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  • 10-Q (Oct 26, 2017)
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  • 10-Q (Jul 28, 2016)
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Other

Realty Income 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. Graphic
  7. Graphic
riq110_10q.htm




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 March 31, 2010, 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)
 
600 La Terraza Boulevard, Escondido, California  92025-3873
(Address of Principal Executive Offices)

Registrant’s telephone number, including area code:(760) 741-2111

 
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  o   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 104,476,811 shares of common stock outstanding as of April 26, 2010.

 
1

 

REALTY INCOME CORPORATION
 

Form 10-Q
March 31, 2010

 

PART I.                   FINANCIAL INFORMATION
 
Page
 
Item 1:
     
 
Consolidated Balance Sheets                                                                                           
    3  
 
Consolidated Statements of Income                                                                                           
    4  
 
Consolidated Statements of Cash Flows                                                                                           
    5  
 
Notes to Consolidated Financial Statements                                                                                           
    6  
Item 2:
       
      16  
      17  
 
Recent Developments                                                                                               
    19  
 
Liquidity and Capital Resources                                                                                           
    21  
 
Results of Operations                                                                                           
    25  
      32  
      33  
 
Property Portfolio Information                                                                                           
    34  
 
Impact of Inflation                                                                                           
    39  
 
Impact of Recent Accounting Pronouncements                                                                                           
    39  
 
Other Information                                                                                           
    39  
Item 3:
    39  
Item 4:
Controls and Procedures                                                                                             
    40  
PART II.                   OTHER INFORMATION
       
Item 1A:
Risk Factors                                                                                             
    41  
Item 2:
    41  
Item 6:
Exhibits                                                                                             
    41  
SIGNATURE                                                                                                                 
    43  


 
 
REALTY INCOME CORPORATION AND SUBSIDIARIES
 
March 31, 2010 and December 31, 2009
(dollars in thousands, except per share data)
 
   
2010
   
2009
 
ASSETS
 
(unaudited)
       
Real estate, at cost:
           
Land
  $ 1,176,915     $ 1,169,295  
Buildings and improvements
    2,286,259       2,270,161  
Total real estate, at cost
    3,463,174       3,439,456  
Less accumulated depreciation and amortization
    (651,841 )     (630,840 )
Net real estate held for investment
    2,811,333       2,808,616  
Real estate held for sale, net
    10,156       8,266  
Net real estate
    2,821,489       2,816,882  
Cash and cash equivalents
    849       10,026  
Accounts receivable, net
    9,517       10,396  
Goodwill
    17,206       17,206  
Other assets, net
    56,642       60,277  
Total assets
  $ 2,905,703     $ 2,914,787  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Distributions payable
  $ 16,983     $ 16,926  
Accounts payable and accrued expenses
    19,400       38,445  
Other liabilities
    11,981       16,807  
Line of credit payable
    39,900       4,600  
Notes payable
    1,350,000       1,350,000  
Total liabilities
    1,438,264       1,426,778  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock and paid in capital, par value $1.00 per share,
               
20,000,000 shares authorized, 13,900,000 shares issued
               
and outstanding
    337,790       337,790  
Common stock and paid in capital, par value $1.00 per share,
               
200,000,000 shares authorized, 104,400,957 and 104,286,705
               
shares issued and outstanding as of March 31, 2010 and
               
December 31, 2009, respectively
    1,629,346       1,629,237  
Distributions in excess of net income
    (499,697 )     (479,018 )
Total stockholders’ equity
    1,467,439       1,488,009  
Total liabilities and stockholders’ equity
  $ 2,905,703     $ 2,914,787  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.


REALTY INCOME CORPORATION AND SUBSIDIARIES

For the three months ended March 31, 2010 and 2009
(dollars in thousands, except per share data)
(unaudited)
 

 
   
2010
   
2009
 
             
REVENUE
           
Rental
  $ 83,159     $ 81,778  
Other
    106       754  
Total revenue
    83,265       82,532  
                 
EXPENSES
               
Depreciation and amortization
    23,255       22,763  
Interest
    21,395       21,410  
General and administrative
    6,711       5,950  
Property
    2,176       2,140  
Income taxes
    277       303  
Total expenses
    53,814       52,566  
Income from continuing operations
    29,451       29,966  
Income from discontinued operations:
               
Real estate acquired for resale by Crest
    206       (125 )
Real estate held for investment
    548       243  
Total income from discontinued operations
    754       118  
Net income
    30,205       30,084  
Preferred stock cash dividends
    (6,063 )     (6,063 )
Net income available to common stockholders
  $ 24,142     $ 24,021  
                 
Amounts available to common stockholders per common share:
               
Income from continuing operations:
               
Basic
  $ 0.23     $ 0.23  
Diluted
  $ 0.23     $ 0.23  
Net income:
               
Basic
  $ 0.23     $ 0.23  
Diluted
  $ 0.23     $ 0.23  
Weighted average common shares outstanding:
               
Basic
    103,606,241       103,439,114  
Diluted
    103,686,440       103,445,044  

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


REALTY INCOME CORPORATION AND SUBSIDIARIES
 
For the three months ended March 31, 2010 and 2009
(dollars in thousands)(unaudited)

   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 30,205     $ 30,084  
Adjustments to net income:
               
Depreciation and amortization
    23,255       22,763  
(Income) loss from discontinued operations:
               
Real estate acquired for resale
    (206 )     125  
Real estate held for investment
    (548 )     (243 )
Amortization of share-based compensation
    1,761       1,397  
Cash provided by (used in) discontinued operations:
               
Real estate acquired for resale
    206       186  
Real estate held for investment
    (85 )     274  
Collection of notes receivable by Crest
    34       32  
Change in assets and liabilities:
               
Accounts receivable and other assets
    5,661       3,997  
Accounts payable, accrued expenses and other liabilities
    (23,756 )     (22,997 )
Net cash provided by operating activities
    36,527       35,618  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sales of investment properties, discontinued operations
    797       1,093  
Restricted escrow deposit for Section 1031 tax-deferred exchange
    (609 )     --  
Acquisition of and improvements to investment properties
    (28,713 )     (2,439 )
Net cash used in investing activities
    (28,525 )     (1,346 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Cash distributions to common stockholders
    (44,764 )     (44,362 )
Cash dividends to preferred stockholders
    (6,063 )     (6,063 )
Borrowings from line of credit
    58,400       --  
Payments under line of credit
    (23,100 )     --  
Principal payment on notes payable
    --       (20,000 )
Other items
    (1,652 )     (224 )
Net cash used in financing activities
    (17,179 )     (70,649 )
Net decrease in cash and cash equivalents
    (9,177 )     (36,377 )
Cash and cash equivalents, beginning of period
    10,026       46,815  
Cash and cash equivalents, end of period
  $ 849     $ 10,438  
 
For supplemental disclosures, see note 11.
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
REALTY INCOME CORPORATION AND SUBSIDIARIES
March 31, 2010
(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 period presented. Certain of the 2009 balances have been reclassified to conform to the 2010 presentation. Readers of this quarterly report should refer to our audited financial statements for the year ended December 31, 2009, which are included in our 2009 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 March 31, 2010, we owned 2,344 properties, located in 49 states, containing over 19.2 million leasable square feet, along with three properties owned by our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc. (“Crest”). Crest was created to buy and sell properties, primarily to individual investors who are involved in tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”).

2.
Summary of Significant Accounting Policies and Procedures
 
A.  The accompanying consolidated financial statements include the accounts of Realty Income, Crest and other entities for which we make operating and financial decisions (i.e., control), after elimination of all material intercompany balances and transactions.  All of Realty Income’s subsidiaries are wholly-owned. We have no unconsolidated or off-balance sheet investments in variable interest entities.

B.  We have elected to be taxed as a real estate investment trust (“REIT”) under the Code. We believe we have qualified and continue to qualify as a REIT. Under the REIT operating structure, we are permitted to deduct distributions paid to our stockholders and 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 Crest, which are included in discontinued operations.

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 collectibility of accounts receivable and appropriate allowances to record.  The allowance for doubtful accounts at March 31, 2010 was $1.3 million and at December 31, 2009 was $865,000.

   
March 31,
   
December 31,
 
D.  Other assets consist of the following (dollars in thousands) at:
 
2010
   
2009
 
Notes receivable issued in conjunction with Crest property sales
  $ 22,180     $ 22,214  
Deferred bond financing costs, net
    11,525       11,899  
Value of in-place and above-market leases, net
    10,626       10,928  
Prepaid expenses
    8,053       7,738  
Credit facility organization costs, net
    1,205       1,470  
Corporate assets, net of accumulated depreciation and amortization
    986       1,058  
Restricted escrow deposits for Section 1031 tax-deferred exchanges
    609       4,479  
Other items
    1,458       491  
    $ 56,642     $ 60,277  




E.  Distributions payable consist of the following declared
 
March 31,
   
December 31,
 
       distributions (dollars in thousands) at:
 
2010
   
2009
 
Common stock distributions
  $ 14,962     $ 14,905  
Preferred stock dividends
    2,021       2,021  
    $ 16,983     $ 16,926  
                 
F.  Accounts payable and accrued expenses consist of the
 
               March 31,
   
December 31,
 
     following (dollars in thousands) at:
                             2010       2009  
Bond interest payable
  $ 9,499     $ 25,972  
Other items
    9,901       12,473  
    $ 19,400     $ 38,445  

   
March 31,
   
December 31,
 
G.  Other liabilities consist of the following (dollars in thousands) at:
 
2010
   
2009
 
Rent received in advance
  $ 5,589     $ 10,341  
Security deposits
    4,317       4,334  
Value of in-place below-market leases, net
    2,075       2,132  
    $ 11,981     $ 16,807  

3.       Properties Acquired
 
We acquire land, buildings and improvements that are used primarily by retail operators.

A.  During the first three months of 2010, Realty Income invested $27.7 million in eight new properties with an initial weighted average contractual lease rate of 9.0%. These eight properties are located in six states, contain over 104,000 leasable square feet, and are 100% leased with an average lease term of 18.2 years. The initial weighted average contractual lease rate is computed by dividing the estimated aggregate base rent for the first year of each lease by the estimated total cost of the properties. In connection with these acquisitions, transaction costs of $48,000 were recorded to "general and administrative" expense on our consolidated statement of income for the three months ended March 31, 2010.
 
In comparison, during the first three months of 2009, Realty Income invested $1.3 million in previously acquired properties with an initial weighted average contractual lease rate of 8.7%.

B.  During the first three months of 2010 and 2009, Crest did not invest in any new properties.

C.  Crest’s property inventory at March 31, 2010 and at December 31, 2009 consisted of three properties valued at $3.8 million. These amounts are included on our consolidated balance sheets in “real estate held for sale, net.”


We have a $355 million revolving, unsecured credit facility that expires in May 2011, unless extended by two, one-year extension options. Under our credit facility, our investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 100 basis points with a facility commitment fee of 27.5 basis points, for all-in drawn pricing of 127.5 basis points over LIBOR. The borrowing rate is not subject to a LIBOR floor. We also have other interest rate options available to us. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.



In May 2008, as a result of entering into our current credit facility, we incurred $3.2 million of credit facility origination costs that were capitalized and are being amortized over three years. The costs that were capitalized are included in "other assets" on our consolidated balance sheets, with balances of $1.2 million at March 31, 2010 and $1.5 million at December 31, 2009.

The average borrowing rate on our credit facility during the first three months of 2010 was 1.2%.  We did not utilize our credit facility during the first three months of 2009. Our effective borrowing rate at March 31, 2010 was 1.2% and at March 31, 2009 was 1.5%. Our credit facility is subject to various leverage and interest coverage ratio limitations. We are in compliance with these covenants.

5.     Notes Payable
 
A.     General

Our senior unsecured note obligations consist of the following at March 31, 2010 and December 31, 2009, sorted by maturity date (dollars in millions):

   5.375% notes, issued in March 2003 and due in March 2013
  $ 100.0  
   5.5% notes, issued in November 2003 and due in November 2015
    150.0  
   5.95% notes, issued in September 2006 and due in September 2016
    275.0  
   5.375% notes, issued in September 2005 and due in September 2017
    175.0  
   6.75% notes, issued in September 2007 and due in August 2019
    550.0  
   5.875% bonds, issued in March 2005 and due in March 2035
    100.0  
    $ 1,350.0  
B.      Note Redemption

On their maturity date in January 2009, we redeemed, using cash on hand, all of our outstanding 8.00% notes issued in January 1999 at a redemption price equal to 100% of the principal amount of $20 million, plus accrued and unpaid interest.

6.       Fair Value of Financial Assets and Liabilities
 
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.

We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, accounts receivable, and all liabilities, due to their short-term nature, except for our notes receivable issued in connection with property sales and our notes payable, which are disclosed below (dollars in millions):

   
Carrying value per
   
Estimated
 
At March 31, 2010
 
balance sheet
   
fair value
 
Notes receivable issued in connection with Crest property sales
  $ 22.2     $ 20.5  
Notes payable
  $ 1,350.0     $ 1,336.2  

   
Carrying value per
   
Estimated
 
At December 31, 2009
 
balance sheet
   
fair value
 
Notes receivable issued in connection with Crest property sales
  $ 22.2     $ 20.0  
Notes payable
  $ 1,350.0     $ 1,276.4  


The estimated fair value of our notes receivable issued in connection with property sales has been calculated by discounting the future cash flows using an interest rate based upon the current 5-year, 7-year, or 10-year Treasury Yield Curve, plus an applicable credit-adjusted spread. The notes receivable were issued in connection with the sale of three Crest properties. Payments to us on these notes receivable are current and no allowance for doubtful accounts has been recorded for them.

The estimated fair value of our notes payable is based upon indicative market prices and recent trading activity of our notes payable.

7.       Gain on Sales of Investment Properties by Realty Income
 
During the first three months of 2010, we sold three investment properties for $1.8 million, which resulted in a gain of $703,000. In comparison, during the first three months of 2009, we sold one investment property for $1.1 million, which resulted in a gain of $198,000. The results of operations for these properties have been reclassified to discontinued operations.
 
During the first three months of 2010 and 2009, Crest did not sell any properties.

8.
Discontinued Operations
 
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. Generally, a provision for impairment is recorded 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 use in this analysis include; projected rental rates, capital expenditures and property sales capitalization rates. Additionally, a property classified as held for sale is carried at the lower of carrying cost or estimated fair value, less the estimated cost to sell.

For the first three months of 2010, a provision for impairment of $34,000 was recorded by Realty Income on one property, which is held for sale.  This provision for impairment is included in "income from discontinued operations, real estate held for investment" on our consolidated income statement for the three months ended March 31, 2010.  For the first three months of 2009, no provisions for impairment were recorded by Realty Income.

For the first three months of 2010, no provisions for impairment were recorded by Crest. For the first three months of 2009, provisions for impairment of $311,000 were recorded by Crest on three properties held for sale at March 31, 2009 and two properties which were sold in the fourth quarter of 2009. The above provisions for impairment are included in "income from discontinued operations, real estate acquired for resale by Crest" on our consolidated statement of income for the three months ended March 31, 2009.

Realty Income’s operations from seven investment properties classified as held for sale at March 31, 2010, plus properties sold in 2010 and 2009, are reported as discontinued operations. Their respective results of operations have been reclassified to “income from discontinued operations, real estate held for investment” on our consolidated statements of income. We do not depreciate properties that are classified as held for sale.

Crest acquires properties with the intention of reselling them rather than holding them for investment and operating the properties. Consequently, we typically classify properties acquired by Crest as held for sale at the date of acquisition and do not depreciate them. As a result, the operations of Crest’s properties are classified as “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.



No debt was assumed by buyers of our investment properties, or repaid as a result of our investment property sales, and we do not allocate interest expense to discontinued operations related to real estate held for investment. We allocate interest expense related to borrowings specifically attributable to Crest’s properties. The interest expense amounts allocated to the Crest properties held for sale are included in “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

If circumstances arise, which were previously considered unlikely and, as a result, we decide not to sell a property previously classified as held for sale, the property is reclassified as real estate held for investment. A property that is reclassified as held for investment is measured and recorded at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for investment, or (ii) the fair value at the date of the subsequent decision not to sell.

The following is a summary of Crest’s “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income (dollars in thousands):

 
 
Three months ended
                    March 31,
 
Crest's income from discontinued operations, real estate acquired for resale
 
2010
   
2009
 
Rental revenue
  $ 22     $ 66  
Interest and other revenue
    350       351  
Interest expense
    (128 )     (173 )
General and administrative expense
    (97 )     (86 )
Property expenses
    (30 )     (34 )
Provisions for impairment
    --       (311 )
Income taxes
    89       62  
Income (loss) from discontinued operations, real estate acquired for resale by Crest
  $ 206     $ (125 )


The following is a summary of Realty Income’s “income from discontinued operations, from real estate held for investment” on our consolidated statements of income (dollars in thousands):
 
 
Three months ended
   March 31,
 
Realty Income's income from discontinued operations, real estate held for investment
 
2010
   
2009
 
Gain on sales of investment properties
  $ 703     $ 198  
Rental revenue
    110       421  
Other revenue
    10       12  
Depreciation and amortization
    (36 )     (229 )
Property expenses
    (205 )     (159 )
Provision for impairment
    (34 )     --  
Income from discontinued operations, real estate held for investment
  $ 548     $ 243  

The following is a summary of our total income from discontinued operations (dollars in thousands, except per share data):
   
Three months ended
        March 31,
 
Total discontinued operations
 
2010
   
2009
 
 Real estate acquired for resale by Crest
  $ 206     $ (125 )
 Real estate held for investment
    548       243  
 Income from discontinued operations
  $ 754     $ 118  
 Per common share, basic and diluted
  $ 0.01     $ 0.00  

 
9.   Distributions Paid and Payable

A.  Common Stock

We pay monthly distributions to our common stockholders. The following is a summary of the monthly distributions paid per common share for the first three months of 2010 and 2009:

Month
 
2010
   
2009
 
January
  $ 0.14300     $ 0.14175  
February
    0.14300       0.14175  
March
    0.14300       0.14175  
Total
  $ 0.42900     $ 0.42525  

At March 31, 2010, a distribution of $0.1433125 per common share was payable and was paid in April 2010.

B.  Preferred Stock

In 2004, we issued 5.1 million shares of 7.375% Monthly Income Class D cumulative redeemable preferred stock. In May 2009, the Class D preferred shares became redeemable, at our option, for $25 per share. During each of the first three months of 2010 and 2009, we paid three monthly dividends to holders of our Class D preferred stock totaling $0.4609377 per share, or $2.4 million, and at March 31, 2010, a monthly dividend of $0.1536459 per share was payable and was paid in April 2010.

In 2006, we issued 8.8 million shares of 6.75% Monthly Income Class E cumulative redeemable preferred stock. Beginning December 7, 2011, the Class E preferred shares become redeemable, at our option, for $25 per share. During each of the first three months of 2010 and 2009, we paid three monthly dividends to holders of our Class E preferred stock totaling $0.421875 per share, or $3.7 million, and at March 31, 2010, a monthly dividend of $0.140625 per share was payable and was paid in April 2010.
 
10.   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 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.

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
               March 31,
 
   
2010
   
2009
 
Weighted average shares used for the basic net income per share computation
    103,606,241       103,439,114  
Incremental shares from share-based compensation
    80,199       5,930  
Adjusted weighted average shares used for diluted net income per share computation
    103,686,440       103,445,044  
Unvested shares from share-based compensation that were anti-dilutive
    520       823,488  
 
 
No stock options were anti-dilutive for the three months ended March 31, 2010 and 2009.
 
11.
Supplemental Disclosures of Cash Flow Information
 
Interest paid in the first three months of 2010 was $37.1 million and in the first three months of 2009 was $37.9 million.
 
Interest capitalized to properties under development in the first three months of 2010 was $2,000 and there was none in the first three months of 2009.
 
Income taxes paid by Realty Income and Crest in the first three months of 2010 was $865,000 and in the first three months of 2009 was $701,000.

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

A.  Share-based compensation expense for the first three months of 2010 was $1.8 million and for the first three months of 2009 was $1.4 million.

B.  See note 8 for a discussion of impairments recorded by Realty Income and Crest in the first three months of 2010 and 2009.
 
C.  In the first three months of 2010, we recorded a $1.0 million receivable for the sale of an investment property as a result of an eminent domain action. This receivable is included in "other assets" on our consolidated balance sheet at March 31, 2010.

D.  In the first three months of 2009, we recorded $389,000 for an insurance settlement, which was received in October 2009.

12.    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 31 industry and activity segments (including properties owned by Crest that are grouped together as a segment). 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, revenue is the only component of segment profit and loss we measure.


The following tables set forth certain information regarding the properties owned by us, classified according to the business of the respective tenants as of March 31, 2010 (dollars in thousands):

   
March 31,
   
December 31,
 
Assets, as of:
 
2010
   
2009
 
Segment net real estate:
           
   Automotive service
  $ 109,178     $ 105,085  
   Automotive tire services
    199,687       201,233  
   Child care
    76,700       77,769  
   Convenience stores
    473,146       477,555  
   Drug stores
    139,869       141,057  
   Health and fitness
    218,851       197,820  
   Restaurants
    724,432       729,489  
   Theaters
    288,058       290,386  
   23 other non-reportable segments
    591,568       596,488  
Total segment net real estate
    2,821,489       2,816,882  
Other intangible assets – Automotive tire services
    632       647  
Other intangible assets – Drug stores
    5,901       6,066  
Other intangible assets – Grocery stores
    848       860  
Other intangible assets – Health and fitness
    829       845  
Other intangible assets – Theaters
    1,808       1,885  
Other intangible assets – Other
    608       625  
Goodwill – Automotive service
    1,338       1,338  
Goodwill – Child care
    5,353       5,353  
Goodwill – Convenience stores
    2,074       2,074  
Goodwill – Home furnishings
    1,557       1,557  
Goodwill – Restaurants
    3,779       3,779  
Goodwill – non-reportable segments
    3,105       3,105  
Other corporate assets
    56,382       69,771  
Total assets
  $ 2,905,703     $ 2,914,787  

Revenue for the three months ended March 31:
 
2010
   
2009
 
Segment rental revenue(1):
           
Automotive service
  $ 3,911     $ 4,207  
Automotive tire services
    5,458       5,808  
Child care
    5,649       5,844  
Convenience stores
    14,207       13,568  
Drug stores
    3,432       3,431  
Health and fitness
    5,656       4,701  
Restaurants
    18,233       17,610  
Theaters
    7,563       7,498  
23 non-reportable segments
    19,050       19,111  
Total rental revenue
    83,159       81,778  
Other revenue
    106       754  
Total revenue
  $ 83,265     $ 82,532  

 
(1) Crest’s revenue appears in “income from discontinued operations, real estate acquired for resale by Crest” and is not included in this table, which covers revenue but does not include revenue classified as part of income from discontinued operations.


13.     Common Stock Incentive Plan
 
In 2003, our Board of Directors adopted, and our stockholders approved, the 2003 Incentive Award Plan of Realty Income Corporation (the “Stock Plan”) to enable us to attract and retain the services of directors, employees and consultants, considered essential to our long-term success. The Stock Plan offers our directors, employees and consultants an opportunity to own stock in Realty Income and/or rights that will reflect our growth, development and financial success. The Stock Plan was amended and restated by our Board of Directors in February 2006 and in May 2007.

The amount of share-based compensation costs recognized in "general and administrative expense" on our consolidated statements of income during the first three months of 2010 was $1.8 million and during the first three months of 2009 was $1.4 million.

The following table summarizes our common stock grant activity under our Stock Plan. Our common stock grants vest over periods ranging from immediately to 10 years.

   
For the three
months ended
March 31, 2010
   
For the year ended
 December 31, 2009
 
   
Number of
shares
   
Weighted
average
price (1)
   
Number of
shares
   
Weighted
average
price (1)
 
Outstanding nonvested shares, beginning of year
    853,234     $ 19.14       994,453     $ 19.70  
Shares granted
    178,200       26.54       142,860       22.86  
Shares vested
    (176,097 )     23.03       (214,521 )     23.14  
Shares forfeited
    (369 )     25.38       (69,558 )     25.95  
Outstanding nonvested shares, end of each period
     854,968     $   22.56        853,234     $   19.14  
 
(1) Grant date fair value.

During the first three months of 2010, we issued 178,200 shares of common stock under our Stock Plan. These shares vest over the following service periods: 20,000 vested immediately, 5,000 vest over a service period of two years, 50,000 vest over a service period of four years and 103,200 vest over a service period of five years.

As of March 31, 2010, the remaining unamortized share-based compensation expense totaled $19.3 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 Stock 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 amount to compensation expense related to dividends paid in 2010 or 2009.


As of March 31, 2010, there were 5,846 vested stock options outstanding and exercisable with a weighted average exercise price of $14.70. There were no stock options exercised and no stock option forfeitures in the first three months of 2010. No stock options were granted after January 1, 2002. Stock options were granted with an exercise price equal to the underlying stock’s fair market value at the date of grant. Stock options expire ten years from the date they were granted and vested over service periods of one, three, four or five years.

14.
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 March 31, 2010, we have contingent payments of $1.5 million for tenant improvements and leasing costs. In addition, we have committed $5.2 million under construction contracts, which is expected to be paid in the next twelve months.

15.
Subsequent Events
 
We have determined that no subsequent events require disclosure, except as follows:
 
In April 2010, we declared the following dividends, which will be paid in May 2010:
 
  
$0.1433125 per share to our common stockholders;
  
$0.1536459 per share to our Class D preferred stockholders; and
  
$0.140625 per share to our Class E preferred stockholders.
 



 


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;
Future expenditures for development projects; and
Profitability of our subsidiary, Crest Net Lease, Inc. (“Crest”).

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; 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, 2009.

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.

Realty Income Corporation, The Monthly Dividend Company®, is a Maryland corporation organized to operate as an equity real estate investment trust, or REIT. Our primary business objective is to generate dependable monthly cash distributions from a consistent and predictable level of funds from operations, or FFO, per share. Our monthly distributions are supported by the cash flow from our portfolio of properties leased to regional and national retail chains. We have in-house acquisition, leasing, legal, credit research, real estate research, portfolio management and capital markets expertise. Over the past 41 years, Realty Income and its predecessors have been acquiring and owning freestanding retail properties that generate rental revenue under long-term lease agreements (primarily 15 to 20 years).

In addition, we seek to increase distributions to stockholders and FFO per share through both active portfolio management and the acquisition of additional properties. Our portfolio management generally includes seeking:
 
Contractual rent increases on existing leases;
Rent increases at the termination of existing leases, when market conditions permit; and
The active management of our property portfolio, including re-leasing vacant properties and selectively selling properties, thereby mitigating our exposure to certain tenants and markets.

In acquiring additional properties, our strategy is to primarily acquire properties that are:
 
Freestanding, single-tenant locations;
Leased to regional and national chains; and
Leased under long-term, net-lease agreements.

At March 31, 2010, we owned a diversified portfolio:
 
Of 2,344 retail properties;
With an occupancy rate of 96.7%, or 2,267 properties occupied and only 77 properties available for lease;
Leased to 118 different retail chains doing business in 30 separate retail industries;
Located in 49 states;
With over 19.2 million square feet of leasable space; and
With an average leasable retail space per property of approximately 8,200 square feet.

Of the 2,344 properties in the portfolio, 2,333, or 99.5%, are single-tenant, retail properties and the remaining 11 are multi-tenant, distribution and office properties. At March 31, 2010, of the 2,333 single-tenant properties, 2,257 were leased with a weighted average remaining lease term (excluding extension options) of approximately 11.0 years.

In addition, at March 31, 2010, our wholly-owned taxable REIT subsidiary, Crest, had an inventory of three properties valued at $3.8 million, which are classified as held for sale. Crest was created to buy and sell properties, primarily to individual investors who are involved in tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”). In addition to the three properties, Crest also holds notes receivable of $22.2 million at March 31, 2010.

We typically acquire properties under long-term leases with chain store operators. These transactions generally provide capital to owners of real estate and chains for expansion or other corporate purposes. Our acquisition and investment activities are concentrated in well-defined target markets and generally focus on chains providing goods and services that satisfy basic consumer needs.


Our net-lease agreements generally:
 
Are for initial terms of 15 to 20 years;
Require the tenant to pay minimum monthly rent and property operating expenses (taxes, insurance and maintenance); and
Provide for future rent increases based on increases in the consumer price index (typically subject to ceilings), fixed increases, or additional rent calculated as a percentage of the tenants’ gross sales above a specified level.

Investment Philosophy
We believe that owning an actively managed, diversified portfolio of commercial properties under long-term, net leases produces consistent and predictable income. Net leases typically require the tenant to be responsible for monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, tenants are typically responsible for future rent increases based on increases in the consumer price index (typically subject to ceilings), fixed increases or 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 leases, coupled with the tenant’s responsibility for property expenses, 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.

Credit Strategy
We primarily provide sale-leaseback financing to less than investment grade tenants. We typically acquire and lease back properties to regional and national chains and believe that within this market we can achieve an attractive risk-adjusted return. Since 1970, our overall weighted average occupancy rate at the end of each year has been 98.3%, and our occupancy rate at the end of each year has never been below 96%.

Acquisition Strategy
We seek to invest in industries in which several, well-organized, regional and national chains are capturing market share through service, quality control, economies of scale, advertising and the selection of prime locations. We execute our acquisition strategy by acting as a source of capital to regional and national chain store owners and operators, doing business in a variety of industries, by acquiring and leasing back their store locations. We undertake thorough research and analysis to identify what we consider to be appropriate industries, tenants and property locations for investment. Our research expertise is fundamental to uncovering net-lease opportunities in markets where our real estate financing program adds value. In selecting real estate for potential investment, we generally seek to acquire properties that have the following characteristics:
 
Freestanding, commercially-zoned property with a single tenant;
Properties that are important locations for regional and national chains;
  
Properties that we deem to be profitable for the tenants;
Properties that are located within attractive demographic areas relative to the business of our tenants, with high visibility and easy access to major thoroughfares; 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 rent increases.

Portfolio 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 industries, tenants and locations in which we have invested. We also regularly analyze our portfolio with a view toward optimizing its returns and enhancing our credit quality.


Our executives regularly review and analyze:
 
  
The performance of various retail industries; and
  
The operation, management, business planning and financial condition of the tenants.

We have an active portfolio 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 March 31, 2010, we classified real estate with a carrying amount of $10.2 million as held for sale on our balance sheet, which includes three properties owned by Crest, valued at $3.8 million. Additionally, we anticipate selling investment properties from our portfolio that have not yet been specifically identified, from which we anticipate receiving between $10 million and $35 million in proceeds during the next 12 months. 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 the next 12 months or be able to invest the proceeds from the sales of any properties in new properties.

Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, the U.S. credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which sometimes impact our access to and cost of capital. We continue to monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly. See our discussion of "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

Increases in Monthly Distributions to Common Stockholders
We have continued our 41-year policy of paying distributions monthly.  Monthly distributions per share were increased in April 2010 by $0.0003125 to $0.1433125. The increase in April 2010 was our 50th consecutive quarterly increase, which was the 57th increase in the amount of our dividend since our listing on the New York Stock Exchange, or NYSE, in 1994. In the first three months of 2010, we paid three monthly cash distributions per share in the amount of $0.143, totaling $0.429. In March 2010 and April 2010, we declared distributions of $0.1433125 per share, which were paid in April 2010 and will be paid in May 2010, respectively.

The monthly distribution of $0.1433125 per share represents a current annualized distribution of $1.71975 per share, and an annualized distribution yield of approximately 5.1% based on the last reported sale price of our common stock on the NYSE of $33.57 on April 26, 2010. Although we expect to continue our policy of paying monthly distributions, we cannot guarantee that we will maintain our current level of distributions, that we will continue our pattern of increasing distributions per share, or what our actual distribution yield will be in any future period.

Acquisitions during the First Three Months of 2010
During the first three months of 2010, Realty Income invested $27.7 million in eight new properties with an initial weighted average contractual lease rate of 9.0%. These eight properties are located in six states, contain over 104,000 leasable square feet, and are 100% leased with an average lease term of 18.2 years. There were no acquisitions by Crest in the first three months of 2010.


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

We made fewer portfolio acquisitions in 2008 and 2009 than in previous years because we felt that preserving our capital resources and maintaining a high level of liquidity, until property prices adjusted and the general economy improved, was the prudent course of action. In late 2009, we felt that market conditions had become more attractive for acquisitions. We believe that our solid financial position, strong balance sheet and access to capital should allow us to expand our acquisition activities in 2010 and invest in new properties that will contribute to our earnings growth.

Investments in Existing Properties
In the first three months of 2010, we capitalized costs of $935,000 on existing properties in our portfolio, consisting of $292,000 for re-leasing costs and $643,000 for building improvements.

Net Income Available to Common Stockholders
Net income available to common stockholders was $24.1 million in the first three months of 2010 versus $24.0 million in the same period of 2009, an increase of $121,000. On a diluted per common share basis, net income was $0.23 in the first three months of 2010 and 2009.

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

The gain from the sale of properties during the first three months of 2010 was $703,000, as compared to $198,000 during the first three months of 2009.

Funds from Operations Available to Common Stockholders (FFO)
In the first three months of 2010 and 2009, our FFO was $46.7 million. On a diluted per common share basis, FFO was $0.45 in the first three months of 2010 and 2009.

See our discussion of FFO 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.

Adjusted Funds from Operations Available to Common Stockholders (AFFO)
In the first three months of 2010, our AFFO was $47.6 million versus $47.7 million in the first three months of 2009.  On a diluted per common share basis, AFFO was $0.46 in the first three months of 2010 and 2009.

See our discussion of AFFO 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.
 


Capital Philosophy
Historically, we have met our long-term capital needs through the issuance of 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 from time to time. 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.

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 March 31, 2010, our total outstanding credit facility borrowings and outstanding notes were $1.39 billion, or approximately 28.1% of our total market capitalization of $4.94 billion.

We define our total market capitalization at March 31, 2010 as the sum of:
 
Shares of our common stock outstanding of 104,400,957 multiplied by the last reported sales price of our common stock on the NYSE of $30.69 per share on March 31, 2010, or $3.20 billion;
Aggregate liquidation value (par value of $25 per share) of the Class D preferred stock of $127.5 million;
  
Aggregate liquidation value (par value of $25 per share) of the Class E preferred stock of $220 million;
Outstanding notes of $1.35 billion; and
  
Outstanding borrowings of $39.9 million on our credit facility.

Mortgage Debt
We have no mortgage debt on any of our properties.

$355 Million Acquisition Credit Facility
We have a $355 million revolving, unsecured credit facility that expires in May 2011, unless extended by two, one-year extension options. Under our credit facility, our investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 100 basis points with a facility fee of 27.5 basis points, for all-in drawn pricing of 127.5 basis points over LIBOR. The borrowing rate is not subject to a LIBOR floor. We also have other interest rate options available to us. At March 31, 2010, we had a borrowing capacity of $315.1 million available on our credit facility and an outstanding balance of $39.9 million at an effective interest rate of 1.24%.

We expect to use the credit facility to acquire additional properties and for other corporate purposes.  Any additional borrowings will increase our exposure to interest rate risk. We have the right to request an increase in the borrowing capacity of the credit facility, up to $100 million, to a total borrowing capacity of $455 million. Any increase in the borrowing capacity is subject to approval by the lending banks participating in our credit facility.

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 March 31, 2010, we had cash and cash equivalents totaling $849,000.
 
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 foreseeable future.  We intend, however, to use additional sources of capital to fund property acquisitions and to repay future borrowings under our credit facility.

Universal Shelf Registration
In March 2009, we filed a shelf registration statement with the SEC, which is effective for a term of three years, to replace our prior shelf registration statement which was set to expire in April 2009. Our current shelf registration statement expires in March 2012. In accordance with the SEC rules, the amount of the 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 common stock, preferred stock, debt securities, or 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 the 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 the offering.

We are currently assigned investment grade corporate credit ratings on our senior unsecured notes.   Fitch Ratings has assigned a rating of BBB+, Moody’s Investors Service has assigned a rating of Baa1 and Standard & Poor’s Ratings Group has assigned a rating of BBB to our senior notes. All of these ratings have “stable” outlooks.

We have also been assigned credit ratings on our preferred stock. Fitch Ratings has assigned a rating of BBB-, Moody’s has assigned a rating of Baa2 and Standard & Poor’s has assigned a rating of BB+ to our preferred stock. All of these ratings have “stable” outlooks.

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.

Our senior unsecured note obligations consist of the following as of March 31, 2010, sorted by maturity date (dollars in millions):

   5.375% notes, issued in March 2003 and due in March 2013
  $ 100.0  
   5.5% notes, issued in November 2003 and due in November 2015
    150.0  
   5.95% notes, issued in September 2006 and due in September 2016
    275.0  
   5.375% notes, issued in September 2005 and due in September 2017
    175.0  
   6.75% notes, issued in September 2007 and due in August 2019
    550.0  
   5.875% bonds, issued in March 2005 and due in March 2035
    100.0  
    $ 1,350.0  

All of our outstanding notes and bonds have fixed interest rates. Interest on all of our senior note and bond obligations is paid semiannually. All of these notes and bonds contain various covenants, including: (i) a limitation on incurrence of any debt which would cause our debt to total adjusted assets ratio to exceed 60%; (ii) a limitation on incurrence of any secured debt which would cause our secured debt to total adjusted assets ratio to exceed 40%; (iii) a limitation on incurrence of any debt which would cause our debt service coverage ratio to be less than 1.5 times; and (iv) the maintenance at all times of total unencumbered assets not less than 150% of our outstanding unsecured debt. We have been in compliance with these covenants since each of the notes and bonds was issued.


The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our notes. These calculations, which are not based on U.S. generally accepted accounting principles, or GAAP, measurements, are presented to investors to show our ability to incur additional debt under the terms of our notes only and are not measures of our liquidity or performance. The actual amounts as of March 31, 2010 are:

Note Covenants
Required
 
Actual
 
Limitation on incurrence of total debt
≤ 60%
    39.5 %
Limitation on incurrence of secured debt
≤ 40%
    0.0 %
Debt service coverage (trailing 12 months)
≥ 1.5 x
    3.6 x
Maintenance of total unencumbered assets
≥ 150% of unsecured debt
    253 %

The following table summarizes the maturity of each of our obligations as of March 31, 2010 (dollars in millions):

Table of Obligations
         
Ground
   
Ground
             
                     
Leases
   
Leases
             
                     
Paid by
   
Paid by
             
Year of
 
Credit
               
Realty
   
Our
             
Maturity
 
Facility
   
Notes
   
Interest (1)
   
Income(2)
   
Tenants(3)
   
Other (4)
   
Totals
 
2010
  $ --     $ --     $ 62.2     $ 0.1     $ 2.8     $ 6.7     $ 71.8  
2011
    39.9       --       82.6       0.1       3.8       --       126.4  
2012
    --       --       82.4       0.1       3.7       --       86.2  
2013
    --       100.0       78.1       0.1       3.5       --       181.7  
2014
    --       --       77.0       0.1       3.3       --       80.4  
Thereafter
    --       1,250.0       350.9       0.8       37.7       --       1,639.4  
Totals
  $ 39.9     $ 1,350.0     $ 733.2     $ 1.3     $ 54.8     $ 6.7     $ 2,185.9  
 
 
(1) Interest on the credit facility and notes has been calculated based on outstanding balances as of March 31, 2010 through their respective maturity dates.
 
(2) Realty Income currently pays the ground lessors directly for the rent under the ground leases. A majority of this rent is reimbursed to Realty Income as additional rent from our tenants.
 
(3) Our tenants, who are generally sub-tenants under ground leases, are responsible for paying the rent under these ground leases. In the event a tenant fails to pay the ground lease rent, we are primarily responsible.
 
(4) “Other” consists of $5.2 million of commitments under construction contracts and $1.5 million of contingent payments for tenant improvements and leasing costs.
 
Our credit facility and note obligations are unsecured.  Accordingly, we have not pledged any assets as collateral for these obligations.

Preferred Stock Outstanding
In 2004, we issued 5.1 million shares of 7.375% Class D cumulative redeemable preferred stock. In May 2009, shares of Class D preferred stock became redeemable at our option for $25 per share, plus any accrued and unpaid dividends. Dividends on shares of Class D preferred are paid monthly in arrears.

In 2006, we issued 8.8 million shares of 6.75% Class E cumulative redeemable preferred stock. Beginning December 7, 2011, shares of Class E preferred stock become redeemable at our option for $25 per share, plus any accrued and unpaid dividends. Dividends on shares of Class E preferred stock are paid monthly in arrears.

Dividends on our Class D and Class E preferred stock are current.


No Off-Balance Sheet Arrangements or Unconsolidated Investments
We have no unconsolidated or off-balance sheet investments in “variable interest entities” or off-balance sheet financing, nor do we engage in trading activities involving energy or commodity contracts or other derivative instruments. Additionally, we have no joint ventures or mandatorily redeemable preferred stock. As such, our financial position and results of operations are not affected by accounting regulations regarding the consolidation of off-balance sheet entities and classification of financial instruments with characteristics of both liabilities and equity.

Distribution Policy
Distributions are paid monthly to our common, Class D preferred and Class E preferred stockholders if, and when, declared by our Board of Directors.

In order to maintain our status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our REIT taxable income (including net capital gains). In 2009, our cash distributions totaled $202.3 million, or approximately 130.5% of our estimated REIT taxable income of $155.0 million. Our estimated REIT taxable income reflects non-cash deductions for depreciation and amortization. Our estimated REIT taxable income is presented to show our compliance with REIT distribution requirements and is not a measure of our liquidity or performance.

We intend to continue to make distributions to our stockholders that are sufficient to meet this distribution requirement and that will reduce our exposure to income taxes. Furthermore, we believe our funds from operations are more than sufficient to support our current level of cash distributions to our stockholders. Our cash distributions to common stockholders for the first three months of 2010 totaled $44.8 million, representing 95.9% of our funds from operations available to common stockholders of $46.7 million. In comparison, our 2009 cash distributions to common stockholders totaled $178.0 million, representing 93.5% of our funds from operations available to common stockholders of $190.4 million.

The Class D preferred stockholders receive cumulative distributions at a rate of 7.375% per annum on the $25 per share liquidation preference (equivalent to $1.84375 per annum per share). The Class E preferred stockholders receive cumulative distributions at a rate of 6.75% per annum on the $25 per share liquidation preference (equivalent to $1.6875 per annum per share). Dividends on our Class D and Class E preferred stock are current.

Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, FFO, cash flow from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Code, our debt service requirements and any other factors the Board of Directors may deem relevant. In addition, our credit facility contains financial covenants that could limit the amount of distributions payable by us in the event of a deterioration in our results of operations or financial condition, and which prohibit the payment of distributions on the common or preferred stock in the event that we fail to pay when due (subject to any applicable grace period) any principal or interest on borrowings under our credit facility.


Distributions of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary income, except to the extent that we recognize capital gains and declare a capital gains dividend, or that such amounts constitute "qualified dividend income" subject to a reduced rate of tax. The maximum tax rate of non-corporate taxpayers for “qualified dividend income” has generally been reduced to 15% (until it “sunsets” or reverts to the provisions of prior law, which under current law will occur with respect to taxable years beginning after December 31, 2010). In general, dividends payable by REITs are not eligible for the reduced tax rate on corporate dividends, except to the extent the REIT’s dividends are attributable to dividends received from taxable corporations (such as our taxable REIT subsidiary, Crest), to income that was subject to tax at the corporate or REIT level (for example, if we distribute taxable income that we retained and paid tax on in the prior taxable year) or, as discussed above, dividends properly designated by us as “capital gain dividends.” Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction in the stockholders’ basis in their stock. Distributions above that basis, generally, will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 24.1% of the distributions to our common stockholders, made or deemed to have been made in 2009, were classified as a return of capital for federal income tax purposes. We are unable to predict the portion of future distributions that may be classified as a return of capital.

 

Our consolidated financial statements have been prepared in accordance with GAAP. Our consolidated financial statements are the basis for our discussion and analysis of financial condition and results of operations. Preparing our consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We believe that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions.

In order to prepare our consolidated financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments must be made with regard to critical accounting policies. One of these judgments is our estimate for useful lives in determining depreciation expense for our properties. Depreciation of buildings and improvements is computed using the straight–line method over an estimated useful life of 25 years. If we use a shorter or longer estimated useful life it could have a material impact on our results of operations. We believe that 25 years is an appropriate estimate of useful life. No depreciation has been recorded on Crest’s properties, which have been classified as held for sale since acquisition.

When acquiring a property for investment purposes, we allocate the fair value of real estate acquired with in-place operating leases to: (1) land, (2) building and improvements and (3) identified intangible assets and liabilities, based in each case on their fair values. Intangible assets and liabilities consist of above-market and below-market leases, the value of in-place leases and tenant relationships.



Another significant judgment must be made as to if, and when, impairment losses should be taken on our properties when events or a change in circumstances indicate that the carrying amount of the asset may not be recoverable. Generally, 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 inputs that we estimate in this analysis include projected rental rates, capital expenditures and property sales capitalization rates. If a property is held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell. The carrying value of our real estate is the largest component of our consolidated balance sheet. If events should occur that require us to reduce the carrying value of our real estate by recording provisions for impairment, it could have a material impact on our results of operations.

The following is a comparison of our results of operations for the three months ended March 31, 2010 to the three months ended March 31, 2009.

Rental Revenue
Rental revenue was $83.2 million for the first three months of 2010 versus $81.8 million for the first three months of 2009, an increase of $1.4 million, or 1.7%. The increase in rental revenue in the first three months of 2010 compared to the first three months of 2009 is primarily attributable to:

  
The eight retail properties acquired by Realty Income in 2010, which generated $22,000 of rent in the first three months of 2010;
  
The 16 retail properties acquired by Realty Income in 2009, which generated $1.4 million of rent in the first three months of 2010 compared to no rental revenue in the first three months of 2009;
Same store rents generated on 2,193 properties during the entire first three months of 2010 and 2009 increased by $616,000, or 0.8%, to $80.55 million from $79.94 million; net of
  
A net decrease of $643,000 relating to the aggregate of (i) development properties acquired before 2009 that started paying rent in 2009, (ii) properties that were vacant during part of 2010 or 2009, (iii) properties sold during 2010 and 2009 and (iv) lease termination settlements, which, in aggregate, totaled $954,000 in the first three months of 2010 compared to $1.6 million in the first three months of 2009; and
  
A decrease in straight-line rent and other non-cash adjustments to rent of $24,000 in the first three months of 2010 as compared to the first three months of 2009.

Overall, comparing the first three months of 2010 versus the first three months of 2009, revenue has been generally flat as we own 2,344 properties at March 31, 2010, compared to 2,347 properties at March 31, 2009.

Of the 2,344 properties in the portfolio at March 31, 2010, 2,333, or 99.5%, are single-tenant properties and the remaining 11 are multi-tenant, distribution and office properties. Of the 2,333 single-tenant properties, 2,257, or 96.7%, were net leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 11.0 years at March 31, 2010. Of our 2,257 leased single-tenant properties, 2,079, or 92.1%, were under leases that provide for increases in rents through:
 
Primarily base rent increases tied to a consumer price index (typically subject to ceilings);
Fixed increases;
Overage rent based on a percentage of the tenants’ gross sales; or
A combination of two or more of the above rent provisions.

Percentage rent, which is included in rental revenue, was $641,000 in the first three months of 2010 and $675,000 in the first three months of 2009. Percentage rent in the first three months of 2010 was less than 1% of rental revenue and we anticipate percentage rent to continue to be less than 1% of rental revenue for 2010.
 

Our portfolio of real estate, leased primarily to regional and national chains under net leases, continues to perform well and provides dependable lease revenue supporting the payment of monthly dividends to our stockholders. At March 31, 2010, our portfolio of 2,344 retail properties was 96.7% leased with 77 properties available for lease as compared to 75 at December 31, 2009 and 84 at March 31, 2009.

As of April 21, 2010, transactions to lease or sell 13 of the 77 properties available for lease at March 31, 2010 were underway or completed. We anticipate these transactions will be completed during the next several months, although we cannot guarantee that all of these properties can be leased or sold within this period. It has been our experience that approximately 1% to 4% of our property portfolio will be unleased at any given time; however, we cannot assure you that the number of properties available for lease will not exceed these levels.

Depreciation and Amortization
Depreciation and amortization was $23.3 million for the first three months of 2010 as compared to $22.8 million for the first three months of 2009. The increase in depreciation and amortization in 2010 was primarily due to the acquisition of properties in 2010 and 2009, which was partially offset by property sales in those same years. As discussed in the section entitled “Funds from Operations Available to Common Stockholders,” depreciation and amortization is a non-cash item that is added back to net income available to common stockholders for our calculation of FFO.

Interest Expense
Interest expense was $21.4 million for the first three months of 2010 and 2009.  Due to utilization of our credit line in the first three months of 2010, we had lower interest rates, which were offset by slightly higher average outstanding balances.

The following is a summary of the components of our interest expense (dollars in thousands):
   
Three months ended
            March 31,
 
   
2010
   
2009
 
Interest on our notes and credit facility
  $ 20,618     $ 20,665  
Interest included in discontinued operations from real estate acquired for resale by Crest
    (128 )     (173 )
Credit facility commitment fees
    248       248  
Amortization of credit facility origination costs and deferred bond financing costs
    659       670  
Interest capitalized
    (2 )     --  
Interest expense
  $ 21,395     $ 21,410  

   
Three months ended
             March 31,
 
Credit facility and notes outstanding
 
2010
   
2009
 
Average outstanding balances (dollars in thousands)
  $ 1,356,429     $ 1,353,111  
Average interest rates
    6.08 %     6.11 %

At March 31, 2010, the weighted average interest rate on our:

  
Notes payable of $1.35 billion was 6.10%;
  
Credit facility outstanding borrowings of $39.9 million was 1.24%; and
  
Combined outstanding notes and credit facility borrowings of $1.39 billion was 5.96%.


Interest Coverage Ratio
Our interest coverage ratio for the first three months of 2010 and 2009 was 3.5 times. Interest coverage ratio is calculated as: the interest coverage amount (as calculated in the following table) divided by interest expense, including interest recorded as discontinued operations. We consider the interest coverage ratio to be an appropriate supplemental measure of a company’s ability to meet its interest expense obligations. Our calculation of interest coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures.

The following is a reconciliation of net cash provided by operating activities on our consolidated statements of cash flow to our interest coverage amount (dollars in thousands):

   
Three months ended
            March 31,
 
   
2010
   
2009
 
Net cash provided by operating activities
  $ 36,527     $ 35,618  
Interest expense
    21,395       21,410  
Interest expense included in discontinued operations(1)
    128       173  
Income taxes
    277       303  
Income tax benefit included in discontinued operations(1)
    (89 )     (62 )
Collection of notes receivable by Crest(1)
    (34 )     (32 )
Crest provisions for impairment(1)
    --       (311 )
Amortization of share-based compensation
    (1,761 )     (1,397 )
Changes in assets and liabilities:
               
Accounts receivable and other assets
    (5,661 )     (3,997 )
Accounts payable, accrued expenses and other liabilities
    23,756       22,997  
Interest coverage amount
  $ 74,538     $ 74,702  
Divided by interest expense(2)
  $ 21,523     $ 21,583  
Interest coverage ratio
    3.5       3.5  
(1)   Crest activities.
(2)   Includes interest expense recorded to "income from discontinued operations, real estate acquired for resale by Crest" on our consolidated statements of income.

Fixed Charge Coverage Ratio
Our fixed charge coverage ratio for the first three months of 2010 and 2009 was 2.7 times. Fixed charge coverage ratio is calculated in exactly the same manner as interest coverage ratio, except that preferred stock dividends are also added to the denominator. 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 calculation of the fixed charge coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures.

Interest coverage amount divided by interest expense plus preferred stock dividends (dollars in thousands):
   
Three months ended
            March 31,
 
   
2010
   
2009
 
Interest coverage amount
  $ 74,538     $ 74,702  
Divided by interest expense plus preferred stock dividends(1)
  $ 27,586     $ 27,646  
Fixed charge coverage ratio
    2.7       2.7  
(1)   Includes interest expense recorded to "income from discontinued operations, real estate acquired for resale by Crest" on our consolidated statements of income.


General and Administrative Expenses
General and administrative expenses increased by $761,000 to $6.71 million in the first three months of 2010 as compared to $5.95 million in the first three months of 2009. In the first three months of 2010, general and administrative expenses as a percentage of total revenue were 8.1% as compared to 7.2% in the first three months of 2009. General and administrative expenses increased during the first three months of 2010 primarily due to increases in employee costs. In April 2010, we had 71 employees as compared to 70 employees in April 2009. For the first three months of 2010, general and administrative expenses include transaction costs of $48,000 related to the acquisition of eight new properties during 2010, as compared to no transaction costs for the first three months of 2009.

Property Expenses
Property expenses are broken down into costs associated with non-net leased multi-tenant properties, unleased single-tenant properties and general portfolio expenses. Expenses related to the multi-tenant and unleased single-tenant properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections, bad debt expense and legal fees. General portfolio costs include, but are not limited to, insurance, legal, bad debt expense, property inspections and title search fees. At March 31, 2010, 77 properties were available for lease, as compared to 75 at December 31, 2009 and 84 at March 31, 2009.

Property expenses were $2.2 million in the first three months of 2010 and $2.1 million in the first three months of 2009. The increase in property expenses in the first three months of 2010 is primarily attributable to an increase in maintenance and utilities associated with properties available for lease, partially offset by a decrease in property taxes.

Income Taxes
Income taxes were $277,000 in the first three months of 2010 as compared to $303,000 in the first three months of 2009. These amounts are for city and state income taxes paid by Realty Income.

In addition, Crest recorded state and federal income tax benefits of $89,000 in the first three months of 2010 as compared to tax benefits of $62,000 in the first three months of 2009. These amounts are included in “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

Discontinued Operations
Crest acquires properties with the intention of reselling them rather than holding them as investments and operating the properties. Consequently, we typically classify properties acquired by Crest as held for sale at the date of acquisition and do not depreciate them. The operation of Crest’s properties is classified as “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income.

If we decide not to sell a property previously classified as held for sale, the property is reclassified as real estate held for investment. A property that is reclassified to held for investment is measured and recorded at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for investment, or (ii) the fair value at the date of the subsequent decision not to sell.


The following is a summary of Crest’s “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statements of income (dollars in thousands, except per share data):

 
 
 
Three months ended
            March 31,
 
Crest's income from discontinued operations, real estate acquired for resale
 
2010
   
2009
 
Rental revenue
  $ 22     $ 66  
Interest and other revenue
    350       351  
Interest expense
    (128 )     (173 )
General and administrative expense
    (97 )     (86 )
Property expenses
    (30 )     (34 )
Provisions for impairment
    --       (311 )
Income taxes
    89       62  
Income (loss) from discontinued operations, real estate acquired for resale by Crest
  $ 206     $ (125 )
Per common share, basic and diluted
  $ 0.00     $ 0.00  

Realty Income’s operations from seven investment properties classified as held for sale at March 31, 2010, plus properties sold in 2010 and 2009, have been classified as discontinued operations. The following is a summary of Realty Income’s “income from discontinued operations, real estate held for investment” on our consolidated statements of income (dollars in thousands, except per share data):

 
 
Three months ended
            March 31,
 
Realty Income's income from discontinued operations, real estate held for investment
 
2010
   
2009
 
Gain on sales of investment properties
  $ 703     $ 198  
Rental revenue
    110       421  
Other revenue
    10       12  
Depreciation and amortization
    (36 )     (229 )
Property expenses
    (205 )     (159 )
Provision for impairment
    (34 )     --  
Income from discontinued operations, real estate held for investment
  $ 548     $ 243  
Per common share, basic and diluted
  $ 0.01     $ 0.00  

The following is a summary of our total income from discontinued operations (dollars in thousands, except per share data):
   
Three months ended
           March 31,
 
Total discontinued operations
 
2010
   
2009
 
Real estate acquired for resale by Crest
  $ 206     $ (125 )
Real estate held for investment
    548       243  
Income from discontinued operations
  $ 754     $ 118  
Per common share, basic and diluted
  $ 0.01     $ 0.00  
 
The above per share amounts have each been calculated independently.

Crest’s Property Sales
During the first three months of 2010 and 2009, Crest did not sell any properties.


Gain on Sales of Investment Properties by Realty Income
During the first three months of 2010, we sold three investment properties for $1.8 million, which resulted in a gain of $703,000. In comparison, during the first three months of 2009, we sold one investment property for $1.1 million, which resulted in a gain of $198,000. The results of operations for these properties have been reclassified to discontinued operations.

Provisions for Impairment on Real Estate Acquired for Resale by Crest
No provisions for impairment were recorded by Crest in the first three months of 2010. For the three months ended March 31, 2009, provisions for impairment of $311,000 were recorded by Crest on three properties held for sale at March 31, 2009 and two properties sold in 2009. These provisions for impairment adjusted the carrying values to the estimated fair-market values of those properties, net of estimated selling costs, and are included in “income from discontinued operations, real estate acquired for resale by Crest” on our consolidated statement of income for the three months ended March 31, 2009.

Provision for Impairment on Realty Income Investment Property
For the first three months of 2010, a provision for impairment of $34,000 was recorded by Realty Income on one property held for sale.  This provision for impairment is included in "income from discontinued operations, real estate held for investment" on our consolidated statement of income for the three months ended March 31, 2010.  No provisions for impairment were recorded by Realty Income in the first three months of 2009.

Preferred Stock Dividends
Preferred stock cash dividends totaled $6.1 million in the first three months of 2010 and 2009.

Net Income Available to Common Stockholders
Net income available to common stockholders was $24.1 million in the first three months of 2010, an increase of $121,000 as compared to $24.0 million in the first three months of 2009.

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

FFO for the first three months of 2010 and 2009 was $46.7 million. The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):
   
Three months ended
             March 31,
 
   
2010
   
2009
 
Net income available to common stockholders
  $ 24,142     $ 24,021  
Depreciation and amortization:
               
Continuing operations
    23,255       22,763  
Discontinued operations
    36       229  
Depreciation of furniture, fixtures and equipment
    (78 )     (81 )
Gain on sales of land and investment properties, discontinued operations
    (703 )     (198 )
 
FFO available to common stockholders
  $   46,652     $   46,734  
                 
FFO per common share:
               
Basic
  $ 0.45     $ 0.45  
Diluted
  $ 0.45     $ 0.45  
                 
Distributions paid to common stockholders
  $ 44,764     $ 44,362  
 
               
FFO in excess of distributions paid to common stockholders
  $ 1,888     $ 2,372  
                 
Weighted average number of common shares used for computation per share:
               
Basic
    103,606,241       103,439,114  
Diluted
    103,686,440       103,445,044  

We define FFO, a non-GAAP measure, consistent with the National Association of Real Estate Investment Trust’s definition, as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items.

We consider FFO to be an appropriate supplemental measure of a REIT’s operating performance as it is based on a net income analysis of property portfolio performance that adds back non-cash items such as depreciation. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a supplemental performance measure. In addition, FFO is used as a measure of our compliance with the financial covenants of our credit facility.

AFFO for the first three months of 2010 was $47.6 million as compared to $47.7 million in the first three months of 2009. We consider AFFO to be an appropriate supplemental measure of our performance because it provides analysts and investors with an additional indicator of our ability to pay dividends. Most companies in our industry use a similar measurement, but they may use the term "CAD" (for Cash Available for Distribution) or "FAD" (for Funds Available for Distribution).  AFFO further adjusts FFO by adding back non-cash items that reduce net income in accordance with GAAP, and deducting such items as capitalized expenditures and straight-line rent revenue.

The following is a reconciliation of net income available to common stockholders to FFO and AFFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):
 
   
Three months ended
           March 31,
 
 
 
2010
   
2009
 
Net income available to common stockholders
  $ 24,142     $ 24,021  
Cumulative adjustments to calculate FFO(1)
    22,510       22,713  
 
FFO available to common stockholders
    46,652       46,734  
Amortization of share-based compensation
    1,761       1,397  
Amortization of deferred note financing costs(2)
    341       341  
Provisions for impairment
    34       311  
Capitalized leasing costs and commissions
    (292 )     (406 )
Capitalized building improvements
    (643 )     (441 )
Straight-line rent revenue(3)
    (238 )     (261 )
Total AFFO available to common stockholders
  $ 47,615     $ 47,675  
                 
AFFO per common share:
               
Basic
  $ 0.46     $ 0.46  
Diluted
  $ 0.46     $ 0.46  
                 
Distributions paid to common stockholders
  $ 44,764     $ 44,362  
                 
AFFO in excess of distributions paid to common stockholders
  $ 2,851     $ 3,313  
                 
Weighted average number of common shares used for computation per share:
               
Basic
    103,606,241       103,439,114  
Diluted
    103,686,440       103,445,044  
 
(1)
See reconciling items for FFO presented on previous page.
(2)
Amortization of deferred note financing costs includes the amortization of costs incurred and capitalized when our notes were issued in January 1999, March 2003, November 2003, March 2005, September 2005, September 2006 and September 2007. These costs are being amortized over the lives of these notes. No costs associated with our credit facility agreements or annual fees paid to credit rating agencies have been included.
(3)
A negative amount indicates that our straight-line rent revenue was greater than our actual cash rent collected.

Presentation of the information regarding FFO and AFFO is intended to assist the reader in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and AFFO in the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and AFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of our performance. FFO and AFFO should not be considered as an alternative to reviewing our cash flows from operating, investing and financing activities.  In addition, FFO and AFFO should not be considered as a measure of liquidity, of our ability to make cash distributions or of our ability to pay interest payments.