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REALTY INCOME REPORTS RECORD THIRD QUARTER AND NINE MONTH OPERATING RESULTS ESCONDIDO, CALIFORNIA, October 27, 2004 — Realty Income Corporation (Realty Income), The Monthly Dividend Company®, (NYSE: O) announces operating results for the third quarter and nine months ended September 30, 2004.
Financial Results Revenue Increases Realty Income’s revenue for the quarter ended September 30, 2004 increased 21.5% to $44.1 million as compared to $36.3 million for the same quarter in 2003. Revenue for the nine months ended September 30, 2004 increased 23.4 % to $130.2 million as compared to $105.5 million for the same period in 2003. Funds from Operations FFO for the quarter ended September 30, 2004 increased 17.5% to $29.5 million as compared to $25.1 million for the same quarter in 2003. On a diluted per common share basis, FFO increased 4.2% to $0.74 per share as compared to $0.71 per share for the same period in 2003. FFO for the nine months ended September 30, 2004 increased 24.0% to $89.4 million as compared to $72.1 million for the same period in 2003. On a diluted per common share basis, FFO increased 10.7 % to $2.28 per share as compared to $2.06 per share for the same period in 2003. FFO for the quarter and nine months ended September 30, 2004 and 2003 has been adjusted to reflect additional impairments on the sale of certain properties during these periods. These additional impairments relate to properties where a contract for the sale of a property and the closing of the sale transaction occurred during the same quarterly period. As these transactions were contracted for and closed during the same quarter, losses on the sales were booked and reflected in the Company's financial statements but no impairments were booked on these properties in the Company's calculation of FFO. The Company now believes that such impairments on property sales should be deducted from the calculation of FFO. FFO for the quarter and nine months ended September 30, 2004 was reduced by $70,000 or $0.002 per share and $341,000 or $0.009 per share respectively. FFO for the quarter and nine months ended September 30, 2003 was reduced by $25,000 or $0.001 per share and $432,000 or $0.012 per share respectively. The losses from these transactions were previously included in the Company's calculation for net income and, as such, have no impact on the Company's previously reported consolidated statements of income or consolidated balance sheets for these periods. 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. We define FFO consistent with the National Association of Real Estate Investment Trust’s definition as net income available to common stockholders, plus depreciation and amortization of assets uniquely significant to the real estate industry, reduced by gains on sales of investment property and extraordinary items. Net Income Available to Common Stockholders Net income available to common stockholders, for the quarter ended September 30, 2004, was $22.0 million as compared to $17.9 million for the same quarter in 2003. On a diluted per common share basis, net income was $0.55 per share, for the quarter ended September 30, 2004, as compared to $0.51 per share for the same quarter in 2003. During the third quarter of 2004, net income available to common stockholders included a non-cash charge of $1.4 million, or $0.04 per share. This amount represents the Class C preferred stock original issuance costs that were paid in 1999 and expensed in the current year when the preferred stock was redeemed. Net income available to common stockholders, for the nine months ended September 30, 2004, was $65.9 million as compared to $51.7 million for the same period in 2003. On a diluted per common share basis, net income was $1.68 per share as compared to $1.47 per share for the same period in 2003. During the nine months ended September 30, 2004, net income available to common stockholders included one-time charges totaling $3.8 million, or $0.10 per share. This amount represents the Class B and Class C preferred stock original issuance costs that were paid in 1999 and expensed in the current year when the preferred stock was redeemed. 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 both the third quarter of 2004 and 2003, income from continuing operations available to common stockholders was $0.45 per diluted share. During the first nine months of 2004, income from continuing operations available to common stockholders increased by $0.01 to $1.31 per diluted share as compared to $1.30 per diluted share for the same period in 2003. Dividend Information In August 2004, Realty income increased the amount of the monthly common stock dividend by 7.4% to an annualized amount of $2.61 per share. In September 2004, the Company also announced the 28th consecutive quarterly increase in the amount of the monthly dividend. This marked the 31st increase in the amount of the dividend since the Company’s listing on the New York Stock Exchange in 1994. The monthly dividend amount was increased to $0.21875 per share from $0.2175 per share for an annualized dividend amount of $2.625 per share. During the quarter, the common stock dividend increased a total of 8.0%. Through September 2004, the Company has paid 410 consecutive monthly dividends throughout its 35-year operating history. The Company continues its 35-year history of declaring and paying dividends every month. Real Estate Portfolio Update As of September 30, 2004, Realty Income’s portfolio of freestanding, single-tenant, retail properties consisted of 1,537 properties located in 48 states, leased to 90 retail chains doing business in 30 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 provide dependable lease revenue supporting the payment of monthly dividends. As of September 30, 2004, portfolio occupancy was 98.1% with only 29 properties available for lease out of 1,537 properties in the portfolio. Rent Increases Same store rents on the 1,067 properties under lease during the three months ended September 30, 2004 and 2003 increased 1.6% to $33.37 million from $32.86 million. Same store rents on 1,067 properties under lease during the nine months ended September 30, 2004 and 2003 increased 1.9% to $99.67 million compared to $97.80 million in 2003. Property Acquisitions During the third quarter, Realty Income and its wholly-owned subsidiary, Crest Net Lease, Inc., invested $44.3 million in 41 new properties and properties under development. Realty Income invested $35.7 million in 33 new properties and properties under development, with an initial average contractual lease yield of 10.0%. The 33 new properties acquired by Realty Income are located in three states and are 100% leased under net-lease agreements with an initial average lease length of 20.0 years. They are leased to three different retail chains in three industries: automotive collision service, automotive service and motor vehicle dealership. Crest Net Lease invested $8.6 million in eight new properties and properties under development. During the nine months ended September 30, 2004, Realty Income and its wholly-owned subsidiary, Crest Net Lease, Inc., invested $178.0 million in 182 new properties and properties under development. Realty Income invested $156.5 million in 160 properties and properties under development with an initial average contractual lease yield of 9.6%. The 160 new properties acquired by Realty Income are located in 14 states and are 100% leased under net-lease agreements with an initial average lease length of 17.3 years. They are leased to nine different retail chains in five industries: automotive collision service, automotive service, convenience store, motor vehicle dealership and restaurant. Crest Net Lease invested $21.5 million in 22 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 third quarter of 2004, Realty Income sold nine properties for $8.9 million, which resulted in a gain on sales of $2.8 million. The properties sold consisted of: one child care location, two consumer electronic stores, three convenience stores, and three restaurant locations. The proceeds were, or will be, used to pay down the Company’s acquisition credit facility and invest in new properties. During the nine months ended September 30, 2004, Realty Income sold 27 properties for $20.6 million, which resulted in a gain on sales of $6.8 million. The properties consisted of: one automotive service location, eleven child care locations, two consumer electronics stores, four convenience stores, and nine restaurant locations. The proceeds were, or will be, used to pay down the Company’s acquisition credit facility and invest in new properties. Other Activities Redemption of Class C Preferred Shares In July 2004, Realty Income redeemed all 1,380,000 shares outstanding of the Company’s 9-1/2% Class C Cumulative Redeemable Preferred stock. Shares were redeemed using a portion of the proceeds from Realty Income’s May 2004 offering of 7.375% Monthly Income Class D Cumulative Redeemable Preferred shares and borrowings on the Company’s credit facility. Issued $28.0 million 7-3/8% Monthly Income Class D Preferred Shares In October 2004, Realty Income issued an additional 1.1 million shares of 7-3/8% Monthly Income Class D Preferred shares priced at $25.4311 per share. The net proceeds from the issuance were used to repay borrowings on the Company’s $250 million unsecured acquisition credit facility. 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 third quarter ended September 30, 2004, Crest sold eight properties for $9.1 million and reported a gain on sales of $1.6 million. During the quarter Crest invested $8.6 million in eight new properties and properties under development. For the nine months ended September 30, 2004, Crest sold 43 properties for $66.7 million and reported a gain on sales of $9.5 million. During this same period, Crest invested $21.5 million in 22 new properties and properties under development. As of September 30, 2004, Crest carried an inventory of $17.7 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 rental revenue will exceed the ongoing operating expenses of Crest without any property sales. Crest’s contribution to Realty Income’s FFO depends on the timing and the number of property sales, if any, in a given quarter. During the third quarter and first nine months of 2004, Crest generated $1.1 million and $7.3 million, or $0.03 and $0.19, respectively, per diluted common share in FFO for Realty Income as compared to $224,000 and $467,000, or $0.01 and $0.01, respectively, during the same periods in 2003. CEO Comments on Year-to-Date Operating Results Commenting on Realty Income’s financial results and real estate operations, Tom A. Lewis, Chief Executive Officer stated, “We are pleased to once again report solid results for the third quarter and that we are on track to achieve our performance goals for 2004. During the third quarter and year-to-date, we’ve realized sizeable increases in revenue, funds from operations, net income and same store rents. Our continued financial strength allowed us to raise the dividend significantly during the third quarter. Shareholders enjoyed two dividend increases during the quarter, a 7.4% increase in August as well as the 28th consecutive quarterly increase in September for a total dividend increase of 8% during the third quarter. During the first nine months of 2004, the dividend has risen from $2.40 to $2.625, or 9.4%. As The Monthly Dividend Company®, we are gratified that we have been able to continue to provide dependable monthly income that has increased over time. “Portfolio acquisitions were also substantial during the third quarter. Realty Income and Crest Net combined invested $44.3 million in 41 new properties during the quarter, for a total of $178.0 million invested in 182 new properties thus far in 2004. Opportunistic acquisitions, strict due diligence and solid underwriting contributed to exceptional initial average lease rates of 10.0% on third quarter acquisitions and 9.6% year-to-date for Realty Income’s acquisitions. In the current retail net-lease environment these are excellent going-in lease rates. We are also continuing our focus on securing longer lease terms with an average lease length on third quarter acquisitions of 20 years and an average lease length of 17.3 years for year-to-date acquisitions. Portfolio occupancy remains high at 98.1% and the portfolio continues to perform well and meet our performance objectives. In all, we are very pleased with the progress we’ve made during the third quarter and year-to-date.” 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 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 4.1% to 5.5% over the Company’s 2003 FFO per diluted common share of $2.90(adjusted). FFO for 2004 is based on an estimated diluted net income per share range of $2.28 to $2.32 adjusted (in accordance with the National Association of Real Estate Investment Trust’s (NAREIT’s) definition of FFO) for estimated real estate depreciation of $0.95 and potential gain on sales of investment properties of $0.21 per share. Management further estimates that Crest Net Lease, Inc. could contribute between $0.20 and $0.21 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. 2005 Estimates Management estimates that FFO per common share for 2005 should range from $3.18 to $3.24, which would equate to an increase of approximately 4% to 7% over the Company’s 2004 projected FFO per share range of $3.02 to $3.06 per share. FFO for 2005 is based on an estimated diluted net income per share range of $2.21 to $2.27 adjusted (in accordance with NAREIT’s definition of FFO) for estimated real estate depreciation of $1.09 and potential gain on sales of investment properties of $0.12 per share. Management further estimates that Crest Net Lease could contribute between $0.06 to $0.09 per share to Realty Income’s FFO during 2005. 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 September 30, 2004, the Company had paid 410 consecutive monthly dividends throughout its 35-year operating history. The monthly income is supported by the cash flow from over 1,500 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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