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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, 2013, 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)

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 x    No o

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

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

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

There were 196,233,589 shares of common stock outstanding as of April 18, 2013.

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REALTY INCOME CORPORATION

Form 10-Q

March 31, 2013

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2013 and December 31, 2012

(dollars in thousands, except per share data)

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

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the three months ended March 31, 2013 and 2012

(dollars in thousands, except per share data)

(unaudited)

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

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 31, 2013 and 2012

(dollars in thousands)(unaudited)

For supplemental disclosures, see note 17.

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

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REALTY INCOME CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(unaudited)

1.                  Management Statement

The consolidated financial statements of Realty Income Corporation (“Realty Income”, the “Company”, “we”, “our” or “us”) were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. Readers of this quarterly report should refer to our audited consolidated financial statements for the year ended December 31, 2012, which are included in our 2012 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.

We report, in discontinued operations, the results of operations of properties that have either been disposed of or are classified as held for sale.  Additionally, due to materiality thresholds, we have separately reported acquired lease intangible assets and liabilities, which were previously reported as a portion of other assets, net and other liabilities, net, respectively, on our consolidated balance sheets.  As a result, certain of the 2012 balances have been reclassified to conform to the 2013 presentation.

At March 31, 2013, we owned 3,525 properties, located in 49 states and Puerto Rico, containing over 53.7 million leasable square feet, along with four properties owned by our wholly-owned taxable REIT subsidiary, Crest Net Lease, Inc., or Crest.

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.  We consolidate entities that we control and record a noncontrolling interest for the portion that we do not own.  Noncontrolling interest that was created or assumed as part of a business combination was recognized at fair value as of the date of the transaction (see note 4).  We have no unconsolidated investments.

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

C.  We recognize an allowance for doubtful accounts relating to accounts receivable for amounts deemed uncollectible. We consider tenant specific issues, such as financial stability and ability to pay rent, when determining collectability of accounts receivable and appropriate allowances to record.  The allowance for doubtful accounts was $426,000 at March 31, 2013 and $448,000 at December 31, 2012.

D.  We assign a portion of goodwill to our property sales, which results in a reduction of the carrying amount of our goodwill. In order to allocate goodwill to the carrying amount of properties that we sell, we utilize a relative fair value approach based on the original methodology for assigning goodwill.  As we sell properties, our goodwill will likely continue to gradually decrease over time.

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3.                  Supplemental Detail for Certain Components of Consolidated Balance Sheets

4.         American Realty Capital Trust, Inc. (ARCT)

A.  Acquisition

On January 22, 2013, we completed our acquisition of ARCT for approximately $3.2 billion.  Each outstanding share of ARCT common stock was converted into the right to receive a combination of: (i) $0.35 in cash and (ii) 0.2874 shares of our common stock, resulting in the issuance of a total of 45,573,144 shares of our common stock to ARCT shareholders, valued at a per share amount of $44.04, which was the closing price of our common stock on January 22, 2013.  In connection with the closing of the ARCT acquisition, we repaid and terminated the amounts then outstanding of approximately $552.9 million under ARCT’s revolving credit facility and term loan.

The acquisition of ARCT provided immediate and long-term benefits to Realty Income, including growth in the size of our real estate portfolio, diversification of industries and property type, accretion to net earnings, increase in the percentage of investment grade tenants, and larger size and scope of our company, which increases competitive advantages in the net-lease marketplace.

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With this acquisition, we added 515 properties to our portfolio.  The preliminary allocation of the purchase price allocation reflects aggregate consideration of approximately $2.1 billion, as calculated below (in thousands):

(1) Includes the value associated with the issuance of the Tau Operating Partnership units discussed below.

We have accounted for the ARCT acquisition in accordance with ASC 805, Business Combinations, and are in the process of completing our allocation of the purchase price for this acquisition, which we expect to finalize later this year.  The following table summarizes our preliminary purchase price allocation, which represents our current best estimate of acquisition date fair values of the assets acquired and liabilities assumed (in thousands):

The final allocation of the purchase price will be based on our assessment of the fair value of the acquired assets and liabilities using both Level 2 and 3 inputs, as summarized below.  The final purchase price allocation may be significantly different from the estimates above.

Investments in Real Estate Properties. We will estimate the fair value generally by applying an income approach methodology using both direct capitalization and discounted cash flow analysis. Key assumptions include capitalization and discount rates. Our valuations will be based, in part, on valuations prepared by an independent valuation firm.

Acquired Lease Intangibles. The fair value of in place leases will be calculated based upon our estimate of the costs to obtain tenants in each of the applicable markets. An asset or liability will be recognized for acquired leases with favorable or unfavorable rents based on our estimate of current market rents in each of the applicable markets. Our valuations of the intangible assets will be based, in part, on valuations prepared by an independent valuation firm.

Debt. The fair value of debt will be estimated based on contractual future cash flows discounted using borrowing spreads and market interest rates that would be available to us for the issuance of debt with similar terms and remaining maturities.

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B.  Transaction Costs

In connection with our acquisition of ARCT, we expect to incur total merger-related transaction costs of approximately $20 million, which include, but are not limited to, advisor fees, legal fees, accounting fees, printing fees and transfer taxes. During the first three months of 2013, we incurred $12.0 million of the estimated $20 million of total merger-related transaction costs, which are included in income from continuing operations.  In 2012, we incurred $7.9 million of these total merger-related transaction costs.

C. Noncontrolling interests and preferred units

Consideration associated with equity issued includes the value of issued common and preferred partnership units of Tau Operating Partnership, L.P., or Tau Operating Partnership, the consolidated subsidiary which consolidates properties acquired through the ARCT acquisition.  At the date of acquisition the partnership units issued represented 0.7058% of Tau Operating Partnership.  Realty Income and its subsidiaries hold the remaining 99.2942% of interests in the Tau Operating Partnership.

The common units do not have voting rights, are entitled to monthly distributions equal to the amount paid to common stockholders of Realty Income, and are redeemable in cash or Realty Income common stock at our option and at a conversion ratio of one to one.  Noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or common stock at the option of the issuer were evaluated to determine whether temporary or permanent equity classification on the balance sheet was appropriate.  We evaluated this guidance and determined that the common units meet the requirements to qualify for presentation as permanent equity.  The following table represents the change in the carrying value of these common units from January 22, 2013 through March 31, 2013 (dollars in thousands):

The Tau Operating Partnership preferred units have also been recorded at fair value as of the date of acquisition.  Since they are redeemable at a fixed price on a determinable date, we have classified them in other liabilities, net on our consolidated balance sheet.  Payments on these preferred units are made monthly at a rate of 2% per annum and are included in interest expense.  As of March 31, 2013, the preferred units have a carrying value of $6.75 million.

D.  Litigation

There have been no material developments to our legal proceedings disclosure previously reported under Part I, Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2012.

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5.     Investments in Real Estate

We acquire the land, buildings and improvements that are necessary for the successful operations of commercial enterprises.

A.                 Acquisitions during the First Quarter of 2013 and 2012

During the first three months of 2013, we invested $128.4 million in 27 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 7.9%. 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. The 27 new properties and properties under development or expansion are located in 16 states, will contain over 477,000 leasable square feet and are 100% leased with a weighted average lease term of 13.8 years. The tenants of the new properties acquired operate in seven industries: automotive collision services, automotive parts, convenience stores, dollar stores, health and fitness, sporting goods, and transportation services.  Acquisition transaction costs of $143,000 were recorded to general and administrative expense on our consolidated statement of income for the three months ended March 31, 2013.

During the first three months of 2013, we also completed our acquisition of ARCT for $3.2 billion, which added 515 properties to our real estate portfolio.  The 515 properties are located in 44 states and Puerto Rico, contain over 16.0 million leasable square feet and are 100% leased with a weighted average lease term of 12.2 years.  The 69 tenants of the 515 properties acquired operate in 28 industries: aerospace, apparel stores, automotive parts, automotive tire services, automotive services, consumer appliances, consumer goods, convenience stores, crafts and novelties, dollar stores, drug stores, financial services, food processing, general merchandise, government services, grocery stores, health care, home furnishings, home improvement, jewelry, other manufacturing, pet supplies and services, restaurants – casual, restaurants – quick service, shoe stores, telecommunications, transportation services, and wholesale clubs.  We recorded ARCT merger-related transaction costs of $12 million in the first three months of 2013.

Our combined total investment in real estate assets, including the ARCT acquisition, during the first quarter of 2013 was $3.3 billion.  None of our investments during the first quarter of 2013 caused any one tenant to be 10% or more of our total assets at March 31, 2013.

Our aggregate acquisitions, during the first three months of 2013, were allocated as follows: $455.2 million to land, $2.28 billion to buildings and improvements, $626.4 million to intangible assets, $9.4 million to other assets, net, and $104.7 million to intangible and assumed liabilities, which includes mortgage premiums of $26.8 million.  515 of the 529 properties acquired during the first three months of 2013 were related to our acquisition of ARCT, the impact of which is separately disclosed in note 4.  There was no contingent consideration associated with these acquisitions.

The properties acquired during the first three months of 2013 generated total revenues of $36.5 million and income from continuing operations of $6.4 million.

The purchase price allocation for $3.2 billion of the $3.3 billion invested by us in the first three months of 2013 is based on a preliminary measurement of fair value that is subject to change.  The allocation for these properties represents our current best estimate of fair value and we expect to finalize the valuations and complete the purchase price allocations in 2013.  In the first quarter of 2013, we finalized the purchase price allocations for $106.4 million invested in the second half of 2012.  There were no material changes to our consolidated income statement for the first three months of 2013 as a result of these purchase price allocation adjustments.

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During the first three months of 2012, we invested $10.7 million in 11 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 9.0%. These 11 new properties are located in six states, contain over 34,000 leasable square feet and are 100% leased with a weighted average lease term of 15.2 years. Acquisition transaction costs of $242,000 were recorded to general and administrative expense on our consolidated statement of income, for the three months ended March 31, 2012.

B.                 Investments in Existing Properties

During the first three months of 2013, we capitalized costs of $1.7 million on existing properties in our portfolio, consisting of $413,000 for re-leasing costs and $1.3 million for building and tenant improvements. In comparison, during the first three months of 2012, we capitalized costs of $1.1 million on existing properties in our portfolio, consisting of $266,000 for re-leasing costs and $793,000 for building and tenant improvements.

C.                 Properties with Existing Leases

Of the $3.3 billion we invested in the first three months of 2013, approximately $3.2 billion was used to acquire 524 properties with existing leases. Associated with these 524 properties, we recorded $530.0 million as the intangible value of the in-place leases, $96.4 million as the intangible value of above-market leases and $77.9 million as the intangible value of below-market leases. The value of the in-place and above-market leases is recorded to acquired lease intangible assets, net on our consolidated balance sheet, and the value of the below-market leases is recorded to acquired lease intangible liabilities, net on our consolidated balance sheet.  The values recorded to all of these intangible values, during the first three months of 2013, are based on a preliminary measurement of fair value that is subject to change.

The value of the in-place leases is amortized as depreciation and amortization expense.  The amounts amortized to expense, for the first three months of 2013 and 2012, were $15.0 million and $3.3 million, respectively.

The value of the above-market and below-market leases is amortized as rental revenue on our consolidated statements of income. All of these amounts are amortized over the term of the respective leases.  The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for the first three months of 2013 and 2012 were $565,000 and $483,000, respectively.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense as appropriate.

The following table presents the impact during the next five years and thereafter related to the net decrease to rental revenue from the amortization of the acquired above-market and below-market lease intangibles and the increase to amortization expense from the amortization of the in-place lease intangibles for properties owned at March 31, 2013 (in thousands):

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D.   Pro Forma Information

The following pro forma total revenue and income from continuing operations, for the first three months of 2013 and 2012, assumes all of our property acquisitions for the first quarter of 2013 occurred on January 1, 2012.  This pro forma supplemental information does not include: (1) the impact of any synergies or lower borrowing costs that we have or may achieve as a result of the acquisitions or any strategies that management has or may consider in order to continue to efficiently manage our operations, and (2) ARCT’s historical operational costs, including general and administrative costs and property expenses.  Additionally, this information does not purport to be indicative of what our operating results would have been had the acquisitions occurred on January 1, 2012, and may not be indicative of future operating results.  For purposes of calculating these pro-forma amounts, we assumed that merger-related costs of approximately $11.5 million, which represent the estimated merger-related costs incurred after consummation of our ARCT acquisition, occurred on January 1, 2012.  Other than the item specified above, no material, non-recurring pro-forma adjustments were included in the calculation of this information.

6.     Credit Facility

We have a $1 billion unsecured acquisition credit facility, with an initial term that expires in May 2016, and includes, at our option, a one-year extension option. Under this credit facility, our current investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 1.075% with a facility commitment fee of 0.175%, for all-in drawn pricing of 1.25% over LIBOR. The borrowing rate is not subject to an interest rate floor or ceiling. We also have other interest rate options available to us under this credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.

At March 31, 2013, credit facility origination costs of $7.6 million are included in other assets, net, on our consolidated balance sheet.  These costs are being amortized over the remaining term of our current $1 billion credit facility.

At March 31, 2013, we had a borrowing capacity of $883.4 million available on our credit facility (subject to customary conditions to borrowing) and an outstanding balance of $116.6 million, as compared to an outstanding balance of $158.0 million at December 31, 2012.

The weighted average interest rate on outstanding borrowings under our credit facility was 1.3% during the first three months of 2013 and 2.1% during the first three months of 2012. At March 31, 2013, the effective interest rate was 1.3%.  Our current and prior credit facilities are and were subject to various leverage and interest coverage ratio limitations. At March 31, 2013, we remain in compliance with these covenants.

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7.     Mortgages Payable

During the first three months of 2013, we assumed mortgages totaling $564.5 million, excluding net premiums.  The mortgages are secured by the properties on which the debt was placed. Of the $564.5 million of mortgages assumed during the first three months of 2013, approximately $543.3 million is considered non-recourse with limited customary exceptions for items such as bankruptcy, misrepresentation, fraud, misapplication of payments, environmental liabilities, failure to pay taxes, insurance premiums, liens on the property and uninsured losses.  Approximately $6.6 million has full recourse to Realty Income, and the remaining $14.6 million of the assumed debt is not guaranteed by Realty Income.  We expect to pay off the mortgages as soon as prepayment penalties make it economically feasible to do so.  We intend to continue to primarily identify property acquisitions that are free from mortgage indebtedness.

During the first three months of 2013, aggregate net premiums totaling $26.8 million were recorded upon assumption of the mortgages for above-market interest rates, as compared to net premiums totaling $10.0 million recorded in 2012. Amortization of these net premiums is recorded as a reduction to interest expense over the remaining term of the respective mortgages, using a method that approximates the effective-interest method.

These mortgages contain customary covenants, such as limiting our ability to further mortgage each applicable property or to discontinue insurance coverage, without the prior consent of the lender. At March 31, 2013, we remain in compliance with these covenants.

As a result of assuming mortgages payable in 2012, we incurred deferred financing costs of $1.1 million, which were classified as part of other assets, net, on our consolidated balance sheets.  The balance of these deferred financing costs was $1.4 million at March 31, 2013, and $1.5 million at December 31, 2012, which is being amortized over the remaining term of each mortgage.   We did not incur any deferred financing costs on our mortgages payable assumed in the first three months of 2013.

The following is a summary of all our mortgages payable as of March 31, 2013 and December 31, 2012, respectively (dollars in thousands):

(1) At March 31, 2013, there were 48 mortgages on the 185 properties, while at December 31, 2012, there were 13 mortgages on the 11 properties.  The mortgages require monthly payments, with principal payments due at maturity.  The mortgages are at fixed interest rates, except for: (1) a $23.6 million mortgage maturing on June 10, 2015 with a floating variable interest rate calculated as the sum of the current one month LIBOR plus 4.5%, not to exceed an all-in interest rate of 5.5%, and (2) a $8.4 million mortgage maturing on September 3, 2021, with a floating interest rate calculated as the sum of the current one month LIBOR plus 2.4%.  As part of the $8.4 million mortgage payable assumed in 2012, we also acquired an interest rate swap which essentially fixes the interest rate on this mortgage payable at 6.0%.  As part of two mortgages totaling $8.8 million and maturing on December 28, 2013, we also acquired an $8.8 million note receivable, upon which we receive interest income at a stated rate of 8.1% through December 28, 2013.

(2) Stated interest rates range from 2.6% through 8.3%.

(3) Effective interest rates range from 2.4% through 9.3%.

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The following table summarizes the maturity of mortgages payable, excluding net premiums of $34.8 million, as of March 31, 2013 (dollars in millions):

8.     Term Loan

In January 2013, in conjunction with our acquisition of ARCT, we entered into a $70 million senior unsecured term loan maturing January 21, 2018.  Borrowing under the term loan bears interest at the current one month LIBOR, plus 1.2%.  In conjunction with this term loan, we also acquired an interest rate swap which essentially fixes our per annum interest rate on the term loan at 2.15%.  As a result of entering into our term loan, we incurred deferred financing costs of $273,000 in the first three months of 2013, which were classified as part of other assets, net, on our consolidated balance sheet at March 31, 2013, and are being amortized over the remaining term of the term loan.

9.     Notes Payable

A.  General

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

B.  Note Repayment

On their maturity date in March 2013, we repaid, using proceeds from our March 2013 common stock offering and our credit line, the $100 million of outstanding 5.375% notes we issued in March 2003 at a price equal to 100% of the principal amount, plus accrued and unpaid interest.

10.     Issuance and Redemption of Preferred Stock

A.  In February 2012, we issued 14.95 million shares of our 6.625% Monthly Income Class F Cumulative Redeemable Preferred Stock at a price of $25.00 per share, including 1.95 million shares purchased by the underwriters upon the exercise of their overallotment option. After underwriting discounts and other offering costs of $12.8 million, we received net proceeds of $360.9 million, of which $127.5 million was used to redeem all of our outstanding 7.375% Monthly Income Class D Cumulative Redeemable Preferred Stock and the balance was used to repay a portion of the borrowings under our credit facility. Beginning February 15, 2017, the Class F preferred shares are redeemable, at our option, for $25 per share.  The initial dividend of $0.1702257 per share was paid on March 15, 2012 and covered 37 days. Thereafter, dividends of $0.138021 per share are paid monthly in arrears on the Class F preferred stock.

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B.  We redeemed all of the 5.1 million shares of our 7.375% Monthly Income Class D Cumulative Redeemable Preferred Stock in March 2012 for $25.00 per share, plus accrued dividends.  We incurred a charge of $3.7 million for the first three months of 2012, representing the Class D preferred stock original issuance costs that we paid in 2004.

11.     Issuance of Common Stock

In March 2013, we issued 17,250,000 shares of common stock at a price of $45.90 per share, including 2,250,000 shares purchased by the underwriters upon the exercise of their overallotment option.  After underwriting discounts and other offering costs of $36.3 million, the net proceeds of $755.5 million were used to redeem our 5.375% notes in March 2013 and repay borrowings under our acquisition credit facility, which were used to fund property acquisitions, including our acquisition of ARCT.

In connection with our January 2013 acquisition of ARCT, as described in note 4, we issued a total of 45,573,144 shares of our common stock to ARCT shareholders and we received 208,709 shares of our common stock that were previously held by ARCT.  The closing price per share of our common stock on the date of the ARCT acquisition was $44.04.  The total value of the 45,573,144 common shares was approximately $2 billion.

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

The estimated fair values of our notes receivable, issued in connection with property sales or acquired in connection with an acquisition, and our mortgages payable have 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. Because this methodology includes unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated fair values, related to our notes receivable and mortgages payable, is categorized as level 3 on the three-level valuation hierarchy.

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The estimated fair value of our senior notes and bonds payable is based upon indicative market prices and recent trading activity of our senior notes and bonds payable. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values, related to our senior notes and bonds payable, is categorized as level 2 on the three-level valuation hierarchy.

13.   Gain on Sales of Investment Properties

During the first three months of 2013, we sold 17 investment properties for $60.0 million, which resulted in a gain of $38.6 million. In comparison, during the first three months of 2012, we sold five investment properties for $3.6 million, which resulted in a gain of $611,000. The results of operations for these properties have been reclassified as discontinued operations.

14.   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. A provision is made for impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key factors that we estimate in this analysis include projected rental rates, estimated holding periods, capital expenditures and property sales capitalization rates. If a property is classified as held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell.

For the first three months of 2013, we recorded total provisions for impairment of $456,000 on four sold properties and one property classified as held for sale in the following industries: one in the automotive parts industry, two in the child care industry, one in the pet supplies and services industry, and one in the restaurant-casual industry.  These provisions for impairment are included in income from discontinued operations on our consolidated statement of income for the three months ended March 31, 2013.  For the first three months of 2012, we did not record any provisions for impairment.

Operations from 16 investment properties classified as held for sale at March 31, 2013, plus properties previously sold, are reported as discontinued operations. Their respective results of operations have been reclassified as income from discontinued operations on our consolidated statements of income. We do not depreciate properties that are classified as held for sale.

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. The interest expense amounts allocated to Crest are included in income from discontinued operations.

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The following is a summary of income from discontinued operations on our consolidated statements of income (dollars in thousands):

(1) The per share amounts for income from discontinued operations above and the income from continuing operations and net income reported on the consolidated statements of income have each been calculated independently.

15.   Distributions Paid and Payable

A.  Common Stock

We pay monthly dividends to our common stockholders. The following is a summary of the monthly dividends paid per common share for the first three months of 2013 and 2012:

At March 31, 2013, a distribution of $0.1812292 per common share was payable and was paid in April 2013.

B.  Common Units

As part of our acquisition of ARCT, we issued 317,022 common partnership units of Tau Operating Partnership.  These common units are entitled to monthly distributions equivalent to the per common share amounts paid to the common stockholders of Realty Income, as described above.  For the first three months of 2013, we paid two monthly distributions to holders of these common units totaling $0.3618334 per unit, or $115,000, and at March 31, 2013, a monthly distribution of $0.1812292 per common unit was payable and was paid in April 2013.

C.  Preferred Stock

In March 2012, we redeemed all of our 5.1 million shares of 7.375% Monthly Income Class D Cumulative Redeemable Preferred Stock, which were issued in 2004. During the first three months of 2012, we paid dividends to holders of our Class D preferred stock totaling $0.3841147 per share, or $2.0 million.

In 2006, we issued 8.8 million shares of our 6.75% Monthly Income Class E Cumulative Redeemable Preferred Stock for $25.00 per share.  As of December 7, 2011, the Class E preferred shares were redeemable, at our option, for $25.00 per share. During each of the first three months of 2013 and 2012, 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, 2013, a monthly dividend of $0.140625 per share was payable and was paid in April 2013.

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In February 2012, we issued 14.95 million shares of 6.625% Monthly Income Class F Cumulative Redeemable Preferred Stock at a price of $25.00 per share. In April 2012, we issued an additional 1.4 million shares of our Class F preferred stock at a price of $25.2863 per share.  Beginning February 15, 2017, shares of our Class F preferred shares are redeemable, at our option, for $25.00 per share, plus any accrued and unpaid dividends. The initial dividend for the Class F preferred stock of $0.1702257 per share, or $2.5 million, was paid on March 15, 2012 and covered 37 days.  During the first three months of 2013, we paid three monthly dividends to holders of our Class F preferred stock totaling $0.414063 per share, or $6.8 million, and at March 31, 2013, a monthly dividend of $0.138021 per share was payable and was paid in April 2013.

We are current in our obligations to pay dividends on our Class E and Class F preferred stock.

D.  Preferred Units

As part of our acquisition of ARCT, we issued 6,750 preferred partnership units of Tau Operating Partnership.  The preferred units are entitled to monthly payments at a rate of 2% per annum.  For the first three months of 2013, we made two monthly payments totaling $20,000, and at March 31, 2013, an amount of $11,000 was payable and was paid in April 2013.

16.   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:

17.   Supplemental Disclosures of Cash Flow Information

Interest paid was $56.2 million in the first three months of 2013 and $50.5 million in the first three months of 2012.

Interest capitalized to properties under development was $229,000 in the first three months of 2013 and $145,000 in the first three months of 2012.

Income taxes paid were $901,000 in the first three months of 2013 and $588,000 in the first three months of 2012.

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

A.   Share-based compensation expense was $3.8 million for the first three months of 2013 and was $3.0 million for the first three months of 2012.

B.  See note 14 for a discussion of impairments recorded by Realty Income in discontinued operations, for the first three months of 2013.

C.  In connection with our acquisition of ARCT, during the first three months of 2013, the following components were acquired: (1) real estate investments and related intangible assets of $3.2 billion, (2) other assets of $21.1 million, (3) lines of credit payable of $317.2 million, (4) a term loan for $235.0 million, (5) mortgages payable of $539.0 million, (6) intangible liabilities of $76.0 million, (7) other liabilities of $24.8 million, and (8) noncontrolling interests of $14.0 million.

D.   For five properties we acquired, during the first three months of 2013, excluding the acquisition of ARCT, we assumed $48.2 million of mortgages payable to third-party lenders and recorded $4.2 million of net premiums.

E.  During the first three months of 2013, we adjusted the purchase price allocations for the acquisition of real estate that we made during the second half of 2012.  As a result of these adjustments, real estate increased by $3.1 million, acquired lease intangible assets, net decreased by $2.4 million, and acquired lease intangible liabilities, net increased by $712,000 on our consolidated balance sheet at March 31, 2013.

F.  During the first three months of 2013, we acquired land for $750,000 as a portion of a development property.  This real estate is included on our consolidated balance sheet at March 31, 2013, and we recorded a liability.

G.  During the first three months of 2013, we acquired real estate for $523,000 via an exchange of one of our properties.

H.   Accrued costs on properties under development resulted in an increase in buildings and improvements and accounts payable of $2.8 million at March 31, 2012.

18.   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 47 activity segments. All of the properties are incorporated into one of the applicable segments. Because almost all of our leases require the tenant to pay operating expenses, revenue is the only component of segment profit and loss we measure.

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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, 2013 (dollars in thousands):