Attached files

file filename
EX-32 - EX-32 - REALTY INCOME CORPa15-17857_1ex32.htm
EX-31.2 - EX-31.2 - REALTY INCOME CORPa15-17857_1ex31d2.htm
EX-31.1 - EX-31.1 - REALTY INCOME CORPa15-17857_1ex31d1.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2015, or

 

o Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 1-13374

 

 

REALTY INCOME CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

33-0580106

 

 

(State or Other Jurisdiction of
Incorporation or Organization)

 

(IRS Employer Identification
Number)

 

 

11995 El Camino Real, San Diego, California 92130

(Address of Principal Executive Offices)

 

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

 

 

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

 

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

 

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

 

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

 

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

 

There were 249,600,461 shares of common stock outstanding as of October 22, 2015.

 



Table of Contents

 

REALTY INCOME CORPORATION

 

 

Index to Form 10-Q

 

 

 

 

 

September 30, 2015

 

 

PART I.

FINANCIAL INFORMATION

Page

Item 1:

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets

2

 

Consolidated Statements of Income

3

 

Consolidated Statements of Cash Flows

4

 

Notes to Consolidated Financial Statements

5

 

 

 

Item 2:

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

 

 

 

 

 

Forward-Looking Statements

21

 

The Company

22

 

Recent Developments

25

 

Liquidity and Capital Resources

28

 

Results of Operations

33

 

Funds from Operations (FFO) Available to Common Stockholders

38

 

Adjusted Funds from Operations (AFFO) Available to Common Stockholders

40

 

Property Portfolio Information

41

 

Impact of Inflation

48

 

Impact of Recent Accounting Pronouncements

48

 

Other Information

48

 

 

 

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

Item 4:

Controls and Procedures

50

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

Item 6:

Exhibits

51

 

 

 

SIGNATURE

 

54

 

-1-



Table of Contents

 

PART 1. FINANCIAL INFORMATION

Item 1.   Financial Statements

 

REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2015 and December 31, 2014

 

(dollars in thousands, except per share data)

 

 

 

2015

 

2014

 

ASSETS

 

(unaudited)

 

 

 

Real estate, at cost:

 

 

 

 

 

Land

 

$

3,246,465

 

$

3,046,372

 

Buildings and improvements

 

8,859,414

 

8,107,199

 

Total real estate, at cost

 

12,105,879

 

11,153,571

 

Less accumulated depreciation and amortization

 

(1,609,914

)

(1,386,871

)

Net real estate held for investment

 

10,495,965

 

9,766,700

 

Real estate held for sale, net

 

13,346

 

14,840

 

Net real estate

 

10,509,311

 

9,781,540

 

Cash and cash equivalents

 

7,074

 

3,852

 

Accounts receivable, net

 

74,977

 

64,386

 

Acquired lease intangible assets, net

 

1,043,554

 

1,039,724

 

Goodwill

 

15,372

 

15,470

 

Other assets, net

 

88,281

 

107,650

 

Total assets

 

$

11,738,569

 

$

11,012,622

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Distributions payable

 

$

47,844

 

$

43,675

 

Accounts payable and accrued expenses

 

97,219

 

123,287

 

Acquired lease intangible liabilities, net

 

241,128

 

220,469

 

Other liabilities

 

36,993

 

53,145

 

Lines of credit payable

 

439,000

 

223,000

 

Term loans

 

320,000

 

70,000

 

Mortgages payable, net

 

706,141

 

852,575

 

Notes payable, net

 

3,786,408

 

3,785,372

 

Total liabilities

 

5,674,733

 

5,371,523

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock and paid in capital, par value $0.01 per share, 69,900,000 shares authorized, 16,350,000 shares issued and outstanding as of September 30, 2015 and December 31, 2014

 

395,378

 

395,378

 

Common stock and paid in capital, par value $0.01 per share, 370,100,000 shares authorized, 238,085,515 shares issued and outstanding as of September 30, 2015 and 224,881,192 shares issued and outstanding as of December 31, 2014

 

7,107,662

 

6,464,987

 

Distributions in excess of net income

 

(1,463,392

)

(1,246,964

)

Total stockholders’ equity

 

6,039,648

 

5,613,401

 

Noncontrolling interests

 

24,188

 

27,698

 

Total equity

 

6,063,836

 

5,641,099

 

Total liabilities and equity

 

$

11,738,569

 

$

11,012,622

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

-2-



Table of Contents

 

REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

For the three and nine months ended September 30, 2015 and 2014

(dollars in thousands, except per share data) (unaudited)

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

 

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

2015

 

2014

 

REVENUE

 

 

 

 

 

 

 

 

 

Rental

 

$

247,578

 

$

226,832

 

$

724,131

 

$

662,822

 

Tenant reimbursements

 

10,187

 

8,275

 

31,757

 

20,872

 

Other

 

1,124

 

606

 

3,729

 

2,238

 

Total revenue

 

258,889

 

235,713

 

759,617

 

685,932

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

104,338

 

95,260

 

303,476

 

278,124

 

Interest

 

63,950

 

52,814

 

181,098

 

157,246

 

General and administrative

 

10,861

 

11,025

 

36,331

 

35,499

 

Property (including reimbursable)

 

13,542

 

12,770

 

42,455

 

33,474

 

Income taxes

 

745

 

697

 

2,448

 

2,358

 

Provisions for impairment

 

3,864

 

495

 

9,182

 

2,676

 

Total expenses

 

197,300

 

173,061

 

574,990

 

509,377

 

 

 

 

 

 

 

 

 

 

 

Gain on sales of real estate

 

6,224

 

10,975

 

17,117

 

14,211

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

67,813

 

73,627

 

201,744

 

190,766

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

-

 

-

 

-

 

3,097

 

 

 

 

 

 

 

 

 

 

 

Net income

 

67,813

 

73,627

 

201,744

 

193,863

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

(338

)

(344

)

(919

)

(1,016

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

 

67,475

 

73,283

 

200,825

 

192,847

 

Preferred stock dividends

 

(6,770

)

(9,327

)

(20,310

)

(30,292

)

Excess of redemption value over carrying value of preferred shares redeemed

 

-

 

(6,015

)

-

 

(6,015

)

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

60,705

 

$

57,941

 

$

180,515

 

$

156,540

 

 

 

 

 

 

 

 

 

 

 

Amounts available to common stockholders per common share, basic and diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.26

 

$

0.26

 

$

0.78

 

$

0.71

 

Net income

 

$

0.26

 

$

0.26

 

$

0.78

 

$

0.72

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

236,211,706

 

222,061,661

 

231,434,521

 

216,804,815

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

236,739,942

 

222,236,071

 

231,862,767

 

217,147,035

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

-3-



Table of Contents

 

REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2015 and 2014

 

(dollars in thousands) (unaudited)

 

 

 

2015

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

201,744

 

$

193,863

 

Adjustments to net income:

 

 

 

 

 

Depreciation and amortization

 

303,476

 

278,124

 

Income from discontinued operations

 

-

 

(3,097

)

Amortization of share-based compensation

 

7,598

 

7,653

 

Non-cash rental adjustments

 

(6,462

)

(5,390

)

Amortization of net premiums on mortgages payable

 

(5,608

)

(10,843

)

Amortization of deferred financing costs

 

6,806

 

8,027

 

Loss on interest rate swaps

 

7,138

 

409

 

Gain on sales of real estate

 

(17,117

)

(14,211

)

Provisions for impairment on real estate

 

9,182

 

2,676

 

Cash provided by discontinued operations

 

-

 

1,310

 

Change in assets and liabilities

 

 

 

 

 

Accounts receivable and other assets

 

2,351

 

11,976

 

Accounts payable, accrued expenses and other liabilities

 

(36,160

)

(30,416

)

Net cash provided by operating activities

 

472,948

 

440,081

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Investment in real estate

 

(1,061,871

)

(1,076,391

)

Improvements to real estate, including leasing costs

 

(5,861

)

(4,538

)

Proceeds from sales of real estate:

 

 

 

 

 

Continuing operations

 

51,958

 

46,644

 

Discontinued operations

 

-

 

6,918

 

Collection of loans receivable

 

-

 

350

 

Restricted escrow deposits for Section 1031 tax-deferred exchanges and pending acquisitions

 

20,517

 

(27,340

)

Net cash used in investing activities

 

(995,257

)

(1,054,357

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Cash distributions to common stockholders

 

(392,767

)

(356,735

)

Cash dividends to preferred stockholders

 

(20,310

)

(31,447

)

Borrowings on line of credit

 

1,059,000

 

1,359,121

 

Payments on line of credit

 

(843,000

)

(1,442,121

)

Proceeds from notes and bonds payable issued

 

-

 

598,594

 

Principal payments on mortgages payable

 

(140,825

)

(77,619

)

Proceeds from term loans

 

250,000

 

-

 

Proceeds from common stock offerings, net

 

276,430

 

528,615

 

Redemption of preferred units

 

(6,750

)

-

 

Distributions to noncontrolling interests

 

(1,267

)

(1,390

)

Debt issuance costs

 

(10,358

)

(5,609

)

Proceeds from dividend reinvestment and stock purchase plan, net

 

360,941

 

56,580

 

Other items, including shares withheld upon vesting

 

(5,563

)

(7,034

)

Net cash provided by financing activities

 

525,531

 

620,955

 

Net increase in cash and cash equivalents

 

3,222

 

6,679

 

Cash and cash equivalents, beginning of period

 

3,852

 

10,257

 

Cash and cash equivalents, end of period

 

$

7,074

 

$

16,936

 

 

For supplemental disclosures, see note 18.

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

-4-



Table of Contents

 

REALTY INCOME CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(unaudited)

 

1.       Management Statement

 

The consolidated financial statements of Realty Income Corporation (“Realty Income”, the “Company”, “we”, “our” or “us”) were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. Readers of this quarterly report should refer to our audited consolidated financial statements for the year ended December 31, 2014, which are included in our 2014 Annual Report on Form 10-K, as certain disclosures that would substantially duplicate those contained in the audited financial statements have not been included in this report.

 

At September 30, 2015, we owned 4,473 properties, located in 49 states and Puerto Rico, containing over 74.8 million leasable square feet.

 

2.                  Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements

 

A.  The accompanying consolidated financial statements include the accounts of Realty Income and other entities for which we make operating and financial decisions (i.e., control), after elimination of all material intercompany balances and transactions.  We consolidate entities that we control and record a noncontrolling interest for the portion that we do not own.  Noncontrolling interest that was created or assumed as part of a business combination was recognized at fair value as of the date of the transaction (see note 11).  We have no unconsolidated investments.

 

B.  We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended. We believe we have qualified and continue to qualify as a REIT. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income.  Assuming our dividends equal or exceed our net income, we generally will not be required to pay federal corporate income taxes on such income. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements, except for federal income taxes of our taxable REIT subsidiaries. The income taxes recorded on our consolidated statements of income represent amounts paid by Realty Income for city and state income and franchise taxes.

 

C.  We recognize an allowance for doubtful accounts relating to accounts receivable for amounts deemed uncollectible. We consider tenant specific issues, such as financial stability and ability to pay rent, when determining collectability of accounts receivable and appropriate allowances to record.  The allowance for doubtful accounts was $607,000 at September 30, 2015 and $765,000 at December 31, 2014.

 

D.  We assign a portion of goodwill to our applicable property sales, which results in a reduction of the carrying amount of our goodwill. In order to allocate goodwill to the carrying amount of properties that we sell, we utilize a relative fair value approach based on the original methodology for assigning goodwill.  As we sell properties, our goodwill will likely continue to gradually decrease over time.  During our tests for impairment of goodwill during the second quarters of 2015 and 2014, we determined that the estimated fair values of our reporting units exceeded their carrying values.  We did not have an impairment on our existing goodwill in 2015 or 2014.

 

E.  In April 2015, the Financial Accounting Standards Board, or FASB, issued ASU 2015-03, which amends Topic 835, Other Presentation Matters. The amendments in this ASU require that debt issuance costs be reported on the balance sheet as a direct reduction of the face amount of the debt instrument they relate to, and should not be classified as a deferred charge, as was previously required under the Accounting Standards Codification.  ASU 2015-03 is effective, on a retrospective basis, for interim and annual periods beginning after December 15, 2015; early adoption is permitted.  We have not yet adopted this ASU and do not expect it to have a material impact on our consolidated financial statements.

 

In September 2015, FASB, issued ASU 2015-16, which amends Topic 805, Business Combinations. The amendments in this ASU require that we recognize purchase price allocation adjustments that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, and

 

-5-



Table of Contents

 

eliminate the requirement to retrospectively account for these adjustments.  ASU 2015-16 is effective, on a prospective basis, for interim and annual periods beginning after December 15, 2015; early adoption is permitted.  We have chosen to early adopt ASU 2015-16 for the three- and nine-months ended September 30, 2015 and it did not have a material impact on our consolidated financial statements.

 

3.       Supplemental Detail for Certain Components of Consolidated Balance Sheets

 

A.         Acquired lease intangible assets, net, consist of the following

 

September 30,

 

December 31,

 

(dollars in thousands) at:

 

2015

 

2014

 

Acquired in-place leases

 

$

1,046,040

 

$

1,005,244

 

Accumulated amortization of acquired in-place leases

 

(242,183

)

(177,722

)

Acquired above-market leases

 

296,196

 

252,581

 

Accumulated amortization of acquired above-market leases

 

(56,499

)

(40,379

)

 

 

$

1,043,554

 

$

1,039,724

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

B.         Other assets, net, consist of the following (dollars in thousands) at:

 

2015

 

2014

 

Deferred financing costs, net

 

$

21,428

 

$

23,274

 

Notes receivable issued in connection with property sales

 

18,040

 

18,342

 

Restricted escrow deposits

 

17,437

 

36,540

 

Prepaid expenses

 

13,292

 

14,137

 

Credit facility origination costs, net

 

10,979

 

4,171

 

Impounds related to mortgages payable

 

5,093

 

5,789

 

Corporate assets, net

 

2,188

 

2,600

 

Other items

 

(176

)

2,797

 

 

 

$

88,281

 

$

107,650

 

 

 

 

 

 

 

C.        Distributions payable consist of the following declared

 

September 30,

 

December 31,

 

distributions (dollars in thousands) at:

 

2015

 

2014

 

Common stock distributions

 

$

45,447

 

$

41,268

 

Preferred stock dividends

 

2,257

 

2,257

 

Noncontrolling interests distributions

 

140

 

150

 

 

 

$

47,844

 

$

43,675

 

 

 

 

 

 

 

D.        Accounts payable and accrued expenses consist of the

 

September 30,

 

December 31,

 

following (dollars in thousands) at:

 

2015

 

2014

 

Notes payable - interest payable

 

$

33,987

 

$

63,919

 

Property taxes payable

 

19,181

 

11,634

 

Accrued costs on properties under development

 

11,944

 

18,011

 

Mortgages, term loans, credit line - interest payable and interest rate swaps

 

11,337

 

4,569

 

Other items

 

20,770

 

25,154

 

 

 

$

97,219

 

$

123,287

 

 

 

 

 

 

 

E.         Acquired lease intangible liabilities, net, consist of the

 

September 30,

 

December 31,

 

following (dollars in thousands) at:

 

2015

 

2014

 

Acquired below-market leases

 

$

274,739

 

$

243,025

 

Accumulated amortization of acquired below-market leases

 

(33,611

)

(22,556

)

 

 

$

241,128

 

$

220,469

 

 

 

 

 

 

 

F.         Other liabilities consist of the following

 

September 30,

 

December 31,

 

(dollars in thousands) at:

 

2015

 

2014

 

Rent received in advance

 

$

26,313

 

$

36,122

 

Security deposits

 

6,051

 

5,876

 

Capital lease obligations

 

4,629

 

4,397

 

Preferred units issued upon acquisition of ARCT

 

-

 

6,750

 

 

 

$

36,993

 

$

53,145

 

 

-6-



Table of Contents

 

4.       Investments in Real Estate

We acquire land, buildings and improvements necessary for the successful operations of commercial tenants.

 

A.           Acquisitions during the First Nine Months of 2015 and 2014

During the first nine months of 2015, we invested $1.1 billion in 195 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.5%. The 195 new properties and properties under development or expansion are located in 36 states, will contain approximately 5.1 million leasable square feet, and are 100% leased with a weighted average lease term of 16.7 years. The tenants occupying the new properties operate in 18 industries and the property types consist of 87.0% retail and 13.0% industrial, based on rental revenue.  None of our investments during 2015 caused any one tenant to be 10% or more of our total assets at September 30, 2015.

 

The $1.1 billion invested during the first nine months of 2015 was allocated as follows: $214.8 million to land, $780.8 million to buildings and improvements, $86.6 million to intangible assets related to leases, and $27.2 million to intangible liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with these acquisitions.

 

The properties acquired during the first nine months of 2015 generated total revenues of $25.3 million and income from continuing operations of $12.6 million.

 

Of the $1.1 billion we invested during the first nine months of 2015, $117.2 million of the purchase price allocation is based on a preliminary measurement of fair value that is subject to change.  The allocation for these properties represents our current best estimate of fair value and we expect to finalize the valuations and complete the purchase price allocations in 2015. During the first nine months of 2015, we finalized the purchase price allocations for $147.1 million invested in the fourth quarter of 2014.  There were no material changes to our consolidated balance sheets or income statements as a result of these purchase price allocations being finalized.

 

In comparison, during the first nine months of 2014, we invested $1.24 billion in 439 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 7.1%. The 439 new properties and properties under development or expansion, were located in 42 states, contain over 8.5 million leasable square feet and were 100% leased with a weighted average lease term of 12.6 years. The tenants occupying the new properties operated in 27 industries and the property types consisted of 85.6% retail, 7.2% industrial and 7.2% office, based on rental revenue.

 

The $1.24 billion invested during the first nine months of 2014 was allocated as follows: $240.1 million to land, $861.9 million to buildings and improvements, $202.0 million to intangible assets related to leases, $901,000 to other assets, net, and $60.5 million to intangible liabilities related to leases and other assumed liabilities. We also recorded net mortgage premiums of $604,000 associated with the $166.7 million of mortgages acquired during the first nine months of 2014.  There was no contingent consideration associated with these acquisitions.

 

The properties acquired during the first nine months of 2014 contributed total revenues of $47.3 million and income from continuing operations of $19.2 million for the nine months ended September 30, 2014.

 

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

 

In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return.  When the lease does not provide for a fixed rate of return on a property under development or expansion, the estimated initial weighted average contractual lease rate is computed as follows: estimated net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs. Of the $1.1 billion we invested during the first nine months of 2015, $37.1 million was invested in 30 properties under development or expansion with an estimated initial weighted average contractual lease rate of 9.9%. Of the $1.24 billion we invested during the first nine months of 2014, $69.0 million was invested in 32 properties under development or expansion with an estimated initial weighted average contractual lease rate of 8.5%.

 

-7-



Table of Contents

 

B.           Acquisition Transaction Costs

Acquisition transaction costs of $368,000 and $589,000 were recorded to general and administrative expense on our consolidated statements of income during the first nine months of 2015 and 2014, respectively.

 

C.           Investments in Existing Properties

During the first nine months of 2015, we capitalized costs of $5.9 million on existing properties in our portfolio, consisting of $555,000 for re-leasing costs, $3.8 million for recurring capital expenditures and $1.5 million for non-recurring building improvements.  In comparison, during the first nine months of 2014, we capitalized costs of $4.5 million on existing properties in our portfolio.

 

D.           Properties with Existing Leases

Of the $1.1 billion we invested during the first nine months of 2015, approximately $304.2 million was used to acquire 47 properties with existing leases.  In comparison, of the $1.24 billion we invested in the first nine months of 2014, approximately $949.6 million was used to acquire 180 properties with existing leases. The value of the in-place and above-market leases is recorded to acquired lease intangible assets, net on our consolidated balance sheets, and the value of the below-market leases is recorded to acquired lease intangible liabilities, net on our consolidated balance sheets.

 

The values of the in-place leases are amortized as depreciation and amortization expense.  The amounts amortized to expense for all of our in-place leases, for the first nine months of 2015 and 2014, were $65.5 million and $62.1 million, respectively.

 

The values of the above-market and below-market leases are amortized over the term of the respective leases, including any bargain renewal options, as an adjustment to rental revenue on our consolidated statements of income. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for the first nine months of 2015 and 2014 were $5.8 million and $6.4 million, respectively.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense as appropriate.

 

The following table presents the estimated impact during the next five years and thereafter related to the amortization of the acquired above-market and below-market lease intangibles and the amortization of the in-place lease intangibles for properties held for investment at September 30, 2015 (in thousands):

 

 

 

Net increase

 

Increase to

 

 

 

(decrease) to

 

amortization

 

 

 

rental revenue

 

expense

 

2015

 

$

(2,090

)

$

22,242

 

2016

 

(8,353

)

88,878

 

2017

 

(8,296

)

87,689

 

2018

 

(8,049

)

85,194

 

2019

 

(7,059

)

75,130

 

Thereafter

 

35,278

 

444,724

 

Totals

 

$

1,431

 

$

803,857

 

 

5.       Credit Facility

 

In June 2015, we entered into a new $2 billion unsecured revolving credit facility, or our new credit facility, which replaced our $1.5 billion credit facility that was scheduled to expire in May 2016. The initial term of our new credit facility expires in June 2019 and includes, at our option, two six-month extensions. Our new credit facility has a $1.0 billion accordion expansion option.  Under our new credit facility, our current investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 0.90% with a facility commitment fee of 0.15%, for all-in drawn pricing of 1.05% over LIBOR. The borrowing rate is subject to an interest rate floor. We also have other interest rate options available to us under our new credit facility. Our new credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.

 

-8-



Table of Contents

 

At September 30, 2015, credit facility origination costs of $11.0 million are included in other assets, net on our consolidated balance sheet.  This balance includes $9.1 million of new credit facility origination costs incurred during the second and third quarters of 2015 as a result of entering into our new credit facility. These costs, as well as the costs incurred as a result of entering into our previous credit facilities, are being amortized over the remaining term of our new credit facility.

 

At September 30, 2015, we had a borrowing capacity of $1.56 billion available on our new credit facility (subject to customary conditions to borrowing) and an outstanding balance of $439.0 million, as compared to an outstanding balance of $223.0 million at December 31, 2014.

 

The weighted average interest rate on outstanding borrowings under our credit facilities was 1.2% during the first nine months of 2015 and 2014. At September 30, 2015, the effective interest rate was 1.3%.  Our new and previous credit facilities are and were subject to various leverage and interest coverage ratio limitations, and at September 30, 2015, we remain in compliance with the covenants on our new credit facility.

 

6.     Mortgages Payable

 

During the first nine months of 2015, we made $140.8 million in principal payments, including the repayment of ten mortgages in full for $135.3 million.  No mortgages were assumed during the first nine months of 2015.

 

During the first nine months of 2014, we made $77.6 million in principal payments, including the repayment of five mortgages in full for $72.0 million, and assumed mortgages totaling $166.7 million, excluding net premiums.  The mortgages are secured by the properties on which the debt was placed.  We expect to pay off the mortgages as soon as prepayment penalties make it economically feasible to do so.

 

During the first nine months of 2014, aggregate net premiums totaling $604,000 were recorded upon assumption of the mortgages for above-market interest rates. Amortization of our net premiums is recorded as a reduction to interest expense over the remaining term of the respective mortgages, using a method that approximates the effective-interest method.

 

These mortgages contain customary covenants, such as limiting our ability to further mortgage each applicable property or to discontinue insurance coverage without the prior consent of the lender. At September 30, 2015, we remain in compliance with these covenants.

 

We did not incur any deferred financing costs on our mortgages assumed in the first nine months of 2014. The balance of our deferred financing costs, which are classified as part of other assets, net, on our consolidated balance sheets, was $619,000 at September 30, 2015 and $827,000 at December 31, 2014. These costs are being amortized over the remaining term of each mortgage.

 

The following is a summary of all our mortgages payable as of September 30, 2015 and December 31, 2014, respectively (dollars in thousands):

 

 

 

 

 

Weighted

 

Weighted

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

Average

 

Average

 

 

 

 

 

 

 

 

 

 

 

Stated

 

Effective

 

Remaining

 

Remaining

 

Unamortized

 

Mortgage

 

 

 

Number of

 

Interest

 

Interest

 

Years Until

 

Principal

 

Premium

 

Payable

 

As Of

 

Properties(1)

 

Rate(2)

 

Rate(3)

 

Maturity

 

Balance

 

Balance, net

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9/30/15

 

192

 

4.9%

 

4.0%

 

3.6

 

$

695,186

 

$

10,955

 

$

706,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12/31/14

 

241

 

5.0%

 

4.0%

 

3.7

 

$

836,011

 

$

16,564

 

$

852,575

 

 

(1)

At September 30, 2015, there were 47 mortgages on 192 properties, while at December 31, 2014, there were 57 mortgages on 241 properties. The mortgages require monthly payments, with principal payments due at maturity. The mortgages are at fixed interest rates, except for four mortgages on 13 properties totaling $51.0 million at September 30, 2015, including net unamortized discounts. At December 31, 2014, five mortgages on 14 properties totaling $74.5 million, including net unamortized discounts, were at variable interest rates. After factoring in arrangements which limit our exposure to interest rate risk and effectively fix our per annum interest rates, our variable rate mortgage debt includes two mortgages totaling $15.5 million at September 30, 2015, and three mortgages totaling $39.1 million at December 31, 2014.

(2)

Stated interest rates ranged from 2.0% to 6.9% at September 30, 2015 and December 31, 2014.

(3)

Effective interest rates ranged from 2.2% to 8.9% at September 30, 2015, while effective interest rates ranged from 2.2% to 9.0% at December 31, 2014.

 

-9-



Table of Contents

 

The following table summarizes the maturity of mortgages payable, excluding net premiums of $11.0 million, as of September 30, 2015 (dollars in millions):

 

Year of

 

 

 

Maturity

 

 

 

2015

 

$

1.9

 

2016

 

225.6

 

2017

 

142.7

 

2018

 

15.3

 

2019

 

26.2

 

Thereafter

 

283.5

 

Totals

 

$

695.2

 

 

7.       Term Loans

 

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

 

In January 2013, in conjunction with our acquisition of American Realty Capital Trust, Inc., or ARCT, we entered into a $70 million senior unsecured term loan maturing January 21, 2018.  Borrowing under this term loan bears interest at the current one month LIBOR, plus 1.2%.  In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest rate on this term loan at 2.15%.

 

Deferred financing costs of $1.2 million incurred in conjunction with the $250 million term loan and $303,000 incurred in conjunction with the $70 million term loan are being amortized over the remaining terms of each term loan.  The net balance of these deferred financing costs, which was $1.2 million at September 30, 2015, and $187,000 at December 31, 2014, is included in other assets, net on our consolidated balance sheets.

 

8.       Notes Payable

 

A.           General

 

Our senior unsecured notes and bonds consisted of the following, sorted by maturity date (dollars in millions):

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

5.5% notes, issued in November 2003 and due in November 2015

 

$

150

 

$

150

 

5.95% notes, issued in September 2006 and due in September 2016

 

275

 

275

 

5.375% notes, issued in September 2005 and due in September 2017

 

175

 

175

 

2.0% notes, issued in October 2012 and due in January 2018

 

350

 

350

 

6.75% notes, issued in September 2007 and due in August 2019

 

550

 

550

 

5.75% notes, issued in June 2010 and due in January 2021

 

250

 

250

 

3.25% notes, issued in October 2012 and due in October 2022

 

450

 

450

 

4.65% notes, issued in July 2013 and due in August 2023

 

750

 

750

 

3.875% notes, issued in June 2014 and due in July 2024

 

350

 

350

 

4.125% notes, issued in September 2014 and due in October 2026

 

250

 

250

 

5.875% bonds, $100 issued in March 2005 and $150 issued in June 2011, both due in March 2035

 

250

 

250

 

Total principal amount

 

3,800

 

3,800

 

Unamortized original issuance discounts

 

(14

)

(15

)

 

 

$

3,786

 

$

3,785

 

 

-10-



Table of Contents

 

The following table summarizes the maturity of our notes and bonds payable as of September 30, 2015, excluding unamortized original issuance discounts (dollars in millions):

 

 

 

Notes and

 

Year of Maturity

 

Bonds

 

2015

 

$

150

 

2016

 

275

 

2017

 

175

 

2018

 

350

 

2019

 

550

 

Thereafter

 

2,300

 

 

 

 

 

Totals

 

$

3,800

 

 

As of September 30, 2015, the weighted average interest rate on our notes and bonds payable was 4.8% and the weighted average remaining years until maturity was 6.5 years.

 

B.           Note Issuance

In September 2014, we issued $250 million of 4.125% senior unsecured notes due October 2026, or the 2026 Notes.  The price to the investors for the 2026 Notes was 99.499% of the principal amount for an effective yield of 4.178% per annum.  A portion of the total net proceeds of approximately $246.4 million from this offering were used to repay all outstanding borrowings under our credit facility, and the remaining proceeds were used for other general corporate purposes, including additional property acquisitions.  Interest is paid semiannually on the 2026 Notes.

 

In June 2014, we issued $350 million of 3.875% senior unsecured notes due July 2024, or the 2024 Notes.  The price to the investors for the 2024 Notes was 99.956% of the principal amount for an effective yield of 3.88% per annum.  The total net proceeds of approximately $346.7 million from these offerings were used to repay a portion of the outstanding borrowings under our credit facility.  Interest is paid semiannually on the 2024 Notes.

 

9.   Redemption of Preferred Stock

 

In September 2014, we issued an irrevocable notice of redemption for all 8.8 million shares of our 6.75% Monthly Income Class E Preferred Stock for $25 per share, plus accrued dividends.  The redemption occurred in October 2014.  We incurred a charge of $6.0 million, representing the Class E preferred stock original issuance costs that we paid in 2006.

 

10.     Issuance of Common Stock

 

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

 

In April 2014, we issued 13,800,000 shares of common stock, including 1,800,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares.  After underwriting discounts and other offering costs of $22.8 million, the net proceeds of $528.6 million were used to repay borrowings under our credit facility.

 

11.     Noncontrolling Interests

 

In January 2013, we completed our acquisition of ARCT.  Equity issued as consideration for this transaction included common and preferred partnership units issued by Tau Operating Partnership, L.P., or Tau Operating Partnership, the consolidated subsidiary which owns properties acquired through the ARCT acquisition.  Realty Income and its subsidiaries hold a 99.4% interest in Tau Operating Partnership, and consolidate the entity.

 

In June 2013, we completed the acquisition of a portfolio of properties by issuing common partnership units in a newly formed entity, Realty Income, L.P.  The units were issued as consideration for the acquisition.  At September 30, 2015, the remaining units from this issuance represent a 1.7% ownership in Realty Income, L.P.  Realty Income holds the remaining 98.3% interests in this entity and consolidates the entity.

 

-11-



Table of Contents

 

A.      Neither of the common partnership units have voting rights. Both common partnership units are entitled to monthly distributions equal to the amount paid to common stockholders of Realty Income, and are redeemable in cash or Realty Income common stock, at our option, and at a conversion ratio of one to one, subject to certain exceptions. Noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the balance sheet was appropriate.  We determined that the units meet the requirements to qualify for presentation as permanent equity.

 

The following table represents the change in the carrying value of all noncontrolling interests through September 30, 2015 (dollars in thousands):

 

 

 

Tau Operating

 

Realty Income, L.P.

 

 

 

 

 

Partnership units(1)

 

units(2)

 

Total

 

Carrying value at December 31, 2014

 

$

13,067

 

$

14,631

 

$

27,698

 

Reallocation of equity

 

836

 

(1,887

)

(1,051

)

Redemptions

 

-

 

(2,121

)

(2,121

)

Distributions

 

(541

)

(716

)

(1,257

)

Allocation of net income

 

195

 

724

 

919

 

Carrying value at September 30, 2015

 

$

13,557

 

$

10,631

 

$

24,188

 

 

 

 

 

 

 

 

 

 

 

Tau Operating

 

Realty Income, L.P.

 

 

 

 

 

Partnership units(1)

 

units(2)

 

Total

 

Carrying value at December 31, 2013

 

$

13,489

 

$

22,422

 

$

35,911

 

Reallocation of equity

 

-

 

(6,647

)

(6,647

)

Redemptions

 

-

 

(1,032

)

(1,032

)

Distributions

 

(695

)

(1,144

)

(1,839

)

Allocation of net income

 

273

 

1,032

 

1,305

 

Carrying value at December 31, 2014

 

$

13,067

 

$

14,631

 

$

27,698

 

 

(1)

317,022 Tau Operating Partnership units were issued on January 22, 2013 and remained outstanding as of September 30, 2015 and December 31, 2014.

(2)

534,546 Realty Income, L.P. units were issued on June 27, 2013, and 499,546 units were outstanding as of December 31, 2014 and 419,546 remain outstanding as of September 30, 2015.

 

During the first nine months of 2015, we recorded net equity reclassification adjustments of $1.1 million between noncontrolling interests and additional paid in capital to adjust the carrying value of noncontrolling interests to be in-line with their equity ownership interests in the entities. During 2014, we recorded an equity reclassification adjustment of $6.6 million between noncontrolling interests and additional paid in capital to adjust the carrying value of the Realty Income, L.P. noncontrolling interests to be in-line with their equity ownership interest in the entity.

 

B.      The Tau Operating Partnership preferred units were recorded at fair value as of the date of acquisition.  Since they were redeemable at a fixed price on a determinable date, we initially classified them in other liabilities on our consolidated balance sheets.  Payments on these preferred units were made monthly at a rate of 2% per annum and were included in interest expense.  As of December 31, 2014, the preferred units had a carrying value of $6.75 million.  In January 2015, we redeemed all 6,750 Tau Operating Partnership preferred units for $1,000 per unit, plus accrued and unpaid distributions.

 

12.     Fair Value of Financial Instruments

 

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The disclosure for assets and liabilities measured at fair value requires allocation to a three-level valuation hierarchy. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

-12-



Table of Contents

 

We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, accounts receivable, escrow deposits, loans receivable, line of credit payable, term loans and all other liabilities, due to their short-term nature or interest rates and terms that are consistent with market, except for our notes receivable issued in connection with property sales, mortgages payable and our senior notes and bonds payable, which are disclosed below (dollars in millions):

 

 

 

Carrying value per

 

Estimated fair

 

At September 30, 2015

 

balance sheet

 

value

 

Notes receivable issued in connection with property sales

 

$

18.0

 

$

19.7

 

Mortgages payable assumed in connection with acquisitions, net

 

706.1

 

713.4

 

Notes and bonds payable, net of unamortized original issuance discounts

 

3,786.4

 

4,001.0

 

 

 

 

 

 

 

 

 

Carrying value per

 

Estimated fair

 

At December 31, 2014

 

balance sheet

 

value

 

Notes receivable issued in connection with property sales

 

$

18.3

 

$

20.1

 

Mortgages payable assumed in connection with acquisitions, net

 

852.6

 

857.9

 

Notes and bonds payable, net of unamortized original issuance discounts

 

3,785.4

 

4,092.8

 

 

The estimated fair values of our notes receivable issued in connection with property sales and our mortgages payable have been calculated by discounting the future cash flows using an interest rate based upon the relevant Treasury yield curve, plus an applicable credit-adjusted spread.  Because this methodology includes unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated fair values related to our notes receivable and mortgages payable is categorized as level three on the three-level valuation hierarchy.

 

The estimated fair values of our senior notes and bonds payable are based upon indicative market prices and recent trading activity of our senior notes and bonds payable. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values, related to our notes and bonds payable, is categorized as level two on the three-level valuation hierarchy.

 

We record interest rate swaps on the consolidated balance sheet at fair value. The fair value of our interest rate swaps are based on valuation techniques including discounted cash flow analysis on the expected cash flows of each swap, using both observable and unobservable market-based inputs, including interest rate curves.  Because this methodology uses observable and unobservable inputs, the measurement of interest rate swaps is categorized as level two on the three-level valuation hierarchy.

 

13.     Gain on Sales of Real Estate

 

During the third quarter of 2015, we sold eight properties for $21.5 million, which resulted in a gain of $6.2 million. During the first nine months of 2015, we sold 22 investment properties for $52.0 million, which resulted in a gain of $17.1 million.  The results of operations for these properties are presented within continuing operations.

 

During the third quarter of 2014, we sold 11 properties for $33.8 million, which resulted in a gain of $11.0 million. During the first nine months of 2014, we sold 28 properties for $53.6 million, which resulted in a gain of $16.8 million. Only the results of operations specifically related to the properties classified as held for sale at December 31, 2013 and sold during the first nine months of 2014 have been reclassified as discontinued operations, which was $2.6 million for the nine months ended September 30, 2014.

 

During the first nine months of 2015, Crest Net Lease, Inc., or Crest, did not sell any properties.  During the first nine months of 2014, Crest sold one property for $820,000, which did not result in a gain. The results of operations for this property were reclassified as discontinued operations.

 

-13-



Table of Contents

 

14.     Discontinued Operations

 

During the first quarter of 2014, the Financial Accounting Standards Board issued guidance that changed the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity’s operations and financial results.  We early adopted the requirements of this accounting pronouncement in the first quarter of 2014.

 

Starting with the first quarter of 2014, the results of operations for all qualifying disposals and properties classified as held for sale that were not previously reported in discontinued operations in our 2013 Annual Report on Form 10-K are presented within income from continuing operations on our consolidated statements of income.  Prior to the date of adoption of Accounting Standards Update 2014-08 (ASU 2014-08), which amends Topic 205, Presentation of Financial Statements, and Topic 360, Property, Plant, and Equipment, we reported, in discontinued operations, the results of operations of properties that had either been disposed of or classified as held for sale in financial statements issued. For the nine months ended September 30, 2014, we recorded income from discontinued operations of $3.1 million, or $0.01 per common share, basic and diluted.

 

15.   Impairments

 

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A provision is made for impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key factors that we utilize in this analysis include projected rental rates, estimated holding periods, historical sales and releases, capital expenditures and property sales capitalization rates. If a property is classified as held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell, and depreciation of the property ceases.

 

During the third quarter of 2015, we recorded total provisions for impairment of $3.9 million on one property classified as held for sale, one property classified as held for investment, and two sold properties in the following industries: one in the pet supplies and services industry and three in the restaurant-casual dining industry. For the first nine months of 2015, we recorded total provisions for impairment of $9.2 million on four properties classified as held for sale, three properties classified as held for investment, four sold properties, and one property disposed of other than by sale in the following industries: one in the health and fitness industry, one in the pet supplies and services industry, nine in the restaurant-casual dining industry, and one among the industry we classify as “other.”  These properties were not previously classified as held for sale in financial statements issued prior to the date of adoption of ASU 2014-08; accordingly, the provisions for impairment are included in income from continuing operations on our consolidated statement of income for the three and nine months ended September 30, 2015.

 

In comparison, for the third quarter of 2014, we recorded total provisions for impairment of $495,000 on four sold properties in the following industries: one in the convenience stores industry, two in the home improvement industry, and one in the restaurant-casual dining industry. For the first nine months of 2014, we recorded total provisions for impairment of $2.7 million on nine sold properties in the following industries: one in the consumer electronics industry, one in the convenience stores industry, one in the home furnishings industry, two in the home improvement industry, and four in the restaurant-casual dining industry. These properties were not previously classified as held for sale in financial statements issued prior to the date of adoption of ASU 2014-08; accordingly, these provisions for impairment are included in income from continuing operations on our consolidated statements of income for the three and nine months ended September 30, 2014.

 

-14-



Table of Contents

 

16.     Distributions Paid and Payable

 

A.                       Common Stock

 

We pay monthly distributions to our common stockholders.  The following is a summary of monthly distributions paid per common share for the first nine months of 2015 and 2014:

 

Month

 

2015

 

2014

 

January

 

$

0.1834167

 

$

0.1821667

 

February

 

0.1890000

 

0.1821667

 

March

 

0.1890000

 

0.1821667

 

April

 

0.1895000

 

0.1824792

 

May

 

0.1895000

 

0.1824792

 

June

 

0.1895000

 

0.1824792

 

July

 

0.1900000

 

0.1827917

 

August

 

0.1900000

 

0.1827917

 

September

 

0.1900000

 

0.1827917

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1.6999167

 

$

1.6423128

 

 

At September 30, 2015, a distribution of $0.1905 per common share was payable and was paid in October 2015.

 

B.      Class E Preferred Stock

Prior to the redemption of the Class E preferred stock in October 2014, dividends of $0.140625 per share were paid monthly in arrears on the Class E preferred stock.  During the first nine months of 2014, we paid six monthly dividends to holders of our Class E preferred stock totaling $1.265625 per share, or $11.1 million.

 

C.      Class F Preferred Stock

The Class F preferred stockholders receive cumulative distributions at a rate of 6.625% per annum on the $25.00 per share liquidation preference (equivalent to $1.65625 per annum per share). Dividends of $0.138021 per share are paid monthly in arrears on the Class F preferred stock.  During each of the first nine months of 2015 and 2014, we paid nine monthly dividends to holders of our Class F preferred stock totaling $1.242189 per share, or $20.3 million, and at September 30, 2015, a monthly dividend of $0.138021 per share was payable and was paid in October 2015. We are current in our obligations to pay dividends on our Class F preferred stock.

 

17.   Net Income Per Common Share

 

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income available to common stockholders, plus income attributable to dilutive shares and convertible common units, for the period by the weighted average number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period.

 

-15-



Table of Contents

 

The following is a reconciliation of the denominator of the basic net income per common share computation to the denominator of the diluted net income per common share computation.

 

 

 

Three months ended

 

Nine months ended

 

 

 

 

 

 

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Weighted average shares used for the basic net income per share computation

 

236,211,706

 

222,061,661

 

231,434,521

 

216,804,815

 

Incremental shares from share-based compensation

 

211,214

 

174,410

 

111,224

 

25,198

 

Weighted average partnership common units convertible to common shares that were dilutive

 

317,022

 

-

 

317,022

 

317,022

 

Weighted average shares used for diluted net income per share computation

 

236,739,942

 

222,236,071

 

231,862,767

 

217,147,035

 

Unvested shares from share-based compensation that were anti-dilutive

 

132,948

 

45,654

 

107,879

 

58,654

 

Weighted average partnership common units convertible to common shares that were anti-dilutive

 

419,546

 

841,568

 

426,469

 

529,381

 

 

18.     Supplemental Disclosures of Cash Flow Information

 

Cash paid for interest was $201.4 million in the first nine months of 2015 and $183.1 million in the first nine months of 2014.

 

Interest capitalized to properties under development was $463,000 in the first nine months of 2015 and $383,000 in the first nine months of 2014.

 

Cash paid for income taxes was $3.1 million in the first nine months of 2015 and $3.5 million in the first nine months of 2014.

 

The following non-cash activities are included in the accompanying consolidated financial statements:

 

A.     See note 15 for a discussion of impairments recorded by Realty Income for the first nine months of 2015 and 2014.

 

B.     See note 9 for a discussion of the $6.0 million excess of redemption value over carrying value of preferred shares subject to redemption charge recorded by Realty Income during the third quarter and first nine months of 2014.

 

C.     During the first nine months of 2014, we acquired mortgages payable to third-party lenders of $166.7 million, recorded $604,000 of net premiums, and recorded $901,000 of interest rate swap value to other assets, net, related to property acquisitions.

 

D.    During the first nine months of 2014, we applied $48.9 million of loans receivable to the purchase price of five acquired properties.

 

E.     Accrued costs on properties under development resulted in an increase in buildings and improvements and accounts payable of $4.8 million at September 30, 2014.

 

19.     Segment Information

 

We evaluate performance and make resource allocation decisions on an industry by industry basis. For financial reporting purposes, we have grouped our tenants into 48 activity segments. All of the properties are incorporated into one of the applicable segments. Because almost all of our leases require the tenant to pay operating expenses, rental revenue is the only component of segment profit and loss we measure.

 

-16-



Table of Contents

 

The following tables set forth certain information regarding the properties owned by us, classified according to the business of the respective tenants (dollars in thousands):

 

 

 

September 30,

 

December 31,

 

Assets, as of:

 

2015

 

2014

 

Segment net real estate:

 

 

 

 

 

Apparel

 

$

181,049

 

$

185,237

 

Automotive service

 

130,860

 

120,948

 

Automotive tire services

 

249,279

 

255,447

 

Beverages

 

298,793

 

302,001

 

Child care

 

52,697

 

54,194

 

Convenience stores

 

733,545

 

752,047

 

Dollar stores

 

1,139,714

 

1,165,560

 

Drug stores

 

1,344,565

 

1,036,697

 

Financial services

 

255,915

 

262,095

 

Grocery stores

 

334,031

 

341,773

 

Health and fitness

 

836,062

 

546,583

 

Health care

 

221,642

 

227,084

 

Home improvement

 

268,609

 

226,577

 

Restaurants-casual dining

 

426,261

 

448,484

 

Restaurants-quick service

 

405,802

 

336,753

 

Theaters

 

369,280

 

375,982

 

Transportation services

 

690,809

 

661,053

 

Wholesale club

 

455,814

 

465,569

 

30 other non-reportable segments

 

2,114,584

 

2,017,456

 

Total segment net real estate

 

10,509,311

 

9,781,540

 

 

 

 

 

 

 

Intangible assets:

 

 

 

 

 

Apparel

 

49,198

 

52,445

 

Automotive service

 

19,431

 

2,909

 

Automotive tire services

 

13,619

 

14,871

 

Beverages

 

2,603

 

2,797

 

Convenience stores

 

16,414

 

17,535

 

Dollar stores

 

54,675

 

58,691

 

Drug stores

 

191,900

 

194,905

 

Financial services

 

35,860

 

39,564

 

Grocery stores

 

43,861

 

46,964

 

Health and fitness

 

64,469

 

66,460

 

Health care

 

31,217

 

35,017

 

Home improvement

 

43,933

 

35,726

 

Restaurants-casual dining

 

9,706

 

10,649

 

Restaurants-quick service

 

25,105

 

16,415

 

Theaters

 

18,635

 

21,600

 

Transportation services

 

95,854

 

101,040

 

Wholesale club

 

37,088

 

39,707

 

Other non-reportable segments

 

289,986

 

282,429

 

 

 

 

 

 

 

Goodwill:

 

 

 

 

 

Automotive service

 

448

 

451

 

Automotive tire services

 

865

 

865

 

Child care

 

5,053

 

5,095

 

Convenience stores

 

2,020

 

2,023

 

Restaurants-casual dining

 

2,232

 

2,279

 

Restaurants-quick service

 

1,085

 

1,085

 

Other non-reportable segments

 

3,669

 

3,672

 

Other corporate assets

 

170,332

 

175,888

 

Total assets

 

$

11,738,569

 

$

11,012,622

 

 

-17-



Table of Contents

 

 

 

Three months ended

 

Nine months ended

 

 

 

 

 

 

 

 

 

September 30,

 

September 30,

 

Revenue

 

2015

 

2014

 

2015

 

2014

 

Segment rental revenue:

 

 

 

 

 

 

 

 

 

Apparel

 

$

4,961

 

$

4,849

 

$

14,825

 

$

12,780

 

Automotive service

 

4,690

 

4,040

 

13,806

 

12,466

 

Automotive tire services

 

7,132

 

6,995

 

21,503

 

21,175

 

Beverages

 

6,397

 

6,321

 

19,054

 

18,827

 

Child care

 

5,019

 

4,990

 

14,901

 

14,974

 

Convenience stores

 

22,638

 

22,592

 

67,770

 

67,221

 

Dollar stores

 

22,086

 

21,875

 

65,976

 

63,074

 

Drug stores

 

27,320

 

21,269

 

75,744

 

62,673

 

Financial services

 

4,260

 

4,248

 

12,787

 

12,572

 

Grocery stores

 

7,441

 

7,236

 

22,323

 

19,981

 

Health and fitness

 

21,238

 

15,764

 

54,649

 

46,078

 

Health care

 

4,012

 

4,017

 

12,045

 

12,022

 

Home improvement

 

6,155

 

4,796

 

16,839

 

10,650

 

Restaurants-casual dining

 

9,426

 

9,551

 

28,245

 

28,878

 

Restaurants-quick service

 

9,961

 

7,933

 

29,940

 

24,530

 

Theaters

 

12,288

 

11,899

 

36,765

 

34,975

 

Transportation services

 

12,573

 

11,598

 

37,775

 

34,383

 

Wholesale club

 

9,341

 

9,250

 

28,024

 

27,247

 

30 other non-reportable segments

 

50,640

 

47,609

 

151,160

 

138,316

 

Total rental revenue

 

247,578

 

226,832

 

724,131

 

662,822

 

Tenant reimbursements

 

10,187

 

8,275

 

31,757

 

20,872

 

Other revenue

 

1,124

 

606

 

3,729

 

2,238

 

Total revenue

 

$

258,889

 

$

235,713

 

$

759,617

 

$

685,932

 

 

20.     Common Stock Incentive Plan

 

In 2012, our Board of Directors adopted and stockholders approved the Realty Income Corporation 2012 Incentive Award Plan, or the 2012 Plan, to enable us to motivate, attract and retain the services of directors and employees considered essential to our long-term success. The 2012 Plan offers our directors and employees an opportunity to own stock in Realty Income or rights that will reflect our growth, development and financial success. Under the terms of the 2012 plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than 3,985,734 shares. The 2012 Plan has a term of ten years from the date it was adopted by our Board of Directors.

 

The amount of share-based compensation costs recognized in general and administrative expense on our consolidated statements of income was $2.2 million during the third quarter of 2015, $2.2 million during the third quarter of 2014, $7.6 million during the first nine months of 2015 and $7.7 million during the first nine months of  2014.

 

-18-



Table of Contents

 

A.   Restricted Stock

 

The following table summarizes our common stock grant activity under our 2012 Plan. Our outstanding restricted stock vests over periods ranging from immediately to five years.

 

 

 

For the nine months ended

 

For the year ended

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Number of

 

Weighted

 

Number of

 

Weighted

 

 

 

shares

 

average price(1)

 

shares

 

average price(1)

 

Outstanding nonvested shares, beginning of year

 

527,176

 

$

29.02

 

722,263

 

$

23.37

 

Shares granted

 

154,385

 

$

50.88

 

262,655

 

$

39.87

 

Shares vested

 

(165,199

)

$

36.71

 

(440,348

)

$

36.88

 

Shares forfeited

 

(24,738

)

$

44.86

 

(17,394

)

$

39.07

 

Outstanding nonvested shares, end of each period

 

491,624

 

$

32.07

 

527,176

 

$

29.02

 

 

 

 

 

 

 

 

 

 

 

(1) Grant date fair value.

 

 

 

 

 

 

 

 

 

 

During the first nine months of 2015, we issued 154,385 shares of common stock under the 2012 Plan. These shares vest over a five year service period, except for the annual grant of shares to our Board of Directors, totaling 28,000 shares, of which 12,000 shares vested immediately, 8,000 shares vest in one year following the grant (assuming continued service), and 8,000 shares vest over a three year service period.  Not included in the table above are 10,269 restricted share units granted during the first nine months of 2015 that vest over a five year service period and have the same economic rights as shares of restricted stock.

 

As of September 30, 2015, the remaining unamortized share-based compensation expense related to restricted stock totaled $15.8 million, which is being amortized on a straight-line basis over the service period of each applicable award.

 

Due to a historically low turnover rate, we do not estimate a forfeiture rate for our nonvested shares. Accordingly, unexpected forfeitures will lower share-based compensation expense during the applicable period. Under the terms of our 2012 Plan, we pay non-refundable dividends to the holders of our nonvested shares. Applicable accounting guidance requires that the dividends paid to holders of these nonvested shares be charged as compensation expense to the extent that they relate to nonvested shares that do not or are not expected to vest. However, since we do not estimate forfeitures given our historical trends, we did not record any compensation expense related to dividends paid in the first nine months of 2015 or 2014.

 

B.    Performance Shares

 

During the first nine months of 2015, and the year ended December 31, 2014, we granted performance share awards, as well as dividend equivalent rights.  The number of performance shares that vest is based on the achievement of the following performance goals:

 

2015 Performance Awards

 

 

 

Metrics

 

Weighting

 

Total shareholder return (“TSR”) relative to MSCI US REIT Index

 

50%

 

TSR relative to NAREIT Freestanding Index

 

20%

 

Dividend per share growth rate

 

20%

 

Debt-to-EBITDA ratio

 

10%

 

 

 

 

 

2014 Performance Awards

 

 

 

Metrics

 

Weighting

 

TSR relative to MSCI US REIT Index

 

60%

 

TSR relative to NAREIT Freestanding Index

 

20%

 

Debt-to-EBITDA ratio

 

20%

 

 

The performance shares are earned based on our performance, and vest 50% on the first and second January 1 after the end of the three year performance period, subject to continued service. The performance period for the 2014 performance awards began on January 1, 2014 and will end on December 31, 2016. The performance period for the 2015 performance awards began on January 1, 2015 and will end on December 31, 2017.

 

-19-



Table of Contents

 

The fair value of the performance shares was estimated on the date of grant using a Monte Carlo Simulation model. The following table summarizes our performance share grant activity:

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Number of

 

Weighted

 

Number of

 

Weighted

 

 

 

performance

 

average

 

performance

 

average

 

 

 

shares

 

price(1)

 

shares

 

price(1)

 

Outstanding nonvested shares, beginning of year

 

59,405

 

$

41.46

 

-

 

$

-

 

Shares granted

 

55,716

 

$

52.78

 

71,705

 

$

41.46

 

Shares vested

 

-

 

$

-

 

(4,067

)

$

41.46

 

Shares forfeited

 

-

 

$

-

 

(8,233

)

$

41.46

 

 

 

 

 

 

 

 

 

 

 

Outstanding nonvested shares, end of each period

 

115,121

 

$

46.94

 

59,405

 

$

41.46

 

 

(1) Grant date fair value.

 

As of September 30, 2015, the remaining share-based compensation expense related to the performance shares totaled $3.8 million.  The portion related to the market-based awards is being recognized on a straight-line basis over the service period, and the portion related to the performance-based awards is being recognized on a tranche-by-tranche basis over the service period.

 

21.     Dividend Reinvestment and Stock Purchase Plan

 

We have a Dividend Reinvestment and Stock Purchase Plan, or the DRSPP, to provide our common stockholders, as well as new investors, with a convenient and economical method of purchasing our common stock and reinvesting their distributions. The DRSPP also allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions. The DRSPP authorizes up to 26,000,000 common shares to be issued.  During the first nine months of 2015, we issued 7,565,432 shares and raised approximately $360.9 million under the DRSPP.  During the first nine months of 2014, we issued 1,290,872 shares and raised approximately $56.6 million under the DRSPP.  From the inception of the DRSPP through September 30, 2015, we have issued 12,656,940 shares and raised approximately $579.5 million.

 

In 2013, we revised our DRSPP to pay for a majority of the plan-related fees, which were previously paid by investors, and to institute a waiver approval process, allowing larger investors or institutions, per a formal approval process, to purchase shares at a small discount, if approved by us. During the first nine months of 2015, we issued 7,413,207 shares and raised $353.7 million under the waiver approval process. During the first nine months 2014, we issued 1,135,897 shares and raised $50.0 million under the waiver approval process.  These shares are included in the total activity for the first nine months of 2015 and 2014 noted in the preceding paragraph.

 

22.     Commitments and Contingencies

 

In the ordinary course of business, we are party to various legal actions which we believe are routine in nature and incidental to the operation of our business. We believe that the outcome of the proceedings will not have a material adverse effect upon our consolidated financial position or results of operations.

 

At September 30, 2015, we had commitments of $2.3 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements. In addition, as of September 30, 2015, we had committed $58.4 million under construction contracts, which is expected to be paid in the next twelve months.

 

23.     Subsequent Events

 

In October 2015, we declared the following dividends, which will be paid in November 2015:

 

·                  $0.1905 per share to our common stockholders and

 

-20-



Table of Contents

 

·                  $0.138021 per share to our Class F preferred stockholders.

 

In October 2015, we issued 11,500,000 shares of common stock, including 1,500,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares.  After underwriting discounts and other offering costs of $22.1 million, a portion of the net proceeds of $517.0 million was used to repay borrowings under our new credit facility and the remaining portion was used for other general corporate purposes, which may include acquisitions.

 

Item 2.                  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

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

 

·

Our anticipated growth strategies;

·

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

·

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

·

Our intention to re-lease vacant properties;

·

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

·

Future expenditures for development projects.

 

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

 

·

Our continued qualification as a real estate investment trust;

·

General business and economic conditions;

·

Competition;

·

Fluctuating interest rates;

·

Access to debt and equity capital markets;

·

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

·

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

·

Impairments in the value of our real estate assets;

·

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

·

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

·

Acts of terrorism and war.

 

Additional factors that may cause risks and uncertainties include those discussed in the sections entitled “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2014.

 

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

 

-21-



Table of Contents

 

THE COMPANY

 

Realty Income, The Monthly Dividend Company®, is an S&P 500 real estate company with the primary business objective of generating dependable monthly cash dividends from a consistent and predictable level of cash flow from operations. Our monthly dividends are supported by the cash flow from our property portfolio. We have in-house acquisition, portfolio management, asset management, credit research, real estate research, legal, finance and accounting, information technology, and capital markets capabilities. Over the past 46 years, Realty Income has been acquiring and managing freestanding commercial properties that generate rental revenue under long-term net lease agreements.

 

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

 

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

 

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

 

·

Contractual rent increases on existing leases;

·

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

·

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

·

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

·

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

·

Investment opportunities in new asset classes for the portfolio.

 

At September 30, 2015, we owned a diversified portfolio:

 

·

Of 4,473 properties;

·

With an occupancy rate of 98.3%, or 4,399 properties leased and 74 properties available for lease;

·

Leased to 236 different commercial tenants doing business in 47 separate industries;

·

Located in 49 states and Puerto Rico;

·

With over 74.8 million square feet of leasable space; and

·

With an average leasable space per property of approximately 16,740 square feet, including approximately 11,580 square feet per retail property and 215,460 square feet per industrial property.

 

Of the 4,473 properties in the portfolio, 4,454, or 99.6%, are single-tenant properties, and the remaining are multi-tenant properties. At September 30, 2015, of the 4,454 single-tenant properties, 4,380 were leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 10.1 years.

 

Investment Philosophy

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

 

Diversification is also a key component of our investment philosophy.  We believe that diversification of the portfolio by tenant, industry, geography, and, to a certain extent, property type leads to more predictable investment results for our shareholders by reducing vulnerability that can come with any single concentration.  Our investment efforts have led to a diversified property portfolio that, as of September 30, 2015, consisted of 4,473 properties located in 49 states and Puerto Rico, leased to 236 different commercial tenants doing business in 47 industry segments. Each of the 47 industry segments represented in our property portfolio individually accounted for no more than 11.1% of our rental revenue for the quarter ended September 30, 2015.  Since 1970, our occupancy rate at the end of each year has never been below 96%.  However, we cannot assure you that our future occupancy levels will continue to equal or exceed 96%.

 

-22-



Table of Contents

 

Investment Strategy

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

 

·

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

·

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

·

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

·

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

·

Properties with real estate valuations that approximate replacement costs;

·

Properties with rental or lease payments that approximate market rents; and

·

Properties that can be purchased with the simultaneous execution or assumption of long-term, net lease agreements, offering both current income and the potential for future rent increases.

 

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

 

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

 

·

Tenants with reliable and sustainable cash flow;

·

Tenants with revenue and cash flow from multiple sources;

·

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

·

Tenants that are large owners and users of real estate.

 

From a retail perspective, our investment strategy is to target tenants that have a service, non-discretionary, and/or low-price-point component to their business.  We believe these characteristics better position tenants to operate in a variety of economic conditions and to compete more effectively with internet retailers.  As a result of the execution of this strategy, over 90% of our retail rental revenue for the third quarter of 2015 is derived from tenants with a service, non-discretionary, and/or low price point component to their business.  From a non-retail perspective, we target industrial properties leased to Fortune 1000, primarily investment grade rated companies.  We believe rental revenue generated from businesses with these characteristics is generally more durable and stable.

 

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

 

Underwriting Strategy

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

 

-23-



Table of Contents

 

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

 

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

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

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

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

 

Prior to entering into any transaction, our research department conducts a review of a tenant’s credit quality.  The information reviewed may include reports and filings, including any public credit ratings, financial statements, debt and equity analyst reports, and reviews of corporate credit spreads, stock prices, market capitalization, and other financial metrics.  We conduct additional due diligence, including additional financial reviews of the tenant and a more comprehensive review of the business segment and industry in which the tenant operates.  We continue to monitor our tenants’ credit quality on an ongoing basis by reviewing the available information previously discussed, and providing summaries of these findings to management.  We estimate that approximately 44% of our annualized rental revenue comes from properties leased to investment grade rated companies or their subsidiaries.  At September 30, 2015, our top 20 tenants represent approximately 55% of our annualized revenue and eight of these tenants have investment grade credit ratings.

 

Asset Management Strategy

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

 

We regularly review and analyze:

 

·                  The performance of the various industries of our tenants;

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

·                  The quality of the underlying real estate locations.

 

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

 

·                  Generate higher returns;

·                  Enhance the credit quality of our real estate portfolio;

·                  Extend our average remaining lease term; or

·                  Decrease tenant or industry concentration.

 

At September 30, 2015, we classified 17 properties with a carrying amount of $13.3 million as held for sale on our balance sheet. For the remainder of 2015, we intend to continue our active disposition efforts to further enhance our real estate portfolio and anticipate approximately $65 million in property sales for all of 2015.  We intend to invest these proceeds into new property acquisitions, if there are attractive opportunities available. However, we cannot guarantee that we will sell properties during 2015 at our estimated values or be able to invest the property sale proceeds in new properties.

 

Impact of Real Estate and Credit Markets

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

 

-24-



Table of Contents

 

RECENT DEVELOPMENTS

 

Increases in Monthly Dividends to Common Stockholders

 

We have continued our 46-year policy of paying monthly dividends.  In addition, we increased the dividend five times during 2015.  As of October 2015, we have paid 72 consecutive quarterly dividend increases and increased the dividend 82 times since our listing on the NYSE in 1994.

 

 

 

Month

 

Month

 

Dividend

 

Increase

 

2015 Dividend increases

 

Declared

 

Paid

 

per share

 

per share

 

1st increase

 

Dec 2014

 

Jan 2015

 

$ 0.1834167

 

$ 0.0003125

 

2nd increase

 

Jan 2015

 

Feb 2015

 

0.1890000

 

0.0055833

 

3rd increase

 

Mar 2015

 

Apr 2015

 

0.1895000

 

0.0005000

 

4th increase

 

Jun 2015

 

Jul 2015

 

0.1900000

 

0.0005000

 

5th increase

 

Sep 2015

 

Oct 2015

 

0.1905000

 

0.0005000

 

 

The dividends paid per share during the first nine months of 2015 totaled approximately $1.6999167, as compared to approximately $1.6423128 during the first nine months of 2014, an increase of $0.0576, or 3.5%.

 

The monthly dividend of $0.1905 per share represents a current annualized dividend of $2.286 per share, and an annualized dividend yield of approximately 4.8% based on the last reported sale price of our common stock on the NYSE of $47.39 on September 30, 2015. Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will be in any future period.

 

Acquisitions during the Third Quarter of 2015

During the third quarter of 2015, we invested $123.9 million in 47 new properties and properties under development or expansion, with an estimated initial weighted average contractual lease rate of 7.0%.  The 47 new properties and properties under development or expansion are located in 22 states, will contain approximately 960,000 leasable square feet and are 100% leased, with a weighted average lease term of 10.9 years.  The tenants occupying the new properties operate in 13 industries and the property types consist of 51.7% retail and 48.3% industrial, based on rental revenue.

 

Acquisitions during the First Nine Months of 2015

During the first nine months of 2015, we invested $1.1 billion in 195 new properties and properties under development or expansion, with an initial weighted average contractual lease rate of 6.5%. The 195 new properties and properties under development or expansion are located in 36 states, will contain approximately 5.1 million leasable square feet, and are 100% leased with a weighted average lease term of 16.7 years. The tenants occupying the new properties operate in 18 industries and the property types consist of 87.0% retail and 13.0% industrial, based on rental revenue.  During the first nine months of 2015, none of our real estate investments caused any one tenant to be 10% or more of our total assets at September 30, 2015.

 

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

 

In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return.  When the lease does not provide for a fixed rate of return on a property under development or expansion, the estimated initial weighted average contractual lease rate is computed as follows: estimated net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs. Of the $1.1 billion we invested during the first nine months of 2015, $37.1 million was invested in 30 properties under development or expansion with an estimated initial weighted average contractual lease rate of 9.9%.  We may continue to pursue development or expansion opportunities under similar arrangements in the future.

 

-25-



Table of Contents

 

Portfolio Discussion

 

Leasing Results

 

At September 30, 2015, we had 74 properties available for lease out of 4,473 properties in our portfolio, which represents a 98.3% occupancy rate based on the number of properties.  Since December 31, 2014, when we reported 70 properties available for lease out of 4,327 and a 98.4% occupancy rate, we:

 

·                  Had 239 lease expirations;

·                  Re-leased 221 properties; and

·                  Sold 14 vacant properties.

 

Of the 221 properties re-leased during the first nine months of 2015, 189 properties were re-leased to existing tenants, six were re-leased to new tenants without vacancy, and 26 were re-leased to new tenants after a period of vacancy.  The annual rent on these 221 leases was $32.8 million, as compared to the previous rent on these same properties of $32.3 million, which represents a rent recapture rate of 101.5%.

 

At September 30, 2015, our average annualized rental revenue was approximately $13.32 per square foot on the 4,399 leased properties in our portfolio.  At September 30, 2015, we classified 17 properties with a carrying amount of $13.3 million as held for sale on our balance sheet.  The disposal of these properties does not represent a strategic shift that will have a major effect on our operations and financial results.

 

Investments in Existing Properties

In the third quarter of 2015, we capitalized costs of $3.4 million on existing properties in our portfolio, consisting of $93,000 for re-leasing costs, $1.8 million for recurring capital expenditures and $1.5 million for non-recurring building improvements.  In the third quarter of 2014, we capitalized costs of $1.8 million on existing properties in our portfolio.

 

In the first nine months of 2015, we capitalized costs of $5.9 million on existing properties in our portfolio, consisting of $555,000 for re-leasing costs, $3.8 million for recurring capital expenditures and $1.5 million for non-recurring building improvements.  In the first nine months of 2014, we capitalized costs of $4.5 million on existing properties in our portfolio.

 

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

 

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

 

At-the-Market (ATM) Program

In September 2015, we established an “at the market” equity distribution program, or our ATM program, pursuant to which we can offer and sell up to 12,000,000 shares of common stock to, or through a consortium of banks acting as our sales agents by means of ordinary brokers’ transactions on the NYSE or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices.  As of September 30, 2015, no shares have been sold under our ATM program.

 

New Credit Facility

In June 2015, we closed on a $2.25 billion unsecured credit facility. Our new credit facility is comprised of a $2.0 billion revolving credit facility and a $250 million five-year unsecured term loan. As of September 30, 2015, $1.56 billion was available on our new credit facility to fund additional acquisitions and for other general corporate purposes.

 

Inclusion in S&P Indices

In January 2015, we were added to the S&P High Yield Dividend Aristocrats® index. In April 2015, we were added to the S&P 500 index and are one of 24 REITs, and the only net lease REIT included in this index.

 

-26-



Table of Contents

 

Issuance of Common Stock

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

 

In October 2015, we issued 11,500,000 shares of common stock, including 1,500,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares.  After underwriting discounts and other offering costs of $22.1 million, a portion of the net proceeds of $517.0 million was used to repay borrowings under our credit facility and the remaining portion will be used for other general corporate purposes, which may include acquisitions.

 

Dividend Reinvestment and Stock Purchase Plan

We have a Dividend Reinvestment and Stock Purchase Plan, or the DRSPP, to provide our common stockholders, as well as new investors, with a convenient and economical method of purchasing our common stock and reinvesting their distributions.  The DRSPP also allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions.  The DRSPP authorizes up to 26,000,000 common shares to be issued.  In 2013, we revised our DRSPP to pay for a majority of the plan-related fees, which were previously paid by investors, and to institute a waiver approval process, allowing larger investors or institutions, per a formal approval process, to purchase shares at a small discount, if approved by us. During the first nine months of 2015, we issued 7,565,432 shares and raised approximately $360.9 million under the DRSPP, of which 7,413,207 shares and $353.7 million was raised under the waiver approval process.

 

Net Income Available to Common Stockholders

Net income available to common stockholders was $60.7 million in the third quarter of 2015, compared to $57.9 million in the third quarter of 2014, an increase of $2.8 million.  On a diluted per common share basis, net income was $0.26 in the third quarter of 2015 and 2014.

 

Net income available to common stockholders was $180.5 million in the first nine months of 2015, compared to $156.5 million in the first nine months of 2014, an increase of $24.0 million. On a diluted per common share basis, net income was $0.78 in the first nine months of 2015, as compared to $0.72 in the first nine months of 2014, an increase of $0.06, or 8.3%.

 

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

 

Gains from the sale of properties during the third quarter of 2015 were $6.2 million, as compared to gains from the sale of properties of $11.0 million during the third quarter of 2014.  Gains from the sale of properties during the first nine months of 2015 were $17.1 million, as compared to gains from the sale of properties of $16.8 million during the first nine months of 2014.

 

Funds from Operations (FFO) Available to Common Stockholders

In the third quarter of 2015, our FFO increased by $19.9 million, or 14.0%, to $162.2 million, compared to $142.3 million in the third quarter of 2014.  On a diluted per common share basis, FFO was $0.69 in the third quarter of 2015 and $0.64 in the third quarter of 2014, an increase of $0.05, or 7.8%.

 

In the first nine months of 2015, our FFO increased by $55.3 million, or 13.2%, to $474.5 million versus $419.2 million in the first nine months of 2014.  On a diluted per common share basis, FFO was $2.05 in the first nine months of 2015, compared to $1.93 in the first nine months of 2014, an increase of $0.12, or 6.2%.

 

Adjusted Funds from Operations (AFFO) Available to Common Stockholders

In the third quarter of 2015, our AFFO increased by $23.4 million, or 16.4%, to $165.8 million, compared to $142.4 million in the third quarter of 2014.  On a diluted per common share basis, AFFO was $0.70 in the third quarter of 2015 and $0.64 in the third quarter of 2014, an increase of $0.06, or 9.4%.

 

In the first nine months of 2015, our AFFO increased by $60.7 million, or 14.6%, to $477.0 million versus $416.3 million in the first nine months of 2014. On a diluted per common share basis, AFFO was $2.06 in the first nine months of 2015, compared to $1.92 in the first nine months of 2014, an increase of $0.14, or 7.3%. See our discussion of FFO and AFFO (which are not financial measures under generally accepted accounting principles, or GAAP), later in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which includes a reconciliation of net income available to common stockholders to FFO and AFFO.

 

-27-



Table of Contents

 

LIQUIDITY AND CAPITAL RESOURCES

 

Capital Philosophy

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

 

Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,” which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common and preferred stockholders, primarily through cash provided by operating activities, borrowing on our new $2.0 billion credit facility and periodically through public securities offerings.

 

Conservative Capital Structure

We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At September 30, 2015, our total outstanding borrowings of senior unsecured notes and bonds, term loans, mortgages payable and credit facility borrowings were $5.25 billion, or approximately 30.9% of our total market capitalization of $16.98 billion.

 

We define our total market capitalization at September 30, 2015 as the sum of:

 

·

Shares of our common stock outstanding of 238,085,515, plus total common units outstanding of 736,568, multiplied by the last reported sales price of our common stock on the NYSE of $47.39 per share on September 30, 2015, or $11.32 billion;

·

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

·

Outstanding borrowings of $439.0 million on our new credit facility;

·

Outstanding mortgages payable of $695.2 million, excluding net mortgage premiums of $11.0 million;

·

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

·

Outstanding senior unsecured notes and bonds of $3.8 billion, excluding unamortized original issuance discounts of $13.6 million.

 

Universal Shelf Registration

In February 2013, we filed a shelf registration statement with the SEC, which is effective for a term of three years and will expire in February 2016. This replaced our prior shelf registration statement.  In accordance with SEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock, or depositary shares, and (6) any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.

 

Mortgage Debt

As of September 30, 2015, we had $695.2 million of mortgages payable, all of which were assumed in connection with our property acquisitions.  Additionally, at September 30, 2015, we had net premiums totaling $11.0 million on these mortgages.  We expect to pay off the mortgages payable as soon as prepayment penalties have declined to a level that will make it economically feasible to do so.  During the first nine months of 2015, we made $140.8 million of principal payments, including the repayment of ten mortgages in full for $135.3 million.

 

-28-



Table of Contents

 

Term Loans

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

 

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

 

$2.0 Billion Revolving Credit Facility

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

 

As of October 7, 2015, we had a borrowing capacity of $2.0 billion available on our new credit facility (subject to customary conditions to borrowing) after using common stock offering proceeds to pay off outstanding borrowings on our new credit facility.  At September 30, 2015, we had a borrowing capacity of $1.56 billion available on our new credit facility and an outstanding balance of $439.0 million.  The interest rate on borrowings outstanding under our new credit facility, at September 30, 2015, was 1.3% per annum.  We must comply with various financial and other covenants in our credit facility.  At September 30, 2015, we remain in compliance with these covenants. We expect to use our new credit facility to acquire additional properties and for other general corporate purposes. Any additional borrowings will increase our exposure to interest rate risk.

 

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

 

Notes Outstanding

Our senior unsecured note and bond obligations consist of the following as of September 30, 2015, sorted by maturity date (dollars in millions):

 

5.5% notes, issued in November 2003 and due in November 2015

 

$

150

 

5.95% notes, issued in September 2006 and due in September 2016

 

275

 

5.375% notes, issued in September 2005 and due in September 2017

 

175

 

2.0% notes, issued in October 2012 and due in January 2018

 

350

 

6.75% notes, issued in September 2007 and due in August 2019

 

550

 

5.75% notes, issued in June 2010 and due in January 2021

 

250

 

3.25% notes, issued in October 2012 and due in October 2022

 

450

 

4.65% notes, issued in July 2013 and due in August 2023

 

750

 

3.875% notes, issued in June 2014 and due in July 2024

 

350

 

4.125% notes, issued in September 2014 and due in October 2026

 

250

 

5.875% bonds, $100 issued in March 2005 and $150 issued in

 

 

 

June 2011, both due in March 2035

 

250

 

Total principal amount

 

$

3,800

 

Unamortized original issuance discounts

 

(14

)

 

 

$

3,786

 

 

In November 2015, we expect to repay our $150 million 5.5% notes by borrowing on our new credit facility.

 

All of our outstanding notes and bonds have fixed interest rates and contain various covenants, which we remain in compliance with at September 30, 2015. Additionally, interest on all of our senior note and bond obligations is paid semiannually.

 

-29-



Table of Contents

 

The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our senior notes and bonds. These calculations, which are not based on U.S. GAAP, measurements, are presented to investors to show our ability to incur additional debt under the terms of our senior notes and bonds as well as to disclose our current compliance with such covenants, and are not measures of our liquidity or performance.  The actual amounts as of September 30, 2015 are:

 

Note Covenants

 

Required

 

Actual

 

 

 

 

 

 

 

Limitation on incurrence of total debt

 

< 60% of adjusted assets

 

43.0%

 

Limitation on incurrence of secured debt

 

< 40% of adjusted assets

 

5.8%

 

Debt service coverage (trailing 12 months)(1)

 

> 1.5 x

 

4.1x

 

Maintenance of total unencumbered assets

 

> 150% of unsecured debt

 

239.4%

 

 

(1) This covenant is calculated on a pro forma basis for the preceding four-quarter period on the assumption that: (i) the incurrence of any Debt (as defined in the covenants) incurred by us since the first day of such four-quarter period and the application of the proceeds therefrom (including to refinance other Debt since the first day of such four-quarter period), (ii) the repayment or retirement of any of our Debt since the first day of such four-quarter period, and (iii) any acquisition or disposition by us of any asset or group since the first day of such four-quarters had in each case occurred on October 1, 2014, and subject to certain additional adjustments.  Such pro forma ratio has been prepared on the basis required by that debt service covenant, reflects various estimates and assumptions and is subject to other uncertainties, and therefore does not purport to reflect what our actual debt service coverage ratio would have been had transactions referred to in clauses (i), (ii) and (iii) of the preceding sentence occurred as of October 1, 2014, nor does it purport to reflect our debt service coverage ratio for any future period.  The following is our calculation of debt service coverage at September 30, 2015 (in thousands, for trailing twelve months):

 

Net income attributable to the Company

 

$

278,614

 

Plus: interest expense

 

231,461

 

Plus: provision for taxes

 

3,552

 

Plus: depreciation and amortization

 

400,013

 

Plus: provisions for impairment

 

11,141

 

Plus: pro forma adjustments

 

42,618

 

Less: gain on sales of real estate

 

(42,387

)

Income available for debt service, as defined

 

$

925,012

 

Total pro forma debt service charge

 

$

223,686

 

Debt service coverage ratio

 

4.1

 

 

Fixed Charge Coverage Ratio

Fixed charge coverage ratio is calculated in exactly the same manner as the debt service coverage ratio, except that preferred stock dividends are also added to the denominator.  Similar to debt service coverage ratio, we consider fixed charge coverage ratio to be an appropriate supplemental measure of a company’s ability to make its interest and preferred stock dividend payments.  Our calculations of both debt service and fixed charge coverage ratios may be different from the calculations used by other companies and, therefore, comparability may be limited.  The presentation of debt service and fixed charge coverage ratios should not be considered as alternatives to any U.S. GAAP operating performance measures.  Below is our calculation of fixed charges at September 30, 2015 (in thousands, for the trailing twelve months):

 

Income available for debt service, as defined

 

$

925,012

 

Pro forma debt service charge plus preferred stock dividends

 

$

250,766

 

Fixed charge coverage ratio

 

3.7

 

 

Cash Reserves

We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our properties.  We intend to retain an appropriate amount of cash as working capital.  At September 30, 2015, we had cash and cash equivalents totaling $7.1 million.

 

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

 

-30-



Table of Contents

 

Credit Agency Ratings

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

 

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

 

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

 

Table of Obligations

The following table summarizes the maturity of each of our obligations as of September 30, 2015 (dollars in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

Ground

 

Ground

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leases

 

Leases

 

 

 

 

 

 

 

 

 

Notes

 

 

 

 

 

 

 

Paid by

 

Paid by

 

 

 

 

 

Year of

 

Credit

 

and

 

Term

 

Mortgages

 

 

 

Realty

 

Our

 

 

 

 

 

Maturity

 

Facility

(1)

Bonds

(2)

Loan

 

Payable

(3)

Interest

(4)

Income

(5)

Tenants

(6)

Other

(7)

Totals

 

2015

 

$

-

 

$

150.0

 

$

-

 

$

1.9

 

$

55.9

 

$

0.4

 

$

3.1

 

$

30.4

 

$

241.7

 

2016

 

-

 

275.0

 

-

 

225.6

 

203.4

 

1.5

 

12.3

 

30.3

 

748.1

 

2017

 

-

 

175.0

 

-

 

142.7

 

181.4

 

1.5

 

12.4

 

-

 

513.0

 

2018

 

-

 

350.0

 

70.0

 

15.3

 

163.0

 

1.6

 

12.4

 

-

 

612.3

 

2019

 

439.0

 

550.0

 

-

 

26.2

 

145.4

 

1.4

 

12.2

 

-

 

1,174.2

 

Thereafter

 

-

 

2,300.0

 

250.0

 

283.5

 

569.3

 

24.6