<SEC-DOCUMENT>0001104659-15-021310.txt : 20150518
<SEC-HEADER>0001104659-15-021310.hdr.sgml : 20150518
<ACCEPTANCE-DATETIME>20150320130634
<PRIVATE-TO-PUBLIC>
ACCESSION NUMBER:		0001104659-15-021310
CONFORMED SUBMISSION TYPE:	CORRESP
PUBLIC DOCUMENT COUNT:		3
FILED AS OF DATE:		20150320

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			REALTY INCOME CORP
		CENTRAL INDEX KEY:			0000726728
		STANDARD INDUSTRIAL CLASSIFICATION:	REAL ESTATE INVESTMENT TRUSTS [6798]
		IRS NUMBER:				330580106
		STATE OF INCORPORATION:			MD
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		CORRESP

	BUSINESS ADDRESS:	
		STREET 1:		11995 EL CAMINO REAL
		CITY:			SAN DIEGO
		STATE:			CA
		ZIP:			92130
		BUSINESS PHONE:		8582845000

	MAIL ADDRESS:	
		STREET 1:		11995 EL CAMINO REAL
		CITY:			SAN DIEGO
		STATE:			CA
		ZIP:			92130
</SEC-HEADER>
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<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">March&nbsp;20, 2015</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;"><b><i><u><font size="3" face="Times New Roman" style="font-size:12.0pt;font-style:italic;font-weight:bold;">VIA EDGAR</font></u></i></b></p>
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<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">Mr.&nbsp;Mark Rakip<br> Staff Accountant<br> Division of Corporation Finance<br> United States Securities and Exchange Commission<br> 100 F Street, N.E.<br> Washington, D.C. 20549</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="font-size:12.0pt;margin:0in 0in .0001pt 1.0in;text-indent:-.5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">Re:</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font><b>Realty Income Corporation <br> Form&nbsp;10-K for the fiscal year ended December&nbsp;31, 2014<br> Filed February&nbsp;18, 2015 <br> File No.&nbsp;1-13374</b></p>
<p style="margin:0in 0in .0001pt 1.0in;text-indent:-.5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">Dear Mr.&nbsp;Rakip:</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;text-indent:.5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">We are writing in response to your comment letter dated March&nbsp;17, 2015 (the &#147;<u>Comment Letter</u>&#148;) setting forth the additional comment of the staff (the &#147;<u>Staff</u>&#148;) of the Securities and Exchange Commission (the &#147;<u>Commission</u>&#148;). The Comment Letter relates to Realty Income Corporation&#146;s Annual Report on Form&nbsp;10-K for the year ended December&nbsp;31, 2014 filed with the Commission on February&nbsp;18, 2015.</font></p>
<p style="margin:0in 0in .0001pt;text-indent:.5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">The material in italics below sets forth the Staff&#146;s comment, followed by our response.</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;"><i><u><font size="3" face="Times New Roman" style="font-size:12.0pt;font-style:italic;">Financial Statements and Supplementary Data</font></u></i></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;"><i><u><font size="3" face="Times New Roman" style="font-size:12.0pt;font-style:italic;">Allocation of the Purchase Price of Real Estate Acquisitions, page&nbsp;59</font></u></i></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="font-size:12.0pt;margin:0in 0in .0001pt .5in;text-indent:-.5in;"><i><font size="3" face="Times New Roman" style="font-size:12.0pt;font-style:italic;">1.</font></i><i><font size="1" style="font-size:3.0pt;font-style:italic;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font></i><i>We note your response to prior comment 1. Please tell us how you define sufficiently lower in determining the difference between the contractual and expected market rents. Also tell us how you determine that the exercise of a bargain renewal option is reasonably assured, including whether you consider historical experience in determining such exercises. Further, quantify for us the number of leases in your portfolio that have bargain renewal options. In your response, tell us the accounting literature relied upon and the basis for your conclusions.</i></p>
<p style="margin:0in 0in .0001pt .5in;text-indent:-.5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="font-size:12.0pt;margin:0in 0in .0001pt .5in;"><b><font size="3" face="Times New Roman" style="font-size:12.0pt;font-weight:bold;">Response:</font></b> The following bullet points summarize our internal &#147;Valuation of Newly Acquired Properties&#148; policy as it relates to the above question.&#160; As of December&nbsp;31, 2014, we have 121 leases in our portfolio that have bargain renewal options.</p>
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<p style="font-size:12.0pt;margin:0in 0in .0001pt 1.0in;text-indent:-.25in;"><font size="3" face="Symbol" style="font-size:12.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>We refer to Accounting Standards Codification (&#147;ASC&#148;) 840-10-20, when evaluating whether a below market option is considered a bargain renewal option.&#160; This accounting literature defines a bargain renewal option as:</p>
<p style="margin:0in 0in .0001pt 1.0in;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="font-size:12.0pt;margin:0in 0in .0001pt 99.0pt;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">o</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>A provision allowing the lessee, at his option, to renew the lease for a rental sufficiently lower than the fair rental of the property at the date the option becomes exercisable that exercise of the option appears, at the inception of the lease, to be reasonably assured.</p>
<p style="margin:0in 0in .0001pt 99.0pt;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="font-size:12.0pt;margin:0in 0in .0001pt 1.0in;text-indent:-.25in;"><font size="3" face="Symbol" style="font-size:12.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>We define contractual option rents as being &#147;sufficiently lower&#148; when they are:</p>
<p style="margin:0in 0in .0001pt 1.0in;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="font-size:12.0pt;margin:0in 0in .0001pt 99.0pt;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">o</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>15% below expected market rents and the option exercise date is within 15 years from the date of acquisition,</p>
<p style="margin:0in 0in .0001pt 99.0pt;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="font-size:12.0pt;margin:0in 0in .0001pt 99.0pt;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">o</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>20% below expected market rents and the option exercise date is between 15 and 20 years from the date of acquisition, or</p>
<p style="margin:0in 0in .0001pt 99.0pt;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="font-size:12.0pt;margin:0in 0in .0001pt 99.0pt;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">o</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>25% below expected market rents and the option exercise date is between 20 and 25 years from the date of acquisition.</p>
<p style="margin:0in 0in .0001pt 99.0pt;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt 1.0in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">We recognize that options with an exercise date 25 years or more from the date of acquisition or options resulting in an extension of the lease term to a date more than 25 years from the date of acquisition are uncertain by nature, due to market volatility, going concern and other uncertain factors, and therefore do not meet the burden of reasonable assurance.</font></p>
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<p style="font-size:12.0pt;margin:0in 0in .0001pt 1.0in;text-indent:-.25in;"><font size="3" face="Symbol" style="font-size:12.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>In determining whether the exercise of a bargain renewal option is &#147;reasonably assured,&#148; we take into account both the size of the discount to expected market rents as well as the length of time between the acquisition date and the option exercise date.&#160; Our policy acknowledges that contractual option rents that are only slightly discounted (i.e. less than 15%) from market do not sufficiently incentivize a tenant to exercise their option, due to factors such as the availability of newer buildings and location optimization.&#160; When considering the additional costs and efforts necessary to relocate, in addition to the 15% discount on rents realized when extending the lease, we believe that tenants then become economically compelled to exercise their option.&#160; Accordingly, we assume that a minimum 15% discount between contractual option rents and expected market rents is required for the bargain renewal option to be reasonably assured.</p>
<p style="margin:0in 0in .0001pt 1.0in;text-indent:-.25in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="font-size:12.0pt;margin:0in 0in .0001pt 1.0in;text-indent:-.25in;"><font size="3" face="Symbol" style="font-size:12.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>Our policy also acknowledges the fact that the longer the period from inception of the lease to the option exercise date, the more difficult it is to determine whether the exercise of the option is reasonably assured. Accordingly, as more time elapses from the date of acquisition, a larger discount is required between contractual option rents and expected market rents in order to offer reasonable assurance that the tenant will exercise their option.</p>
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<p align="center" style="margin:0in 0in .0001pt;text-align:center;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt .5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">We do have extensive experience with lease expirations, having resolved over 1,800 lease rollovers in the past 20 years.&#160; This experience offers us additional insight as to whether a tenant will likely renew a lease upon expiration.&#160; However, our specific experience with bargain renewal option rollover is relatively limited.&#160; We believe that the parameters established in our policy, although not directly driven by historical data, are reflective of the insight obtained through our lease rollover history and allow us to objectively apply the accounting literature included in ASC 840 in our determination of bargain renewal options.</font></p>
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<p align="right" style="margin:0in 0in .0001pt;text-align:right;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">***</font></p>    </td>
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<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;text-indent:.5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">If you have any questions or comments to this letter, please do not hesitate to contact me at (858) 284-5109.</font></p>
<p style="margin:0in 0in .0001pt;text-indent:.5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">Sincerely,</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">Realty Income Corporation</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;"><u><font size="3" face="Times New Roman" style="font-size:12.0pt;">/s/ Paul M. Meurer</font></u></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
<p style="margin:0in 0in .0001pt;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">Paul M. Meurer</font></p>
<p style="margin:0in 0in .0001pt .5in;text-indent:-.5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">Executive Vice President,</font></p>
<p style="margin:0in 0in .0001pt .5in;text-indent:-.5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">Chief Financial Officer and Treasurer</font></p>
<p style="margin:0in 0in .0001pt .5in;text-indent:-.5in;"><font size="3" face="Times New Roman" style="font-size:12.0pt;">&nbsp;</font></p>
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