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REALTY INCOME ANNOUNCES RECORD SECOND QUARTER AND MID-YEAR OPERATING RESULTS ESCONDIDO, CALIFORNIA, July 28, 2004 — Realty Income Corporation (Realty Income), The Monthly Dividend Company®, (NYSE: O) today announced operating results for the second quarter and six months ended June 30, 2004.
(For the quarter ended June 30, 2004)
Financial Results Revenue Increases Realty Income’s revenue for the second quarter ended June 30, 2004 increased 25.7% to $44.5 million as compared to $35.4 million for the same quarter in 2003. Revenue for the six months ended June 30, 2004 increased 24.2% to $86.8 million as compared to $69.9 million for the same period in 2003. Funds from Operations FFO for the quarter ended June 30, 2004 increased 23.0% to $29.4 million as compared to $23.9 million for the same quarter in 2003. On a diluted per common share basis, FFO increased 8.8% to $0.74 per share compared to $0.68 per share for the same quarter in 2003. FFO for the six months ended June 30, 2004 increased 27.0% to $60.2 million as compared to $47.4 million for the same period one year ago. On a diluted per common share basis, FFO increased 14.8% to $1.55 per share as compared to $1.35 per share for the same period in 2003. The Company considers FFO to be an appropriate supplemental measure of a Real Estate Investment Trust’s (REIT's) operating performance as it is based on net income analysis of property portfolio performance that excludes non-cash items such as depreciation. FFO is an alternative non-GAAP measure that is also considered to be a good indicator of a company’s ability to generate income to pay dividends. (See reconciliation of net income available to common stockholders to FFO.) Net Income Available to Common Stockholders Net income available to common stockholders for the quarter ended June 30, 2004 was $21.6 million as compared to $18.2 million for the same quarter in 2003. On a diluted per common share basis, net income was $0.54 per share for the three months ended June 30, 2004 as compared to $0.52 per share for the same quarter in 2003. During the second quarter, net income available to common stockholders included a non-cash charge of $2.4 million, or $0.06 per share, in the second quarter and first six months of 2004. This amount represents the Class B preferred stock original issuance costs that were paid in 1999. Net income available to common stockholders for the six months ended June 30, 2004 was $44.0 million as compared to $33.8 million for the same period in 2003. On a diluted per common share basis, net income was $1.13 per share as compared to $0.96 per share for the same period in 2003. The calculation to determine net income for a real estate company includes gains and losses from the sale of investment properties. The amount of gains and losses varies from quarter to quarter according to the timing of property sales. This variance can significantly impact net income. During the second quarter of this year, income from continuing operations available to common stockholders decreased by $0.02 to $0.41 per share in 2004 as compared to $0.43 per share in 2003, on a diluted per common share basis. During the first six months of this year, income from continuing operations available to common stockholders increased by $0.01 to $0.87 per share in 2004 as compared to $0.86 per share for the same period in 2003, on a diluted per common share basis. Dividend Information In June 2004, Realty Income announced the 27th consecutive quarterly increase in the amount of the monthly dividend on its common stock. This marked the 29th increase in the amount of the dividend since the Company’s listing on the New York Stock Exchange in 1994. The amount of the monthly dividend was increased to $0.2025 per share from $0.20125 per share for an annualized dividend amount of $2.43 per share. Through June 30, 2004, the Company has paid 407 consecutive monthly dividends. Realty Income continues its 35-year history of declaring and paying common stock dividends on a monthly basis. Real Estate Portfolio Update As of June 30, 2004, Realty Income’s portfolio of freestanding, single-tenant retail properties consisted of 1,513 properties located in 48 states, leased to 88 retail chains doing business in 29 retail industries. The properties are leased under long-term, net leases with a weighted average remaining lease term of approximately 11.9 years. Portfolio Management Activities The Company’s portfolio of retail real estate, owned primarily under 15- to 20-year net leases, continues to perform well and generate dependable lease revenue supporting the payment of monthly dividends. As of June 30, 2004, portfolio occupancy was 98.4% with only 24 properties available for lease out of 1,513 properties in the portfolio. Same store rents on the 1,086 properties under lease during the three months ended June 30, 2004 and 2003 increased 1.7% to $33.55 million from $32.99 million in 2003. Same store rents on the same 1,086 properties under lease during the six months ended June 30, 2004 and 2003 increased 2.1% to $67.18 million compared to $65.81 million in 2003. Property Acquisitions During the second quarter, Realty Income and its wholly-owned subsidiary, Crest Net Lease, Inc. invested $19.2 million in 13 new properties and properties under development. Realty Income invested $16.4 million in 12 new properties and properties under development with an initial contractual lease yield of 9.8%. The 12 new properties acquired by Realty Income are located in six states and are 100% leased under net-lease agreements with an initial average lease length of 16.9 years. They are leased to four different retail chains in three industries: convenience store, motor vehicle dealership, and restaurant. In addition, Crest Net Lease invested $2.8 million in one new property and properties under development. During the six months ended June 30, 2004, Realty Income and its wholly-owned subsidiary, Crest Net Lease, Inc., invested $133.9 million in 141 new properties and properties under development. Realty Income invested $121.0 million in 127 new properties and properties under development with an initial average contractual lease yield of 9.5%. The 127 new properties acquired by Realty Income are located in 13 states and are 100% leased under net-lease agreements with an initial average lease length of 16.6 years. They are leased to six different retail chains in three industries: convenience store, motor vehicle dealership, and restaurant. In addition, Crest Net Lease invested $12.9 million in 14 new properties and properties under development. Property Dispositions Realty Income continues to successfully execute its asset disposition program. The objective of the program is to sell assets when the Company believes the reinvestment of the sales proceeds will generate higher returns, enhance the credit quality of the Company's real estate portfolio or increase the average lease length. During the second quarter of 2004, Realty Income sold nine properties for $5.8 million, which resulted in a gain on sales of $2.4 million. The properties sold consisted of: four restaurant properties, three child care locations, one convenience store property and one automotive service property. The proceeds were, or will be, used to pay down the Company’s acquisition credit facility and invest in new properties. During the first six months of 2004, Realty Income sold 18 properties for $11.8 million, which resulted in a gain on sales of $3.8 million. The properties sold consisted of: ten child care locations, six restaurant properties, one automotive service property and one convenience store property. Other Second Quarter 2004 Activities Redemption of Class B and Class C Shares Realty Income redeemed all outstanding shares of the Company’s 9-3/8% Class B preferred stock at par ($25 per share) on June 6, 2004. In June 2004, the Company also announced the planned redemption of all outstanding shares of the 9-1/2% Class C preferred stock. The shares are to be redeemed at par ($25 per share) on July 30, 2004. Issuance of $100 Million 7-3/8% Monthly Income Class D Preferred Shares In May 2004, Realty Income issued 4.0 million shares of 7-3/8% Monthly Income Class D preferred shares priced at $25 per share. Dividends on the Class D preferred shares are paid monthly at a rate of 7-3/8% annually, which is equivalent to approximately $1.84375 per share on an annualized basis. The proceeds from the offering were, and are being, used to redeem all outstanding shares of the Class B and C preferred stock, repay borrowings on the Company’s $250 million unsecured acquisition credit facility and for other general corporate purposes. Crest Net Lease Crest Net Lease Inc. is a wholly-owned subsidiary of Realty Income focused on acquiring and subsequently marketing net-leased properties for sale. During the second quarter ended June 30, 2004, Crest sold 16 properties for $26.6 million and reported a gain on sales of $3.9 million. During the same quarter, Crest also invested $2.8 million in one new property and properties under development. For the six months ended June 30, 2004, Crest sold 35 properties for $57.6 million and reported a gain on sales of $8.0 million. During this same period, Crest invested $12.9 million in 14 new properties and properties under development. As of June 30, 2004, Crest carried an inventory of $16.6 million, which consists of 16 properties held for sale. Management’s goal is for Crest to carry an average inventory of between $20 to $25 million in properties. Crest generates an earnings spread on the difference between the lease payments it receives on the properties held in inventory and the cost of the capital used to acquire the properties. Management believes that at this level of inventory, earnings will exceed the ongoing operating expenses of Crest. Crest’s contribution to Realty Income’s FFO depends on the timing and number of Crest’s property sales, if any, in a given quarter. During the second quarter and first half of 2004 Crest generated $2.9 million and $6.2 million, or $0.07 and $0.16, respectively, per diluted common share in FFO for Realty Income as compared to $157,000 and $242,000, or $0.004 and $0.01 during the same periods in 2003. CEO Comments on Mid-Year Operating Results Commenting on Realty Income’s financial results and real estate operations, Tom A. Lewis, Chief Executive Officer, stated, “During the first half of the year we have enjoyed strong performance in all aspects of the Company’s business. To summarize, revenue during the quarter was higher as a result of the large volume of acquisitions completed during the 4th quarter of 2003 and during the first quarter of 2004. FFO per share for the second quarter of 2004 was $0.06 higher than the same period in 2003 attributable to a higher level of activity in Crest Net. "FFO per share before Crest Net contribution" declined $0.01, during the second quarter, from $0.68 per share to $0.67 per share. Included in the second quarter "FFO per share before Crest Net contribution" was a $0.06 per share non-cash charge to expense the excess redemption value over carrying value of the Preferred B shares that were redeemed during the second quarter. The excess redemption value refers to the non-cash reclassification of the original Preferred B stock issuance costs. These issuance costs were actually paid in 1999 when the Class B Preferred shares were originally issued, but upon the redemption of this security, during the second quarter of this year, these issuance costs were reclassified as preferred stock dividends and expensed. This treatment is consistent with SEC guidelines for the expensing of the original issuance costs of preferred securities when the securities are redeemed. Absent this non-cash charge, "FFO per share before Crest Net contribution" would have been $0.73 per share during the second quarter of 2004 versus $0.68 per share during the second quarter of 2003, or an increase in "FFO per share before Crest Net contribution" of 7.4% from our core portfolio. "Our portfolio of freestanding retail properties continues to perform well with occupancy remaining high at 98.4% and just 24 properties available for lease out of over 1,500 properties in the portfolio. In addition, same store rents rose 1.7% in the second quarter and 2.1% year-to-date. We also have been focused on executing net leases with longer lease terms and, as a result, our weighted average remaining lease length in the portfolio has increased to approximately 11.9 years. Our acquisition pipeline is strong with ample acquisition opportunities that meet our investment criteria in various stages of review and due diligence. During the second quarter Realty Income and Crest Net combined completed 13 new property acquisitions, investing $19.2 million, which brings us to a total of $133.9 million invested in new property acquisitions year-to-date. This is in line with our expectations for acquisitions during the first half of the year." “We have also increased the dividend two times and have paid, as of the end of the quarter, 407 consecutive monthly dividends to our shareholders. As always, our focus is on maintaining a conservative balance sheet, and realizing stable real estate performance with a high occupancy rate so that we can continue to provide our shareholders with dependable monthly income that increases over time. Based on the performance thus far, we are optimistic about our prospects for positive performance in all Company operations for the remainder of the year.” Earnings Commentary Realty Income’s FFO per common share has historically tended to be stable and fairly predictable because of the long-term leases that are the primary source of the Company’s revenue. There are, however, several factors that can cause FFO per common share to vary from levels that have been anticipated by the Company. These factors include, but are not limited to, changes in interest rates, occupancy rates, periodically accessing the capital markets, the level and timing of property acquisitions and dispositions, lease rollovers, the general real estate market, the economy, and the operations of Crest Net Lease. 2004 Estimates The Company recently issued new Class D preferred stock and is using the proceeds to redeem all outstanding shares of the Company’s Class B and C preferred stock. In accordance with previous guidance regarding these events, management estimates that FFO per common share for 2004 should range from $3.02 to 3.06 per share, which would equate to an increase of approximately 3% to 5% over 2003 FFO per common share of $2.92. These estimates include both the preferred dividend cash savings and one-time, non-cash, redemption charges, for a net effect of $0.07 on FFO per share as compared to the Company’s previous guidance. FFO for 2004 is based on an estimated diluted net income per share range of $2.13 to $2.17, adjusted (in accordance with the National Association of Real Estate Investment Trust’s (NAREIT) definition of FFO) for estimated real estate depreciation of $1.04 and potential gain on sales of investment properties of $0.15 per share. Management further estimates that Crest Net Lease, Inc. could contribute between $0.17 to $0.19 per share to Realty Income’s FFO during 2004. Crest’s primary business is the purchase and sale of properties for a profit. These sales may occur at various times during the course of the year, which could cause FFO in certain quarters to fluctuate from normal levels. The Company does not intend to provide quarterly estimates of FFO. Absent changes in annual FFO guidance, at the end of each quarter, it may be presumed that the Company’s overall estimate for the year has not changed.
Forward-Looking Statements Realty Income is The Monthly Dividend Company®, a New York Stock Exchange real estate company dedicated to providing shareholders with dependable monthly income. As of June 30, 2004, the Company had paid 407 consecutive monthly dividends throughout its 35-year operating history. The monthly income is supported by the cash flows from over 1,513 retail properties owned under long-term lease agreements with leading regional and national retail chains. The Company is an active buyer of net-leased retail properties nationwide.
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