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PORTFOLIO ACQUISITIONS
Finding the Hidden Gems
The measure of Realty Income's success in meeting these challenges, during 2004, is demonstrated by the number
of new property acquisitions. In summary, during 2004 Realty Income reviewed over $2.6 billion in potential
real estate acquisitions involving 1,965 properties, or 95 potential transactions. Of these, Realty Income and its Crest Net Lease
subsidiary acquired 194 new properties for $215.3 million. Of the 194 properties purchased, Realty Income invested
$193.8 million in 172 properties to be held for long-term investment in the Company's core portfolio. These
properties are located in 18 states, have an initial average lease rate of 9.5% and an average lease term of
17.5 years. They are leased to 12 different retail chains in seven retail industries. Crest Net Lease
acquired 22 properties for $21.5 million and these properties were marketed for resale. These acquisitions
contributed to increased lease revenue that generated FFO per share growth during 2004.
This level of acquisition activity is not something that the Company takes for granted, however. Its traditional method
of acquiring one or two properties from a variety of retailers, with the occasional acquisition of a small
portfolio of properties, has met with rising competition from individual investors over the past couple of
years. Because of this, initial lease yields on these types of properties have fallen to historic lows making
them less attractive as investments for Realty Income. Fortunately, Realty Income's acquisition team identified
another source for potentially larger and more attractively priced acquisitions in the area of real estate
investment banking. A transaction that typifies this new focus is the Circle K portfolio acquisition completed
in March 2004.
To illustrate, at the end of 2003, Alimentation Couche-Tard purchased the Circle K convenience store business
from Conoco Phillips. Since Alimentation Couche-Tard's business is running convenience stores, not owning real
estate, they wanted to sell the properties and use the proceeds to pay off a portion of the debt they had incurred
to complete the acquisition of Circle K. Realty Income then stepped in and, after exhaustive due diligence on the
properties and Alimentation Couche-Tard, agreed to provide approximately $100.5 million in sale-leaseback financing
and acquire 112 Circle K convenience stores. This is an example of the financing that may be required when one
retailer purchases the assets of another retailer.
"Looking ahead, we plan to continue to pursue not only this new type of business, but to uncover other acquisition
opportunities that have fallen under the radar. In a market that is constantly changing and increasingly competitive,
our commitment is to use whatever resources are required and to stay focused on our goal to stay ahead of our
competitors," concludes Mr. Kundrak.
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Realty Income's primary business objective each year is to
increase FFO per share. As the Company's real estate portfolio has continued to grow, the number
of acquisitions that are required to generate additional earnings growth becomes ever larger, Mr.
Kundrak adds. This means that his department must constantly be on the lookout for new acquisition
opportunities and creatively pursue a market that has become ever more competitive.
Balance sheet restructuring and recapitalizations are other financial events where sale-leaseback financing can
be useful. This is an area in which Realty Income has been very active during the past year. In most cases,
these types of transactions require Realty Income to purchase large portfolios of properties within a
specific time frame. Because of the Company's 36 years of sale-leaseback know-how, sizable resources, and
access to capital, Realty Income is not only competitive in this area, but its sale-leaseback specialists
and experienced management team seek to add value to every transaction.
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