the regular February distribution) and a $0.23 per share special distribution paid on January 11, 1996.
OTHER ITEMS ===========
COMPETITION FOR ACQUISITION OF REAL ESTATE. The Company will face competition in the acquisition, operation and sale of its properties. Such competition can be expected from other businesses, individuals, fiduciary accounts and plans and other entities engaged in real estate investment. Some of the Company's competitors are larger and have greater financial resources than the Company. This competition may result in a higher cost for properties the Company wishes to purchase. The tenants leasing the Company's properties generally face significant competition from other operators. This may result in an adverse impact on that portion, if any, of the rental stream to be paid to the Company based on a tenant's revenues and may also adversely impact the tenants' results of operations or financial condition.
ENVIRONMENTAL MATTERS. Investments in real property create a potential for environmental liability on the part of the owner of such property for contamination resulting from the presence or discharge of hazardous substances on the property. Such liability may be imposed without regard to knowledge of, or the timing, cause or person responsible for the release of such substances onto the property. The Company believes that its properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of its present properties. Moreover, the tenants are required to operate in compliance with all applicable federal, state and local laws and regulations. Nevertheless, if environmental contamination should exist, the Company could be subject to strict liability by virtue of its ownership interest.
TAXATION OF THE COMPANY. The Company has elected to be taxed as a REIT under the Code, commencing with its taxable year ended December 31, 1994. As long as the Company meets the requirements under the Code for qualification as a REIT each year, the Company will be entitled to a deduction when calculating its taxable income for dividends paid to its stockholders. For the Company to qualify as a REIT, however, certain detailed technical requirements must be met (including certain income, asset and stock ownership tests) under Code provisions for which, in many cases, there are only limited judicial or administrative interpretations. Although the Company intends to operate so that it will continue to qualify as a REIT, the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility
of future changes in the Company's circumstances preclude any assurance that the Company will so qualify in any year. For any taxable year that the Company fails to qualify as a REIT, it would not be entitled to a deduction for dividends paid to its stockholders in calculating its taxable income. Consequently, distributions to stockholders would be substantially reduced and could be eliminated because of the Company's increased tax liability. Should the Company's qualification as a REIT terminate, the Company may not be able to elect to be treated as a REIT for the subsequent five-year period, which would substantially reduce and could eliminate distributions to stockholders for the years involved.
EFFECT OF DISTRIBUTION REQUIREMENTS. To maintain its status as a REIT for federal income tax purposes, the Company generally is required each year to distribute to its stockholders at least 95% of its taxable income. In addition, the Company is subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of 85% of its ordinary income for such calendar year, 95% of its capital gain net income for the calendar year and any amount of such income that was not distributed in prior years.
ADDITIONAL CAPITAL REQUIREMENTS. The Company's future growth will depend in large part upon its ability to raise additional capital. If the Company were to raise additional capital through the issuance of equity securities, the interests of holders of Common Stock, including the shares of Common Stock offered hereby, could be diluted. Likewise, the Company's Board of Directors is authorized to cause the Company to issue preferred stock in one or more series and entitled to such dividends and voting and other rights as the Board of Directors may determine. Accordingly, the Board of Directors may authorize the issuance of preferred stock with voting, dividend and other similar rights which could be dilutive to or otherwise adversely affect the interests of holders of Common Stock.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its directors and executive officers. The loss of the services of its key employees could have a material adverse effect on the Company's operations.
ITEM 2:

ITEM 2: PROPERTIES - -------------------
Information pertaining to the properties of Realty Income can be found under Item 1.
ITEM 3:

ITEM 3: LEGAL PROCEEDINGS - --------------------------
The Company is subject to certain claims and lawsuits, the outcome of which are not determinable at this time. In the opinion of management, any liability that might be incurred by the Company upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on the consolidated financial condition or results of operations of the Company.
ITEM 4:

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------
No matters were submitted to stockholders during the fourth quarter of the fiscal year.
PART II =======
ITEM 5:

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------
A. Common stock of the Company is listed on the New York Stock Exchange under the symbol "O." The stock initially began trading on The New York Stock Exchange on October 18, 1994. Prior to October 18, 1994, the stock was not publicly traded.
The following table shows the high, low and closing sales prices per share for the Common Stock as reported by the New York Stock Exchange for the periods indicated:
(1) Distributions are currently declared monthly by the Company based on financial results for the prior months. At December 31, 1995, a special distribution of $0.23 per share and two distributions of $0.155 per share had been declared and were paid on January 11, 1996, January 15, 1996 and January 26, 1996, respectively.
B. There were 18,557 holders of record of Realty Income's shares of common stock as of March 8, 1996, however, Realty Income believes the total number of beneficial shareholders of Realty Income to be approximately 40,000.
ITEM 6:

ITEM 6: SELECTED FINANCIAL DATA - -------------------------------- (not covered by Independent Auditors' Report)
(1) Ratio of Earnings to Fixed Charges is calculated by dividing net income after adding back interest expense, by fixed charges. Fixed charges are comprised of interest costs. Ratio of Earnings to Fixed Charges is not applicable for 1992 and 1991 because the Company did not have any fixed charges for these periods.
(2) Due to the change in the capital structure caused by the Consolidation (see Item 8, Note 1 to the Consolidated Financial Statements), per share information would not be meaningful for 1993 through 1991 and therefore has not been included.
(3) The 1994 amount represents distributions paid or declared, as the case may be, after the Consolidation.
ITEM 7:

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ----------------------------------------------------------
GENERAL - -------
Realty Income Corporation ("Realty Income" or the "Company") was organized to operate as an equity real estate investment trust ("REIT"). The Company's primary business objective is to generate a consistent and predictable level of funds from operations ("FFO") per share and distributions to stockholders. Additionally, the Company generally will seek to increase FFO per share and distributions to stockholders through both internal and external growth, while also seeking to lower the ratio of distributions to stockholders as a percentage of FFO in order to allow internal cash flow to be used to fund additional acquisitions and for other corporate purposes. Realty Income pursues internal growth through (i) contractual rent increases on existing leases; (ii) rental increases at the termination of existing leases when market conditions permit; and (iii) the active management of the Company's property portfolio, including selective sales of properties. The Company generally pursues
external growth through the acquisition of additional properties under long-term, triple-net lease agreements with initial contractual base rent which, at the time of acquisition, is in excess of the Company's estimated cost of capital.
Realty Income was organized in the state of Delaware on September 9, 1993 to facilitate the merger, which was effective on August 15, 1994 (the "Consolidation"), of 10 private and 15 public real estate limited partnerships (the "Partnerships") with and into Realty Income. The Company's common stock is listed on the New York Stock Exchange (the "NYSE") under the symbol "O" and commenced trading on October 18, 1994.
Investors in the Partnerships who elected to invest in the equity of the Company received a total of 19,503,080 shares of common stock. Certain investors elected to receive Variable Rate Senior Notes (the "Notes") totaling $12.6 million. The Notes are due in 2001 and are listed on the NYSE. The Company paid $0.9 million in cash in lieu of issuing promissory notes and $0.5 million in cash in lieu of issuing fractional shares. On February 15, 1996, the Company declared its intent to redeem all of its outstanding Notes at par value, plus accrued interest to the date of redemption. The redemption date is scheduled for March 29, 1996.
The Consolidation was accounted for as a reorganization of affiliated entities in a manner similar to a pooling-of- interests. Under this method, the assets and liabilities of the Partnerships were carried over at their historical book values and operations have been recorded on a combined historical cost basis. The pooling-of-interests method of accounting also requires the reporting of the results of operations as though the entities had been combined as of the beginning of the earliest period presented. Accordingly, the results of operations for the year ended December 31, 1994 comprise those of the separate entities combined from the beginning of the period through August 15, 1994 (the date of the Consolidation) and those of the Company from August 16, 1994 through December 31, 1994. Financial information for 1993 has also been restated on a combined basis to provide comparative information.
In accordance with the Company's certificate of incorporation and bylaws, the responsibility for the management and control of the Company's operations is vested in its board of directors. Prior to August 18, 1995, the Company's day-to-day affairs were managed by R.I.C. Advisor, Inc. (the "Advisor") which provided advice and assistance regarding acquisitions of properties by the Company and performed the day-to-day management of the Company's properties and business. On August 17, 1995, the Advisor was merged with and into Realty Income (the "Merger") and the advisory agreement between Realty Income and the Advisor was terminated. Realty Income issued 990,704 shares of common
stock as consideration for the outstanding common stock of the Advisor. The Advisor held 57,547 shares of common stock of the Company which were retired after the Merger.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
Realty Income was organized for the purpose of operating as an equity REIT which acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of its net cash flow generated from lease revenue. The Company intends to retain an appropriate amount of cash as working capital reserves. At December 31, 1995, the Company had cash and cash equivalents totaling $1.65 million.
Capital Funding
In November 1994, Realty Income entered into a $100 million three-year, revolving, unsecured acquisition credit facility. In December 1995, the Company negotiated several modifications to the credit facility including (i) an increase in borrowing capacity to $130 million from $100 million; (ii) a reduction in the interest rate to London Interbank Offered Rate ("LIBOR") plus 1.25% from LIBOR plus 1.375%; and (iii) an extension of the credit facility from November 1997 to November 1998. This credit facility has been and is expected to be used to acquire additional retail properties leased to national and regional retail chains under long term lease agreements. As of February 9, 1996, $118 million of borrowing capacity was available to the Company under the acquisition credit facility. As of February 9, 1996, the interest rate on this facility was 6.9%.
Realty Income expects to meet its long-term capital needs for the acquisition of properties through the issuance of public or private debt or equity. In August 1995, the Company filed a universal shelf registration statement with the Securities and Exchange Commission covering up to $200 million in value of common stock, preferred stock or debt securities. In November and December 1995, the Company issued a total of 2,540,000 shares of common stock at a price of $19.625 per share. The shares were issued pursuant to the registration statement and a related prospectus supplement. The net proceeds of $46.6 million from this offering were used to repay $44.6 million of outstanding borrowings under the acquisition credit facility with the remainder invested in properties.
The Company is not currently involved in any negotiations and has not entered into any arrangements relating to any additional securities issuances.
Property Acquisitions
During 1995, Realty Income purchased 58 properties in 19 states for $65.4 million. Two of the properties are currently under development. All of the above mentioned properties, including the properties under development, are leased with initial terms of ten to 20 years. The properties were purchased with $12.8 million of cash on hand, $50.6 million from the acquisition credit facility and $2.0 million from the stock offering proceeds. Additional stock offering proceeds of $44.6 million were used to repay the credit facility. The Company invested an additional $288,000 in existing properties.
(1) The Company acquired these two properties as undeveloped land and is funding construction and other costs relating to the development of the properties by the prospective tenants. The prospective tenants have entered into leases with the Company covering these properties and are contractually obligated to complete construction on a timely basis and to pay construction cost overruns to the extent they exceed the construction budget by more than 5%. As of December 31, 1995, the total acquisition and estimated construction costs for the two development properties was $1.3 million, of which $1.0 million had not been funded.
Distributions
Cash distributions paid for the years ended December 31, 1995, 1994 and 1993 were $36.7 million, $44.7 million and $40.8 million, respectively. The 1994 distributions were made up of twelve monthly distributions in the aggregate amount of $38.9 million and the final partnership distribution of $5.8 million. The 1994 final partnership distributions were substantially comprised of proceeds from the sales of properties sold during 1993.
For the year ended December 31, 1995, the Company paid monthly distributions of $0.15 per share from January through July and increased its monthly distributions to $0.155 per share in August. Monthly distributions of $0.155 per share were paid in August through December 1995. The distributions paid for 1995 totaled $1.825 per share. In December 1995, the Company declared two distributions of $0.155 per share which were paid on January 15 and January 26, 1996 and a special distribution of $0.23 per share which was paid on January 11, 1996. For tax purposes, a portion of the special distribution, in the amount of approximately $0.144 per share, is taxable as ordinary income in 1995 and represents the remaining portion of taxable earnings and profits which were assumed by the Company in the Merger with the Advisor. The remaining amount of approximately $0.086 per share of the special distribution will be included in the 1996 distributions for tax purposes.
From August 15, 1994, the date of the Consolidation, through December 1994, the Company paid monthly distributions of $0.15 per share, totaling $0.60 per share. Prior to the Consolidation on August 15, 1994, the Company did not have equivalent shares outstanding so no comparative per share information is presented.
As a result of the Merger on August 17, 1995, the Company assumed a defined benefit pension plan (the "Plan") covering substantially all of its employees. The board of directors of the Advisor froze the Plan effective May 31, 1995. For each Plan participant, the accrued benefit earned under the Plan as of May 31, 1995 was frozen. In October 1995, the Company declared its intent to terminate the Plan, and the Plan was terminated on January 2, 1996. As part of the Plan's termination, the Company anticipates meeting its obligation to the Plan of approximately $1.7 million in the second half of 1996.
Management believes that the Company's cash provided from operating activities and borrowing capacity are sufficient to meet its liquidity needs for the foreseeable future.
RESULTS OF OPERATIONS - ---------------------
Prior to the Consolidation on August 15, 1994, the capital structure of the Partnerships consisted of limited partner interests with no long term debt. In the Consolidation, limited partners exchanged their partnership units for shares of common stock or Notes of the Company. The general partners did not receive any shares or Notes for their general partner interest. Due to these changes in capital structure, which were caused by the Consolidation, and additional expenses associated with the operations of a publicly traded REIT, the results of operations for the years ended December 31, 1995, 1994 and 1993 are not necessarily comparable.
Comparison of 1995 to 1994
Rental revenue was $51.2 million for 1995 versus $47.9 million for 1994. The increase in rental revenue was primarily due to the acquisition of 62 properties from December 1994 through December 1995. These properties generated revenue of $3.8 million in 1995. During 1996, the contractual lease payments (not including any percentage rents) on these properties are approximately $7.8 million.
Substantially all the Company's leases provide for increases in rents through base rent increases tied to a consumer price index with adjustment ceilings or overage rent based on a percentage of the tenants' gross sales. Some leases contain both types of clauses. Percentage rent, which is included in rental revenue, was $1.6 million for 1995 as compared to $2.6 million in 1994.
Vacant properties are a factor in determining gross revenue generated and property costs incurred by the Company. At December 31, 1995 and 1994, the Company had four properties that were not under lease. All of the remaining properties were under lease agreements with third party tenants.
The significant portion of the remaining revenue earned during 1995 and 1994 was attributable to interest earned on cash invested in two funds which hold short-term investments in United States government agency securities or direct purchases of short- term United States government agency securities. Interest revenue was $0.3 million for 1995 as compared to $0.9 million during 1994. The interest revenue decreased in 1995 due to a reduction of cash held, which was invested in properties.
The Company recorded a net gain on the sale of properties during 1995 of $18,000 as compared to $1.2 million for 1994. During 1995 and 1994 cash proceeds generated from these sales were $0.6 million and $3.8 million, respectively. The Company anticipates a small number of property sales will occur in the normal course of business.
Depreciation and amortization was $14.8 million in 1995 versus $13.8 million in 1994. The increase was primarily due to the depreciation of 62 properties acquired from December 1994 through December 31, 1995 and amortization of goodwill recorded in connection with the Merger of the Advisor in 1995.
Advisor fees decreased by $1.7 million to $3.7 million in 1995 as compared to $5.4 million in 1994. On August 17, 1995 the Advisor was merged into the Company. The advisor fees for 1995 were calculated in accordance with the terms of the advisory agreement which became effective August 15, 1994 and was terminated on August 17, 1995. Prior to August 16, 1994, advisor
fees were calculated in accordance with the terms of the Partnership agreements of the Partnerships.
General and administrative expenses were $4.8 million in 1995 versus $4.0 million in 1994. The $0.8 million increase in general and administrative expenses was due to a $1.3 million increase in administrative expenses reduced by a $0.5 million decrease in property expenses. The increase in administrative expenses was attributable to costs for management, accounting systems, professional and support personnel and office facilities. Prior to August 17, 1995 these costs were the responsibility of the Advisor. The decline in property expenses during 1995 as compared to 1994 was primarily due to reductions in property taxes, provision for impairment loss and other property costs. Administration expense in 1994 included approximately $0.5 million of one-time expenses primarily associated with the distribution of stock certificates, shareholder informational material and final partnership K-1's to shareholders after the Consolidation had occurred. Other administrative expenses increased in 1995 compared to 1994 due to additional expenses associated with the operation of a publicly traded REIT including, but not limited to, transfer agent fees, NYSE fees, board of directors fees and property acquisition expenses.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. No charge was recorded for impairment loss in 1995. In 1994, a $0.1 million charge was made to general and administrative expenses to reduce the net carrying value of one property.
Interest expense was $2.6 million for 1995 as compared to $0.4 million for 1994. Of the $2.2 million increase, $1.6 million was interest paid on the acquisition credit facility in 1995 and $0.6 million was interest paid on the Notes. During 1995, interest of $0.2 million was capitalized. No interest was capitalized in 1994.
In 1994, the Company expensed Consolidation costs aggregating $11.2 million which were nonrecurring costs incurred to effect the Consolidation. In a manner similar to the pooling- of-interests method of accounting, the Consolidation costs were charged to expense upon the consummation of the Consolidation. Such costs included, but were not limited to, fees paid to underwriters, attorneys, and accountants, as well as costs associated with obtaining a fairness opinion, soliciting the stockholders, and registering and listing the common stock and the Notes on the NYSE.
For 1995, the Company had net income of $25.6 million versus $15.2 million in 1994. The net income in 1994 was negatively impacted by one time Consolidation costs of $11.2 million. Net income for 1994, excluding the Consolidation costs, was $26.4 million.
Comparison of 1994 to 1993
Rental revenue was $47.9 million for 1994 versus $48.6 million for 1993. The decline in the 1994 rental revenue was mainly due to the sale of four retirement center properties during December 1993. The 1993 rental revenue generated from those properties was $2.4 million. Percentage rent, which is included in rental revenue, was $2.6 million for 1994 as compared to $1.0 million in 1993.
Vacant properties are a factor in determining gross revenue generated and property costs incurred by the Company. At December 31, 1994, the Company had four properties that were not under lease as compared to seven properties at December 31, 1993. All of the remaining properties were under lease agreements with third party tenants.
The significant portion of the remaining revenue earned during 1994 and 1993 was attributable to interest earned on cash invested in a fund which holds short-term investments in United States government agency securities or direct purchases of short- term United States government agency securities. Interest revenue was $0.9 million for 1994 as compared to $0.3 million during 1993. The interest revenue increased in 1994 due to the increase in cash from the sale of the four retirement centers as well as an increase in short-term interest rates. In the fourth quarter of 1994, portions of the proceeds from the sale of the retirement properties were distributed to the limited partners, used to pay transaction costs associated with the Consolidation and invested in properties.
The Company recorded a gain on the sale of properties during 1994 of $1.2 million as compared to $3.6 million for 1993. During 1994 and 1993 cash proceeds generated from these sales were $3.8 million and $26.5 million, respectively. The Company anticipates a small number of property sales will occur in the normal course of business.
Depreciation and amortization was $13.8 million in 1994 versus $14.7 million 1993. The decrease in 1994 as compared to 1993 was primarily due to the sale of four retirement center properties during December 1993.
Advisor fees increased by $0.3 million to $5.4 million in 1994 as compared to $5.1 million in 1993. The increase in Advisor fees was due to the increase in expense reimbursements to
the Advisor primarily associated with cost of living increases in salary and general and administrative expenses. Under the terms of the advisory agreement, which became effective August 15, 1994, the fees with respect to the properties included in the Consolidation were based upon the aggregate of all fees, distributions and reimbursements paid to the general partners of the partnerships merged into the Company during the twelve months ended prior to the closing date of the Consolidation. Prior to August 15, 1994, advisor fees were calculated in accordance with the terms of the Partnership agreements of the Partnerships.
General and administrative expenses were $4.0 million in 1994 versus $3.5 million in 1993. The $0.5 million increase in general and administrative expenses was due to a $1.1 million increase in administrative expenses reduced by a $0.6 million decrease in property expenses. Of the increase in administrative expenses, approximately $0.5 million was attributable to one-time expenses primarily associated with the distribution of stock certificates, shareholder informational material and final partnership K-1's to shareholders after the Consolidation had occurred. The remainder of the increase was due to additional expenses associated with the operation of a publicly traded REIT. The decline in property expenses during 1994 as compared to 1993 was due to the reduction in the provision for impairment loss. Other property expenses increased due to increases in the cost of living.
Interest expense was $0.4 million for 1994 as compared to $5,000 for 1993. Of the $0.4 million increase, $0.3 million was interest paid on the Notes. The remainder of the increased interest expense was attributable to short-term borrowings by certain partnerships to finance their portion of the REIT transaction costs prior to the Consolidation and amortization of deferred acquisition credit facility fees.
In 1994, the Company expensed Consolidation costs aggregating $11.2 million which were nonrecurring costs incurred to effect the Consolidation. In a manner similar to the pooling- of-interests method of accounting, the Consolidation costs were charged to expense upon the consummation of the Consolidation. Such costs included, but were not limited to, fees paid to underwriters, attorneys, and accountants, as well as costs associated with obtaining a fairness opinion, soliciting the stockholders, and registering and listing the common stock and the Notes on the NYSE.
For 1994, the Company had net income of $15.2 million versus $29.3 million in 1993. The net income in 1994 was negatively impacted by one time Consolidation costs of $11.2 million. Net income for 1994, excluding the Consolidation costs, was $26.4 million.
FUNDS FROM OPERATIONS - ---------------------
Funds from operations ("FFO") for 1995 was $40.4 million versus $39.1 million during 1994 and $40.4 million during 1993. Excluding the one-time cost to disseminate information to investors relating to the Consolidation, the 1994 FFO was approximately $39.6 million. Realty Income defines FFO as net income excluding gains or losses from sales of properties and the one-time expenses of the 1994 Consolidation, plus depreciation and amortization. In accordance with the recommendations of the National Association of Real Estate Investment Trusts ("NAREIT"), amortization of deferred financing costs are not added back to net income to calculate FFO. Amortization of financing costs are included in interest expense on the consolidated statements of income.
Management considers FFO to be an appropriate measure of the performance of an equity REIT. FFO is used by financial analysts in evaluating REITs and can be one measure of a REIT's ability to make cash distribution payments. Presentation of this information provides the reader with an additional measure to compare the performance of different REITs.
FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flow from operating, investing, and financing activities as a measure of liquidity or ability to make cash distributions.
Below is reconciliation of net income to funds from operations (dollars in thousands):
IMPACT OF INFLATION - -------------------
Tenant leases generally provide for increases in rent as a result of increases in the tenant's sales volumes or increases in the consumer price index. Management expects that inflation will cause these lease provisions to result in increases in rent over time. However, inflation and increased costs may have an adverse impact on the tenants if increases in the tenant's operating expenses exceed increases in revenues. Over 97% of the properties are leased to tenants under triple-net leases in which the tenant is responsible for substantially all property costs and expenses. These features in the leases reduce the Company's exposure to rising expenses due to inflation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - ---------------------------------------
Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and of Long- Lived Assets to Be Disposed Of" ("Statement 121") was issued in March 1995. Statement 121 provides guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. Statement 121 is effective for financial statements issued for fiscal years beginning after December 15, 1995.
The Company's existing accounting policies comply with Statement 121 and therefore implementing Statement 121 is not expected to have a material effect on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123") was issued in October 1995. Statement 123 established the fair value based method of accounting for stock-based compensation arrangements, under which compensation cost is determined using the fair value of the stock options at the grant date and the number of options vested, and is recognized over the periods in which the related services are rendered. Statement 123 is effective for fiscal years beginning after December 15, 1995.
If the Company were to retain its current intrinsic value based method, as allowed by Statement 123, it will be required to disclose the pro forma effect of adopting the fair value based method. To date, the Company has not made a decision to adopt the fair value based method.
ITEM 8:

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
Table of Contents Page ================= ======
A. Independent Auditors' Report........................... 40
B. Consolidated Balance Sheets, December 31, 1995 and 1994........................... 41-42
C. Consolidated Statements of Income, Years ended December 31, 1995, 1994 and 1993......... 43
D. Consolidated Statements of Stockholders' Equity, Years ended December 31, 1995, 1994 and 1993......... 44-46
E. Consolidated Statements of Cash Flows, Years ended December 31, 1995, 1994 and 1993......... 47-48
F. Notes to Consolidated Financial Statements............. 49-60
G. Consolidated Quarterly Financial Data (unaudited) for 1995 and 1994........................ 61
H. Schedule III-Real Estate and Accumulated Depreciation.........................................62-183
Schedules not Filed: All schedules, other than that indicated in the Table of Contents, have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
Independent Auditors' Report ----------------------------
The Board of Directors and Stockholders Realty Income Corporation:
We have audited the consolidated financial statements (Note 1) of Realty Income Corporation and subsidiaries as listed in the accompanying table of contents. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule III listed in the accompanying table of contents. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Realty Income Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule III, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
San Diego, California January 26, 1996, except as to Note 5B to the consolidated financial statements, which is as of February 15, 1996
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
For supplemental disclosure of noncash investing and financing activities, see Note 9.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
REALTY INCOME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements ========================================== December 31, 1995, 1994 and 1993
1. Organization and Operation
Realty Income Corporation (the "Company") was organized in the state of Delaware on September 9, 1993 to facilitate the merger, which was effected on August 15, 1994 (the "Consolidation"), of 10 private and 15 public real estate limited partnerships (the "Partnerships") with and into the Company. The Company invests in commercial real estate and has elected to be taxed as a real estate investment trust ("REIT").
Investors in the Partnerships who elected to invest in the Company received common stock of the Company totaling 19,503,080 shares. Certain investors elected to receive Variable Rate Senior Notes (the "Notes") totaling $12.6 million.
The Consolidation was accounted for as a reorganization of affiliated entities under common control in a manner similar to a pooling-of-interests. Under this method, the assets and liabilities of the Partnerships were carried over at their historical book values and their operations have been recorded on a combined historical cost basis. The pooling-of-interests method of accounting also requires the reporting of the results of operations as though the entities had been combined as of the beginning of the earliest period presented. Accordingly, the results of operations for the year ended December 31, 1994 comprise those of the separate entities combined from January 1, 1994 through August 15, 1994 and those of the Company from August 16, 1994 through December 31, 1994. Financial information for 1993 has also been restated on a combined basis to provide comparative information. Costs incurred to effect the Consolidation and integrate the continuing operations of the separate entities were expenses of the Company in the period the Consolidation was consummated. These expenses include all costs and expenses incurred in structuring and consummating the Consolidation. Such costs included, but were not limited to, fees paid to underwriters, attorneys, and accountants, as well as costs associated with obtaining a fairness opinion, soliciting the shareholders, and registering and listing the common stock and the Notes on the New York Stock Exchange. Prior to the Consolidation, the Company had no significant operations; therefore, the combined operations for the periods prior to the Consolidation represent the operations of the Partnerships. The Consolidation did not require any material adjustments to conform the accounting policies of the separate entities to that of the Company. All intercompany transactions and balances have been eliminated.
1. Organization and Operation (continued)
The results of operations of the previously separate entities for the periods before the Consolidation was consummated that are included in the results of operations for the years ended December 31, 1994 and 1993 follow:
2. Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and partnerships more than 50 percent owned (subsidiaries) after elimination of all material intercompany balances and transactions.
Cash and Cash Equivalents - The Company considers all short- term, highly liquid investments that are readily convertible to cash and have an original maturity of three months or less at the time of purchase to be cash equivalents.
Depreciation and Amortization - Depreciation of buildings and improvements and amortization of goodwill are computed using the straight-line method over an estimated useful life of approximately 25 years.
Leases - All leases are accounted for as operating leases. Under this method, lease payments are recognized as revenue over the term of the lease on a straight line basis.
Income Taxes - Prior to the Consolidation, the Company's operations were conducted through private and public real estate limited partnerships. In accordance with partnership taxation, each partner was responsible for reporting its share of taxable income. Accordingly, no federal income tax provision has been made in the accompanying consolidated financial statements prior to August 16, 1994.
After August 15, 1994, the Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. Management believes the Company has qualified and continues to qualify as a REIT and therefore will be permitted to deduct distributions paid to its stockholders, eliminating the federal taxation of income represented by such distributions at the Company's level. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements for the period August 16, 1994 through December 31, 1994 and the year ended December 31, 1995.
Distributions Paid and Payable - For the year ended December 31, 1995, cash distributions of $1.825 per share were paid. As of December 31, 1995, three distributions totaling $0.54 per share were declared and payable. In 1995, distributions of $1.876 per share are taxable as ordinary income and $0.093 per share was a return of capital. A portion of the distributions payable at December 31, 1995, in the amount of $0.144 per share, is included in the $1.876 per share taxable as ordinary income and represents the remaining portion of taxable earnings and profits which were assumed by the Company in the merger with R.I.C. Advisor, Inc. (the "Advisor"). For the period
2. Summary of Significant Accounting Policies (continued)
August 16, 1994 through December 31, 1994, cash distributions of $0.60 per share were paid and are taxable as ordinary income.
Provision for Impairment Loss - The Company reviews long- lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Provision is made for impairment loss if estimated future operating cash flows (undiscounted and without interest charges) over a long-term holding period plus estimated disposition proceeds (undiscounted) are less than the current book value. There was no provision for the year ended December 31, 1995. For the years ended December 31, 1994 and 1993, a provision of $135,000 and $935,000, respectively, was charged to operations to reduce the net carrying value of three investment properties.
Net Income Per Share - Net income per share for 1995 was calculated based upon the weighted average number of shares outstanding during the year. Net income per share for 1994 was calculated assuming 19,502,091 shares of the Company's common stock were outstanding. Prior to the Consolidation, no shares of common stock were outstanding. Due to the change in the capital structure resulting from the Consolidation, the net income per share information for the year ended December 31, 1993 would not be meaningful and has not been included.
Reclassifications - Certain of the 1994 and 1993 balances have been reclassified to conform to 1995 presentation. The reclassifications had no effect on stockholders' equity or net income.
Estimates - Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
3. The Merger of R.I.C. Advisor, Inc.
On August 17, 1995, the Company merged with the Advisor and issued 990,704 shares of the Company's common stock valued at approximately $21.2 million (the "Merger"). The Merger was accounted for using the purchase method. Accordingly, the purchase price was allocated to assets acquired based on their estimated fair values. This treatment resulted in approximately $22.9 million of goodwill. Amortization of goodwill for the year ended December 31, 1995 was $340,000.
3. The Merger of R.I.C. Advisor, Inc. (continued)
The following unaudited pro forma summary presents information as if the Merger had occurred at the beginning of each period presented. The pro forma information is provided for information purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined company. The Advisor had several non-recurring expenses during 1995 and 1994 which negatively impacted net income and net income per share.
4. Credit Facility Available for Acquisitions
In November 1994, the Company obtained a $100 million, three-year, revolving, unsecured acquisition credit facility from The Bank of New York, as agent, and several major U.S. and non- U.S. banks. In December 1995, the credit facility was modified to (i) increase the borrowing capacity to $130 million from $100 million; (ii) reduce the interest rate to London Interbank Offered Rate ("LIBOR") plus 1.25% from LIBOR plus 1.375%; and (iii) extend the credit facility from November 1997 to November 1998.
The credit facility is subject to various leverage and interest coverage ratio limitations, all of which the Company was in compliance with as of December 31, 1995 and 1994. As of December 31, 1995 and 1994, the outstanding balance on the credit facility was $6 million and $0, respectively. The effective interest rate at December 31, 1995 was 7.19%. A commitment fee of 0.35% or less, per annum, accrues on the average amount of the unused available credit commitment.
Interest of $217,000 was capitalized on properties under construction in 1995. No interest was capitalized in 1994.
5. Notes Payable
A. In connection with the Consolidation, certain investors elected to receive Notes totaling $12.6 million. The Notes mature on June 30, 2001, and the interest rate is adjusted quarterly. Interest payments are due quarterly and principal is due at maturity. Interest incurred for the years ended December 31, 1995 and 1994 was $997,000 and $332,000, respectively. The interest rate on the Notes at December 31, 1995 and 1994, was 7.44% and 6.94%, respectively. On January 2, 1996 the interest rate adjusted to 7.13%.
B. On February 15, 1996, the Company announced its plan to redeem all of its outstanding Notes. The Notes will be redeemed at par plus accrued interest to the date of redemption. The redemption date is scheduled for March 29, 1996.
6. Operating Leases
A. General
At December 31, 1995, the Company owned 685 properties in 42 states. Of the Company's properties, 675 are single-tenant locations and the remainder are multi-tenant. At December 31, 1995, four single-tenant properties were vacant and available for lease.
Substantially all leases are triple-net leases whereby the tenant pays all property taxes and assessments, fully maintains the interior and exterior of the building, and carries insurance coverage for public liability, property damage, fire, and extended coverage. The Company's leases are primarily for initial terms of 15 to 20 years and provide for cost of living increases and/or increased rent based upon a percentage of the tenant's sales. Percentage rent for 1995, 1994 and 1993 was $1.6 million, $2.6 million and $1.0 million respectively.
6. Operating Leases (continued)
Minimum annual rents to be received on the operating leases as of December 31, 1995 are as follows (dollars in thousands):
B. Major Tenants
The following schedule presents rental income, including percentage rents, from tenants representing more than 10% of the Company's total revenue for at least one of the years ended December 31, 1995, 1994 or 1993 (dollars in thousands):
7. Net Gain on Sales of Properties
In 1995, the Company sold three properties for a total of $617,000 and recognized a net gain of $18,000. In 1994, the Company sold five properties and had three land easement transactions for a total of $3.8 million and recognized a net gain of $1.2 million. In 1993, the Company sold six properties, exchanged one property and had seven land easement transactions for a total of $26.5 million and recognized a net gain of $3.6 million.
8. Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair values for its financial instruments, as well as the methods and significant assumptions used to estimate fair values. Management of the Company believes that the carrying values reflected in the balance sheets at December 31, 1995 and 1994 reasonably approximate the fair values for cash and cash equivalents, accounts receivable, due from affiliates and all liabilities. In making such assessments, the Company utilized estimates and quoted market prices.
9. Supplemental Disclosure of Cash Flow Information
Interest paid during 1995, 1994 and 1993 was $2,186,000, $354,000 and $5,000, respectively.
The following non-cash investing and financing activities are included in the accompanying financial statements:
A. Distributions payable totaled $12.4 million and $2.9 million at December 31, 1995 and 1994, respectively.
B. The Merger of the Advisor into the Company on August 17, 1995 resulted in the following:
In 1995, other assets of $95,000 were reclassified to goodwill. Common stock retired after the Merger includes par value of common stock and capital in excess of par value of $58,000 and $1,172,000, respectively.
9. Supplemental Disclosure of Cash Flow Information (continued)
C. In 1995, the following increases (decreases) occurred resulting from exchanges of Notes Payable for Common Stock (dollars in thousands):
Notes Payable $ (19) Common Stock 1 Capital in Excess of Par Value 19
D. In 1995, pursuant to the assumption of the defined benefit pension plan by the Company (Note 11), the Company recorded a due from affiliate and a liability (included in other liabilities) of $493,000. This represents the amount of the increase in the liability to the plan, of which the Company is indemnified by the former shareholders of the Advisor.
E. In 1994, the following increases occurred resulting from exchanges of limited partnership units for Notes payable and Common Stock (dollars in thousands):
Notes Payable $ 12,616 Common Stock 19,502 Capital in Excess of Par Value 452,996
F. In October 1993, the Company regained possession of a property through foreclosure. The Company held a note on the property with a net balance of $1.5 million.
10. Related Party Transactions
A. Advisory Agreement
In August 1994, in connection with the Consolidation, the Company entered into an advisory agreement under which R.I.C. Advisor, Inc. advised the Company with respect to its investments and assumed day-to-day management of the Company (the "Advisory Agreement"). The Advisory Agreement provided for a monthly advisor fee equal to 0.1189% of the appraised value of the real estate properties as of the Consolidation date plus the current book value of the non-real estate assets of the Company. Amounts incurred under the Advisory Agreement for the period from January 1, 1995 through August 17, 1995 and August 15, 1994 through December 31, 1994 were $3.7 million and $2.2 million, respectively. Prior to the Consolidation, the general partners of the Partnerships received management fees and reimbursements from the Partnerships (Note 10B). On August 17, 1995, the Advisor was merged into the Company (Note 3). As part of the Merger, the Advisory Agreement was terminated.
10. Related Party Transactions (continued)
B. Related Party Transactions Prior to the Consolidation
Cash Distributions - The Advisor and William E. and Evelyn J. Clark, the former general partners of the Partnerships, collectively, received approximately 1.0% of the Partnerships' distributions. For the period from January 1, 1994 through August 15, 1994 and the year ended December 31, 1993, the general partners' distributions totaled $342,000 and $436,000, respectively.
Management Fees - The Advisor received management fees of approximately 1.5% of gross receipts of the Partnerships. For the period from January 1, 1994 through August 15, 1994 and the year ended December 31, 1993, management fees totaled $432,000 and $762,000, respectively.
Administrative Expenses - The Advisor received reimbursements for personnel and overhead costs incurred to administer the operations of the Partnerships. For the period from January 1, 1994 through August 15, 1994 and the year ended December 31, 1993, reimbursements totaled $2.8 million and $4.3 million, respectively.
The administrative expenses and management fees described in the preceding paragraphs are included in advisor fees in the accompanying consolidated statements of income.
11. Employee Benefit Plan
As a result of the Merger on August 17, 1995, the Company assumed a defined benefit pension plan (the "Plan") covering substantially all of its employees. The Plan's benefit formulas generally based payments to retired employees upon their length of service and a percentage of qualifying compensation during the final years of employment. The Company's funding policy was to contribute annually the amount necessary to satisfy the Internal Revenue Service's funding standards. The Plan did not provide for funding of prior service costs.
The board of directors of the Advisor froze the Plan effective May 31, 1995. No additional employees were entitled to enter the Plan after May 31, 1995. For each Plan participant, the accrued benefit earned under the Plan was frozen as of May 31, 1995. In October 1995, the Company declared its intent to terminate the Plan, and the Plan was terminated on January 2, 1996.
11. Employee Benefit Plan (continued)
The following table sets forth the Plan's funded status and amounts recognized in the Company's financial statements as of December 31, 1995 (dollars in thousands):
Actuarial Present Value of Benefit Obligations: Accumulated Benefit Obligation, All Vested $(7,526) Plan Assets at Fair Value, Primarily Listed Stock and Cash and Cash Equivalents 5,319 ------- Benefit Obligation in Excess of Plan Assets (Included in Other Liabilities) $(2,207) =======
Assumptions Used: Discount Rates 6.0% Rates of Increase in Compensation Levels N/A Expected Long-Term Rates of Return on Assets 8.0%
At December 31, 1995, the benefit obligation in excess of plan assets is included in other liabilities in the accompanying balance sheet. In connection with the Merger, the Company assumed a benefit obligation of $1,714,000. The Merger agreement provides for indemnification by the former shareholders of the Advisor with respect to increases in the benefit obligation. Pursuant to the Merger agreement, an escrow was established to satisfy certain contingencies, including any potential increases in the benefit obligation. Therefore, a receivable from the Advisor's former shareholders has been recorded for $493,000, and is included as due from affiliates in the accompanying consolidated balance sheets as of December 31, 1995.
12. Stock Incentive Plan
On September 9, 1993, the board of directors and the original stockholder of the Company approved a stock incentive plan (the "Stock Plan") designed to attract and retain directors, officers and employees of the Company by enabling such individuals to participate in the ownership of the Company. The Stock Plan provides for the award (subject to ownership limitations) of a broad variety of stock-based compensation alternatives such as nonqualified stock options, incentive stock options, restricted stock and performance awards.
In August 1994, options were granted to each of the three independent directors to purchase 10,000 shares of the Company's stock at an exercise price of $20 per share (the estimated value of the shares at the date of grant). These options vest during the directors' continued service periods at a rate of 2,500 shares per year. At December 31, 1995, options to acquire 7,500 shares were vested.
13. Commitments and Contingencies
As of December 31, 1995, the Company had entered into agreements with unrelated parties to acquire two properties to be purchased under sale/leaseback agreements for an estimated aggregate amount of $2.3 million and to fund two buildings under construction on land owned by the Company for an estimated aggregate amount of $1.3 million.
In the ordinary course of its business, the Company is a party to various legal actions which the Company believes are routine in nature and incidental to the operation of the business of the Company. The Company believes that the outcome of the proceedings will not have a material adverse effect upon its operations or financial condition.
(1) The Consolidation costs expensed in the third quarter of 1994 represent the costs of the Consolidation of the Company and 25 private and public partnerships on August 15, 1994. The Consolidation was accounted for in a manner similar to a pooling- of-interests.
REALTY INCOME CORPORATION AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Note 1. Six hundred eighty two of the properties are single unit retail outlets. Trade Center, Silverton Business Center and Empire Business Center properties are multi-tenant commercial properties. All properties were acquired on an all cash basis, no encumbrances were outstanding for the periods presented.
Note 2. The aggregate cost for federal income tax purposes is $446,365,567.
Note 3. Reconciliation of total real estate carrying value for the three years ended December 31, 1995 are as follows:
Continued REALTY INCOME CORPORATION AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Note 4. Reconciliation of accumulated depreciation for the three years ended December 31, 1995 are as follows:
Note 5. Provision is made for impairment loss if estimated undiscounted future cash flow over a long term holding period plus estimated undiscounted disposition value is less than current book value. A provision for impairment loss was made on the Stone Meadow Center in Spring, TX and the Artesian Center in Humble, TX in 1993 and on the Automall property in Mesa, AZ in 1994 and 1993.
ITEM 9:

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ---------------------------------------------------------
The corporation has had no disagreements with its independent auditors' on accountancy or financial disclosure.
PART III ========
ITEM 10:

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
This item is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held on May 14, 1996, to be filed pursuant to Regulation 14A.
ITEM 11:

ITEM 11: EXECUTIVE COMPENSATION - --------------------------------
This item is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held on May 14, 1996, to be filed pursuant to Regulation 14A.
ITEM 12:

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------------------------------------------------------------
This item is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held on May 14, 1996, to be filed pursuant to Regulation 14A.
ITEM 13:

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
This item is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders presently scheduled to be held on May 14, 1996, to be filed pursuant to Regulation 14A.
PART IV =======
ITEM 14:

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ----------------------------------------------------------------
A. The following documents are filed as part of this report.
1. Financial Statements (see Item 8)
a. Independent Auditors' Report
b. Consolidated Balance Sheets, December 31, 1995 and 1994
c. Consolidated Statements of Income, Years ended December 31, 1995, 1994 and 1993
d. Consolidated Statements of Stockholders' Equity, Years ended December 31, 1995, 1994 and 1993
e. Consolidated Statements of Cash Flows, Years ended December 31, 1995, 1994 and 1993
f. Notes to Consolidated Financial Statements
g. Consolidated Quarterly Financial Data (unaudited) for 1995 and 1994
2. Financial Statement Schedule (see Item 8)
Schedule III - Real Estate and Accumulated Depreciation
Schedules not Filed: All schedules, other than those indicated in the Table of Contents, have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
3. Exhibits
2.1 Agreement and Plan of Merger between Realty Income Corporation and R.I.C. Advisor, Inc. dated as of April 28, 1995 (incorporated by reference to Appendix A to the Company's definitive Proxy Statement filed June 30, 1995)
3.1 Amended and Restated Certificate of Incorporation of Realty Income Corporation (filed as Exhibit 3.1 to the Company's 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference)
3.2 Amended and Restated Bylaws of Realty Income Corporation (filed as Exhibit 3.2 to the Company's 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference)
4.1 Indenture between the Company and Chemical Trust Company as Trustee, including the Variable Rate Senior Note Due 2001 (filed as Exhibit 4.05 to the Company's Registration Statement on Form S-4 (Registration No. 33-69410) and incorporated herein by reference)
4.2 Form of Note (attached as Exhibit A to Exhibit 4.1 above)
4.3 Form of Stock Certificate (filed as Exhibit 4.04 to the Company's Registration Statement on S-4 (Registration Statement No. 33-69410) and incorporated herein by reference)
4.4 Form of Indenture (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-3 (Registration No. 33-95374) and incorporated herein by reference)
4.5 Form of Debt Security (filed and included as Exhibit 4.3 to the Company's Registration Statement on Form S-3 (Registration No. 33-95374) and incorporated herein by reference)
10.1 Revolving Credit Agreement (filed as Exhibit 99.2 to the Company's 8-K dated December 16, 1994 and incorporated herein by reference)
10.2 Stock Incentive Plan (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-95708) and incorporated by reference)
21.1 Subsidiaries of the Company as of January 1, 1996, filed herewith
24.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule (electronically filed with the Securities and Exchange Commission only)
B. Four reports on Form 8-K were filed by registrant during the last quarter of the period covered by this report. The reports were dated September 29, 1995; October 30, 1995; October 31, 1995 and December 19, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REALTY INCOME CORPORATION
By: /s/ William E. Clark ----------------------------------------------------------- William E. Clark Chairman and Chief Executive Officer
Date: March 19, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ William E. Clark ----------------------------------------------------------- William E. Clark Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)
Date: March 19, 1996
By: /s/ Thomas A. Lewis ----------------------------------------------------------- Thomas A. Lewis Vice Chairman of the Board of Directors and Vice President, Capital Markets
Date: March 19, 1996
SIGNATURES (continued)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Donald R. Cameron ----------------------------------------------------------- Donald R. Cameron Director
Date: March 19, 1996
By: /s/ Roger P. Kuppinger ----------------------------------------------------------- Roger P. Kuppinger Director
Date: March 19, 1996
By: /s/ Michael D. McKee ----------------------------------------------------------- Michael D. McKee Director
Date: March 19, 1996
By: /s/ Gary Malino ----------------------------------------------------------- Gary Malino Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)
Date: March 19, 1996
By: /s/ Gregory J. Fahey ----------------------------------------------------------- Gregory J. Fahey Controller
Date: March 19, 1996