UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTIONAnnual report pursuant to Section 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2021
2023, or
☐TRANSITION REPORT PURSUANT TO SECTIONTransition report pursuant to section 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 1-13374
REALTY INCOME CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Maryland | | | | | | | | 33-0580106 |
Maryland | | 33-0580106 |
| (State or Other Jurisdiction of Incorporation or Organization) | | (IRS Employer Identification No.)Number) |
11995 El Camino Real, San Diego, California 92130
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (858) 284-5000
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of Each Class | Trading
Symbol(s) | Name of Each Exchange On
Which Registered |
| Common Stock, $0.01 Par Value | O | New York Stock Exchange |
| 6.000% Series A Cumulative Redeemable Preferred Stock, $0.01 Par Value | O PR | New York Stock Exchange |
| 1.125% Notes due 2027 | O27A | New York Stock Exchange |
| 1.875% Notes due 2027 | O27B | New York Stock Exchange |
| 1.625% Notes due 2030 | O30 | New York Stock Exchange |
| 4.875% Notes due 2030 | O30A | New York Stock Exchange |
| 5.750% Notes due 2031 | O31A | New York Stock Exchange |
| 1.750% Notes due 2033 | O33A | New York Stock Exchange |
| 5.125% Notes due 2034 | O34 | New York Stock Exchange |
| 6.000% Notes due 2039 | O39 | New York Stock Exchange |
| 2.500% Notes due 2042 | O42 | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company.company, or an emerging growth company. See the definitions of “large"large accelerated filer,”" “accelerated filer,” “smaller"smaller reporting company,”" and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | |
| | | | Emerging growth company | ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At June 30, 2021,2023, the aggregate market value of the Registrant’s shares of common stock, $0.01 par value, held by non-affiliates of the Registrant was $25.4$42.3 billion based upon the last reported sale price of $66.74$59.79 per share on the New York Stock Exchange on June 30, 2021,2023, the last business day of the Registrant’s most recently completed second fiscal quarter. The determination of affiliate status for purposes of this calculation is not necessarily a conclusive determination for other purposes.
At February 11, 2022, the number of 861,123,757shares of common stock outstanding was 591,320,553.
DOCUMENTS INCORPORATED BY REFERENCE
Part III, Items 10, 11, 12, 13, and 14 incorporate by reference certain specific portions of the definitive Proxy Statement for Realty Income Corporation’s Annual Meeting expected to be held on May 17, 2022,2024, to be filed pursuant to Regulation 14A. Only those portions of the proxy statement which are specifically incorporated by reference herein shall constitute a part of this annual report.
REALTY INCOME CORPORATION
Index to Form 10-K
December 31, 2023
PART I
Item 1: Business
In this Annual Report on Form 10-K, unless the context otherwise requires, references to “Realty Income,” the “Company,” “we,” “our” or “us” refer to Realty Income Corporation and our subsidiaries including, following the consummation of our merger with VEREIT, Inc. on November 1, 2021, VEREIT, Inc. and its subsidiaries. References to “VEREIT” refer to VEREIT, Inc. prior to the consummation of our merger with VEREIT on November 1, 2021. For more information on this merger, see "Recent Developments" in Part I of this Annual Report on Form 10-K below.
THE COMPANY
Realty Income, The Monthly Dividend Company®, is an S&P 500 company and member of the S&P 500 Dividend Aristocrats® index for having increased its dividend every year for over 25 consecutive years. We invest in people and places to deliver dependable monthly dividends that increase over time. We are structured as a real estate investment trust ("REIT"), requiring us to annually distribute at least 90% of our taxable income (excluding net capital gains) in the form of dividends to our stockholders. The monthly dividends are supported by the cash flow generated from real estate ownedin which we own or hold interests in under long-term net lease agreements with our commercial clients.
Realty Income was founded in 1969, and listed on the New York Stock Exchange ("NYSE": O) in 1994. Over the past 5355 years, Realty Income has been acquiring and managing freestanding commercial properties that generate rental revenue under long-term net lease agreements with our commercial clients.
At December 31, 2021, we owned a diversified portfolio:
•Consisting of 11,136 properties;
•With an occupancy rate of 98.5%, or 10,972 properties leased and 164 properties available for lease or sale;
•With clients doing business in 60 separate industries;
•Located in all 50 U.S. states, Puerto Rico, the United Kingdom (U.K.) and Spain;
•With approximately 210.1 million square feet of leasable space;
•With a weighted average remaining lease term (excluding rights to extend a lease at the option of our client) of approximately 9.0 years; and
•With an average leasable space per property of approximately 18,860 square feet, approximately 12,470 square feet per retail property and approximately 248,120 square feet per industrial property.
Of the 11,136 properties in the portfolio at December 31, 2021, 11,043, or 99.2%, are single-client properties, of which 10,883 were leased, and the remaining are multi-client properties.
Our seven senior officers owned 0.04% of our outstanding common stock with a market value of $15.1 million at February 11, 2022. Our directors and seven senior officers, as a group, owned 0.11% of our outstanding common stock with a market value of $42.2 million at February 11, 2022.
Our common stock is listed on the NYSE under the ticker symbol “O” with a CUSIP number of 756109-104. Our central index key number is 726728. Our notes are listed on the NYSE as follows:
| | | | | | | | | | | | | | |
Notes | | Ticker Symbol | | CUISP |
1.125% Notes due July 2027 | | O27A | | 756109-BB9 |
1.875% Notes due January 2027 | | O27B | | 756109-BM5 |
1.625% Notes due December 2030 | | O30 | | 756109-AY0 |
1.750% Notes due July 2033 | | O33A | | 756109-BC7 |
2.500% Notes due January 2042 | | O42 | | 756109-BN3 |
In January 2022, we had 371 employees, inclusive of four part-time employees, as compared to 210 employees, inclusive of two part-time employees, in January 2021.
We maintain a corporate website at www.realtyincome.com. On our website we make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, Form 3s, Form 4s, Form 5s, current
reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file these reports with the Securities and Exchange Commission, or SEC. None of the information on our website is deemed to be part of this report.
RECENT DEVELOPMENTS
Merger with VEREIT
On April 29, 2021, we entered into an Agreement and Plan of Merger, as amended, or the Merger Agreement, with VEREIT, its operating partnership, VEREIT Operating Partnership, L.P., or VEREIT OP, and two newly formed subsidiaries. Pursuant to the terms of the Merger Agreement, (i) one of the newly formed subsidiaries of us agreed to merge with and into VEREIT OP, with VEREIT OP as the surviving entity, and (ii) immediately thereafter, VEREIT agreed to merge with and into the other newly formed subsidiary of us, with our subsidiary as the surviving corporation, which we refer to collectively as the merger.
On November 1, 2021, we completed our acquisition of VEREIT, and the merger was consummated. Pursuant to the terms of the Merger Agreement and subject to the terms thereof, upon the consummation of the merger, (i) each outstanding share of VEREIT common stock, and each outstanding common partnership unit of VEREIT OP owned by any of its partners other than VEREIT, Realty Income or their respective affiliates, was automatically converted into 0.705 of newly issued shares of our common stock, or in certain instances, Realty Income L.P. units, and (ii) each VEREIT OP outstanding common unit owned by VEREIT, Realty Income or their respective affiliates remained outstanding as partnership interests in the surviving entity.
Orion Divestiture
Following of the closing of our merger with VEREIT, we contributed 92 office real estate assets, a consolidated real estate venture holding one office asset, and an unconsolidated real estate venture holding five office assets to a wholly owned subsidiary named Orion Office REIT Inc., or Orion. On November 12, 2021, we distributed the outstanding shares of Orion common stock to our shareholders (including legacy VEREIT stockholders who received shares of our common stock in our merger with VEREIT) on a pro rata basis at a rate of one share of Orion common stock for every ten shares of Realty Income common stock held on November 2, 2021, the applicable record date, which we refer to as the Orion Divestiture. Following the Orion Divestiture, Orion began operating as a separate, independent public company.
In conjunction with the Orion Divestiture, we incurred approximately $6.0 million of transaction costs during the year ended December 31, 2021, which were recorded in merger and integration-related costs within our consolidated statements of income and comprehensive income.
As part of the Orion Divestiture, Orion paid us a dividend of $425.0 million and reimbursed $170.2 million to us for the early redemption of mortgage loans underlying the contributed assets prior to the effectuation of the Orion Divestiture. The distribution of Orion resulted in the derecognition of net assets of $1.74 billion, which net of the aforementioned cash payments of $595.2 million, resulted in a reduction to additional paid in capital of $1.14 billion.
Merger and Integration-related Costs
In conjunction with our merger with VEREIT, we incurred approximately $161.4 million of transaction costs during the year ended December 31, 2021, which were included in the $167.4 million of merger and integration-related costs within our consolidated statements of income and comprehensive income. The merger and integration-related costs primarily consist of advisory fees, including success-based fees, attorney fees, accountant fees, SEC filing fees and additional integration costs that include incremental and non-recurring costs necessary to convert data and systems, retain employees and otherwise enable us to operate acquired businesses or assets efficiently.
Theater Industry Update
As of December 31, 2021, our clients2023, we owned or held interests in 13,458 properties located in the theater industry represented 3.4% of our annualized contractual rent. As of December 31, 2021,United States ("U.S.") and Europe.
On January 23, 2024, we were fully reserved for the outstanding receivable balances for 34 theater properties. At December 31, 2021, the receivables outstanding for our 81 theater properties totaled $71.0 million, inclusive of $12.7 million of straight-line rent receivables, and net of $38.1 million of reserves, inclusive of $7.6 million of straight-line rent reserves.
For the years ended December 31, 2021 and 2020, we recorded $5.1 million and $22.1 million, respectively, in reserves on contractual base rent for theater properties. Contractual rent reserves exclude reserves on contractually obligated reimbursements by our clients, which was equivalent to $1.4 million and $1.6 million, respectively.
At December 31, 2021, the receivables outstanding across the portfolio totaled $426.8 million, net of $74.0 million of reserves, and includes $231.9 million of straight-line rent receivable, net of $11.8 million of reserves.
The following table summarizes reserves to rental revenue for theater properties (in millions):
| | | | | | | | |
| | Year Ended |
| | December 31, 2021 |
Rental revenue reserves | | $ | 6.5 | |
Straight-line rent reserves | | 5.8 | |
Total reserves | | $ | 12.3 | |
We did not record any provisions for impairment on theater properties during 2021. See "Item 1A—Risk Factors" in Part I of this Annual Report on Form 10-K for more information regarding the actual and potential future impacts of the COVID-19 pandemic and the measures taken to limit its spreadclosed on our clients and our business, results of operations, financial condition and liquidity.
Increases in Monthly Dividends to Common Stockholders
We have continued our 53-year policy of paying monthly dividends. In addition, we increased the dividend five times during 2021 and once during 2022. As of February 2022, we have paid 97 consecutive quarterly dividend increases and increased the dividend 114 times since our listing on the NYSE in 1994.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Month | | Month | | Monthly Dividend | | Increase |
| 2021 Dividend increases | | Declared | | Paid | | per share | | per share |
| 1st increase | | Dec 2020 | | Jan 2021 | | $ | 0.2345 | | | $ | 0.0005 | |
| 2nd increase | | Mar 2021 | | Apr 2021 | | $ | 0.2350 | | | $ | 0.0005 | |
| 3rd increase | | Jun 2021 | | Jul 2021 | | $ | 0.2355 | | | $ | 0.0005 | |
| 4th increase | | Sept 2021 | | Oct 2021 | | $ | 0.2360 | | | $ | 0.0005 | |
| 5th increase | | Nov 2021 | | Dec 2021 | | $ | 0.2460 | | | $ | 0.0100 | |
| | | | | | | | |
| 2022 Dividend Increases | | | | | | | | |
| 1st increase | | Dec 2021 | | Jan 2022 | | $ | 0.2465 | | | $ | 0.0005 | |
The dividends paid per share during 2021 totaled $2.833, as compared to $2.794 during 2020, an increase of $0.039, or 1.4%. In November 2021, we also made a $2.060 tax distribution of Orion shares, that occurred in conjunction with the Orion Divestiture on November 12, 2021, after ourpreviously announced merger with VEREIT on November 1, 2021. The fair market value of these shares for tax distribution was determined to be $20.6272 per share,Spirit Realty Capital, Inc. ("Spirit", formerly NYSE: SRC), which was calculated using the five day volume weighted average share price after issuance.
The monthly dividend of $0.2465 per share represents a current annualized dividend of $2.958 per share, and an annualized dividend yield of 4.1% based on the last reported sale price of our common stock on the NYSE of $71.59 on December 31, 2021. Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will beis further described in any future period.
Acquisitions During 2021
Below is a listing of our acquisitions in the U.S. and Europe for the year ended December 31, 2021 (excludes properties assumed on November 1, 2021 in conjunction with our merger with VEREIT):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Properties | | Leasable Square Feet | | Investment
($ in thousands) | | Weighted Average Lease Term (Years) | | Initial Weighted Average Cash Lease Yield (1) |
Year ended December 31, 2021 (2) | | | | | | | | | |
Acquisitions - U.S. (in 43 states) | 714 | | | 14,727,335 | | | $ | 3,608,573 | | | 14.1 | | 5.5 | % |
Acquisitions - Europe (U.K. and Spain) | 129 | | | 9,196,345 | | | 2,558,909 | | | 11.6 | | 5.5 | % |
| Total Acquisitions | 843 | | | 23,923,680 | | | $ | 6,167,482 | | | 13.1 | | 5.5 | % |
Properties under Development (3) | 68 | | | 2,681,676 | | | 243,278 | | | 15.7 | | 6.0 | % |
Total (4) | 911 | | | 26,605,356 | | | $ | 6,410,760 | | | 13.2 | | 5.5 | % |
(1)noteThe initial weighted average cash lease yield for a property is generally computed as estimated contractual first year cash net operating income, which, in the case of a net leased property, is equal 21, Subsequent Events, to the aggregate cash base rent for the first full yearconsolidated financial statements. The Spirit portfolio consisted of each lease, divided by the total cost of the property. Since it is possible2,018 U.S. retail, industrial, and other properties across 49 states. With assets that a client could default on the payment of contractual rent, we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above. Contractual net operating income used in the calculation of initial average cash yield includes approximately $8.5 million received as settlement credits for 41 properties as reimbursement of free rent periods for the year ended December 31, 2021.
In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does not provide for a fixed rate of return on a property under development or expansion, the initial average cash lease yield is computed as follows: estimated cash net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs.
(2) None of our investments during 2021 caused any one client to be 10% or more of our total assets at December 31, 2021.
(3) Includes £7.0 millionof investments in U.K. development properties, converted at the applicable exchange rates on the funding dates.
(4) Our clients occupying the new properties are 83.6% retail and 16.4% industrial, based on rental revenue. Approximately 40% of the rental revenue generated from acquisitions during 2021 is from our investment grade rated clients, their subsidiaries or affiliated companies.
Portfolio Discussion
Leasing Results
At December 31, 2021, we had 164 properties available for lease out of 11,136 properties in our portfolio, which represents a 98.5% occupancy rate based on the number of properties in our portfolio.
Below is a summary of our portfolio activity for the periods indicated below:
| | | | | |
Three months ended December 31, 2021 | |
Properties available for lease at September 30, 2021 | 86 | |
Lease expirations (1)(2)
| 354 | |
Re-leases to same client | (210) | |
Re-leases to new client | (13) | |
Vacant dispositions | (53) | |
Properties available for lease at December 31, 2021 | 164 | |
| | | | | |
Year ended December 31, 2021 | |
Properties available for lease at December 31, 2020 | 140 | |
Lease expirations (1)(2)
| 529 | |
Re-leases to same client | (336) | |
Re-leases to new client | (36) | |
Vacant dispositions | (133) | |
Properties available for lease at December 31, 2021 | 164 | |
(1)Includes 103 net vacancies assumed from the combined effect of our merger with VEREIT and spin-off of office properties to Orion Office REIT Inc. in November 2021.
(2)Includes scheduled and unscheduled expirations (including leases rejected in bankruptcy), as well as future expirations resolved in the periods indicated above.
During the three months ended December 31, 2021, the annualized new rent on re-leases was $49.09 million, as compared to the previous annualized rent of $48.22 million on the same units, representing a rent recapture rate of 101.8% on the units re-leased. We re-leased six units to new clients without a period of vacancy, and nine units to new clients after a period of vacancy.
During the year ended December 31, 2021, the annual new rent on re-leases was $89.23 million, as compared to the previous annual rent of $86.29 million on the same units, representing a rent recapture rate of 103.4% on the units re-leased. We re-leased 13 units to new clients without a period of vacancy, and 33 units to new clients after a period of vacancy.
As part of our re-leasing costs, we pay leasing commissions to unrelated, third party real estate brokers consistent with the commercial real estate industry standard, and sometimes provide rent concessionshighly complementary to our clients. We do not considerexisting portfolio, this transaction enhances the collective impact of the leasing commissions or rent concessions to our clients to be material to our financial position or results of operations.
At December 31, 2021, our average annualized contractual rent was approximately $14.03 per square foot on the 10,972 leased properties in our portfolio. At December 31, 2021, we classified 33 properties, with a carrying amount of $30.5 million, as real estatediversification and lease intangibles held for sale, net on our balance sheet. The expected sale of these properties does not represent a strategic shift that will have a major effect on our operations and financial results and is consistent with our existing disposition strategy to further enhancedepth our real estate portfolio and maximize portfolio returns.
Investments in Existing Properties
During 2021, we capitalized costs of $21.9 million on existing properties in our portfolio, consisting of $6.3 million for re-leasing costs, $978,000 for recurring capital expenditures, and $14.6 million for non-recurring building improvements.
The majority of our building improvements relate to roof repairs, HVAC improvements, and parking lot resurfacing and replacements. The amounts of our capital expenditures can vary significantly, depending on the rental market, credit worthiness of our clients, the lease term and the willingness of our clients to pay higher rental revenue over the terms of the leases.
We define recurring capital expenditures as mandatory and recurring landlord capital expenditure obligations that have a limited useful life. We define non-recurring capital expenditures as property improvements in which we invest additional capital that extend the useful life of the properties.
Note Issuances
In January 2022, we issued £250.0 million of 1.875% senior unsecured notes due January 2027 (the "January 2027 Notes") and £250.0 million of 2.500% senior unsecured notes due January 2042 (the "January 2042 Notes"). The public offering price for the January 2027 Notes was 99.487% of the principal amount for an effective semi-annual yield to maturity of 1.974% and the public offering price for the January 2042 Notes was 98.445% of the principal amount for an effective semi-annual yield to maturity of 2.584%. Combined, the new issues of the January 2027 Notes and the January 2042 Notes have a weighted average term of approximately 12.5 years and a weighted average effective semi-annual yield to maturity of approximately 2.28%.
In connection with our merger with VEREIT, in November 2021, we completed our debt exchange offer to exchange outstanding notes previously issued by VEREIT OP, totaling $4.65 billion in principal, for new notes issued by Realty Income, pursuant to which approximately 99.2% of the outstanding notes issued by VEREIT OP were exchanged for a like aggregate principal amount of the notes issued by Realty Income. The interest rate, interest payment dates, redemption terms and maturity of each series of Realty Income notes issued by Realty Income in the exchange offers were the same as those of the corresponding series of VEREIT notes exchanged. With respect to the notes originally issued by VEREIT OP that remained outstanding, we amended the indenture governing such notes to, among other things, eliminate substantially all of the restrictive covenants in such indenture.
In July 2021, we issued £400.0 million through the issuance of 1.125% senior unsecured notes due July 2027 (the "July 2027 Notes") and £350.0 million through the issuance of 1.750% senior unsecured notes due July 2033 (the "July 2033 Notes"). The public offering price for the July 2027 Notes was 99.305% of the principal amount for an effective semi-annual yield to maturity of 1.242% and the public offering price for the July 2033 Notes was 99.842% of the principal amount for an effective semi-annual yield to maturity of 1.757%. Combined, the new issues of the July 2027 Notes and July 2033 Notes have a weighted average term of 8.8 years and a weighted average effective
semi-annual yield to maturity of 1.48%. The issuances represented our debut green bond offering of Sterling-denominated notes, which were intended to finance or refinance, in whole or in part, new or existing eligible green projects in the categories outlined in our green financing framework, which is designed to align with the International Capital Markets Association (the "ICMA") Green Bond Principles 2021.
Early Redemption of Notes
In December 2021, we completed the early redemption on all $750.0 million in principal amount of our outstanding 4.650% notes due August 2023, plus accrued and unpaid interest. As a result of the early redemption, we recognized a $46.4 million loss on extinguishment of debt during the three months ended December 31, 2021.
In January 2021, we completed the early redemption on all $950.0 million in principal amount of our outstanding 3.250% notes due October 2022, plus accrued and unpaid interest. As a result of the early redemption, we recognized a $46.5 million loss on extinguishment of debt during the three months ended March 31, 2021.
Loss on extinguishment of debt is excluded in our calculation of AFFO.
New Appointments to our Board of Directors
Priscilla Almodovar and Mary Hogan Preusse were appointed to our Board of Directors in November 2021, while Jacqueline Brady was appointed in May 2021. Ms. Almodovar and Ms. Preusse both formerly served on the VEREIT Board of Directors.
Capital Raising
During 2021, we raised $4.51 billion from the sale of common stock at a weighted average price of $66.51 per share, of which approximately $1.29 billion related to common stock issued through underwritten overnight public offerings and the majority of the remaining proceeds of approximately $3.22 billion related to the sale of common stock through our At-The-Market (ATM) Program.
ATM Program
In August 2021, following the issuance and sale of 74,911,567 shares under our prior ATM equity distribution plans, or our prior ATM programs, we established a new ATM equity distribution plan, or our new ATM program, pursuant to which up to 69,088,433 additional shares of common stock may be offered and sold (1) bywill allow us to or through, a consortium of banks acting asstrengthen our sales agents or (2) by a consortium of banks acting as forward sellers on behalf of any forward purchasers contemplated thereunder, in each case by means of ordinary brokers' transactions on the NYSE at prevailing market prices or at negotiated prices.
Issuances of Common Stock in Underwritten Public Offerings
In July 2021, we raised $594.1 million from the issuance of 9,200,000 shares of common stock, inclusive of 1,200,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares.
In January 2021, we raised $669.6 million from the issuance of 12,075,000 shares of common stock, including 1,575,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares.
Impact of COVID-19
We continue to work diligentlylongstanding relationships with our clients most affected by the pandemic to understand their business operations and financial liquidity and their ability to satisfy their contractual obligations to us. As we carefully navigate this difficult economic period with our clients, our focus is on finding resolutions that preserve the long-term relationships we have built with many of our clients. See "Item 1A—Risk Factors" in Part I of this report for more information regarding the actual and potential future impacts of the COVID-19 pandemic and the measures taken to limit its spread on ourexisting clients and our business, results of operations, financial condition and liquidity.curate new ones.
The majority of lease concessions granted to our clients during 2020 and 2021 as a result of the COVID-19 pandemic have been rent deferrals with the original lease term unchanged. In these cases, we have determined that the collection of deferred rent is probable (within the meaning applicable under generally accepted accounting principles ("GAAP")), although we cannot assure you that this determination will not change in the future. In addition, as we believe to be the case with many retail landlords, we have received many short-term rent relief requests, most often in the form of rent deferral requests, or requests for further discussion from clients. We believe that not all client requests will ultimately result in lease modification agreements, nor have we relinquished our contractual rights under our lease agreements where rent concessions have not yet been granted. Our rent collections for the periods below and rent relief requests to-date may not be indicative of collections, concessions or requests in any future period.
Percentages of Contractual Rent Collected as of December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| Month Ended October 31, 2021 | | Month Ended November 30, 2021 | | Month Ended December 31, 2021 | | Quarter Ended December 31, 2021 |
| | | |
Contractual rent collected(1) across total portfolio | 99.7% | | 99.5% | | 99.4% | | 99.5% |
Contractual rent collected(1) from our top 20 clients (2) | 99.9% | | 99.8% | | 99.8% | | 99.8% |
Contractual rent collected(1) from our investment grade clients (3) | 99.9% | | 99.8% | | 99.8% | | 99.8% |
| Contractual rent collected from our theater clients | 100.0% | | 100.0% | | 100.0% | | 100.0% |
| Contractual rent collected from our health and fitness clients | 96.7% | | 96.7% | | 96.7% | | 96.7% |
(1) Collection rates are calculated as the aggregate contractual rent collected for the applicable period from the beginning of that applicable period through December 31, 2021, divided by the contractual rent charged for the applicable period. Rent collection percentages are calculated based on contractual rent (excluding percentage rents and contractually obligated reimbursements by our clients). Charged amounts have not been adjusted for any COVID-19 related rent relief granted and include contractual rent from any clients in bankruptcy. Due to differences in applicable foreign currency conversion rates and rent conventions, the percentages above may differ from percentages calculated utilizing our total portfolio annualized contractual rent.
(2) We define our top 20 clients as our 20 largest clients based on percentage of total portfolio annualized contractual rent as of December 31, 2021 for all periods.
(3) We define investment grade clients as clients with a credit rating, and our clients that are subsidiaries or affiliates of companies with a credit rating, as of the balance sheet date, of Baa3/BBB- or higher from one of the three major rating agencies (Moody’s/S&P/Fitch).
As the adverse impacts of the COVID-19 pandemic and the measures taken to limit its spread continue to evolve, the ability of our clients to continue to pay rent to us may further diminish, and therefore we cannot assure you that our historical rental collections are indicative of our rental collections in the future. As a result of the impacts of the COVID-19 pandemic and the measures taken to limit its spread, our revenues in the foreseeable future may decline, and that decline may continue or increase in subsequent periods as long as such impacts continue to exist.
Select Financial Results
The following summarizes our select financial results (dollars in millions, except per share data):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2021 | | 2020 | | % Increase / (Decrease) |
| Total revenue | $ | 2,080.5 | | $ | 1,647.1 | | 26.3 | % |
Net income available to common stockholders (1) | $ | 359.5 | | $ | 395.5 | | (9.1) | % |
Net income per share (2) | $ | 0.87 | | $ | 1.14 | | (23.7) | % |
| Funds from operations available to common stockholders ("FFO") | $ | 1,240.6 | | $ | 1,142.1 | | 8.6 | % |
FFO per share (2) | $ | 2.99 | | $ | 3.31 | | (9.7) | % |
| Normalized funds from operations available to common stockholders ("Normalized FFO") | $ | 1,408.0 | | $ | 1,142.1 | | 23.3 | % |
Normalized FFO per share (2) | $ | 3.39 | | $ | 3.31 | | 2.4 | % |
| Adjusted funds from operations available to common stockholders ("AFFO") | $ | 1,488.8 | | $ | 1,172.6 | | 27.0 | % |
AFFO per share (2) | $ | 3.59 | | $ | 3.39 | | 5.9 | % |
(1) The calculation to determine net income available to common stockholders includes provisions for impairment, gains from the sale of real estate, and foreign currency gains and losses. These items can vary from year to year and can significantly impact net income available to common stockholders and period to period comparisons.
(2) All per share amounts are presented on a diluted per common share basis.
Our financial results during 2021 were primarily impacted by the following transactions: (i) a $97.2 million loss on extinguishment of debt, which primarily includes $46.5 million related to the January 2021 early redemption of the 3.250% notes due October 2022 recorded in the three months ended March 31, 2021 and $46.4 million related to the December 2021 early redemption of the 4.650% notes due August 2023 recorded in the three months ended December 31, 2021, (ii) $167.4 million of merger and integration-related costs related to our merger with VEREIT and spin-off of office properties to Orion, (iii) $39.0 million of provisions for impairment, and (iv) $14.7 million in net reserves, recorded as a reduction of rental revenue. Our financial results during 2020 were primarily impacted by the following transactions: (i) $147.2 million of provisions for impairment, (ii) $52.5 million in net reserves recorded as a reduction of rental revenue, (iii) a $9.8 million loss on extinguishment of debt due to the January 2020 early
redemption of the 5.750% notes due January 2021, and (iv) a $3.5 million executive severance charge for our former Chief Financial Officer ("CFO").
See our discussion of FFO, Normalized FFO, and AFFO (which are not financial measures under GAAP), later in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this annual report, which includes a reconciliation of net income available to common stockholders to FFO and Normalized FFO, and AFFO.
DIVIDEND POLICY
Distributions are paid monthly to holders of shares of our common stock.
Distributions are paid monthly to the limited partners holding common units of Realty Income, L.P., each on a per unit basis that is generally equal to the amount paid per share to our common stockholders.
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 taxable income (excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our taxable income (including net capital gains). In 2021, our cash distributions to common stockholders totaled $1.17 billion, or approximately 149.1% of our estimated taxable income of $784.7 million. Our estimated taxable income reflects non-cash deductions for depreciation and amortization. Our estimated taxable income is presented to show our compliance with REIT dividend requirements and is not a measure of our liquidity or operating performance. We intend to continue to make distributions to our stockholders that are sufficient to meet this dividend requirement and that will reduce or eliminate our exposure to income taxes. Furthermore, we believe our cash on hand and funds from operations are sufficient to support our current level of cash distributions to our stockholders. Our cash distributions to common stockholders in 2021 totaled$1.17 billion, representing78.5% of our adjusted funds from operations available to common stockholders of $1.49 billion. In comparison, our 2020 cash distributions to common stockholders totaled $964.2 million, representing 82.2% of our adjusted funds from operations available to common stockholders of $1.17 billion.
Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, FFO, Normalized FFO, AFFO, cash flow from operations, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, or 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 default, and which prohibit the payment of distributions on our common 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” is generally 20%. In general, dividends payable by REITs are not eligible for the reduced tax rate on qualified dividend income, except to the extent that certain holding requirements have been met with respect to the REIT’s stock and the REIT’s dividends are attributable to dividends received from certain taxable corporations (such as our taxable REIT subsidiaries) or 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). However, non-corporate stockholders, including individuals, generally may deduct up to 20% of dividends from a REIT, other than capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning after December 31, 2017 and before January 1, 2026.
Distributions in excess of earnings and profits generally will first be treated as a non-taxable reduction in the stockholders’ basis in their stock, but not below zero. Distributions in excess of that basis generally will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 67.3% of the distributions to our common stockholders, made or deemed to have been made in 2021, were classified as a return of capital for federal income tax purposes.
BUSINESS PHILOSOPHY AND STRATEGY
We believe that owning an actively managed,managing a diversified portfolio of commercial properties under long-term, net lease agreements produces consistent and predictable income. A net lease typically requires the client to be responsible for monthly rent and certain property operating expenses including property taxes, insurance, and maintenance. In addition, clients of our properties typically pay rent increases based on: (1) fixed increases, (2) increases tied to inflation (typically subject to ceilings), or (3) additional rent calculated as a percentage of the clients’ gross sales above a specified level. We believe that a portfolio of properties under long-term net lease agreements with our commercial clients 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.
Diversification is also a key component of our investment philosophy. We believe that diversification of the portfolio by client, industry, geography, and property type leads to more consistent and predictable income for our stockholders by reducing vulnerability that can come with any single concentration. Our investment activities have led to a diversified property portfolio that,and as of December 31, 2021, consisted of 11,1362023, we owned or held interests in 13,458 properties located in all 50 U.S. states, Puerto Rico, the United Kingdom ("U.K."), France, Germany, Ireland, Italy, Portugal, and Spainand doing business in 6086 industries. None of the 60 industries represented in our property portfolio accounted for more than 9.1% of our annualized contractual rent as of December 31, 2021.
With expanded scale from our merger with VEREIT, we hope to serve our existing clients better and to partner with new clients that require the larger and more diversified balance sheet we now provide. Equally, asAs we look to continue to expand geographically across Europe, we hope to partnerfocus upon building relationships with new multinational clients that seek a real estate partner with an expanding geographic footprint.
Investment Strategy
We seek to acquire, invest in and develop high-quality real estate that our clients consider important to the successful operation of their businesses. We generally seek to acquireown or hold interests in commercial real estate that has some or all of the following characteristics:
•Properties in markets or locations important to our clients;
•Properties with strong demographic attributes or that we deem to be profitable for our clients (e.g., retail stores or revenue generating sites);
•Properties with strong demographic attributes relative to the specific business drivers of our clients;
•Properties with real estate valuations that approximate replacement costs;
•Properties with rental or lease payments that approximate market rents for similar properties;
•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 future rent increases;
•Properties that leverage relationships with clients, sellers, investors, or developers as part of a long-term strategy; and
•Properties that leverage our proprietary insights, including predictive analytics (e.g., through the selection ofthose in locations and geographic markets we expect to remain strong or strengthen in the future).future.
We typically seek to invest in properties or portfolios of properties owned or leased by clients that are already or could become leaders in their respective businesses supported by mechanisms including (but not limited to) occupancy of prime real estate locations, pricing, merchandise assortment, service, quality, economies of scale, consumer branding, e-commerce, and advertising. In addition, we frequently acquire large portfolios of properties net leased to different clients operating in a variety of industries. We have an internal team dedicated to sourcing such opportunities, often using our relationships with various clients, owners/developers, brokers, and advisers to uncover and secure transactions. We also undertake thorough research and analysis to identify what we consider to be appropriate property locations, clients, and industries for investment. This research expertise is instrumental to uncovering net leaseinvestment opportunities in markets where we believe we can add value.
In selecting potential investments, we generally look for clients with the following attributes:
•Reliable and sustainable cash flow, including demonstrated economic resiliency;
•Revenue and cash flow from multiple sources;
•Are willing to sign a long-term lease (10 or more years); and
•Are large owners and users of real estate.
From a retail perspective, our investment strategy is to target clients that have a service, non-discretionary, and/or low-price-point component to their business. OurWe target investments are usually with clients who have demonstrated
resiliency to e-commerce or have a strong omni channelomnichannel retail strategy, uniting brick-and-mortar and mobile browsing, both of which reflect the continued importance of last mile retail, the movement of goods to itstheir final destination, real estate as part of a customer experience and supply chain strategy. Our overall investments (including last mile retail) are driven by an optimal portfolio strategy that, among other considerations, targets allocation ranges by asset class and industry. We review our strategy periodically and stress test our portfolio in a variety of positive and negative economic scenarios to ensure we deliver consistent earnings growth and value creation across economic cycles. As a result of the execution of this strategy, approximately92% 91% of our annualized retail contractual rent onDecember 31, 20212023, is derived from our clients with a service, non-discretionary, and/or low price point component to their business. From a non-retail perspective, we target industrial properties leased to industry leaders, the majority of which are investment grade rated companies. We believe these characteristics enhance the stability of the rental revenue generated from these properties.
After applying this investment strategy, we pursue those transactions where we believe we can achieve an attractive investment spread over our cost of capital and favorable risk-adjusted returns. We will continue to evaluate all investments for consistency with our objective of owning net lease assets.
Underwriting Strategy
In order toTo be considered for acquisition, propertiesinvestments must meet stringent underwriting requirements. We have established a four-part analysis that examines each potential investmentanalyze investments based on:on one or more of the following criteria:
•The aforementioned overall real estate characteristics, including demographics, replacement cost, and comparative rental rates;
•Industry, client (including credit profile)credit), and market conditions;
•Expected financial returns under various scenarios (including default);
•The value of real estate (based on replacement cost, comparative rental rates and alternative uses), or other collateral backing the client’s contractual obligations; and
•Store profitability for retail locations if profitability data is available; and
•Theavailable or the importance of the real estate location to the operations of the clients’ business.
We believe the principal financial obligations for most of our clients typically include their bank and other debt, payment obligationsWith regard to employees, suppliers, and real estate lease obligations. Becauseinvestments, we typically own the land and building in which a client conducts its business or which are critical to the client’s ability to generate revenue, we believe the risk of default on a client’s lease obligation is less than the client’s unsecured general obligations.revenue. It has been our experience that clients must retain their profitable and critical locations in order to survive. Therefore, in the event of reorganization, we believe they are less likely to reject a lease of a profitable or critical location because this would terminate their right to use the property.
Thus, as the property owner, we believe that we willshould fare better than unsecured creditors of the same client in the event of reorganization. If a property is rejected by our client during reorganization, we own the property and can either lease it to a new client or sell the property. In addition, we believe that the risk of default on real estate leases
can be further mitigated by monitoring the performance of our clients’ individual locations and considering whether to proactively sell locations that meet our criteria for disposition.
We conduct comprehensive reviews of the business segments and industries in which our clients’clients operate. PriorIn addition, prior to entering into any transaction, our credit research departmentteam conducts a review of a client’s credit quality. The information reviewed may include reports and filings, including any public credit ratings, financial statements, debt and equity analyst reports, and reviews of corporate credit spreads, stock prices, market capitalization, and other financial metrics. We conduct additional due diligence, including additional financial reviews of the client, and continue to monitor our clients’ credit quality on an ongoing basis, by reviewing the available information previously discussed, and providingprovide summaries of these findings to management.
At December 31, 2021, approximately 44%2023, 39.6% of our total portfolio annualized contractual rent (as defined in "Property Portfolio Information"below) comes from properties leased to our investment grade clients, their subsidiaries or affiliated companies. At December 31, 2021,2023, our top 20 clients (based on percentage of total portfolio annualized contractual rent) represented approximately 43%40.2% of our annualized rent and 1210 of these clients have investment grade credit ratings or are subsidiaries or affiliates of investment grade companies.
Asset Management Strategy
In addition to pursuing new properties for investment, we seek to increase earnings and dividends through active asset management.
Generally, our asset management efforts seek to achieve:
•Rent increases during and at the expiration of existing leases, when market conditions permit;
•Optimum exposure to certain clients, industries, and markets through re-leasing vacant properties and selectively selling properties;
•Maximum asset-level returns on properties that are renewed, re-leased or sold; and
•Additional value creation opportunities from the existing portfolio by enhancingleveraging internal capabilities to enhance individual properties, pursuingpursue alternative uses, and derivingderive ancillary revenue; andrevenue.
•Investment opportunities in new asset classes for the portfolio.
WeAs part of our ongoing credit and predictive analytics research, we continually monitor our portfolio for any changes that could affect the performance of our clients, our clients’ industries, and the real estate locations in which we have invested. We also regularly analyze our portfolio with a view towards optimizing its returns and enhancing its overall credit quality. Our active asset management strategy pursues asset sales 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; and/or
•Strategically decrease client, industry, or geographic concentration.
The active management of the portfolio is an essential component of our long-term strategy of maintaining high occupancy.
Capital Philosophy
Our goal is to deliver dependable monthly dividends to our stockholders that increase over time. Historically, we have met our principal short-term and long-term capital needs, including the funding of high-quality real estate acquisitions, property development, and capital expenditures, by issuing common stock, preferred stock, long-term unsecured notes and bonds, term loans under our revolving credit facility and preferred stock.loan borrowings. Over the long term, we believe that common stock should be the majority of our capital structure; however, we may also raise funds from debt or other equity securities.structure. We may issue common stock when we believe that our share price is at a level that allows for the proceeds of anyan offering to be accretively invested into additional properties. In addition, we may issue common stockproperties or to permanently finance properties that were initially financed by our revolving credit facility, commercial paper program,programs, or shorter-term debt securities. However, we cannot assure you that we will have access to the capital markets at all times and at terms that are acceptable to us.
Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,” which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common stockholders, primarily through cash provided by operating activities, borrowings on our credit facility and under our commercial paper program and through public securities offerings.
We may choose to mitigate our financial exposure to exchange rate risk for properties acquired outside the U.S. through the issuance of debt securities denominated in the same local currency and through currency derivatives. We may leave a portion of our foreign cash flow unhedged to reinvest in additional properties in the same local currency.
For 2022, we intend to continue our active disposition efforts to further enhance our real estate portfolio. We plan to invest these proceeds into new property acquisitions if there are attractive opportunities available. However, we cannot guarantee that we will sell properties during 2022 or be able to invest the property sale proceeds in new properties.
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 December 31, 2021, our total outstanding borrowings of senior unsecured notes and bonds, term loan, mortgages payable, credit facility borrowings, commercial paper, and our proportionate share of outstanding borrowings by unconsolidated entities were $15.26 billion, or approximately 26.5% of our total market capitalization of $57.66 billion.
We define our total market capitalization at December 31, 2021 as the sum of:
•Shares of our common stock outstanding of 591,261,991, plus total common units outstanding of 1,060,709, multiplied by the last reported sales price of our common stock on the NYSE of $71.59 per share on December 31, 2021, or $42.4 billion;
•Outstanding borrowings of $650.0 million on our revolving credit facility;
•Outstanding borrowings of$901.4 millionon our commercial paper program;
•Outstanding mortgages payable of $1.11 billion, excluding net mortgage premiums of $28.7 million and deferred financing costs of $790,000;
•Outstanding borrowings of $250.0 million on our term loan, excluding deferred financing costs of $443,000;
•Outstanding senior unsecured notes and bonds of $12.26 billion, including Sterling-denominated notes totaling £1.47 billion, and excluding unamortized net premiums of $295.5 million and deferred financing costs of $53.1 million; and
•Our proportionate share of outstanding debt from unconsolidated entities of $86.0 million, excluding deferred financing costs of $1.8 million.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, including the current market, the global credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and global credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.
Universal Shelf Registration
In June 2021, we filed a shelf registration statement with the SEC, which is effective for a term of three years and will expire in June 2024. In accordance with SEC rules, the amount of 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 (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock, or depositary shares, and (6) 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 these 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 any offering.
Revolving Credit Facility and Commercial Paper Program
We have a $3.0 billion unsecured revolving credit facility with an initial term that expires in March 2023 and includes, at our option, two six-month extensions. The multicurrency revolving facility allows us to borrow in up to 14 currencies, including U.S. dollars. Our revolving credit facility has a $1.0 billion expansion option, which is subject to obtaining lender commitments. Under our revolving credit facility, our investment grade credit ratings as of December 31, 2021 provide for financing at the London Interbank Offered Rate ("LIBOR"), plus 0.775% with a facility commitment fee of 0.125%, for all-in pricing of 0.90% over LIBOR. Our revolving credit facility was amended in December 2021 to include provisions for establishing alternative reference rates when LIBOR is no longer available.
The borrowing rate is subject to an interest rate floor and may change if our investment grade credit ratings change. We also have other interest rate options available to us under our credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.
At December 31, 2021, we had a borrowing capacity of $2.35 billion available on our revolving credit facility and an outstanding balance of $650.0 million. The weighted average interest rate on borrowings outstanding under our revolving credit facility during 2021 was 0.9% per annum. We must comply with various financial and other covenants in our credit facility. At December 31, 2021, we were in compliance with these covenants. We expect to use our credit facility to acquire additional properties and for other general corporate purposes. Any additional borrowings will increase our exposure to interest rate risk.
Additionally, we have a U.S. dollar-denominated unsecured commercial paper program. Under the terms of the program, we may issue from time to time unsecured commercial paper notes up to a maximum aggregate amount outstanding of $1.0 billion. Borrowings under this program generally mature in one year or less. At December 31, 2021, we had an outstanding balance of $901.4 million. The weighted average interest rate on borrowings under our
commercial paper program was 0.2% for 2021. We use our $3.0 billion revolving credit facility as a liquidity backstop for the repayment of the notes issued under the commercial paper program.
We generally use our credit facility and commercial paper borrowings for the short-term financing of new property acquisitions. Thereafter, we generally seek to refinance those borrowings with the net proceeds of long-term or more permanent financing, including the issuance of equity or debt securities. We cannot assure you, however, that we will be able to obtain any such refinancing, or that market conditions prevailing at the time of the refinancing will enable us to issue equity or debt securities at acceptable terms. We regularly review our credit facility and commercial paper program and may seek to extend, renew or replace our credit facility and commercial paper program, to the extent we deem appropriate.
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 December 31, 2021, we had cash and cash equivalents totaling $258.6 million, inclusive of £105.1 million Sterling and €7.2 million Euro.
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 next twelve months. We intend, however, to use permanent or long-term capital to fund property acquisitions and to repay future borrowings under our credit facility and commercial paper program.
Credit Agency Ratings
The borrowing interest rates under our revolving credit facility are based upon our ratings assigned by credit rating agencies. As of December 31, 2021, we were assigned the following investment grade corporate credit ratings on our senior unsecured notes and bonds: Moody’s Investors Service has assigned a rating of A3 with a “stable” outlook and Standard & Poor’s Ratings Group has assigned a rating of A- with a “stable” outlook. In addition, we were assigned the following ratings on our commercial paper at December 31, 2021: Moody's Investors Service has assigned a rating of P-2 and Standard & Poor's Ratings Group has assigned a rating of A-2.
Based on our ratings as of December 31, 2021, the facility interest rate was LIBOR, plus 0.775% with a facility commitment fee of 0.125%, for all-in drawn pricing of 0.90% over LIBOR. Our credit facility provides that the interest rate can range between: (i) LIBOR, plus 1.45% if our credit rating is lower than BBB-/Baa3 or our senior unsecured debt is unrated and (ii) LIBOR, plus 0.75% if our credit rating is A/A2 or higher. In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which range from: (i) 0.30% for a rating lower than BBB-/Baa3 or unrated, and (ii) 0.10% for a credit rating of A/A2 or higher. Our revolving credit facility and term loan facility were amended in December 2021 to include provisions for establishing alternative reference rates when LIBOR is no longer available.
We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease. 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.
Term Loans
In October 2018, in conjunction with entering into our revolving credit facility, we entered into a $250.0 million senior unsecured term loan, which matures in March 2024, and is governed by the credit agreement that governs our revolving credit facility. Borrowing under this term loan bears interest at the current one-month LIBOR, plus 0.85%. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest on this term loan at 3.89%. Our term loan facility was amended in December 2021 to include provisions for establishing alternative reference rates when LIBOR is no longer available.
Mortgage Debt
As of December 31, 2021, we had $1.11 billion of mortgages payable, the majority of which were assumed in connection with our property acquisitions, includingten mortgages from our merger with VEREIT in 2021 totaling $839.1 million and a Sterling-denominated mortgage payable of £31.0 million. Additionally, at December 31, 2021, we had net premiums totaling $28.7 million on these mortgages and deferred financing costs of $790,000. We expect to pay off the mortgages payable as soon as prepayment penalties have declined to a level that would make it economically feasible to do so. During 2021, we made $66.6 million of principal payments, including the repayment of seven mortgages in full for $63.0 million.
Notes Outstanding
As of December 31, 2021, we had $12.26 billion of senior unsecured note and bond obligations, excluding unamortized net premiums of $295.5 million and deferred financing costs of $53.1 million. All of our outstanding notes and bonds have fixed interest rates and contain various covenants, with which we remained in compliance as of December 31, 2021. Additionally, with the exception of our £400.0 million of 1.625% senior unsecured notes issued in October 2020, our January 2027 Notes, our July 2027 Notes, our July 2033 Notes, and our January 2042 Notes, in each case where interest is paid annually, interest on our remaining senior unsecured note and bond obligations is paid semiannually.
In connection with our merger with VEREIT, in November 2021, we completed our debt exchange offer to exchange outstanding notes previously issued by VEREIT OP, totaling $4.65 billion in principal, for new notes issued by Realty Income, pursuant to which approximately 99.2% of the outstanding notes issued by VEREIT OP were exchanged for a like aggregate principal amount of the notes issued by Realty Income. The interest rate, interest payment dates, redemption terms and maturity of each series of Realty Income notes issued by Realty Income in the exchange offers were the same as those of the corresponding series of VEREIT notes exchanged. With respect to the notes originally issued by VEREIT OP that remained outstanding, we amended the indenture governing such notes to, among other things, eliminate substantially all of the restrictive covenants in such indenture.
Environmental, Social and Governance (ESG)
In recent years, our environmental, social, and governance efforts have quickly evolved from commitments to action. We continue to focus on how best to institutionalize efforts for a lasting and positive impact. As a result, we strive to be a sustainability leader in the net lease REIT sector.
As The Monthly Dividend Company®, our mission is to conduct business with integrity, transparency, respect and humility to create long-term value across economic cycles for all stakeholders. We are committed to conducting our business according to the highest moral and ethical standards. Our dedication to providing dependable monthly dividends that increase over time is only enhanced by our elevated purpose, mission, vision and values.
We believe that our commitment to corporate responsibility, which encompasses ESG principles, is critical to our performance and long-term success and that we all have a shared responsibility to our people, communities that we operate in and the planet. In support of this commitment, we are dedicated to providing an engaging, inclusive, and safe work environment for our employees, operating our business in an environmentally conscious manner, and upholding our corporate responsibilities as a public company for the benefit of our stakeholders - our investors, clients, team and community. The Nominating/Corporate Governance Committee of our Board of Directors has direct oversight of ESG matters.
Environmental - Sustainability
We hold the protection of our assets, communities, and the environment in high regard. Based on our business model, the properties in our portfolio are primarily net leased to our clients, and each client is generally responsible for maintaining the buildings, including utilities management and the implementation of environmentally sustainable practices at each location. Therefore, we generally cannot control the implementation of environmentally sustainable practices without the assistance of our clients whose environmental initiatives may or may not be aligned with ours. However, we hope that with continued engagement, we can encourage clients to adopt environmentally sustainable practices. In that light, we have expanded and intend to continue to expand our client engagement efforts to achieve shared sustainability objectives on an ongoing basis. As a member of the National Association of Real Estate Investment Trusts ("Nareit") Real Estate Sustainability Council, we are focused on leveraging best practices and advancing our efforts in this area.
Response to Climate Change
We seek to promote effective energy efficiency and other sustainability strategies and compliance with federal, state and international laws and regulations related to climate change, both internally and with our clients. We remain committed to sustainable business practices in our day-to-day activities by encouraging a culture of environmental responsibility at our offices and within our communities. We work with our clients to promote environmental responsibility at the properties we own, however, as noted above, as our properties are primarily net leased to our clients we generally cannot control the implementation of environmentally sustainable practices without the assistance of our clients. As we grow our sustainability efforts, we intend to leverage our size and expand our client engagement efforts to achieve shared sustainability objectives. We are:
•Operating from green certified buildings: our San Diego headquarters earned Energy Star Certification and through our merger with VEREIT, we have added LEED Platinum and LEED Silver office spaces;
•Continuing to upgrade our headquarters by completing a complete, building-wide LED retrofit, installing electric vehicle charging stations, and working to install rooftop and canopy photovoltaic panel system. This is in addition to our automatic lighting control system with light-harvesting technology, building management system that monitors and controls energy use, and energy efficient PVC roofing and heating and cooling systems;
•Following our 2021 Green Financing Framework to allocate proceeds from our inaugural Green Bond offering to green certified building acquisitions and other eligible green projects;
•Expanding and incorporating a greater volume of “Green Lease Clauses” in our leases for access to utility and performance data through lease rollovers, sale-leaseback transactions, and initiatives which allow us to benchmark our properties and work with clients to identify and implement energy efficiency projects;
•Increasing our client engagement initiative to learn about client sustainability goals, initiatives, and collaboration opportunities focused on utility data sharing, renewable energy options, electric vehicle charging infrastructure, as well as LED lighting and HVAC retrofits and other energy efficiency projects;
•Working with strategic real estate partners to survey existing site-level environmental characteristics to help develop a more comprehensive inventory of the portfolio’s low-footprint carbon initiatives;
•Providing our asset management and real estate operations teams with additional resources to identify and evaluate client partnership opportunities;
•Surveying asset-level property characteristics via client survey requests to increase environmental data coverage;
•Continuing to strengthen our governance structure and legal instruments to expedite opportunities across our portfolio; and
•Considering climate-related risks within our strategic enterprise-level risk assessment process while following Task Force on Climate-Related Financial Disclosure (TCFD) recommendations to better understand how climate change may impact future business decisions.
Social - Company Culture and Employees
Human Capital
We put great effort into cultivating an inclusive company culture. We are one team, and together we are committedseek to providing an engaging work environment centered on our One Team values of Do the right thing, Take ownership, Empower each other, Celebrate differences, and Give more than we take. As such, we hire talented employees with diverse backgrounds and perspectives and worklook to providefoster an environment withthat allows for regular, open communication where capable team members have fulfilling careers and are encouraged to engage with and make a positive impact on our Company, its operations, its business partners, and the communities in which we operate.
The COVID-19 pandemic presented challenges to our employees. In response, during 2020 and continuing into 2021, we took the following actions to seek to assist our employees:
•For the continued safety of all employees, maintained a remote work environment;
•Implemented an improved internal communication and document management platform that provides employees enhanced video conferencing, document management, and virtual collaboration workspace which enhanced employee communications and collaboration during our remote work environment;
•Increased dialogue with our team leaders, including our CEO, who conducts regular check-in meetings with all departments and employees across the Company;
•Provided resources to employees who were directly impacted by the COVID-19 pandemic;
•Updated our business continuity plan that includes emergency planning, disaster recovery, alternative communication outlets, and real-time testing simulations;
Employees operate as "One Team" and, together, we are committed to providing an engaging work environment centered on our values of:
•Engaged with employees through a survey to gather their perspectives on how and when to return to an office work environment based on their individual situations;Do the Right Thing,
•Established virtual engagement activities bringing colleagues together through the Team Building Committee and Green Team;Take Ownership,
•Empower Each Other,
•Celebrate Differences, and
•Hosted virtual “O”verall Wellbeing Program classes and events addressing mental health, stress reduction, financial wellbeing, and other wellness topics.Give More than We Take.
Recruitment, Development and Retention
We believeAt the heart of our corporate culture lie our dedicated employees, who form the foundation of our corporate culture and are one oforganization, representing our most valuable assets. As of January 2022, we employed 371 professionals (including four part-time employees), with theDecember 31, 2023, our workforce comprises 418 professionals. The majority of talentour talented team members are recruited and hired from the local communities in which we operate. In orderoperate, embodying our commitment to broadenlocal engagement. To extend the scope of our reach for talent acquisition efforts, we offerhave implemented various initiatives, including college and high school internship programs. Our comprehensive approach encompasses a college internship program and attract candidates utilizing diverse resourceswide range of strategies, such as engaging with affinity associations, utilizing targeted job advertisements, employing sourcing software that emphasizes diversity criteria, and fostering employee referrals. Additionally, as partThese measures ensure that we continually attract and embrace a diverse pool of candidates. Furthermore, we recognize that internal mobility within our ongoing effortsorganization unlocks yet another great source of talent. By encouraging our current employees to strengthenexpand their skills and take on new challenges, we tap into a rich reservoir of potential that enhances our internalworkforce's capabilities and reinforces our corporate culture.
We offer leadership development capabilities, we operate an annual mentorship programprograms and train on critical topics such as ethics, insider trading, anti-discrimination and harassment, cybersecurity, Diversity, Equalitydiversity, equality and Inclusion (DE&I) awareness,inclusion, safety, and important company policies that are required for every employee.other Company policies. We also offer competency-based training that includesprovide professional development mentorship opportunities executivefor One Team members and officer-level coaching, and leadership development.
Assistanceprovide assistance and support are provided to employees who are working towards obtainingpursuing job-related licenses, and relevant certifications, as well asand continuing education. Opportunities to enroll in professional and technical education is also extended to all employees who are looking for ways to continue learning and growing with the Company.
Employee retention is vital to maintainingessential for supporting a robustpositive culture and cohesiveproductive workforce. To that end, we provide compensation thatAccordingly, we believe iswe offer competitive with our peerscompensation and competitors, including a generous benefits package.packages. Benefits include medical, dental, and vision healthcare benefitscoverage for all employees and their families; participation in afamilies, 401(k) planor equivalent plans with aCompany matching contribution from us;opportunity; paid time-off;time-off or equivalent vacation; disability and life insurance; and, in years that the Company's performance meets certain goals, the ability to earn equity in the Company that vests over four years. Our employees (excluding continuing employees fromsubject to applicable vesting periods.
Additional information regarding our merger with VEREIThuman capital programs and initiatives is available in November 2021) have an average tenureour annual Proxy Statement and Sustainability Report, both of approximately 4.5 years andwhich can be found on our leadership,website. Information on our website, including Senior Vice President and above, have an average tenure of approximately 9.5 years.our Sustainability Report, is not incorporated by reference into this Annual Report.
Diversity, Equality and Inclusion (DE&I)
We believe that much of our success is rooted in the diversity of our teamsOne Team and our commitmentdedication to inclusion. This commitment starts at the top withinclusion are foundational to our highly skilled and diverse Board, comprised of individuals with a variety of backgrounds and experience. We strive to emulate this diversity throughout the Company as part of our ongoing commitment to diversity, equality and inclusion with our DE&I Policy.success. We continue to expand our DE&I efforts around buildingtraining and learning sessions to build employee awareness and understanding through various training requirements and learning opportunities. In 2021, we accomplished a 100% participation in our requiredaction while also encouraging open discussion amongst colleagues. Our DE&I training and hosted a variety of voluntary learning sessions around an array of DE&I topics (e.g., Cultural Diversity, and Humility, LGBTQ+ Pride, Black History), which supported employee self-reflection, engagement, and action throughout the year. In addition, we introduced the option for employeesinitiatives are designed to select a floating holiday that recognizes DE&I that is personally meaningful to them.
These learning opportunities aim to continue buildingenhance knowledge, anddeepen understanding, facilitate open and safe conversations regardingon critical DE&I topics, such as confronting bias in the workplace, drivingencourage inclusive conversations with others,interactions, and promoting belonging in our remote environment.
We performcultivate a sense of belonging. In addition, we conduct pay equity analysis each yearanalyses to help ensure that regardless of gender, race, or national origin,equitable pay for employees who perform similar work under similar circumstances, are paid similar wages.
Workforce Demographics
The following data is as of December 31, 2021 and was gathered voluntarily from employees and reflects the information provided by the participating respondents. No employees have identified as non-binary. We define Manager Level as employees that either supervise at least one team membergender, race, or hold a title of Associate Director or above. We define Senior Officer Level as employees with a title of Senior Vice President or above. In addition to maintaining a diverse workforce, 42% of our Board of Directors self-identify as women and 50% self-identify as racially or ethnically diverse.
*7 of 19 senior officers identify as women
Employee Engagement
We believe our focus on culture, employee engagement and inclusion has helped us mitigate the risk of losing key team members. To assess, analyze, and respond to employee sentiment and to ensure that we are doing all we can to foster engagement from a strategic perspective, we launched our first employee engagement survey in 2019. Eighteen months later, we conducted our second employee engagement survey, both with an overwhelming 99% of employees participating and increasing positive results. We continuously strive in our culture and work environment to create opportunities for engagement and improvement. We intend to continue conducting employee engagement surveys every eighteen months.
We sponsor an active Team Building Committee comprised of volunteer-employees across numerous departments and seniority levels that organizes employee-driven, team-building events and activities to promote employee involvement, communication, and organizational continuity to foster strong interconnected relationships. We complement the Team Building Committee in support of our Environmental, Social, and Governance efforts with another volunteer-based, employee-driven Green Team that works on sustainability related matters at our office and in the community.ethnicity.
Employee Health, Safety and Wellbeing
We believeprioritize the health, safety, and wellbeing of our team members are cornerstones for our successful operations.members. Our “O”verall Wellbeing Program provides opportunities for our peoplewellbeing program is designed to participate in variousempower employees through a range of activities and educational programsinitiatives that contribute to enhanceboth their personal and professional lives. To supportdevelopment. In fostering a healthy work environment, we promote work-life balance we offerby offering flexible work schedules access toand providing discounted fitness programs, on-site dry-cleaning pickup, car wash services, paid family leave, generous maternityparental leave, onsite lactation rooms, an infant-at-work program, employee health fairs, and an infant at work program for new parents. Employees also have access to a robust employee assistance program. Our Injuryprogram, among other programs and Illness Prevention Program (IIPP) helps us meetservices.
Government Regulation
General
Compliance with various governmental regulations has an impact on our goalbusiness, including our capital expenditures, earnings and competitive position, which can be material. We incur costs to monitor and take actions to comply with governmental regulations that are applicable to our business, which include, among others, federal securities laws and regulations, applicable stock exchange requirements, REIT and other tax laws and regulations, environmental and health and safety laws and regulations, local zoning, usage and other regulations relating to real property and the Americans with Disabilities Act of maintaining a safe and healthy working environment for our employees.
Additionally, we have continued to train employees on best practices for healthy hygiene in the workplace as we evaluate a return to office plan. Every employee was required to attend an information session on healthy office protocols and COVID-19 safety and prevention prior to regularly returning to the office to work. For our corporate offices, we have invested in MERV 13 filters, provide continuous HVAC air filtration, installed sanitizing stations, implemented social distancing guidelines, and trained employees on healthy hand washing habits. We also escalated cleaning protocols and preventative health screening questionnaires to create a safe and clean environment for our employees.
Governance - Fiduciary Duties and Ethics
1990, or ADA. We believe inthat our properties generally have the importance of a company’s reputation for integritynecessary permits and approvals needed and are committed to managing the Company for the benefit of our stockholders. We are focused on maintaining good corporate governancein compliance with applicable laws and have implemented the below practices that illustrate this commitment including, but are not limited to:regulations.
•Our Board of Directors is currently comprised of 12 directors, 11 of whom are independent, non-employee directors;
•
Our Board
Environmental Matters
Investments in real property can create a potential for environmental liability. Federal, state and local environmental laws and regulations regulate releases of Directors is electedhazardous or toxic substances into the environment. While our tenants are generally primarily responsible for compliance with environmental laws and regulations, we as owner of property can face liability for environmental contamination created by the presence or discharge of hazardous substances on an annual basisthe property. We can face such liability regardless of our knowledge of the contamination; the timing of the contamination; the cause of the contamination; or the party responsible for the contamination of the property. We have no knowledge of any hazardous substances existing on our properties in violation of any applicable laws; however, no assurance can be given that such substances are not currently located on any of our properties.
Some of our properties contain, have contained, or are adjacent to or near properties that contain or have contained storage tanks for petroleum products or that involve or involved the use of hazardous or toxic substances. Under certain laws and regulations, a current or previous owner, operator or tenant may be required to investigate and clean-up hazardous or toxic substances or petroleum product releases or threats of releases, and may be held liable to a government entity or third parties for property damage and for investigation, clean-up and monitoring costs incurred by those parties in connection with actual or threatened contamination. These laws typically impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the contamination. The liability may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a majority vote standard;party held jointly and severally liable may seek contributions from other identified, solvent, responsible parties for their fair share toward these costs. In addition, strict environmental laws regulate a variety of activities that can occur on a property, including the storage of petroleum products or other hazardous or toxic substances, air emissions and water discharges. Such laws may impose fines or penalties for violations.
•Our directors conduct annual self-evaluationsEnvironmental laws also govern asbestos-containing materials (“ACM”). Federal regulations require building owners and participate in director orientation and continuing education programs;
•An enterprise riskthose exercising control over a building’s management evaluation is conducted annually to identify and assess Company risk;
•Each standing committeewarn, through signs and labels, of potential hazards posed by workplace exposure to ACM in their building. The regulations also have employee training, record keeping and due diligence requirements pertaining to ACM. Significant fines can be assessed for violation of these regulations, and we could be subject to lawsuits if personal injury from exposure to ACM occurs. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of ACM when those materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. These laws may impose liability for improper handling or a release into the environment of ACM and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with ACM. In addition, our properties may contain or develop harmful mold or other airborne contaminants. The presence of significant mold or other airborne contaminants at any of our Boardproperties could require us to undertake a costly remediation to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. Further, the presence of Directors is comprised entirelysignificant mold or other airborne contaminants could expose us to liability from our tenants, employees of independent directors;our tenants or others if property damage or personal injury occurs.
Americans with Disabilities Act of 1990
Our properties are generally required to comply with ADA. The ADA has separate compliance requirements for “public accommodations” and
•We adhere “commercial facilities,” but generally requires that buildings be made accessible to all other corporate governance principles outlined in our Corporate Governance Guidelines. These guidelines,people with disabilities. Compliance with the ADA, as well as a number of additional federal, state and local laws and regulations, may require modifications to properties we currently own and any properties we purchase, or may restrict renovations of those properties. Noncompliance with these laws or regulations could result in fines or an award of damages to private litigants, as well as the incurrence of costs to make modifications to attain compliance. Although our bylaws, committee charterstenants are generally responsible for compliance with the ADA and other governance documents maysimilar laws or regulations, we could be foundheld liable as the owner of the property for a failure of one of our tenants to comply with such laws or regulations. As of December 31, 2023, we have not received notice from any governmental authority, nor are we otherwise aware, of any non-compliance with the ADA that we believe would have a material adverse effect on our website.business, financial position or results of operations.
Available Information
We are committed to conductingmaintain a corporate website at www.realtyincome.com. On our business according to the highest ethical standards and upholding our corporate responsibilities as a public company operating for the benefitwebsite we make available, free of charge, copies of our stockholders. Our Boardannual report on Form 10-K, quarterly reports on Form 10-Q, Form 3s, Form 4s, Form 5s, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file these reports with the Securities and Exchange Commission (the "SEC"). None of Directors has adopted a Code of Business Ethics that applies to our directors, officers, and other employees. The Code of Business Ethics includes our commitment to dealing fairly with all of our customers, service providers, suppliers, and competitors. We conduct an annual training with our employees regarding ethical behavior and require all employees to acknowledge the terms of, and abide by, our Code of Business Ethics, which is also availableinformation on our website. Our employees have accesswebsite is deemed to membersbe part of our Board of Directors to report anonymously, if desired, any suspicion of misconduct by any member of our senior management or executive team. Anonymous reporting is always available through our whistleblower hotline and reported to our Audit Committee quarterly.this report.
PROPERTY PORTFOLIO INFORMATION
At December 31, 2021,2023, out of the 13,458 properties that we owned a diversified portfolio:
•Consisting of 11,136 properties;
•With an occupancy rate of 98.5%, or 10,972 properties leased and 164 properties available for lease or sale;
•With clients doing businessheld interests in, 60 separate industries;
•Located in all 50 U.S. states, Puerto Rico, the U.K. and Spain;
•With approximately 210.1 million square feet of leasable space;
•With a weighted average remaining lease term (excluding rights to extend a lease at the option of the client) of approximately 9.0 years; and
•With an average leasable space per property of approximately 18,860 square feet, approximately 12,470 square feet per retail property and approximately 248,120 square feet per industrial property.
At December 31, 2021, 10,97213,265 properties were vastly leased under net lease agreements. A net lease typically requires the client to be responsible for monthly rent and certain property operating expenses including property taxes, insurance, and maintenance. In addition, clients of our properties typically pay rent increases based on: (1) fixed increases, (2) increases tied to inflation (typically subject to ceilings), or (3) additional rent calculated as a percentage of the clients’clients' gross sales above a specified level.
We define total portfolio annualized contractual rent as the monthly aggregate cash amount charged to clients, inclusive of monthly base rent receivables, but excluding percentage rent and reimbursements from clients, as of the balance sheet date, multiplied by 12, excluding percentage rent.rent, interest income on loans and preferred equity investments, and including our pro rata share of such revenues from properties owned by unconsolidated joint ventures. We believe total portfolio annualized contractual revenuerent is a useful supplemental operating measure, as it excludes properties that were no longer owned at the balance sheet date and includes the annualized rent from properties acquired during the quarter. Total portfolio annualized contractual rent has not been reduced to reflect reserves recorded as reductionsadjustments to GAAPgenerally accepted accounting principles in the United States, ("U.S. GAAP") rental revenue in the periods presentedpresented.
Top 10 Industry Concentrations
We are engaged in a single business activity, which is the leasing of property to clients, generally on a net basis. That business activity spans various geographic boundaries and excludes unconsolidated entities.
Industry Diversification
The following table sets forthour investment philosophy and so we believe it remains important to present certain information regarding our property portfolio classified according to the business of the respective clients, expressed as a percentage of our total portfolio annualized contractual rent:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Percentage of Total Portfolio Annualized Contractual Rent by Industry as of |
| | Dec 31, 2021 | | Dec 31, 2020 | | Dec 31, 2019 | | Dec 31, 2018 | | Dec 31, 2017 |
| United States | | | | | | | | | | |
| | | | | | | | | | |
| Aerospace | | 0.4 | % | | 0.6 | % | | 0.8 | % | | 0.9 | % | | 1.0 | % |
| Apparel stores | | 1.5 | | | 1.3 | | | 1.1 | | | 1.2 | | | 1.4 | |
| Automotive collision services | | 1.0 | | | 1.1 | | | 1.0 | | | 0.9 | | | 1.0 | |
| Automotive parts | | 1.5 | | | 1.6 | | | 1.6 | | | 1.7 | | | 1.5 | |
| Automotive service | | 3.2 | | | 2.7 | | | 2.6 | | | 2.3 | | | 2.5 | |
| Automotive tire services | | 1.8 | | | 2.0 | | | 2.1 | | | 2.3 | | | 2.5 | |
| Beverages | | 1.3 | | | 2.1 | | | 2.0 | | | 2.4 | | | 2.6 | |
| Child care | | 1.5 | | | 2.1 | | | 2.1 | | | 2.2 | | | 1.7 | |
| Consumer electronics | | 0.6 | | | 0.3 | | | 0.3 | | | 0.3 | | | 0.3 | |
| Consumer goods | | 0.7 | | | 0.6 | | | 0.6 | | | 0.7 | | | 0.7 | |
| Convenience stores | | 9.1 | | | 11.9 | | | 12.3 | | | 12.6 | | | 9.3 | |
| Crafts and novelties | | 1.0 | | | 0.9 | | | 0.6 | | | 0.6 | | | 0.6 | |
| Diversified industrial | | 1.0 | | | 0.8 | | | 0.7 | | | 0.8 | | | 0.8 | |
| Dollar stores | | 7.5 | | | 7.6 | | | 7.9 | | | 7.3 | | | 7.5 | |
| Drug stores | | 6.6 | | | 8.2 | | | 8.8 | | | 9.4 | | | 10.2 | |
| Education | | 0.1 | | | 0.2 | | | 0.2 | | | 0.3 | | | 0.3 | |
| Energy | | 0.4 | | | — | | | — | | | — | | | — | |
| Entertainment | | 0.8 | | | 0.3 | | | 0.3 | | | 0.3 | | | 0.4 | |
| Equipment services | | 0.3 | | | 0.3 | | | 0.4 | | | 0.4 | | | 0.4 | |
| Financial services | | 2.0 | | | 1.8 | | | 2.0 | | | 2.4 | | | 2.3 | |
| Food processing | | 0.7 | | | 0.7 | | | 0.7 | | | 0.5 | | | 0.6 | |
| General merchandise | | 3.5 | | | 3.4 | | | 2.5 | | | 2.1 | | | 2.3 | |
| Government services | | * | | 0.6 | | | 0.7 | | | 0.9 | | | 0.9 | |
| Grocery stores | | 4.9 | | | 4.9 | | | 5.2 | | | 5.0 | | | 5.3 | |
| Health and beauty | | 0.2 | | | 0.2 | | | 0.2 | | | 0.2 | | | * |
| Health and fitness | | 4.7 | | | 6.7 | | | 7.0 | | | 7.1 | | | 7.7 | |
| Health care | | 1.9 | | | 1.5 | | | 1.6 | | | 1.6 | | | 1.4 | |
| Home furnishings | | 2.2 | | | 0.7 | | | 0.8 | | | 0.8 | | | 0.9 | |
| Home improvement | | 3.1 | | | 3.1 | | | 2.9 | | | 2.8 | | | 2.9 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Machinery | | 0.1 | | | 0.1 | | | 0.1 | | | 0.1 | | | 0.1 | |
| Motor vehicle dealerships | | 1.3 | | | 1.6 | | | 1.6 | | | 1.8 | | | 2.0 | |
| Office supplies | | 0.2 | | | 0.1 | | | 0.2 | | | 0.2 | | | 0.2 | |
| Other manufacturing | | 0.5 | | | 0.4 | | | 0.6 | | | 0.7 | | | 0.8 | |
| Packaging | | 0.6 | | | 0.9 | | | 0.8 | | | 1.0 | | | 1.1 | |
| Paper | | * | | 0.1 | | | 0.1 | | | 0.1 | | | 0.1 | |
| Pet supplies and services | | 0.9 | | | 0.7 | | | 0.7 | | | 0.5 | | | 0.6 | |
| Restaurants - casual dining | | 5.9 | | | 2.8 | | | 3.2 | | | 3.3 | | | 3.6 | |
| Restaurants - quick service | | 6.5 | | | 5.3 | | | 5.8 | | | 6.3 | | | 5.2 | |
| Shoe stores | | 0.2 | | | 0.2 | | | 0.2 | | | 0.5 | | | 0.6 | |
| Sporting goods | | 1.5 | | | 0.7 | | | 0.8 | | | 0.9 | | | 1.0 | |
| Telecommunications | | 0.1 | | | 0.5 | | | 0.5 | | | 0.6 | | | 0.6 | |
| Theaters | | 3.4 | | | 5.6 | | | 6.1 | | | 5.3 | | | 5.7 | |
| Transportation services | | 3.4 | | | 3.9 | | | 4.3 | | | 5.0 | | | 5.4 | |
| | | | | | | | | | |
| Wholesale clubs | | 2.5 | | | 2.4 | | | 2.5 | | | 2.9 | | | 3.1 | |
| Other | | 0.9 | | | 0.3 | | | 0.8 | | | 0.8 | | | 0.9 | |
| Total United States | | 91.5 | % | | 93.8 | % | | 97.3 | % | | 100.0 | % | | 100.0 | % |
Europe (1) | | | | | | | | | | |
| Grocery stores | | 5.3 | | | 4.9 | | | 2.7 | | | — | | | — | |
| Health care | | 0.1 | | | 0.1 | | | — | | | — | | | — | |
| Home improvement | | 2.0 | | | 1.2 | | | — | | | — | | | — | |
| Warehousing and storage | | 0.2 | | | — | | | — | | | — | | | — | |
| Other | | 0.9 | | | * | | * | | — | | | — | |
| Total Europe | | 8.5 | % | | 6.2 | % | | 2.7 | % | | — | % | | — | % |
| Totals | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| * Less than 0.1% | | | | | | | | | | |
(1) Europe consists of properties in the U.K., starting in May 2019, and in Spain, starting in September 2021. | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Percentage of Total Portfolio Annualized Contractual Rent by Industry (1) |
| | As of |
| | Dec 31, 2023 | | | Dec 31, 2022 | | | Dec 31, 2021 | | | Dec 31, 2020 | | | Dec 31, 2019 |
| Grocery | | 11.4% | | | 10.0% | | | 10.2% | | | 9.8% | | | 7.9% |
| Convenience Stores | | 10.2 | | | 8.6 | | | 9.1 | | | 11.9 | | | 12.3 |
| Dollar Stores | | 7.1 | | | 7.4 | | | 7.5 | | | 7.6 | | | 7.9 |
| Home Improvement | | 5.9 | | | 5.6 | | | 5.1 | | | 4.3 | | | 2.9 |
| Drug Stores | | 5.5 | | | 5.7 | | | 6.6 | | | 8.2 | | | 8.8 |
| Restaurants-Quick Service | | 5.2 | | | 6.0 | | | 6.6 | | | 5.3 | | | 5.8 |
| Restaurants-Casual | | 4.4 | | | 5.1 | | | 5.9 | | | 2.8 | | | 3.2 |
| Automotive Service | | 4.3 | | | 4.0 | | | 3.2 | | | 2.7 | | | 2.6 |
| Health and Fitness | | 3.9 | | | 4.4 | | | 4.7 | | | 6.7 | | | 7.0 |
| Gaming | | 3.9 | | | 2.9 | | | — | | | — | | | — |
TableThe presentation of ContentsTop 10 Industry Concentrations combines total portfolio contractual rent from the U.S. and Europe. Europe consists of properties in the U.K., starting in May 2019, in Spain, starting in September 2021, in Italy, starting in October 2022, in Ireland, starting in June 2023, and in France, Germany, and Portugal, starting in December 2023.Property Type Composition
The following table sets forth certain property type information regarding our property portfolio as of December 31, 20212023 (dollars in thousands):
| | Property Type | Property Type | Number of
Properties | | Approximate Leasable Square Feet (1) | | Total Portfolio Annualized Contractual Rent | | Percentage of Total Portfolio Annualized Contractual Rent | Property Type | | Number of
Properties | | Approximate Leasable Square Feet (1) | | Total Portfolio Annualized Contractual Rent | | Percentage of Total Portfolio Annualized Contractual Rent |
| Retail | Retail | 10,819 | | | 134,919,200 | | | $ | 2,430,223 | | | 83.4 | % | Retail | | 13,053 | | 179,880,600 | | $ | 3,304,177 | | | 81.8 | | 81.8 | % |
| Industrial | Industrial | 294 | | | 72,947,300 | | | 424,217 | | | 14.6 | |
Gaming (2) | |
Other (2)(3) | Other (2)(3) | 23 | | | 2,201,000 | | | 57,757 | | | 2.0 | |
| Totals | Totals | 11,136 | | | 210,067,500 | | | $ | 2,912,197 | | | 100.0 | % | Totals | | 13,458 | | 272,083,100 | | $ | 4,041,871 | | | 100.0 | | 100.0 | % |
(1)Includes leasable building square footage. Excludes 3,6002,962 acres of leased land categorized as agriculture at December 31, 2021.2023.
(2)Includes our pro rata share of leasable square feet of properties owned by unconsolidated joint ventures.
(3)"Other" includes seven27 properties classified as agriculture, consisting of approximately 0.3 million leasable square feet and $38.0 million in annualized contractual rent and 10 properties classified as office, consisting of 2,009,800 approximateapproximately 2.1 million leasable square feet and $29.2$27.4 million in annualized contractual rent, and 16 properties classified as agriculture, consisting of 191,200 approximate leasable square feet and $28.6 million in annualized contractual rent. In November 2021, we completed the spin-off of substantially all of our office assets into Orion Office REIT Inc.well as one land parcel under development.
Client Diversification
The following table sets forth the 20 largest clients in our property portfolio, expressed as a percentage of total portfolio annualized contractual rent, which does not give effect to deferred rent, at December 31, 2021:2023:
| | Client | Client | Number of
Leases | | Percentage of Total Portfolio Annualized Contractual Rent (1) | Client | | Number of
Leases | | Percentage of Total Portfolio Annualized Contractual Rent (1) |
| Dollar General | | Dollar General | | 1,659 | | | 3.8 | % |
| Walgreens | Walgreens | 333 | | | 4.1 | % |
| Dollar General | 1,272 | | | 4.0 | |
| Dollar Tree / Family Dollar | |
| 7-Eleven | 7-Eleven | 627 | | | 4.0 | |
| Dollar Tree / Family Dollar | 1,016 | | | 3.6 | |
| EG Group Limited | |
| Wynn Resorts | |
| FedEx | FedEx | 80 | | | 3.0 | |
| B&Q (Kingfisher) | |
| Asda | |
| Sainsbury's | |
| LA Fitness | LA Fitness | 79 | | | 2.5 | |
| Sainsbury's | 26 | | | 2.3 | |
| BJ's Wholesale Club | 32 | | | 2.0 | |
| BJ's Wholesale Clubs | |
| Lifetime Fitness | |
| MGM (Bellagio) | |
| CVS Pharmacy | CVS Pharmacy | 183 | | | 1.8 | |
| Wal-Mart / Sam's Club | 64 | | | 1.8 | |
| B&Q (Kingfisher) | 23 | | | 1.7 | |
| AMC Theaters | 35 | | | 1.7 | |
| Regal Cinemas (Cineworld) | 41 | | | 1.6 | |
| Red Lobster | 201 | | | 1.6 | |
| Walmart / Sam's Club | |
| Tractor Supply | Tractor Supply | 153 | | | 1.4 | |
| Tesco | Tesco | 15 | | | 1.4 | |
| Lifetime Fitness | 16 | | | 1.4 | |
| Home Depot | 29 | | | 1.2 | |
| Amazon | 16 | | | 1.1 | |
| Fas Mart (GPM Investments) | 262 | | | 1.0 | |
| Totals | 4,503 | | | 43.1 | % |
| AMC Theaters | |
| Red Lobster | |
| Total | | Total | | 5,332 | | 40.2 | % |
(1)Amounts for each client are calculated independently; therefore, the individual percentages may not sum to the total. Excludes non-rental contractual income on loans and preferred equity investments.
Lease Expirations
The following table sets forth certain information regarding the timing of the lease term expirations in our portfolio (excluding rights to extend a lease at the option of the client) and their contribution to total portfolio annualized contractual rent as of December 31, 20212023 (dollars in thousands):
| Total Portfolio (1) | Total Portfolio (1) | | Total Portfolio (1) |
| Expiring Leases | | Approximate Leasable Square Feet | | Total Portfolio Annualized Contractual Rent | | Percentage of Total Portfolio Annualized Contractual Rent |
| Expiring
Leases | | | Expiring
Leases | | Approximate Leasable Square Feet | | Total Portfolio Annualized Contractual Rent | | Percentage of Total Portfolio Annualized Contractual Rent |
| Year | Year | Retail | | Non-Retail | | Approximate Leasable Square Feet | | Total Portfolio Annualized Contractual Rent | | Percentage of Total Portfolio Annualized Contractual Rent | Year | Retail | | Non-Retail |
| 2022 | 363 | | 28 | |
| 2023 | 774 | | 27 | | 11,461,700 | | 147,579 | | | 5.1 | |
| 2024 | 2024 | 660 | | 30 | | 13,290,800 | | 150,833 | | | 5.2 | | 2024 | 474 | | 14 | | 6,370,500 | | $ | 79,995 | | | 2.0 | | 2.0 | % |
| 2025 | 2025 | 800 | | 32 | | 13,432,100 | | 191,366 | | | 6.6 | |
| 2026 | 2026 | 745 | | 32 | | 15,313,000 | | 174,810 | | | 6.0 | |
| 2027 | 2027 | 1,143 | | 22 | | 16,729,100 | | 216,666 | | | 7.4 | |
| 2028 | 2028 | 942 | | 33 | | 18,442,100 | | 220,058 | | | 7.6 | |
| 2029 | 2029 | 811 | | 14 | | 17,085,400 | | 209,853 | | | 7.2 | |
| 2030 | 2030 | 497 | | 16 | | 13,504,900 | | 154,216 | | | 5.3 | |
| 2031 | 2031 | 424 | | 36 | | 19,914,400 | | 228,369 | | | 7.8 | |
| 2032 | 2032 | 577 | | 12 | | 8,872,600 | | 167,609 | | | 5.8 | |
| 2033 | 2033 | 508 | | 13 | | 11,776,300 | | 149,801 | | | 5.1 | |
| 2034 | 2034 | 493 | | 5 | | 9,027,300 | | 189,096 | | | 6.5 | |
| 2035 | 2035 | 373 | | 2 | | 4,054,000 | | 95,522 | | | 3.3 | |
| 2036 | 2036 | 370 | | 6 | | 6,385,700 | | 120,659 | | | 4.1 | |
| 2037-2059 | 1,420 | | 28 | | 18,261,000 | | 417,133 | | | 14.3 | |
| 2037 | |
| 2038 | |
| 2039-2143 | |
| Totals | Totals | 10,900 | | 336 | | 207,520,500 | | $ | 2,912,197 | | | 100.0 | % | Totals | 13,835 | | 427 | | 269,031,000 | | $ | 4,041,871 | | | 100.0 | | 100.0 | % |
(1)Leases on our multi-client properties are counted separately in the table above. This table excludes 208270 vacant units.
Geographic Diversification
The following table sets forth certain state-by-stategeographic information regarding our property portfolio as of December 31, 2021:2023 (dollars in thousands):
| | Location | Location | Number of Properties | | Percent Leased | | Approximate Leasable Square Feet | | Percentage of Total Portfolio Annualized Contractual Rent | Location | Number of Properties | | Percent Leased | | Approximate Leasable Square Feet | | Percentage of Total Portfolio Annualized Contractual Rent |
| | Alabama | |
| Alabama | |
| Alabama | Alabama | 380 | | 98 | % | | 4,074,500 | | 2.1 | % | 408 | | 98 | % | | 4,438,600 | | 1.7 | % |
| Alaska | Alaska | 6 | | 100 | | | 299,700 | | 0.1 | |
| Arizona | Arizona | 223 | | 99 | | | 3,344,600 | | 1.9 | |
| Arkansas | Arkansas | 226 | | 98 | | | 2,454,300 | | 1.1 | |
| California | California | 315 | | 99 | | | 10,962,400 | | 6.3 | |
| Colorado | Colorado | 156 | | 98 | | | 2,550,000 | | 1.5 | |
| Connecticut | Connecticut | 30 | | 90 | | | 1,350,800 | | 0.5 | |
| Delaware | Delaware | 26 | | 100 | | | 192,000 | | 0.2 | |
| Florida | Florida | 700 | | 99 | | | 9,492,600 | | 5.3 | |
| Georgia | Georgia | 487 | | 99 | | | 8,364,900 | | 3.6 | |
| Hawaii | Hawaii | 22 | | 100 | | | 47,800 | | 0.2 | |
| Idaho | Idaho | 27 | | 100 | | | 189,100 | | 0.1 | |
| Illinois | Illinois | 455 | | 98 | | | 11,743,900 | | 5.0 | |
| Indiana | Indiana | 386 | | 99 | | | 7,370,100 | | 2.9 | |
| Iowa | Iowa | 88 | | 98 | | | 3,466,600 | | 1.0 | |
| Kansas | Kansas | 172 | | 100 | | | 4,452,400 | | 1.3 | |
| Kentucky | Kentucky | 172 | | 97 | | | 3,413,800 | | 1.3 | |
| Louisiana | Louisiana | 296 | | 99 | | | 4,861,900 | | 2.2 | |
| Maine | Maine | 55 | | 98 | | | 1,008,300 | | 0.5 | |
| Maryland | Maryland | 72 | | 96 | | | 2,740,100 | | 1.3 | |
| Massachusetts | Massachusetts | 88 | | 99 | | | 3,045,800 | | 1.4 | |
| Michigan | Michigan | 447 | | 98 | | | 5,276,700 | | 2.9 | |
| Minnesota | Minnesota | 230 | | 100 | | | 3,511,200 | | 2.1 | |
| Mississippi | Mississippi | 277 | | 99 | | | 4,148,400 | | 1.4 | |
| Missouri | Missouri | 341 | | 98 | | | 4,636,100 | | 2.1 | |
| Montana | Montana | 21 | | 100 | | | 204,500 | | 0.1 | |
| Nebraska | Nebraska | 75 | | 99 | | | 1,013,000 | | 0.4 | |
| Nevada | Nevada | 72 | | 100 | | | 2,638,300 | | 1.0 | |
| New Hampshire | New Hampshire | 30 | | 100 | | | 567,900 | | 0.4 | |
| New Jersey | New Jersey | 136 | | 98 | | | 2,199,900 | | 1.8 | |
| New Mexico | New Mexico | 101 | | 99 | | | 1,280,200 | | 0.7 | |
| New York | New York | 239 | | 99 | | | 4,277,800 | | 3.3 | |
| North Carolina | North Carolina | 372 | | 99 | | | 7,611,600 | | 3.3 | |
| North Dakota | North Dakota | 22 | | 86 | | | 352,300 | | 0.2 | |
| Ohio | Ohio | 656 | | 99 | | | 14,915,200 | | 4.7 | |
| Oklahoma | Oklahoma | 279 | | 98 | | | 3,876,100 | | 1.8 | |
| Oregon | Oregon | 41 | | 98 | | | 656,400 | | 0.5 | |
| Pennsylvania | Pennsylvania | 327 | | 98 | | | 5,852,700 | | 2.8 | |
| Rhode Island | Rhode Island | 7 | | 86 | | | 109,800 | | 0.1 | |
| South Carolina | South Carolina | 287 | | 99 | | | 3,917,800 | | 2.0 | |
| South Dakota | South Dakota | 30 | | 97 | | | 430,200 | | 0.2 | |
| Tennessee | Tennessee | 369 | | 98 | | | 6,372,600 | | 2.6 | |
| Texas | Texas | 1,422 | | 98 | | | 23,608,600 | | 10.6 | |
| Utah | Utah | 36 | | 100 | | | 1,529,500 | | 0.6 | |
| Vermont | Vermont | 7 | | 100 | | | 134,900 | | 0.1 | |
| Virginia | Virginia | 339 | | 97 | | | 5,792,000 | | 2.5 | |
| Washington | Washington | 76 | | 99 | | | 1,674,300 | | 1.0 | |
| West Virginia | West Virginia | 74 | | 100 | | | 726,000 | | 0.4 | |
| Wisconsin | Wisconsin | 239 | | 100 | | | 4,200,600 | | 1.9 | |
| Wyoming | Wyoming | 23 | | 100 | | | 157,700 | | 0.1 | |
| Puerto Rico | Puerto Rico | 6 | | 100 | | | 59,400 | | 0.1 | |
| France | |
| Germany | |
| Ireland | |
| Italy | |
| Portugal | |
| Spain | Spain | 43 | | 100 | | | 2,492,000 | | 0.7 | |
| U.K. | 130 | | 100 | | | 10,418,200 | | 7.8 | |
| United Kingdom | |
| Totals/average | Totals/average | 11,136 | | 99 | % | | 210,067,500 | | 100.0 | % | Totals/average | 13,458 | | 100 | % | | 272,083,100 | | 100.0 | % |
•*Less than 0.1% | |
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the documents incorporated by reference, containscontain 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 annual report, the words “estimated”, “anticipated”, “expect”, “believe”, “intend”“estimated,” “anticipated,” “expect,” “believe,” “intend,” “continue,” “should,” “may,” “likely,” “plans,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include discussions of our business and portfolio; growth strategies and intentions to acquire or dispose of properties (including timing, partners, clients and terms); re-leases, re-development and speculative development of properties and expenditures related thereto; future operations and results; the announcement of operating results, strategy, plans, orand the intentions of management.management; and trends in our business, including trends in the market for long-term leases of freestanding, single-client properties. Forward-looking statements are subject to risks, uncertainties, and assumptions about Realty Income Corporation including, among other things:
•Our accesswhich may cause our actual future results to capital and other sources of funding;
•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-client properties;
•Future expenditures for development projects;
•The impact of the COVID-19 pandemic, or future pandemics, on us, our business, our clients, or the economy generally; and
•The uncertainties regarding whether the anticipated benefits or results of our merger with VEREIT will be achieved.
Future events and actual results, financial and otherwise, may differ materially from the results discussed or implied by the forward-looking statements. In particular, forward-looking statements regarding estimated or future results of operations or financial condition, estimated or future acquisitions of properties, or the estimated or potential impact of our merger with VEREIT are based upon numerous assumptions and estimates and are inherently subject to substantial uncertainties and actual results of operations, financial condition, property acquisitions and the impacts of our merger with VEREITmay differ materially from those expressed or implied in the forward-looking statements, particularly if actual events differ from those reflected in the estimates and assumptions upon which such forward-looking statements are based.expected results. Some of the factors that could cause actual results to differ materially are:
•Ourare, among others, our continued qualification as a real estate investment trust;
•General general domestic and foreign business, and economic, or financial conditions;
•Competition;
•Fluctuating competition; fluctuating interest and currency rates;
•Access inflation and its impact on our clients and us; access to debt and equity capital markets;
•Continuedmarkets and other sources of funding (including the terms and partners of such funding); continued volatility and uncertainty in the credit markets and broader financial markets;
•Other other risks inherent in the real estate business including our clients' solvency, client defaults under leases, increased client bankruptcies, potential liability relating to environmental matters, illiquidity of real estate investments, and potential damages from natural disasters;
•Impairments impairments in the value of our real estate assets;
•Changes changes in domestic and foreign income tax laws and rates;
•The continued evolution property ownership through joint ventures, partnerships and other arrangements which may limit control of the COVID-19 pandemic and theunderlying investments; epidemics or pandemics including measures taken to limit itstheir spread, and itsthe impacts on us, our business, our clients, orand the economy generally;
•The timing and pace the loss of reopening efforts atkey personnel; the local, state and national level in response to the COVID-19 pandemic and developments, such as the unexpected surges in COVID-19 cases, that cause a delay in or postponement of reopenings;
•The outcome of any legal proceedings to which we are a party or which may occur in the future;
•Acts acts of terrorism and war; and
•Any effects of uncertainties regarding whether the anticipated benefits or results of ourfrom mergers and acquisitions including from the merger with VEREIT will be achieved.Spirit (the "Merger").
Additional factors that may cause risks and uncertainties include those discussed in the sections entitled “Business”,“Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Reportannual report on Form 10-K, for the fiscal year ended December 31, 2021.2023.
Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements whichare not guarantees of future plans and performance and speak only as of the date that this annual report was filed with the SEC. WhileActual plans and operating results may differ materially from what is expressed or forecasted in this annual report and forecasts made in the forward-looking statements reflect our good faith beliefs, they arediscussed in this annual report might not guarantees of future performance.materialize. We do not undertake noany obligation to publicly release the results of any
revisions to theseupdate forward-looking statements that may be made to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, the forward-looking events discussed in this annual report might not occur.statements were made.
Item 1A: Risk Factors
This “Risk Factors” section contains references to our “capital stock” and to our “stockholders.” Unless expressly stated otherwise, the references to our “capital stock” represent our common stock and any class or series ofpreferred stock which may be outstanding from time to time, while the references to our “stockholders” represent holders of our common stock and any class or series of preferred stock which may be outstanding preferred stock.from time to time.
Risks Related to Our Business and Industry
The COVID-19 pandemic has disrupted our operations and is expected to continue to have an adverse effect on our business, results of operations, financial condition and liquidity.
The COVID-19 pandemic, including the continued spread of new variants, has had, and other pandemics in the future could have, repercussions across global economies and financial markets. The COVID-19 pandemic and the measures taken to limit its spread have adversely impacted regional, national and global economic activity and have contributed to significant volatility and negative pressure in financial markets. The impact of the COVID-19 pandemic has rapidly evolved and, as cases and variants of COVID-19 have continued to increase and be identified, many countries, including the United States, the United Kingdom, and Spain, have reacted by, among other things, instituting quarantines and restricting travel. Many national, state and local governments, including in areas where we own properties, have also reacted by instituting quarantines, restrictions on travel, shelter-in-place orders, vaccine requirements, restrictions on types of business that may continue to operate, school closures, vaccine and testing requirements, limitations on attendance at events or other gatherings, and social distancing requirements, and additional national, state and local governments may implement similar restrictions. In that regard, surges in COVID-19 cases have led many state and local governments to increase the scope and severity of some of these restrictions and to institute new restrictions.
As a result, the COVID-19 pandemic and the measures taken to limit its spread have negatively impacted the global, national and regional economies generally and many industries, directly or indirectly, and those impacts may continue and may increase in severity, including potentially triggering prolonged periods of negative or limited economic growth. Factors that have contributed or may contribute to the adverse impact of the COVID-19 pandemic and the measures taken to limit its spread on the business, results of operations, financial condition and liquidity of us and our clients include, without limitation, the following:
•A complete or partial closure of, or other operational limitations or issues at, properties operated by our clients resulting from government action (including travel bans, border closings, business closures, quarantine, vaccine and testing requirements, shelter-in-place or similar orders requiring that people remain in their homes) or client action;
•Reduced economic activity, customer traffic, consumer confidence or discretionary spending, the deterioration in our or our clients’ ability to operate in affected areas and any delays in the supply of products or services to our clients may impact certain of our clients’ businesses, results of operations, financial condition and liquidity and may cause certain of our clients to be unable to meet their obligations to us in full, or at all, and to seek, whether through negotiation, restructuring or bankruptcy, reductions or deferrals in their rent payments and other obligations to us or early termination of their leases;
•We may experience difficulties, some of which may be related to supply chain disruptions, in leasing, selling or redeveloping vacant properties or renewing expiring or terminated leases on terms we consider acceptable, or at all;
•We may experience difficulty accessing the bank lending, capital markets and other financial markets on attractive terms, or at all, and a severe disruption or instability in the national or global financial markets or deterioration in credit and financing conditions may adversely affect our cost of capital, our access to capital to grow our business (including through acquisitions, development opportunities and other strategic transactions) and to fund our business operations, our ability to pay dividends on our common stock, our ability to pay the principal of and interest on our indebtedness, and our other liabilities on a timely basis, and our clients’ ability to fund their business operations and meet their obligations to us and others;
•The financial impact of the COVID-19 pandemic could negatively impact our credit ratings, the interest rates on our borrowings, and our future compliance with financial covenants under our credit facility and other debt instruments, which could result in a default and potentially an acceleration of indebtedness, any of which could
negatively impact our ability to make additional borrowings under our revolving credit facility, to sell commercial paper notes under our commercial paper program or incur other indebtedness, and pay dividends on our common stock and to pay the principal of and interest on our indebtedness, and our other obligations when due;
•The impact of the COVID-19 pandemic on the market value of our properties has led to impairment charges and may require that we incur further impairment charges, asset write-downs or similar charges;
•The impact on the ability of our employees, including members of our management team or board of directors, to fulfill their duties to us as a result of the COVID-19 pandemic, either as a result of measures taken to limit its spread or as a result of infection; and
•A general decline in business activity and demand for real estate transactions could adversely affect our ability to grow our portfolio of properties.
The extent to which the COVID-19 pandemic continues to impact our operations and those of our clients will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or limit its impact, and the direct and indirect economic effects of the pandemic and containment measures. To date, the COVID-19 pandemic and the measures taken to limit its spread have adversely impacted and may continue to adversely impact, among other things, the ability of a number of our clients’ to generate adequate, or in certain cases, any revenue from their businesses, the ability or willingness of many of our clients to pay rent in full, or at all, or on a timely basis, and our ability to collect rent from our clients. It may also adversely impact our ability to enforce remedies for the failure to pay rent, our occupancy levels, our ability to acquire properties or complete construction projects, and may otherwise negatively affect our business.
Most of our clients operate retail businesses, many of which appear to have been disproportionately impacted by the COVID-19 pandemic and the measures taken to mitigate its spread. These adverse impacts have, at times, reduced the amount of rent we have been able to collect from our clients in those industries and may further decrease the likelihood of us collecting such rent in the future. In addition, if any of these or other clients declare bankruptcy or enter into similar corporate restructuring arrangements, they may seek to reject or renegotiate our existing leases, which could adversely affect our ability to collect rent that is owed or to collect future rent on those properties at anticipated rates, or at all, or to re-lease those properties on favorable terms.
In addition, most of our clients operate retail businesses that depend on customer traffic. As a result, conditions that lead to a decline in customer traffic (including quarantine, shelter-in-place or similar orders requiring that people remain in their homes or orders requiring business closures or restricting business operations) have had and so long as those conditions continue to exist will continue to have an adverse effect on the business, results of operations, financial condition and liquidity of a number of our clients, and their willingness or ability to pay rent, to renew expiring leases or to enter into new leases on terms favorable to us, or at all.
In addition to the near-term effects of the COVID-19 pandemic on our clients and their businesses, we are unable to predict at this time the broader long-term impacts on consumer behavior in regard to brick-and-mortar retail and service-based businesses. To the extent certain adverse factors, including but not limited to, continued patterns of consumer savings and unemployment, persist, certain discretionary businesses could have prolonged negative consequences as a result of shifts in long-term consumer behavior.
As a result of the foregoing, we cannot predict the number of our clients that will not pay rent in the future, nor can we predict whether our clients who have paid rent in the past will continue to do so or whether our clients who have deferred rent will pay such rent in the future. As the COVID-19 pandemic continues, our clients may cease to pay their rent obligations to us in full or at all, and our clients may elect not to renew their leases, seek to terminate their leases, seek relief from their leases (including through negotiation, restructuring or bankruptcy), or decline to renew expiring leases or enter into new leases, all of which may adversely impact our rental revenue and occupancy rates, generate additional expenses, result in impairment charges or other write-downs of assets, and adversely impact our results of operations, financial condition and liquidity. In addition, as we believe to be the case with many retail landlords, we have received and may continue to receive short-term rent relief requests, most often in the form of rent deferral requests, or requests for further discussion from our clients. Collections and rent relief requests to-date may not be indicative of collections or requests in any future period.
Likewise, the deterioration of global economic conditions as a result of the pandemic may ultimately lead to a further decrease in occupancy levels and rental rates across our portfolio as our clients reduce or defer their spending, institute restructuring plans or file for bankruptcy. Some of our major clients have experienced temporary closures of some or all of their properties or have substantially altered or reduced their operations in response to the COVID-19 pandemic, and additional clients may do so in the future. In addition, the measures taken to prevent the spread of
COVID-19 (including quarantine, shelter-in-place or similar orders requiring that people remain in their homes) have led and may lead to further closures, or other operational issues or changes at our properties, or delays in acquisition activities, construction projects, and other corporate actions, all of which may materially adversely impact our operations.
In addition, in light of the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, we have taken certain precautionary measures within our organization intended to help reduce the risk of the virus to our employees, our clients, and the communities in which we operate, including instituting a work-from-home policy for our employees and limiting non-essential travel and in-person attendance at industry events.
While we anticipate that these measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect to take additional measures as the information available to us continues to develop. These actions, and any future actions we may take in response to the COVID-19 pandemic, could further negatively impact our business, financial condition, results of operations and liquidity.
For the foregoing reasons, we expect that the impact of the COVID-19 pandemic and related containment measures, including the impact on regional, national and global economies, may adversely affect our business, results of operations, financial condition and liquidity, and, given unpredictability of the scope, severity and duration of the pandemic, such impacts may be material.
To the extent the COVID-19 pandemic and related containment measures continue to adversely affect regional, national and global economic conditions and financial markets, as well as the business, results of operations, financial conditions and liquidity of us and our clients, they may also have the effect of heightening many of the risks described elsewhere in this “Risk Factors” section, including the risks resulting from our significant indebtedness; our need to generate sufficient cash flows to service our indebtedness, to pay dividends on our common stock, to pay the principal of and interest on our indebtedness, and provide for our other cash needs; our ongoing need for external financing; our ability to access borrowings under our credit facility and to sell notes under our commercial paper program; our ability to comply with the covenants contained in the agreements that govern our indebtedness; our ability to integrate VEREIT’s business or realize the anticipated synergies and related benefits of the merger; our dependency on key personnel; and the impact of negative market conditions or adverse events on our clients. In addition, in light of the COVID-19 pandemic and the measures taken to limit its spread, our historical information regarding our business, properties, results of operations, financial condition or liquidity may not be representative of the future results of operations, financial condition, liquidity or other financial or operating results of us, our properties or our business.
In order to grow we need to continue to acquire investment properties. The acquisition of investment properties may be subject to competitive pressures.
We face competition in the acquisition and operation of our properties. We expect competition from:
•Businesses;
•Individuals;
•Fiduciaryfrom businesses, individuals, fiduciary accounts and plans;plans, and
•Other other entities engaged in real estate investment and financing.
Some of these competitors are larger than we are and have greater financial resources. This competition may result in a higher cost for properties we wish to purchase.
Negative market conditions or adverse events affecting our existing or potential clients, or the industries in which they operate, could have an adverse impact on our ability to attract new clients, re-lease space, collect rent or renew leases, which could adversely affect our cash flow from operations and inhibit growth.
Cash flow from operations depends in part on our ability to lease space to our clients on economically favorable terms and to collect rent from our clients on a timely basis. We could be adversely affected by various facts and events over which we have limited or no control, such as:
•Lack of demand in areas where our properties are located;
•Inability to retain existing clients and attract new clients;
•Oversupply of space and changes in market rental rates;
•Declines in our clients’ creditworthiness and ability to pay rent, which may be affected by their operations (including as a result from changes in consumer behaviors or preferences impacting our clients operations), economic downturns and competition within their industries from other operators;
•Defaults by and bankruptcies of clients, failure of clients to pay rent on a timely basis, or failure of our clients to comply with their contractual obligations;
•Changes in laws, rules or regulations that negatively impact clients or our properties;
•The current COVID-19 pandemic (see “Risk Factors — The COVID-19 pandemic has disrupted our operations and is expected to continue to have an adverse effect on our business, results of operations, financial condition and liquidity” above) or otherEpidemics, pandemics or outbreaks of illness, disease or virus that affect countries or regions in which our clients and their parent companies operate or in which our properties or corporate headquarters are located;
•Changes in consumer behaviors (e.g., decrease in discretionary consumer spending), preferences or demographics impacting our clients' operations;
•Supply chain disruptions;
•Economic or physical decline of the areas where the properties are located; and
•Deterioration of physical condition of our properties.
At any time, any of our clients may experience a downturn in its business that may weaken its operating results or overall financial condition. As a result, a client may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any client bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of our client’s lease and material losses to us.
If our clients do not renew their leases as they expire, we may not be able to rent or sell the properties. Furthermore, leasesLeases that are renewed, and some new leases for properties that are re-leased, may have terms that are less economically favorable than expiring lease terms, or may require us to incur significant costs, such as renovations, improvements on behalf of the client or lease transaction costs. Negative market conditions may cause us to sell vacant properties for less than their carrying value, which could result in impairments. Any of these events could adversely affect our cash flow from operations and our ability to make distributions to our stockholders and service our indebtedness. A significant portion of the costs of owning property, such as real estate taxes, insurance and maintenance, are not necessarily reduced when circumstances cause a decrease in rental revenue from the properties. In a weakened financial condition, our clients may not be able to pay these costs of ownership and we may be unable to recover these operating expenses from them.
At any time, any of our clients may experience a downturn in its business that may weaken its operating results or overall financial condition. As a result, a client may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any client bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of our client’s lease and material losses to us. Further, the occurrence of a client bankruptcy or insolvency could diminish or eliminate the income we receive from our client’s lease or leases. The occurrence of a client bankruptcy or insolvency could diminish the income we receive from our client’s lease or leases. In addition, aA bankruptcy court might authorize oura client to terminate one or more of its leases with us. If that happens, our claim against the bankrupt client for unpaid future
rent would be subject to statutory limitations that most likely would result in rent payments that would be substantially less than the remaining rent we are owed under the leases (although it(it is also possible that we may not receive any unpaid future rent under terminated leases) or we may elect not to pursue claims against a client for terminated leases. In addition, any claimClaims we have for unpaid past rent, if any, may not be paid in full, or at all. Client bankruptcies within a given property may also adversely impact our ability to re-release that property at favorable terms, or at all. Moreover, in the case of a client’s leases that are not terminated as the result of its bankruptcy, we may be required or elect to reduce the rent payable under those leases or provide other concessions, reducing amounts we receive under those leases. As a result, client bankruptcies may have a material adverse effect on our results of operations and financial condition. Any of these events could adversely affect our cash flow from operations and our ability to make distributions to stockholders and service our indebtedness.
As of December 31, 2021
, 164 of our properties were available for lease or sale. As of December 31, 2021, no single client or group of our clients in the same industry accounted for more than 10% of our total portfolio annualized contractual rent.
Downturns in any of our industries could adversely affect our clients (including, for example, the recent challenges faced by our clients in the theater industry), which in turn could also have a material adverse effect on our financial position, results of operations and our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions on our common stock and any outstanding preferred stock.
In addition, some of our properties are leased to clients that may have limited financial and other resources and, therefore, they are more likely to be adversely affected by a downturn in their respective businesses, including any downturns that have resulted or may result from the COVID-19 pandemic or other epidemics or pandemics, or in the regional, national or international economy. Furthermore, we have made and may continue to make selected acquisitions of properties that fall outside our historical focus on freestanding, single-client, net-lease retail locations in the U.S. As a result, we may be exposed to a variety of new risks by expanding into new property types and/or new jurisdictions outside the U.S. and properties leased to clients engaged in non-retail businesses. These risks may include limited experience in managing certain types of new properties, new types of real estate locations and lease structures, and the laws and culture of non-U.S. jurisdictions.
As a property owner, we may be subject to unknown environmental liabilities.
Investments in real property can create a potential for environmental liability. An owner of property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We can face such liability regardless of:
•Ourof our knowledge of the contamination;
•The the timing of the contamination;
•The the cause of the contamination; or
•The the party responsible for the contamination of the property.
There may be environmental conditions associated with our properties of which we are unaware. In that regard, aA number of our properties are leased to operators of convenience stores that sell petroleum-based fuels, as well as to operators of oil change and tune-up facilities, and operators that use chemicals and other waste products. These facilities and some other of our properties, use, or may have used in the past, underground lifts or undergroundstorage tanks for the storage of petroleum-based or waste products, which could create a potential for the release of hazardous substances. Certain of our other properties, particularly those leased for industrial-type purposes, may also involve operations or activities that could give rise to environmental liabilities.
The presence of hazardous substances on a property may adversely affect our client's ability to continue to operate that property or our ability to lease or sell that property and we may incur substantial remediation costs or third partythird-party liability claims. Although our leases generally require our clients to operate in compliance with all applicable federal, state, and local environmental laws, ordinances and regulations, and to indemnify us against any environmental liabilities arising from the clients’ activities on the properties, we could nevertheless be subject to liability, including strict liability, by virtue of our ownership interest. There also can be no assurance that our clients could or would satisfy their indemnification obligations under their leases. The discovery of environmental liabilities attached to our properties could have an adverse effect on our results of operations, our financial condition, or our ability to make distributions to stockholders and to pay the principal of and interest on our debt securities and other indebtedness.
In addition, several
Some of our properties were built during the period when asbestos was commonly used in building construction and we may acquire other buildings that contain asbestos in the future. Environmental laws govern the presence, maintenance, and removal of asbestos-containing materials, or ACMs, and require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, that they adequately inform or train those who may come into contact with asbestos and that they undertake special precautions, including removal or other abatement in the event that asbestos is disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.
While we have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to environmental contamination, if environmental contamination should exist on any of our properties, we could be subject to liability, including strict liability, by virtue of our ownership interest. In addition, while we maintain environmental insurance policies, it is possible that our insurance could be insufficient to address any particular environmental situation and/or that, in the future, we could be unable to obtain insurance for environmental matters at a reasonable cost, or at all. Our clients are generally responsible for, and indemnify us against, liabilities for environmental matters that arise during the lease terms as a result of clients’ activities on the properties. For properties that have underground storage tanks, in addition to providing an indemnity in our favor, the clients generally are required to meet applicable state financial assurance obligations, including maintaining certain minimum net worth requirements, obtaining environmental insurance, or relying upon the state trust funds where available in the states where these properties are located to reimburse responsible parties for costs of environmental remediation. However, it is possible that one or more of our clients could fail to have sufficient funds to cover any such indemnification or to meet applicable state financial assurance obligations or such environmental contamination may predate our client's lease term, and thus we may still be obligated to pay for any such environmental liabilities.
If we fail to qualify as a REIT, it could adversely impact us, and the amount of dividends we are able to pay would decrease, which could adversely affect the market price of our capital stock and could adversely affect the value of our debt securities.
We believe that, commencing with our taxable year ended December 31, 1994, we have been organized and have operated, and we intend to continue to operate, so as to qualify as a REIT under Sections 856 through 860 of the Code. However, we cannot make any assurances that we have been organized or have operated in a manner that has satisfied the requirements for qualification as a REIT, or that we will continue to be organized or operate in a manner that will allow us to continue to qualify as a REIT.
Qualification as a REIT involves the satisfaction of numerous requirements under highly technical and complex Code provisions, for which there are only limited judicial and administrative interpretations, as well as the determination of various factual matters and circumstances not entirely within our control.
our REIT qualification, and our ability to ensure such qualification, have become, and may become in the future, more complex. For example, in order to qualify as a REIT, at least 95% of our gross income in each year must be derived from qualifying sources, and we must pay distributions to stockholders aggregating annually at least 90% of our taxable income (excluding net capital gains).
If we fail to satisfy any of the requirements for qualification as a REIT, we may be subject to certain penalty taxes or, in some circumstances, we may fail to qualify as a REIT. If we were to fail to qualify as a REIT in any taxable year:
•We would be required to pay regular United States, or U.S., federal corporate income tax on our taxable income;
•We would not be allowed a deduction for amounts distributed to our stockholders in computing our taxable income;
•We could be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost;
•We would no longer be required to make distributions to stockholders; and
•This treatment would substantially reduce amounts available for investment or distribution to stockholders because of the additional tax liability for the years involved, which could have a material adverse effect on the market price of our capital stock and the value of our debt securities.
Even if we qualify for and maintain our REIT status, we may be subject to certain federal, state, local and foreign taxes on our income and property. For example, if we have net income from a prohibited transaction, that income will be subject to a 100% tax. In addition, our taxable REIT subsidiaries including Crest, are subject to federal,state and, in some cases, foreign taxes at the applicable tax rates on their income and property. Any failure to comply with legal and regulatory tax obligations could adversely affect our ability to conduct business and could adversely affect the market price of our capital stock and the value of our debt securities.
Legislative or other actions affecting REITs could have a negative effect on us or our investors.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Services, or the IRS, and the U.S. Department of the Treasury, or the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect us or our investors, including holders of our common stock or debt securities. We cannot predict how changes in the tax laws might affect us or our investors. New legislation, Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT, the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other
entities more attractive relative to an investment in a REIT.
The 2017 Tax Cuts and Jobs Act, or TCJA, has significantly changed In addition, the U.S. federal income taxationtax treatment of U.S. businesses and their owners, including REITs and their stockholders. We are continuing to assess the potential impactcertain of TCJA on us as related regulations are proposed and finalized.
Although a number of regulations related to TCJA became final after 2017, there are still a number of proposed regulations open for comment, and further changes may be made in light of changes in the U.S. government. The legislation is still unclear in some respects andour sale-leaseback transactions could be subject to further potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any ofchange, which could lessen or increase themake such sale-leaseback transactions less attractive to potential sellers and lessees and negatively impact of the legislation. In addition, state and local tax jurisdictions, which often use federal taxable income as a starting point for computing state and local tax liabilities, are continuing to evaluate the legislation to determine their respective levels of conformity to the new law. While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the tax legislation as a whole will have on us.operations.
Distribution requirements imposed by law limit our flexibility.
To maintain our status as a REIT for federal income tax purposes, we generally are required to distribute to our stockholders at least 90% of our taxable income, excluding net capital gains, each year. We also are subject to tax at regular corporate rates to the extent that we distribute less than 100% of our taxable income (including net capital gains) each year.
In addition, we are subject to a 4% nondeductible excise tax to the extent that we fail to distribute during any calendar year at least the sum of 85% of our ordinary income for that calendar year, 95% of our capital gain net income for the calendar year, and any amount of that income that was not distributed in prior years.
We intend to continue to make distributions to our stockholders to comply with the distribution requirements of the Code as well as to reduce our exposure to federal income taxes and the nondeductible excise tax. Differences in timing between the receipt of income and the payment of expenses to arrive at taxable income, along with the effect of required debt amortization payments, could require us to borrow funds to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.
Future issuances of equity securities could dilute the interest of holders of our common stock.
Our future growth will depend, in large part, upon our ability to raise additional capital. If we were to raiseRaising additional capital through the issuance of equity securities we couldcan dilute the interests of holders of our common stock. The interests of our common stockholders could also be diluted by the issuance of shares of common stock pursuant to stock incentive plans. Likewise, ourOur Board of Directors is authorized to cause us to issue preferred stock of any class or series (withwith dividend, voting and other rights as determined by our Board of Directors). Accordingly, our Board of Directors may authorize(such as the issuanceshares of preferred stock that were issued in connection with voting, dividend and other similar rights thatthe closing of the Merger with Spirit) which could dilute, or otherwise adversely affect, the interest of holders of our common stock.
We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell or refinance such assets.
We have in the past and may in the future acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership units in an operating partnership, which could result in stockholder dilution through the issuance of operating partnership units that, under certain circumstances, may be exchanged for shares of our common stock. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to restrictions on our ability to dispose of, or refinance the debt on, the acquired properties in order to protect the contributors’ ability to defer recognition of taxable gain. Similarly, we may be required to incur or maintain debt we would otherwise not incur so we can allocate the debt to the contributors to maintain their tax bases. In the event we take any action that incurs taxable gain allocated to these contributors, we may be required to make them whole under tax protection agreements. These restrictions could limit our ability to manage, control, sell or refinance an asset at a time, or on terms, that would be favorable absent such restrictions.
We are subject to risks associated with debt and preferred stock financing.
We intend to incur additional indebtedness in the future, including borrowings under our $3.0$4.25 billion unsecured revolving credit facility and our $1.0$3.0 billion commercial paper program. The credit agreement governing our revolving credit facility also governs our $250.0 million unsecured term loan facility due March 2024. programs.
Our revolving credit facility grants us the option, subject to obtaining lender commitments and other customary conditions, to expand the borrowing limits thereunder to up to $4.0$5.25 billion. The credit agreement governing our revolving credit facility also governs our $250.0 million unsecured term loan facility due March 2024 and, on January 6, 2023, we entered into the term loan agreement (the “2023 term loan agreement”) governing our 2023 term loans, pursuant to which we borrowed an aggregate of approximately $1.0 billion in multicurrency borrowings. The 2023 term loan agreement also permits us to incur additional term loans, up to an aggregate of $1.5 billion in total borrowings, pursuant to an accordion expansion feature, which is subject to obtaining lender commitments and other customary conditions. The term loans pursuant to our 2023 term loan agreement mature in January 2025 with one remaining 12-month maturity extension available at our option. At December 31, 2023, we also had a total of $18.6 billion of outstanding unsecured senior debt securities (excluding unamortized net original issuance premiums, deferred financing costs and basis adjustments on interest rate swaps designated as fair value hedges), including approximately $4.2 billion denominated in Sterling (of which $1.2 billion is related to our privately placed Sterling notes), $1.2 billion denominated in Euro thereunder, and approximately $822.4 million of outstanding mortgage debt (excluding unamortized net discounts and deferred financing costs).
In connection with the consummation of the closing of the Merger on January 23, 2024, we effectively assumed Spirit’s existing term loans with various lenders. Specifically, on January 22, 2024, we entered into an amended and restated term loan agreement, pursuant to which we borrowed $800 million in aggregate total borrowings, $300 million of which matures on August 22, 2025 and $500 million of which matures on August 20, 2027 (the “$800 million term loan agreement”), and an amended and restated term loan agreement pursuant to which we borrowed $500 million in aggregate total borrowings which matures on June 16, 2025. The $800 million term loan agreement and the $500 million term loan agreement became effective upon the closing of the Merger on January 23, 2024. Our A3/A- credit ratings provide for a borrowing rate of 80 basis points over the applicable benchmark rate, which includes adjusted Secured Overnight Financing Rate ("SOFR") for US Dollar-denominated loans, adjusted Sterling Overnight Indexed Average (“SONIA”) for Sterling-denominated loans, and Euro Interbank Offered Rate (“EURIBOR”) for Euro-denominated loans. In conjunction with closing, we executed one-year variable-to-fixed interest rate swaps which fix our per annum interest rate at 5.0% over the initial term. In addition, we have anas a result of the Merger, all outstanding secured indebtedness, liabilities, and other indebtedness of Spirit and its subsidiaries, including $2.75 billion of additional senior unsecured notes that were originally issued by Spirit Realty Capital, L.P., substantially all of which were exchanged for senior unsecured notes issued by us, became indebtedness and liabilities of ours or our subsidiaries, as the case may be, which substantially increased the total secured indebtedness and the total liabilities and other indebtedness of us and our subsidiaries.
Pursuant to our unsecured commercial paper note program under whichprograms we may offer and sell up to $1.0$3.0 billion of commercial paper at any time. We use our $3.0 billion revolving credit facility as a liquidity backstop for the repayment of notes issued under the commercial paper program.programs. Specifically, we maintain unused borrowing capacity under our revolving credit facility equal to the aggregate principal amount of borrowings outstanding under our commercial paper programprograms from time to time. We also may in the future enter into amendments and restatements of our current revolving credit facility and term loan facility,facilities, or enter into new revolving credit facilities or term loan facilities, and any such amended, restated or replacement revolving credit facilities or term loan facilities may increase the amounts we are entitled to borrow, subject to customary conditions, compared to our current revolving credit facility and term loan facility,facilities, or we may incur other indebtedness. We may also in the future increase the size of our commercial paper program. In addition,programs or establish new commercial paper programs. We expect that we will continue to use our current and any new revolving credit facilities we may enter into (in each case as the same may be expanded, amended or restated, if applicable, from time to time), as a resultliquidity backstop for the repayment of the merger, all outstanding secured indebtedness of VEREIT and its subsidiaries and all outstanding liabilities and other indebtedness of VEREIT and its subsidiaries (including $4.65 billion of additional senior unsecured notes that were originally issued by VEREIT OP, substantially all of which were subsequently exchanged for senior unsecured notes issued by us) became indebtedness and liabilities of oursunder our current or our subsidiaries, as the caseany new commercial paper programs that we may be, which has substantially increased the total secured indebtedness of us and our subsidiaries and the total liabilities and other indebtedness of our subsidiaries.maintain from time to time.
To the extent that new indebtedness is added to our current debt levels, the related risks that we now face would increase. As a result, we are and will be subject to risks associated with debt financing, including the risk that our cash flow could be insufficient to make required payments on our debt or to pay dividends on our common stock. We also face variable interest rate risk as the interest rates on our revolving credit facility, term loan facilities, and commercial paper programs are variable (subject to our interest rate swaps on our term loan facilities, in effect from time to time), and the interest rates on any credit facilities and term loan arefacilities we may enter into in the future may be variable, and could therefore increase over time. In addition, commercial paper borrowings are short-term obligations and the interest rate on newly issued commercial paper varies according to market conditions at the time of issuance. Similarly, some of the indebtedness to which we have become subject to subsequent to the Merger may also bear interest at variable rates. In addition, while we may enter into hedging and other derivatives instruments to mitigate our exposure to fluctuations in borrowing and currency rates, we may not realize the anticipated benefits from these arrangements or they may be insufficient to mitigate our exposure. We also face the risk that we may be unable to refinance or repay our debt as it comes due. Given past disruptions in the financial markets and ongoing global financial uncertainties, including the impact of COVID-19 and of the United
Kingdom’s withdrawal from the European Union (referred to as Brexit), we also face the risk that one or more of the participants in our revolving credit facility may not be ableunwilling or unable to lend us money.
We have incurred and may continue to incur indebtedness that is denominated in local currencies to fund our international investments and operations. However, it is possible that such indebtedness may be insufficient or may be on unacceptable terms requiring us to use non-local currency indebtedness. In addition,such event, we may be subject to foreign exchange rate volatility. While we may enter into hedging and other derivatives instruments to mitigate our exposure to fluctuations in foreign exchange rates, we may not realize the anticipated benefits from these arrangements or these arrangements may be insufficient to mitigate our exposure.
Our revolving credit facility, our term loan facilityfacilities, and our mortgage loan documents contain provisions that could limit or, in certain cases, prohibit the payment of dividends and other distributions to holders of our common stock
and any outstanding preferred stock. In particular,The credit agreements governing our revolving credit facility and our $250.0 million term loan facility, all of which are governed by the same credit agreement,facilities provide that, if an event of default (as defined in the credit agreement)agreements, as applicable) exists, we may not pay any dividends or make other distributions on (except distributions payable in shares of a given class of our stock to the stockholders of that class), or repurchase or redeem, among other things, any shares of our common stock or any outstanding preferred stock, during any period of four consecutive fiscal quarters in an aggregate amount in excess of the greater of:
•Theof (i) the sum of (a) 95% of our adjusted funds from operations (as defined in the credit agreement)agreements, as applicable) for that period plus (b) the aggregate amount of cash distributions made to holders of our outstanding preferred stock if any, for that period, and
•The (ii) the minimum amount of cash distributions required to be made to our stockholders in order to maintain our status as a REIT for federal income tax purposes and to avoid the payment of any income or excise taxes that would otherwise be imposed under specified sections of the Code on income we do not distribute to our stockholders,
except that we may repurchase or redeem shares of our outstanding preferred stock, if any, with net proceeds from the issuance of shares of our common stock or preferred stock.
The credit agreement further providesagreements each provide that, in the event of a failure to pay principal, interest, or any other amount payable thereunder when due or upon the occurrence of certain events of bankruptcy, insolvency or reorganization with respect to us or with respect to one or more of our subsidiaries that in the aggregate meet a significance test set forth in the credit agreement,agreements, we and our subsidiaries (other than our wholly-owned subsidiaries) may not pay any dividends or make other distributions on (except for (a) distributions payable in shares of a given class of our stock to the stockholders of that class and (b) dividends and distributions described in the second bullet point(ii) above), or repurchase or redeem, among other things, any shares of our common stock or preferred stock. If any such event of default under the applicable credit agreements (or under any other credit agreement or debt instrument with similar terms that we may in the future enter into or be subject to) were to occur, it would likely have a material adverse effect on the market price of our outstanding common stock and any outstanding preferred stock and on the market value of our debt securities which could limit the amount of dividends or other distributions payable to holders of our common stock and any outstanding preferred stock or the amount of interest and principal we are able to pay on our indebtedness, or prevent us from paying those dividends, other distributions, interest or principal altogether, and may adversely affect our ability to qualify, or prevent us from qualifying, as a REIT.
Our indebtedness could also have other important consequences to holders of our common stock, any outstanding preferred stock, and our debt securities, including:
•Increasing increasing our vulnerability to general adverse economic and industry conditions;
•Limiting limiting our ability to obtain additional financing to fund future working capital, acquisitions, capital expenditures and other general corporate requirements;
•Requiring requiring the use of a substantial portion of our cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, capital expenditures, and general corporate requirements;
•Limiting limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and
•Putting putting us at a disadvantage compared to our competitors with less indebtedness.
If we default under a credit facility, loan agreement, or other debt instrument, the lenders will generally have the right to demand immediate repayment of the principal and interest on all of their loans and, in the case of secured indebtedness, to exercise their rights to seize and sell the collateral. Moreover, a default under a single loan or debt instrument may trigger cross-default or cross- accelerationcross-acceleration provisions in other indebtedness and debt instruments, giving the holders of such other indebtedness and debt instruments similar rights to demand immediate repayment and to seize and sell any collateral.
Real estate ownership is subject to particular conditions that may have a negative impact on our revenue.
We are subject to all of the inherent risks associated with the ownership of real estate. In particular, we face the risk that rental revenue from our properties may be insufficient to cover all corporate operating expenses, debt service payments on indebtedness we incur, and distributions on our capital stock. Additional real estate ownership risks include:
•Adverse changes in general or local economic conditions;
•Changes in supply of, or demand for, similar or competing properties;
•Changes in interest rates and operating expenses;expenses (including energy costs, shortages and rationing);
•Competition within an industry and for our clients;
•Changes in market rents;
•Inability to lease properties upon termination of existing leases;
•Renewal of leases at lower rental rates;
•Inability to collect rental revenue from our clients due to financial hardship, including bankruptcy;
•Changes in tax, real estate, zoning and environmental laws that may have an adverse impact upon the value of real estate;
•Uninsured property liability;
•Property damage or casualty losses;
•Unexpected expenditures for capital improvements, including requirements to bring properties into compliance with applicable federal, state and local laws;
•The need to periodically renovate and repair our properties;
•Risks assumed as manager for pre-leased development or redevelopment projects;
•Physical or weather-related damage to properties;
•The potential risk of functional obsolescence of properties over time;
•Acts of terrorism and war;
•Changes in consumer behaviors, preferences or demographics;
•The impacts of climate change; and
•Acts of God and other factors beyond the control of our management.
Real estate property investments are illiquid. We may not be able to acquire or dispose of properties when desired or on favorable terms.
Real estate investments are relatively illiquid. Our ability to quickly buy, sell or exchange any of our properties in response to changes in economic and other conditions will be limited.limited and U.S. and foreign tax and regulatory regimes and authorities may impose or have the effect of restricting or limiting our ability to sell properties. No assurances can be given that we will recognize full value, at a price and at terms that are acceptable to us, for any property that we are required to sell for liquidity reasons. Our inability to respond rapidly to changes in the performance of our investments could adversely affect our financial condition and results of operations.
Our acquisition of additional properties may have a significant effect on our business, liquidity, financial position and/or results of operations.
Our future success will depend, in part, upon our ability to manage our mergers and acquisitions, acquisitions, and expansion opportunities.opportunities under prevailing market conditions. We are regularly engaged in the process of identifying, analyzing, underwriting, and negotiating possible acquisition transactions. We cannot provide any assurances that we will be successful in consummating future mergers and acquisitions or acquisitions on favorable terms or that we will realize expected cash yields, operating efficiencies, cost savings, revenue enhancements, synergies, or other benefits. Our inability to consummate one or more acquisitions on such terms, our failure to adequately underwrite and identify risks and obligations when acquiring properties, or our failure to realize the intended benefits from one or more acquisitions, could have a significant adverse effect on our business, liquidity, financial position and/or results of operations, including as a result of our incurrence of additional indebtedness and related interest expense and our assumption of unforeseen contingent liabilities in connection with completed acquisitions.
Furthermore, we
We have made and may continue to make selected acquisitions of properties (including through the use of alternative acquisition structures such as joint ventures, partnerships, fund and other structures) that fall outside our historical focus on freestanding, single-client, net lease retail locations in the United States.U.S. We may be exposed to a variety of new risks by expanding into new property types and/or new jurisdictions outside the United States, including in the United Kingdom(e.g., non-retail businesses), geographies, lease and Spain,acquisition structures, and properties leased to our clients engagedwho engage in non-retail businesses. These risks may includebe enhanced by our limited experience in managing certainnew property types, of new properties, new types of real estate locationsgeographies, lease and leaseacquisition structures, clients. and the laws andand/or culture of non-United States jurisdictions.non-U.S. geographies.
We are subject to additional risks from our international investments.investments and debt.
We have acquired and may continue to acquireinvest in properties outside of the United States. U.S.These investments may expose us to a variety of risks that are different from and in addition to those commonly found in the United States.U.S. Our international investments are subject to additional risks, including:
•The laws, rules and regulations applicable in such jurisdictions outside of the United States,U.S., including those related to property ownership and control by foreign entities;
•Complying with a wide variety of foreign laws;laws, including corruption, employment, data protection, energy usage, health and safety and environmental regulations which may require capital expenditures to maintain or bring our
foreign properties into compliance with applicable regulations and/or may require disclosure of various environmental, social and governance matters;
•Fluctuations in exchange rates between foreign currencies and the U.S. dollar (including risks related to their impact on our results of operations, hedging and other derivative arrangements used to mitigate our exposure to fluctuations in foreign currency rates, translational reporting risks, and exchange controls;controls);
•As we may not have or have only a limited number of properties within a jurisdiction, our experience in that market and with local business may be limited;limited, and our operating costs may be disproportionately higher until the number of properties within a jurisdiction grows;
•Cultural factorsWe may face challenges with expanding into current or new jurisdictions, such as identifying and securing investment opportunities, hiring and retaining employees, extended time periods for acquiring or disposing of investments, which may increase the cost of funding an investment, and potentially experiencing different cultural and business practices that differ from our United States standards and practices including as they relaterelated to employees, rent adjustments, ground leases, and property ownership requirements and limitations;
•Challenges in establishing effective controls and procedures to manage and regulate operations in different regions and to monitor and ensure compliance with applicable regulations, such as applicable laws related to corrupt practices, employment, licensing, construction, energy usage, climate change or environmental compliance;
•Unexpected or other changes in regulatory requirements (including disclosure requirements), tax, tariffs, trade barriers and other laws within jurisdictions outside the United StatesU.S. or between the United StatesU.S. and such jurisdictions;
•Potentially adverse tax consequences with respect to our properties;properties and/or investment vehicles;
•Initial limited investments within certain regions or countries may result in industry or client concentration risks;
•The impact of regional or country-specific business cycles, inflation and economic instability, including deteriorationsdeterioration in political relations with the United States,U.S., instability in, or further withdrawals from, the European Union or other international trade alliances or agreements; and
•Political instability, uncertainty over property rights, civil unrest, acts of war, drug trafficking, political activism or the continuation or escalation of terrorist or gang activities.
We also engage external property managers and other third parties, who assist with managing our international properties. If a property manager or third party fails to meet its obligations or terminates its services, we may need to find a replacement; however, these services may be on less favorable terms and conditions, or we may not be able to find a suitable replacement in a timely manner or at all.
We have incurred and may continue to incur indebtedness that is denominated in local currencies to fund our international investments and operations. However, it is possible that such indebtedness may be insufficient or may be on unacceptable terms requiring us to use non-local currency indebtedness. In such event, we may be subject to foreign exchange rate volatility which may be impacted by various factors, including those described above. While we may enter into hedging and other derivatives instruments to mitigate our exposure to fluctuations in foreign exchange rates, we may not realize the anticipated benefits from these arrangements or these arrangements may be insufficient to mitigate our exposure. For more information, see “—We are subject to risks associated with debt and preferred stock financing.”
If we are unable to adequately address these risks, they could have a significant adverse effect on our operations.
We may engage in development, speculative development, or expansion projects or invest in new assets,asset classes, which would subject us to additional risks that could negatively impact our operations.
We may engage in development, speculative development, or other expansion projects, which could require us to raise additional capital and overseeobtain additional state and local permitting.permits. A decision by any governmental agency not to issue a required permit or substantial delays in the permitting process could cause us to incur penalties, delay us from receiving rental payments or result in us receiving reduced rental payments, or prevent us from pursuing the development, speculative development, or expansion project.project altogether. Additionally, any such new development, speculative development, or expansion project may not operate at designed capacity or may cost more to operate than we expect. The inability to successfully complete development, speculative development, or expansion projects or to complete them on a timely basis could adversely affect our business and results of operations.
We have recently increased on investments in assets and transaction structures that are outside of our traditional business, including entering into new asset classes, such as casinos and vertical farms, and entering into (or expanding our use of) new transaction structures, such as joint ventures, lending, and increased exploration of sale-leaseback transactions. In addition, in the future, we may invest in new or different assets or enter into new transaction structures that may or may not be closely related to our current business. These new assets and transaction structures may have new, different or increased risks than what we are currently exposed to in our business and we may not be able to manage these risks successfully. Additionally, when investing in such new assets or transaction structures, we will be exposed to the risk that those assets or structures, or the income generated thereby, will affect our ability to meet the requirements to maintain our REIT status.status, or will subject us to additional regulatory requirements or limitations. If we are not able to successfully manage the risks associated with such new assets, it could have an adverse effect on our business, results of operations and financial condition.
Property taxes may increase without notice.
Real estate property taxes on our properties (including properties we develop or acquire) may increase as property tax rates change and as those properties are assessed or reassessed by tax authorities. While the majority of our leases are under a net lease structure, some or all of such property taxes may not be collectible from our clients.
We may face extensive regulations from gaming and other regulatory authorities regarding current and future gaming properties.
As a landlord of a gaming facility or future gaming facilities, we may be impacted by the risks associated with the gaming industry. The ownership, operation, and management of gaming facilities are subject to pervasive regulation. Gaming authorities also retain great discretion such that gaming regulations can impact our gaming clients, individuals associated with the operation of gaming properties, and us as the owner of the real estate and landlord related to such facilities. Gaming laws and regulations can impact all facets of a gaming property, including but not limited to alcoholic beverages, environmental matters, employees, health care, currency transactions, zoning and building codes, and marketing and advertising. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted, which could adversely affect our operating results, and may also result in additional taxes or licensing fees imposed on us and our gaming clients. In addition, subject to certain administrative due process requirements, gaming regulators generally have broad authority to conduct investigations into the conduct or associations of our officers or certain investors to ensure compliance with applicable standards and suitability to hold a gaming license, and to deny any application or limit, condition, restrict, revoke, or suspend any gaming license, registration, or finding of suitability or approval, or fine any person licensed, registered, or found suitable or qualified as a licensee. As a result, our ability to obtain or maintain our required licenses and approvals, or avoid penalties related thereto, may be subject to risks, including risks outside of our control, and cannot be predicted.
Were a tenant unable to continue to perform under a lease, because of the highly regulated nature of the industry, it may be difficult to re-lease gaming properties. This difficulty may be exacerbated to the extent the gaming property is located in a geography that does not have an expansive gaming footprint, such as one of the properties, in which we are invested. A transfer of interest, including a new lease, will likely require approval of regulators and the licensing of a new gaming operator tenant.
An uninsured loss or a loss that exceeds the policy limits on our properties could subject us to lost capital or revenue on those properties.
Under the terms and conditions of theOur leases currently in force ongenerally require our properties, clients generally are required to indemnify and hold us harmless from liabilities resulting from injury to persons, air, water, land or property, due to activities conducted on the properties, except for claims arising from the negligence or intentional misconduct of us or our agents. Additionally, clients are generally required, at the client’s expense, to obtain and keep in full force during the term of the lease, liability and property damage insurance policies. The insurance policies our clients are required to maintain for property damage are generally in amounts not less than the full replacement cost of the improvements less slab, foundations, supports and other customarily excluded improvements. Our clients are generally required to maintain general liability coverage depending on the client and the industry in which the client operates.
In addition to the indemnities and required insurance policies identified above, many
Many of our properties are also covered by flood and earthquake insurance policies (subject to substantial deductibles) obtained and paid for by theour clients as part of their risk management programs. Additionally, we have obtained blanket liability, flood and earthquake (subject to substantial deductibles) and property damage insurance policies to protect us and our properties against loss should the indemnities and insurance policies provided by the
clients fail to restore the properties to their condition prior to a loss. We do not carry insurance for certain losses and certain types of losses may be either uninsurable or not economically insurable. However, should a loss occur that is uninsured or in an amount exceeding the combined aggregate limits for the policies noted above, or in the event of a loss that is subject to a substantial deductible under an insurance policy, we could lose all or part of our capital invested in, and anticipated revenue from, one or more of the properties, which could have a material adverse effect on our results of operations or financial condition and on our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions to our stockholders. We also face the risk that our insurance carriers
may not be able to provide payment under any potential claims that might arise under the terms of our insurance policies, and we may not have the ability to purchase insurance policies we desire.
In addition, although we obtain title insurance policies on our properties to help protect us and our properties against title defects (such as adverse claims of ownership, liens or other encumbrances), there may be certain title defects that our title insurance will not cover. If a material title defect related to any of our properties is not adequately covered by a title insurance policy, we could lose some or all of our capital invested in and our anticipated profits from such property, cause a financial misstatement or damage our reputation.
Compliance with the Americans with Disabilities Act of 1990 and fire, safety, and other regulations may require us to make unintendedunanticipated expenditures that could adversely impact our results of operations.
Our properties are generally required to comply with the Americans with Disabilities Act of 1990, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants. The retailersclients to whom we lease properties are obligated by law to comply with the ADA provisions and, we believe that these retailers may bein many cases, the clients are generally obligated to cover costs associated with compliance.compliance pursuant to the terms of their applicable leases. If required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these retailersclients to cover costs could be adversely affected and we could be required to expend our own funds to comply with the provisions of the ADA, which could materially adversely affect our results of operations or financial condition and our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions to our stockholders. In addition, we are required to operate our properties must be in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our results of operations or financial condition and our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions to our stockholders.
Property taxes may increase without notice.
The real property taxes on our properties and any other properties that we develop or acquire in the future may increase as property tax rates change and as those properties are assessed or reassessed by tax authorities. While the majority of our leases are under a net lease structure, some or all of such property taxes may not be collectible from our clients.
Our business is subject to risks associated with climate change and our sustainability strategies.
TheOur business is subject to risks associated with the effects of climate change, and a resulting shift to a lower carbon economy, could present several climate-relatedand may be subject to further risks and opportunities for our business. Physical risks from climatein the future. Climate change could result inadversely affect our business through both chronic and acute perils including, but not limited to, extreme weather, changes in precipitation and temperature, and rising sea levels, all of which may result in physical damage to, or a decrease in demand for, our properties located in the areas affected by these conditions. Shouldconditions, and may adversely impact consumer behaviors, preferences and spending for our clients, which may impact their ability to fulfill their obligations under our leases, or our ability to re-lease the properties in the future. In addition, should the impact of climate change be severe or occur for lengthy periods of time, connectivity, labor and supply chains could impact business continuity for ourselves and our clients. ThisChronic climate change may lead to increased costs for us and our clients to adapt to the demands and expectations of climate change or lower carbon usage, including with respect to heating, cooling or electricity costs, retrofitting properties to be more energy efficient or comply with new rules or regulations, or other unforeseen costs. These risks could adversely affect our reputation, financial condition or results of operations.
In addition, we
We seek to promote effective energy efficiency and other sustainability strategies and compliance with federal, state and international laws and regulations related to climate change, both internally and with our clients. Our sustainability strategies and efforts to comply with changes in federal, state and international laws and regulations on climate change could result in significant capital expenditures to improve our existing properties or properties we may acquire. Any changes to such laws and regulations could also result in increased operating costs or capital expenditures at our properties. If we are unable to comply with laws and regulations on climate change or implement effective sustainability strategies, our reputation among our clients and investors may be damaged and we may incur fines and/or penalties. Moreover, there can be no assurance that any of our sustainability strategies
will result in reduced operating costs, higher occupancy or higher rental rates or deter our existing clients from relocating to properties owned by our competitors.
We
In addition, tenants of net-leased properties are responsible for maintenance and other day-to-day management of the properties. This lack of control over our net-leased properties makes it difficult for us to collect property-level environmental metrics and to enforce sustainability initiatives, which may impact our ability to comply with certain regulatory disclosure requirements to which we are subject to risks related(such as the anticipated changes to the discontinuance of LIBOR.
Certain ofSEC’s climate-related disclosure rules) or comply effectively with established Environmental, Social and Governance ("ESG") frameworks and standards, such as the Global Real Estate Sustainability Benchmarks, Task Force for Climate-Related Financial Disclosures (“TCFD”) and the Sustainability Accounting Standards Board. If we are unable to successfully collect the data necessary to comply with these disclosure requirements, we may be subject to increased regulatory risk and if such data is incomplete or unfavorable, our existing debt instruments and other financial arrangements, includingrelationship with our $3.0 billion revolving credit facilityinvestors, our stock price, and our $250.0 million term loan facility, provide for borrowingsaccess to be made at variable interest rates that use the London Interbank Offered Rate, or LIBOR (or metrics derived from or related to LIBOR), as a benchmark for establishing the interest rate applicable to outstanding borrowings thereunder, and we may incur additional
indebtedness or enter into new financial arrangements that use LIBOR as a benchmark for establishing the interest rate for borrowing thereunder. Likewise, as part of our cash management practices we may from time to time invest available cash in financial instruments that use LIBOR as a benchmark for calculating interest payments or other obligations thereunder.
LIBOR is in the process of being discontinued. While certain U.S. dollar LIBOR settings will continue to be published on the current basis until June 30, 2023, all other LIBOR settings either are no longer being published or are being published only for a limited time and only on a “synthetic” basis (i.e., not on the basis of submissions made by panel banks). The regulator of the administrator of LIBOR has prohibited any new use of LIBOR by firms subject to its supervision, and certain regulators in the United States have stated that no new contracts using U.S. dollar LIBOR should be entered into after 2021.
While our revolving credit facility and our term loan facility include provisions for establishing alternative reference rates when LIBOR is no longer be available, the consequences of the adoption of any such alternative reference rates cannot be predicted and could have an adverse impact on the amount of interest and commitment fees that we pay under those facilities. Likewise, the unavailability of LIBOR may have an adverse impact on interest rates and other financing costs under other debt instruments and other financial obligations of ours, as well as the market value of and the payments we receive under any LIBOR-linked securities or investments that we may own from time to time. In addition, financial markets generallycapital may be adversely affected by the discontinuation of LIBOR, the uncertainties regarding its discontinuation, the alternative reference rates that are being or may be used in place of LIBOR and other issues related to LIBOR. Any of the foregoing could adversely affect our results of operations and financial condition.negatively impacted.
Our charter contains restrictions upon ownership of our common stock.
Our charter contains restrictions on ownership and transfer of our common stock intended to, among other purposes, assist us in maintaining our status as a REIT for United StatesU.S. federal and/or state income tax purposes. For example, our charter restricts any person from acquiring beneficial or constructive ownership of more than 9.8% (by value or by number of shares, whichever is more restrictive) of our outstanding shares of common stock. These restrictions could have anti-takeover effects and could reduce the possibility that a third party will attempt to acquire control of us, which could adversely affect the market price of our common stock.
The value of certain of our investment in real property may be reduced as the result of the expiration or loss of local tax abatements, tax credit programs, or other governmental incentives.
Certain of our investments have the benefit of governmental tax incentives aimed at inducing property users to relocate to incentivize development in areas and neighborhoods which have not historically seen robust commercial development. The 2017 Tax Cuts and Jobs Act provided for such communities to be designated as Qualified Opportunity Zones, which are eligible for such tax benefits. These incentives typically have specific sunset provisions and may be subject to governmental discretion in the eligibility or award of the applicable incentives. The expiration of these incentive programs or the inability of potential clients or users to be eligible for or to obtain governmental approval of the incentives, or the inability to remain compliant with such programs, may have an adverse effect on the value of our investment, cash flow and net income, and may result in impairment charges.
Risks RelatingRelated to the Spirit Merger and the Transactions Contemplated by the Merger Agreement
WeFollowing the Merger, we may not be ableunable to integrate VEREIT’s businessthe operations of Spirit successfully, or realize the anticipated synergies and related benefits of the mergerMerger and the transactions contemplated by the Merger Agreement.Agreement or do so within the anticipated time frame.
The merger involvedMerger involves the combination of two companies which operated as independent public companies. We arewill be required to devote significant management attention and resources to integrating the business practices and operations of VEREIT.Spirit. Potential difficulties we may encounter in the integration process include the following:
•the inability to successfully combine the businesses of Realty Income and VEREITSpirit’s operations with ours in a manner that permits the combined company to achieve operating efficiencies (including with the integration of information technology systems), cost savings and efficiencies, revenues, synergies or other benefits either in the time frame anticipated cost savings;or at all;
•lost salesrevenue and clients as a result of certain clients of either of Realty Incomeus or VEREITSpirit deciding not to do business with the combined company;
•the continued complexities associated with managing thea multi-national combined company, out of multiple locations and integrating certain personnel from the two companies;companies, and the complexities associated with the separation of personnel;
•the additional complexities of combining two companies with different histories, regulatory restrictions, markets and customer bases;
•the complexities associated with combining Realty Income and VEREIT’s information technology systems including integrating the companies’ two enterprise resource planning (ERP) platforms into one primary ERP tool;
•the inability to realize expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits;clients;
•the failure to retain key employees of either of the two companies;
•potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Merger and the transactions contemplated by the Agreement and Plan of Merger, dated October 29, 2023 (the “Merger Agreement”), by and among the Company, Saints MD Subsidiary, Inc., a Maryland corporation and wholly owned subsidiary of the Company, and Spirit; and
•performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the Merger and integrating Realty Income’sSpirit's operations with ours.
In addition, as disclosed, certain legal proceedings were instituted against us, Spirit, and VEREIT’s operations.the former Spirit directors and we may see additional legal proceedings instituted in the future. The pendency and outcome of any legal proceedings is uncertain and may result in additional costs, expenses and the diversion of management’s attention
all of which could have an adverse effect on our business, operating results and price of our common stock or our ability to raise additional capital.
Our historical and unaudited pro forma condensed combined financial statements may not be representative of our results after the mergerMerger and the transactions contemplated by the Merger Agreement.
The mergerMerger and the transactions contemplated by the Merger Agreement including the subsequent spin-off of Orion, were completed in November 2021.January 2024. Accordingly, our historical financial statements and our operating results for the periods prior to such time do not give effect to those transactions. In addition, the unaudited pro forma condensed combined financial statements related to such transactions that we have previously prepared were created for informational purposes only and do not purport to be indicative of the financial position or results of operations that actually would have occurred had the mergerMerger and the transactions contemplated by the Merger Agreement been completed as of the dates indicated, nor does it purport to be indicative of theour future operating results or financial position of Realty Income after the mergerMerger and the transactions contemplated by the Merger Agreement. The unaudited pro forma condensed combined financial statements reflect adjustments, which were based upon preliminary estimates, to allocate the purchase price to VEREIT’sSpirit’s assets and liabilities and certain estimates and assumptions regarding the mergerMerger and the transactions contemplated by the Merger Agreement that Realty Incomewe and VEREITSpirit believe are reasonable under the circumstances. In addition, the unaudited pro forma condensed combined financial statements do not reflect other future events that occur after the mergerMerger and the transactions contemplated by the Merger Agreement, including the costs related to the planned integration of the two companies and any future nonrecurring charges resulting from the mergerMerger and the transactions contemplated by the Merger Agreement, and do not consider potential impacts of current market conditions on revenues or expense efficiencies. As a result, we cannot assure you that our historical and unaudited pro forma condensed combined financial statements will be representative of our results for future periods.
Our common stockholders will be diluted by the Merger.
At the closing of the Merger, we issued approximately 108.0 million additional shares of common stock. Consequently, as a result of this dilution, our common stockholders as of immediately prior to the Merger have less voting control and influence over our management and policies after the effective time of the Merger than they previously exercised over our management and policies.
General Risk Factors
The market value of our capital stock and debt securities could be substantially affected by various factors.
The market value of our capital stock and debt securities will depend on many factors, which may change from time to time and may be outside of our control, including:
•Prevailing interest rates, increases in which may have an adverse effect on the market value of our capital stock and debt securities;
•The market for similar securities issued by other REITs;
•General economic, political and financial market conditions;
•The financial condition, performance and prospects of us, our clients and our competitors;
•Changes in legal and regulatory taxation obligations;
•Litigation and regulatory proceedings;
•Changes in financial estimates or recommendations by securities analysts with respect to us, our competitors or our industry;
•Changes in our credit ratings;
•Actual or anticipated variations in quarterly operating results of us and our competitors; and
•Failure to achieve the perceived benefits of the mergerMerger and the transactions contemplated by the Merger Agreement or if the effect of the mergerMerger and the transactions contemplated by the Merger Agreement on our results of operations or financial condition is not consistent with the expectations of financial or industry analysts.
In addition, over the last several years, prices of common stock and debt securities in the United States,U.S., trading markets have experienced extreme price fluctuations, and the market values of our common stock and debt securities have also fluctuated significantly during this period. As a result of these and other factors, investors who purchase our capital stock and debt securities may experience a decrease, which could be substantial and rapid, in the market value of our capital stock and debt securities, including decreases unrelated to our operating performance or prospects.
Litigation risks could affect our business.
From time to time, we are involved in legal proceedings, lawsuits, and other claims including those that may arise out of mergers and acquisitions, acquisitions, development opportunities, dispositions, joint ventures, and other strategic transactions. An unfavorable resolution of litigation may have a material adverse effect on our business, results of operations and financial condition. Regardless of its outcome, litigation may result in substantial costs and expenses and significantly divert the attention of management.
We depend on key personnel.
We depend on the efforts of our executive officers and key employees. In addition, our success after the merger with VEREIT will depend in part upon our ability to retain executive officers and key employees who may depart because of issues relating to the uncertainty and difficulty of integration following the merger or a desire not to remain with Realty Income. The loss of the services of our executive officers and key employees could have a material adverse effect on our results of operations or financial condition and on our ability to pay the principal and interest on our debt securities and other indebtedness and to make distributions to our stockholders. It is possible that we will not be able to recruit additional personnel with equivalent experience in the net lease industry or retain employees to the same extent as in the past.
Natural disasters, terrorist attacks, cyber attacks, other acts of violence or war, or other unexpected events may affect the value of our debt and equity securities, the markets in which we operate and our results of operations.
Natural disasters, terrorist attacks, cyber attacks, other acts of violence or war, or other unexpected events (e.g., pandemics or epidemics) may negatively affect our operations, the market price of our capital stock and the value of our debt securities. There can be no assurance that events like these will not occur or have a direct impact on our clients, our business or the United StatesU.S. or world generally.
If events like these were to occur, they could materially interrupt our business operations, cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy. They also could result in or prolong an economic recession in the U.S. or abroad. Any of these occurrences could have a significant adverse impact on our operating results and revenues and on the market price of our capital stock and on the value of our debt securities. It could also have an adverse effect on our ability to pay principal and interest on our debt securities or other indebtedness and to make distributions to our stockholders.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We, rely onlike all businesses, are subject to cyber-attacks and security incidents, which threaten the confidentiality, integrity, and availability of our systems and information resources. Cyber-attacks are malicious cyber activity and a security incident is a successful cyber-attack that has the potential to expose sensitive data, internal systems, or otherwise disrupt business operations. Those attacks and incidents may be due to intentional or unintentional acts by employees, contractors or third-parties, who seek to gain unauthorized access to our or our service providers’ systems to disrupt operations, corrupt data, or steal confidential information through malware, computer viruses, ransomware, social engineering (e.g., phishing attachments to e-mails) or other vectors.
The risk of a cybersecurity breach or operational disruption, particularly through a cyber incident, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased, particularly as remote working has become more common. Our information technology (“IT”) networks and related systems includingare essential to the Internet,operation of our business and our ability to perform day-to-day operations and, in some cases, may be critical to the operations of certain of our clients. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption (such as the implementation of systems and/or vendors that provide constant monitoring of our IT networks and related systems for cyber-attacks and incidents); however, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.
While we maintain some of our own critical IT networks and related systems, we depend on third-parties to provide important software, technologies, tools and a broad array of services and functions, such as payroll, human resources, electronic communications, data storage, and certain finance and treasury functions, among others. In the ordinary course of our business, we collect, process, transmit and store electronicsensitive data, within our own systems and utilize those of third-party providers, including intellectual property, our proprietary business information and to manage or support a varietythat of our clients, suppliers and business processes, including financial transactionspartners, as well as personally identifiable information.
Our measures to prevent, detect and maintenance of records, which may include personal identifying information. Although we have taken steps to protect the security of the data maintained in our information systems, our security measuresmitigate these threats may not be ablesuccessful in preventing a security incident or data breach or limiting the effects of such a breach. This is particularly so because attack methodologies change frequently or are not recognized until launched, and we also may be unable to prevent the systems’ improper functioning,investigate or the theft of intellectual property, personal information,remediate incidents because attackers are increasingly using techniques and tools designed to circumvent controls, to avoid detection, and to remove or personal property, such as in the event of cyber-attacksobfuscate forensic evidence. Our clients, joint venture partners, or ransom-ware attacks. Any failureother third parties with whom we do business may themselves become subject to maintain proper function,cyberattacks or security incidents, over which we may have no control, and availability of our information systemswhich could interrupt our operations, result in theft of company assets, damage our reputation, subjecthave an indirect adverse impact on them, us to liability claims and could adversely affector our business relationship.
The primary risks that could directly result from the occurrence of a cyberattack or security incident include operational interruption, damage to our relationship with our clients, reputational damage, and private data exposure. We could be required to expend significant capital and other resources to address an attack or incident, which may not be covered or fully covered by our insurance and which may involve payments for investigations, forensic analyses, legal advice, public relations advice, system repair or replacement, or other services, in addition to any remedies or relief that may result from legal proceedings. Our financial conditionresults may be negatively impacted by any such attacks and results of operations.incidents or any resulting negative media attention. Further, while we carry cyber liability insurance, such insurance may not be adequate to cover all losses related to such events.
Volatility in market and economic conditions may impact the accuracy of the various estimates used in the preparation of our financial statements and footnotes to the financial statements.
Various estimates are used in the preparation of our financial statements, including estimates related to asset and liability valuations (or potential impairments), and various receivables. Often these estimates require the use of market data values that are currently difficult to assess, as well asand involve estimates of future performance or receivables collectability thatall of which can also be difficult to accurately predict. Although management believes it has been prudent and used reasonable judgment in making these estimates, it is possible that actual results may differ from these estimates.
Inherent limitations of internal controls over financial statements, disclosure controls and safeguarding of assets may adversely impact our financial condition and results of operations.
Our internal controls over financial reporting, disclosure controls and procedures and our operating internal controls may not prevent or detect financial misstatements or loss of assets because of inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to financial statement and disclosure accuracy and safeguarding of assets.
Additionally, as a result of our merger with VEREIT, we are operating two separate ERP systems to execute our financial reporting until we can complete a full data migration and complete the related testing. We have started the process of integrating these two ERP platforms into one primary system and expect to complete the implementation process during 2022. We have updated our internal controls over financial reporting, as necessary, to accommodate modifications to our business processes for these parallel ERP systems, as we work towards enhanced automated controls through a central platform. However, utilization of parallel ERP systems has inherent risks, which can complicate our financial reporting controls and potentially lead to breakdowns in data integrity. This ERP integration also has required, and will continue to require, significant capital and human resources to deploy. In addition, potential flaws in implementing the primary ERP or in the failure of any portion/module of the ERP to meet our needs or provide appropriate controls may pose risks to our ability to operate successfully and efficiently and with an effective system of internal controls.
Failures in our internal controls could result in adverse consequences in our financial reporting and operations, including delays, additional costs, impairment in our ability to access capital, adverse impacts to investor confidence, regulatory review, or litigation.
Our business operations may not generate the cash needed to make distributions on our capital stock or to service our indebtedness.
Our ability to make distributions on our common stock and any outstanding preferred stock and payments on our indebtedness, and to fund planned acquisitions and capital expenditures will depend on our ability to generate cash in the future. We cannot make any assurances that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our common stock and any outstanding preferred stock, to pay our indebtedness, or to fund our other liquidity needs.
Disruptions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on us, and the market price of our common stock.stock, and may make it more difficult or costly for us to raise capital.
Historically, there have been periods where the global equity and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of equity and debt securities to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases have resulted in the unavailability of certain types of financing. Uncertainty in the equity and credit markets may negatively impact our ability to access additional financing at reasonable terms, which may adversely affect our ability to make acquisitions. A prolonged downturn in the equity or credit markets may cause us to refinance at higher rates, seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to buy or sell properties, or may adversely affect the price we purchase or receive for properties, thatas we do sell, asand prospective buyers may
experience increased costs of financing or difficulties in obtaining financing. These events in the equity and credit markets may make it more difficult or costly for us to raise capital through the issuance of common stock, preferred stock or debt securities. These disruptions in the financial markets also may have a material adverse effect on the market value of our common stock and debt securities, the income we receive from our properties and the lease rates we can charge for our properties, as well as other unknown adverse effects on us or the economy in general.
Inflation (including prolonged inflationary periods) may adversely affect our results of operations, financial condition and results of operations.liquidity.
Increased inflation or anticipated inflationary periods, such as the period in which we are currently in, could have a more pronounced negative impact on any variable rate debt we incur in the future and on our results of operations. During times when inflation is greater than increases in rent, as provided for in our leases, rent increases may not keep up with the rate of inflation. Likewise, eveninflation and other costs (including increases in employment and other fees and expenses). Government regulations may limit the indices we can utilize in lease adjustments thereby limiting our ability to increase rent. Even though net leases reduce our exposure to rising property expenses due to inflation, substantial inflationary pressures and increased costs may have an adverse impact on our clients if increases in their operating expenses exceed increases in revenue, which may adversely affect our clients’ ability to pay rent. In addition, theThe U.K. government's plangovernment plans to reformmigrate away from the Retail Price Index (RPI)("RPI"), to align withalternatives such as the Consumer Price Index (CPIH)including owner occupiers' housing costs, that may result in a lower measure of inflation and, in turn, have a negative impact on our lease revenue currently tied to RPI in the U.K. Inflationary periods may cause us to experience increased costs of financing, making it difficult to incur or refinance debt at attractive rates or at all, and may adversely affect the properties we can acquire if the cost of financing an acquisition is in excess of our anticipated earnings from such property thereby limiting the properties that can be acquired. To the extent periods of high inflation are prolonged, these results may be exacerbated.
Item 1B: Unresolved Staff commentsComments
There are no unresolved staff comments.
Item 1C:Cybersecurity
We maintain a cyber risk management program to identify, assess, manage, mitigate, and respond to cybersecurity threats. We design and assess our program based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF) and use the NIST CSF as a guide to help us identify, assess, and manage cybersecurity risks relevant to our business. The program is integrated within our enterprise risk management system and addresses our IT networks and related systems that are essential to the operation of our business.
We maintain controls and procedures, including third-party oversight procedures, and cybersecurity training for all employees on an annual basis, which are designed to ensure prompt escalation of cybersecurity incidents so that decisions regarding public disclosure and reporting of such incidents can be made by management in a timely manner.
We work with third parties that assist us to identify, assess, and manage cybersecurity risks, including professional services firms, consulting firms, threat intelligence service providers, and penetration testing firms.
Our cybersecurity program and designated incident response team are comprised of key employees, and third-party information security experts from leading cybersecurity incident response firms, who are responsible for efficiently and effectively responding to cybersecurity incidents. We have established comprehensive incident response and recovery plans and continue to evaluate the effectiveness of those plans.
Our Cybersecurity Risk Committee, chaired by our Head of IT, and comprised of functional leaders, provides oversight, direction and guidance related to the cybersecurity risk management decisions.
We have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected us, including our operations, business strategy, results of operations, or financial condition. We face risks from cybersecurity threats that, if realized, are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition. See “Risk Factors – We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.”
Cybersecurity Governance
The Board of Directors considers cybersecurity risk as part of its risk oversight function, and the Audit Committee of our Board oversees Realty Income's cybersecurity and other information technology risk exposures and the steps taken by management to monitor and control such exposures. Our cybersecurity risk profile and cybersecurity program status are reported to the Audit Committee on a quarterly basis. In addition, management updates the Audit Committee, as necessary, regarding any material cybersecurity incidents, as well as any incidents with lesser impact potential. The Audit Committee reports to the full Board regarding its activities, including those related to cybersecurity, and the full Board also receives briefings from management on our cybersecurity risk management program, as appropriate.
Our management team, including the Cybersecurity Risk Committee chaired by our Head of IT and comprised of functional leaders across the Company, is responsible for assessing and managing our material risks from cybersecurity threats. The team has primary responsibility for our overall cybersecurity risk management program and supervises both our internal cybersecurity personnel and our retained external cybersecurity consultants. Our management team has extensive experience implementing and operating cybersecurity technologies, policies, and procedures throughout various industries and includes a Certified Information Systems Security Professional with ISC2.
Our management team supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents through various means, which may include briefings from internal security personnel; threat intelligence and other information obtained from governmental, public or private sources, including external consultants engaged by us; and alerts and reports produced by security tools deployed in the IT environment.
Item 2: Properties
Information pertaining to our properties can be found under Item 1.
Item 3: Legal Proceedings
We are subject Information regarding legal proceedings is included in note 20, Commitments and Contingencies, to certain claims and lawsuits in the ordinary course of business, the outcome of which cannot be determined at this time. In the opinion of management, any liability we might incur upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.statements.
Item 4: Mine Safety Disclosures
None.
PART II
Item 5:Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
A. Market Information
Our common stock is traded on the NYSE under the ticker symbol “O.” The following table shows the high and low sales prices per share for our common stock as reported by the NYSE, and distributions declared per share of common stock for the periods indicated.
| | | | | | | | | | | | | | | | | | | | |
| | Price Per Share
of Common Stock | | |
| | | High | | Low | | Distributions Declared (1) |
| 2021 | | | | | | |
| First Quarter | | $ | 64.60 | | | $ | 57.00 | | | $ | 0.7040 | |
| Second Quarter | | 71.84 | | | 63.64 | | | 0.7055 | |
| Third Quarter | | 72.75 | | | 64.86 | | | 0.7070 | |
| Fourth Quarter | | 74.60 | | | 64.98 | | | 0.7285 | |
| Total | | | | | | $ | 2.8450 | |
| 2020 | | | | | | |
| First Quarter | | $ | 84.92 | | | $ | 38.00 | | | $ | 0.6980 | |
| Second Quarter | | 65.56 | | | 43.41 | | | 0.6995 | |
| Third Quarter | | 66.80 | | | 56.33 | | | 0.7010 | |
| Fourth Quarter | | 65.09 | | | 57.09 | | | 0.7025 | |
| Total | | | | | | $ | 2.8010 | |
(1) Common stock cash distributions are declared monthly by us based on financial results for the prior months. At December 31, 2021, a distribution of $0.2465 per common share had been declared and was paid in January 2022.
B. There were approximately 12,400 13,800registered holders of record of our common stock as of DecemberJanuary 31, 2021. We estimate that our total number2024. This figure does not reflect the beneficial ownership of stockholders is approximately 1,162,000 when we include both registered and beneficial holdersshares of our common stock.
Repurchases of Equity Securities
During the three months ended December 31, 2021,2023, the following shares of stock were withheld for state and federal payroll taxes on the vesting of employee stock awards, as permitted under the 2012 andRealty Income 2021 Incentive Award Plans of Realty Income Corporation:Plan, (the "2021 Plan"):
•9,502 shares of stock, at a weighted average price of $69.62, in October 2021;
•429 shares of stock, at a weighted average price of $70.89, in November 2021; and
•1,228 shares of stock, at a weighted average price of $71.35, in December 2021. | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share |
| October 1, 2023 — October 31, 2023 | | 2,242 | | | $ | 49.06 | |
| November 1, 2023 — November 30, 2023 | | 1,283 | | | $ | 51.92 | |
| December 1, 2023 — December 31, 2023 | | 11,735 | | | $ | 57.22 | |
| Total | | 15,260 | | | $ | 55.58 | |
Item 6: Reserved
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis reflect our financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022. GENERAL
Realty Income, The Monthly Dividend Company®, is an S&P 500 company and member of the S&P 500 Dividend Aristocrats® index for having increased its dividend every year for over 25 consecutive years. We invest in people and places to deliver dependable monthly dividends that increase over time. We are structured as a real estate investment trust ("REIT")REIT requiring us annually to distribute at least 90% of our taxable income (excluding net capital gains) in the form of dividends to our stockholders. The monthly dividends are supported by the cash flow generated from real estate owned under long-term net lease agreements with our commercial clients.
Realty Income was founded in 1969, and listed on the New York Stock Exchange ("NYSE": O) in 1994. Over the past 53 years, Realty Income has been acquiring and managing freestanding commercial properties that generate rental revenue under long-term net lease agreements with our commercial clients.
AtAs of December 31, 2021,2023, we owned or held interests in a diversified portfolio:
•Consistingportfolio of 11,136 properties;
•With an occupancy rate of 98.5%, or 10,97213,458 properties leased and 164 properties available for lease or sale;
•With clients doing business in 60 separate industries;
•Locatedlocated in all 50 U.S. states, Puerto Rico, the United Kingdom (U.K.)U.K., France, Germany, Ireland, Italy, Portugal, and Spain;
•WithSpain, with approximately 210.1272.1 million square feet of leasable space;
•Withspace to clients doing business in 86 separate industries. Of the 13,458 properties in the portfolio at December 31, 2023, 13,197, or 98.1%, are single-client properties, of which 13,007 were leased, and the remaining are multi-client properties. Our total portfolio has a weighted average remaining lease term (excluding rights to extend a lease at the option of our client) of approximately 9.0 years; and
•With an average leasable space per property of approximately 18,860 square feet, approximately 12,470 square feet per retail property and approximately 248,120 square feet per industrial property.
Of the 11,136 properties in the portfolio at December 31, 2021, 11,043, or 99.2%, are single-client properties, of which 10,883 were leased, and the remaining are multi-client properties.9.8 years.
Unless otherwise specified, references to rental revenue in the Management's Discussion and Analysis of Financial Condition and Results of Operations are exclusive of reimbursements from clients for recoverable real estate taxes and operating expenses totaling $274.2 million, $184.7 million and $104.9 million $79.4 millionfor the years ended December 31, 2023, 2022 and $69.1 million for 2021, 2020respectively.
RECENT DEVELOPMENTS
Closing of Spirit Realty Capital Merger
On January 23, 2024, we closed on our previously announced merger with Spirit, which is further described in note 21, Subsequent Events, to the consolidated financial statements. The Spirit portfolio consisted of 2,018 U.S. retail, industrial and 2019, respectively.other properties across 49 states. With assets that are highly complementary to our existing portfolio, this transaction enhances the diversification and depth of our real estate portfolio and will allow us to strengthen our longstanding relationships with existing clients and curate new ones.
Increases in Monthly Dividends to Common Stockholders
We have continued our 55-year history of paying monthly dividends. In addition, referenceswe increased the dividend five times during 2023 and onceduring 2024. As of February 2024, we have paid 105 consecutive quarterly dividend increases and increased the dividend 123 times since our listing on the NYSE in 1994.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 Dividend increases | Month Declared | | Month Paid | | Monthly Dividend per share | | Increase per share |
| 1st increase | Dec 2022 | | Jan 2023 | | $ | 0.2485 | | | $ | 0.0005 | |
| 2nd increase | Feb 2023 | | Mar 2023 | | $ | 0.2545 | | | $ | 0.0060 | |
| 3rd increase | Mar 2023 | | Apr 2023 | | $ | 0.2550 | | | $ | 0.0005 | |
| 4th increase | Jun 2023 | | Jul 2023 | | $ | 0.2555 | | | $ | 0.0005 | |
| 5th increase | Sep 2023 | | Oct 2023 | | $ | 0.2560 | | | $ | 0.0005 | |
| | | | | | | |
| 2024 Dividend increase | | | | | | | |
| 1st increase | Dec 2023 | | Jan 2024 | | $ | 0.2565 | | | $ | 0.0005 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The dividends paid per share during 2023 totaled $3.051, as compared to reserves recorded$2.967 during 2022, an increase of $0.084, or 2.8%.
The monthly dividend of $0.2565 per share represents a current annualized dividend of $3.0780 per share, and an annualized dividend yield of 5.4% based on the last reported sale price of our common stock on the NYSE of $57.42 on December 31, 2023. Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will be in any future period.
Investments During 2023
During the year ended December 31, 2023, we invested $9.5 billion at an initial weighted average cash yield of 7.1%, including an investment in 1,408 properties, properties under development or expansion, investments in loans and a preferred equity investment.See notes 4, Investments in Real Estate, 5, Investments in Unconsolidated Entities, and 6, Investments in Loans, to the consolidated financial statements for further details.
Equity Capital Raising
We have an At-The-Market ("ATM") program, pursuant to which we may offer and sell up to 120.0 million shares of common stock (1) by us to, or through, a consortium of banks acting as our sales agents or (2) by a consortium of banks acting as forward sellers on behalf of any forward purchasers contemplated thereunder, in each case by means of ordinary brokers' transactions on the NYSE at prevailing market prices or at negotiated prices or by any other methods permitted by applicable law.
During 2023, we raised $5.5 billionof net proceeds from the sale of common stock, at a weighted average price of $59.79 per share, primarily through proceeds from the sale of common stock through our At-the-Market ("ATM") Program. The ATM program issuances during 2023 included91.7 millionshares issued pursuant to forward sale confirmations. As of December 31, 2023, 6.2 million shares of common stock subject to forward sale confirmations have been executed but not settled. See note 11, Issuances of Common Stock, to the consolidated financial statements for further details.
Note Issuances
In January 2024, we issued $450.0 million of 4.750%senior unsecured notes due February 2029 and $800.0 million of5.125%senior unsecured notes due February 2034. In connection with the Merger, we also completed the $2.7 billion exchange in principal of outstanding notes issued by Spirit Realty, L.P. (“Spirit OP”). See note 21, Subsequent Events,to the consolidated financial statements for further details.
In December 2023, we issued £300.0 million of 5.750% senior unsecured notes due December 2031 and £450.0 million of 6.000% senior unsecured notes due December 2039.
In July 2023, we issued €550.0 million of 4.875% senior unsecured notes due July 2030 and €550.0 million of 5.125% senior unsecured notes due July 2034.
In April 2023, we issued $400.0 million of 4.700% senior unsecured notes due December 2028 and $600.0 million of 4.900% senior unsecured notes due July 2033.
In January 2023, we issued $500.0 million of 5.050% senior unsecured notes due January 2026 and $600.0 million of 4.850% senior unsecured notes due March 2030.
See note 10. Notes Payable, to the consolidated financial statements for further details.
Appointment of New Chief Financial Officer and Treasurer ("CFO")
Effective January 1, 2024, Jonathan Pong was appointed Executive Vice President, CFO and Treasurer, replacing Christie Kelly, our former CFO, upon her planned retirement that was announced in June 2023.
Portfolio Discussion
Leasing Results
At December 31, 2023, we had 193 properties available for lease or sale out of 13,458 properties in our portfolio, which represents a 98.6% occupancy rate based on the number of properties in our portfolio. Our property-level occupancy rates exclude properties with ancillary leases only, such as cell towers and billboards, properties with possession pending, and include properties owned by unconsolidated joint ventures.
Below is a summary of our portfolio activity for the periods indicated below:
| | | | | |
| Three months ended December 31, 2023 | |
| Properties available for lease at September 30, 2023 | 159 | |
Lease expirations (1) | 266 | |
| Re-leases to same client | (164) | |
| Re-leases to new client | (26) | |
| Vacant dispositions | (42) | |
| Properties available for lease at December 31, 2023 | 193 | |
| | | | | |
| Year ended December 31, 2023 | |
| Properties available for lease at December 31, 2022 | 126 | |
Lease expirations (1) | 984 | |
| Re-leases to same client | (750) | |
| Re-leases to new client | (51) | |
| Vacant dispositions | (116) | |
| Properties available for lease at December 31, 2023 | 193 | |
(1)Includes scheduled and unscheduled expirations (including leases rejected in bankruptcy), as well as future expirations resolved in the periods indicated above.
During the three months ended December 31, 2023, the new annualized contractual rent on re-leases was $52.7 million, as compared to the previous annual rent of $50.8 million on the same units, representing a rent recapture rate of 103.6% on the units re-leased, which excludes restructurings associated with the Cineworld bankruptcy. Including Cineworld restructured leases that resulted in lease extensions, the recapture rate was 94.1% for the three months ended December 31, 2023. We re-leased 20 units to new clients without a period of vacancy, and 12 units to new clients after a period of vacancy.
During the year ended December 31, 2023, the new annualized contractual rent on re-leases was $198.1 million, as compared to the previous annual rent of $190.3 million on the same units, representing a rent recapture rate of 104.1% on the units re-leased, which excludes restructurings associated with the Cineworld bankruptcy. Including Cineworld restructured leases that resulted in lease extensions, the recapture rate was 101.1% for the year ended December 31, 2023. We re-leased 27 units to new clients without a period of vacancy, and 39 units to new clients after a period of vacancy.
As part of our re-leasing costs, we pay leasing commissions to unrelated, third-party real estate brokers consistent with the commercial real estate industry standard, and sometimes provide rent concessions to our clients. We do not consider the collective impact of the leasing commissions or rent concessions to our clients to be material to our financial position or results of operations.
Pan European Sale and Leaseback with Decathlon SE ("Decathlon")
We entered the markets of France, Germany, and Portugal for the first time through sale-leaseback transactions with affiliates of Decathlon, a world leader in retail sporting goods and an investment grade rated company, for €527.0 million, which includes 82 retail properties located in France, Germany, Italy, Portugal, and Spain.
Investments in Unconsolidated Joint Ventures
In October 2023, we completed our previously announced $951.4 million acquisition of common and preferred interests from Blackstone Real Estate Trust, Inc. ("BREIT") in a new joint venture that owns a 95% interest in the real estate of The Bellagio Las Vegas. The investment included $301.4 million of common equity in the joint venture in exchange for an indirect interest of 21.9% in the property and a $650.0 million preferred equity interest in the joint venture with an expected rate of return of 8.1%.
In November 2023, we established a joint venture with Digital Realty Trust, Inc. ("Digital Realty") to support the development of two build-to-suit data centers in Northern Virginia. We invested approximately $199.8 million to acquire an 80% equity interest in the venture, while Digital Realty maintains a 20% interest. Each partner will fund its pro rata share of the remaining $117.7 million estimated development cost for the first phase of the project, which is slated for completion in mid-2024.
See note 5, Investments in Unconsolidated Entities, to the consolidated financial statements for further details.
Impact of Inflation
Leases generally provide for limited increases in rent as a reductionresult of rental revenue include amounts reservedfixed increases, increases in the consumer price index, or retail price index in the case of certain leases in the U.K. (typically subject to ceilings), or increases in the clients’ sales volumes. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the current period, as well as unrecognized contractualleases, rent increases may not keep up with the rate of inflation and other costs.
Moreover, our strategic focus on the use of net lease agreements reduces our exposure to rising property expenses due to inflation because the client is responsible for property expenses. Even though the utilization of net leases reduces our exposure to rising property expenses due to inflation, substantial inflationary pressures and increased costs may have an adverse impact on our clients if increases in their operating expenses exceed increases in revenue, which may adversely affect our clients' ability to pay rent. Additionally, inflationary periods may cause us to experience increased costs of financing, make it difficult to refinance debt at attractive rates or at all, and unrecognized straight-line rental revenue for leases accounted for on a cash basis. Referencesmay adversely affect the properties we can acquire if the cost of financing an acquisition is in excess of our anticipated earnings from such property, thereby limiting the properties that can be acquired.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to reserve reversals recorded as increasesfluctuate. Likewise, during certain periods, the global capital markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to rental revenue include amounts whereand cost of capital. We continually monitor the accounting for recognition of rental revenuecommercial real estate and straight-line rental revenue has been moved from the cashglobal capital markets carefully and, if required, will make decisions to the accrual basis.adjust our business strategy accordingly.
LIQUIDITY AND CAPITAL RESOURCES
Capital Philosophy
Historically,As of December 31, 2023, we have methad $4.1 billion of liquidity, which consists of cash and cash equivalents of $232.9 million, including £46.1 million denominated in Sterling and €43.6 million denominated in Euro, unsettled ATM forward equity of $337.8 million, and $3.5 billion of availability under our long-term capital needs by issuing common stock, long-term$4.25 billion unsecured notes and bonds, term loans under our revolving credit facility, and preferred stock. Over the long term, we believe that common stock should be the majority ofafter deducting $764.4 million in borrowings under our capital structure; however, we may also raise funds from debt or other equity securities.commercial paper programs. We may issue common stock when we believe thatuse 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 initially financed by ourunsecured revolving credit facility commercial paper program, or debt securities. However, we cannot assure you that we will have access toas a liquidity backstop for the capital markets at all times and at terms that are acceptable to us.repayment of the notes issued under these programs.
Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,”“Material Cash Requirements” table, which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs, and cash distributions to common stockholders, primarily through cash provided by operating activities, borrowings onunder our revolving credit facility, short-term term loans, and under our commercial paper programprograms, and through public securities offerings.
We may chooseexpect to mitigatefund the next twelve months of obligations through a combination of the following:
•Cash and cash equivalents;
•Future cash flows from operations;
•Issuances of common stock or debt; and
•Additional borrowings under our financial exposure to exchange rate risk for properties acquired outside the U.S. through the issuance of debt securities denominated in the same local currencyrevolving credit facility and through currency derivatives. We may leave a portion of our foreign cash flow unhedged to reinvest in additional properties in the same local currency.
Conservative Capital Structureterm loan (after deducting outstanding borrowings under our commercial paper programs).
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 next twelve months. We intend, however, to use permanent or long-term capital to fund property acquisitions and to repay future borrowings under our credit facility and commercial paper programs.
Long-Term Liquidity Requirements
Our goal is to deliver dependable monthly dividends to our stockholders are best servedthat increase over time. Historically, we have met our principal short-term and long-term capital needs, including the funding of high-quality real estate acquisitions, investments in loans, property development, and capital expenditures by a conservativeissuing common stock, preferred stock, long-term unsecured notes, and term loan borrowings. Over the long term, we believe that common stock should be the majority of our capital structure. Therefore,We may issue common stock when we seekbelieve our share price is at a level that allows for the proceeds of an offering to maintain a conservativebe accretively invested into additional properties or to permanently finance properties that were initially financed by our revolving credit facility, commercial paper programs, or shorter-term debt level on our balance sheetsecurities. However, we cannot assure you that we will have access to the capital markets at all times and solid interest and fixed charge coverage ratios. Atat terms that are acceptable to us.
Capitalization
As of December 31, 2021,2023, our total market capitalization was $65.4 billion. Total market capitalization consisted of $43.3 billion of common equity (based on the December 31, 2023 closing price on the NYSE of $57.42 and assuming the conversion of common units of Realty Income, L.P.) and total outstanding borrowings of $22.1 billion on our revolving credit facility, commercial paper, term loans, mortgages payable, senior unsecured notes and bonds, term loan, mortgages payable, credit facility borrowings, commercial paper, and our proportionate share of outstanding borrowings by unconsolidated entities were $15.26 billion, or approximately 26.5% of ourentities' debt (excluding unamortized deferred financing costs, discounts, and premiums). Our total debt to market capitalization of $57.66 billion.
We define our total market capitalizationwas 33.8% at December 31, 2021 as the sum of:
•Shares of our common stock outstanding of 591,261,991, plus total common units outstanding of 1,060,709, multiplied by the last reported sales price of our common stock on the NYSE of $71.59 per share on December 31, 2021, or $42.4 billion;
•Outstanding borrowings of $650.0 million on our revolving credit facility;
•Outstanding borrowings of$901.4 millionon our commercial paper program;
•Outstanding mortgages payable of $1.11 billion, excluding net mortgage premiums of $28.7 million and deferred financing costs of $790,000;
•Outstanding borrowings of $250.0 million on our term loan, excluding deferred financing costs of $443,000;
•Outstanding senior unsecured notes and bonds of $12.26 billion, including Sterling-denominated notes of £1.47 billion, and excluding unamortized net premiums of $295.5 million and deferred financing costs of $53.1 million; and
•Our proportionate share of outstanding debt from unconsolidated entities of $86.0 million, excluding deferred financing costs of $1.8 million.2023.
Universal Shelf Registration
In June 2021,On February 16, 2024, we filed a new shelf registration statement with the SEC, which is effective for a term of three years and will expire in June 2024.February 2027. In accordance with SEC rules, the amount of 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 (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock, or depositary shares, and (6) 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 these 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 any offering.
At-the-Market ("ATM")
ATM Program
Under our "at-the-market" equity distribution plan, orAs of December 31, 2023, there were approximately 6.2 million shares of unsettled common stock subject to forward sale confirmations through our ATM program, up to 69,088,433representing approximately $337.8 million in expected net proceeds, which have been executed at a weighted average price of $54.70 per share (assuming full physical settlement of all outstanding shares of common stock, may be offeredsubject to such forward sale agreements and certain assumptions made with respect to settlement dates). During the year ended December 31, 2023, we settled approximately 91.7 million shares of common stock previously sold (1) by uspursuant to orforward sale agreements through a consortium of banks acting as our sales agents or (2) by a consortium of banks acting as forward sellers on behalf of any forward purchasers contemplated thereunder, in each case by means of ordinary brokers' transactions on the NYSE at prevailing market prices or at negotiated prices. During 2021, we issued 46,290,540 shares and raisedATM program for approximately $3.21$5.4 billion of gross proceeds under the ATM program. Atnet proceeds. As of December 31, 2021,2023, we had 29,387,491 81.3 millionshares remaining for future issuance under our ATM program. We anticipate maintaining the availability of our ATM program in the future, including the replenishment of authorized shares issuable thereunder.
Issuance of Common Stock in Conjunction with our Merger with VEREIT
On November 1, 2021, we completed our acquisition of VEREIT. Pursuant to the termsDebt and subject to the conditions set forth in the Merger Agreement, each outstanding share of VEREIT common stock and each common unit of VEREIT OP (other than those held by VEREIT, us or our affiliates) was converted into 0.705 shares of Realty Income common stock. As a result of the merger, former VEREIT common stockholders, VEREIT OP common unitholders and awardees of vested share awards separated from Realty Income received approximately 162 million shares of Realty Income common stock, based on the shares of VEREIT common stock and common units of VEREIT OP outstanding as of October 29, 2021.
Issuances of Common Stock in Underwritten Public Offerings
In July 2021, we issued 9,200,000 shares of common stock, inclusive of 1,200,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares. After deducting underwriting discounts of $2.9 million, the net proceeds of $594.1 million were used to repay borrowings under our $1.0 billion commercial paper program, to fund investment opportunities and for other general corporate purposes.
In January 2021, we issued 12,075,000 shares of common stock, inclusive of 1,575,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares. After deducting underwriting discounts of $19.3 million, the net proceeds of $669.6 million were used to fund property acquisitions and for general corporate purposes, and working capital.
Dividend Reinvestment and Stock Purchase Plan
Our Dividend Reinvestment and Stock Purchase Plan, or our DRSPP, provides our common stockholders, as well as new investors, with a convenient and economical method of purchasing our common stock and reinvesting their distributions. Our DRSPP also allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions. Our DRSPP authorizes up to 26,000,000 common shares to be issued. Our DRSPP includes a waiver approval process, allowing larger investors or institutions, per a formal approval process, to purchase shares at a small discount, if approved by us. We did not issue shares under the waiver approval process during 2021. During 2021, we issued 168,000 shares and raised approximately $11.2 million under our DRSPP. At December 31, 2021, we had 11,335,379 shares remaining for future issuance under our DRSPP program.
Revolving Credit Facility and Commercial Paper Program
We have a $3.0 billion unsecured revolving credit facility with an initial term that expires in March 2023 and includes, at our option, two six-month extensions. The multicurrency revolving facility allows us to borrow in up to 14 currencies, including U.S. dollars. Our revolving credit facility has a $1.0 billion expansion option, which is subject to obtaining lender commitments. Under our revolving credit facility, our investment grade credit ratings as of December 31, 2021 provide for financing at the London Interbank Offered Rate ("LIBOR") plus 0.775% with a facility commitment fee of 0.125%, for all-in pricing of 0.90% over LIBOR. Our revolving credit facility and term loan facility were amended in December 2021 to include provisions for establishing alternative reference rates when LIBOR is no longer available.
The borrowing rate is subject to an interest rate floor and may change if our investment grade credit ratings change. We also have other interest rate options available to us under our credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.Financing Activities
At December 31, 2021, we had a borrowing capacity2023, our total outstanding borrowings of $2.35 billion available on our revolving credit facility, and an outstanding balance of $650.0 million. The weighted average interest rate on borrowings under our revolving credit facility during 2021 was 0.9% per annum. We must comply with various financial and other covenants in our credit facility. At December 31, 2021, we were in compliance with these covenants. We expect to use our credit facility to acquire additional properties and for other general corporate purposes. Any additional borrowings will increase our exposure to interest rate risk.
We have a U.S. dollar-denominated unsecured commercial paper, program. Under the terms of the program, we may issue from time to time unsecured commercial paper notes up to a maximum aggregate amount outstanding of $1.0 billion. Borrowings under this program generally mature in one year or less. At December 31, 2021, we had an outstanding balance of $901.4 million. The weighted average interest rate on borrowings under our commercial paper program was 0.2% for 2021. We use our $3.0 billion revolving credit facility as a liquidity backstop for the repayment of the notes issued under the commercial paper program.
The commercial paper borrowings generally carry a term of less than six months. The commercial paper borrowings outstanding at December 31, 2021 mature between January 2022 and April 2022. We generally use our credit facility and commercial paper borrowings for the short-term financing of new property acquisitions. Thereafter, we generally seek to refinance those borrowings with the net proceeds of long-term or more permanent financing, including the issuance of equity or debt securities. We cannot assure you, however, that we will be able to obtain any such refinancing, or that market conditions prevailing at the time of the refinancing will enable us to issue equity or debt securities at acceptable terms. We regularly review our credit facility and commercial paper program and may seek to extend, renew or replace our credit facility and commercial paper program, to the extent we deem appropriate.
Term Loans
In October 2018, in conjunction with entering into our revolving credit facility, we entered into a $250.0 million senior unsecured term loan, which matures in March 2024, and is governed by the credit agreement that governs our revolving credit facility. Borrowing under this term loan bears interest at the current one-month LIBOR, plus 0.85%. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest on this term loan at 3.89%.
Mortgage Debt
As of December 31, 2021, we had $1.11 billion ofloans, mortgages payable, the majority of which were assumed in connection with our property acquisitions, including ten mortgages from our merger with VEREIT in 2021 totaling $839.1 million and a Sterling-denominated mortgage payable of £31.0 million. Additionally, at December 31, 2021, we had net premiums totaling $28.7 million on these mortgages and deferred financing costs of $790,000. We expect to pay off the mortgages payable as soon as prepayment penalties have declined to a level that would make it economically feasible to do so. During 2021, we made $66.6 million of principal payments, including the repayment of seven mortgages in full for $63.0 million.
Notes Outstanding
Our senior unsecured note and bond obligations consist of the following as of December 31, 2021, sorted by maturity date (in millions):
| | | | | | | | | | | |
| Principal Amount (Currency Denomination) | | Carrying Value (USD) As of December 31, 2021 |
4.600% notes, $500 issued February 2014, of which $485 was exchanged in November 2021, both due in February 2024 (1) | $ | 500 | | | $ | 500 | |
| 3.875% notes, issued in June 2014 and due in July 2024 | $ | 350 | | | 350 | |
| 3.875% notes, issued in April 2018 and due in April 2025 | $ | 500 | | | 500 | |
4.625% notes, $550 issued October 2018, of which $544 was exchanged in November 2021, both due in November 2025 (1) | $ | 550 | | | 550 | |
| 0.750% notes, issued December 2020 and due in March 2026 | $ | 325 | | | 325 | |
4.875% notes, $600 issued June 2016, of which $596 was exchanged in November 2021, both due in June 2026 (1) | $ | 600 | | | 600 | |
| 4.125% notes, $250 issued in September 2014 and $400 issued in March 2017, both due in October 2026 | $ | 650 | | | 650 | |
| 3.000% notes, issued in October 2016 and due in January 2027 | $ | 600 | | | 600 | |
| 1.125% notes, issued in July 2021 and due in July 2027 | £ | 400 | | | 541 | |
3.950% notes, $600 issued August 2017, of which $594 was exchanged in November 2021, both due in August 2027 (1) | $ | 600 | | | 600 | |
| 3.650% notes, issued in December 2017 and due in January 2028 | $ | 550 | | | 550 | |
3.400% notes, $600 issued June 2020, of which $598 was exchanged in November 2021, both due in January 2028 (1) | $ | 600 | | | 600 | |
2.200% notes, $500 issued November 2020, of which $497 was exchanged in November 2021, both due in June 2028 (1) | $ | 500 | | | 500 | |
| 3.250% notes, issued in June 2019 and due in June 2029 | $ | 500 | | | 500 | |
3.100% notes, $600 issued December 2019, of which $596 was exchanged in November 2021, both due in December 2029 (1) | $ | 599 | | | 599 | |
| 1.625% notes, issued in October 2020 and due December 2030 | £ | 400 | | | 541 | |
| 3.250% notes, $600 issued in May 2020 and $350 issued in July 2020, both due in January 2031 | $ | 950 | | | 950 | |
2.850% notes, $700 issued November 2020, of which $699 was exchanged in November 2021, both due in December 2032 (1) | $ | 700 | | | 700 | |
| 1.800% notes, issued in December 2020 and due in March 2033 | $ | 400 | | | 400 | |
| 1.750% notes, issued in July 2021 and due in July 2033 | £ | 350 | | | 474 | |
| 2.730% notes, issued in May 2019 and due in May 2034 | £ | 315 | | | 427 | |
| 5.875% bonds, $100 issued in March 2005 and $150 issued in June 2011, both due in March 2035 | $ | 250 | | | 250 | |
| 4.650% notes, $300 issued in March 2017 and $250 issued in December 2017, both due in March 2047 | $ | 550 | | | 550 | |
| Total principal amount | | | $ | 12,257 | |
| Unamortized net premiums and deferred financing costs | | | 243 | |
| | | $ | 12,500 | |
(1) In connection with our merger with VEREIT, we completed our debt exchange offer to exchange all outstanding notes issued by VEREIT OP on November 9, 2021 for new notes issued by Realty Income, pursuant to which approximately 99.2% of the outstanding notes issued by VEREIT OP were exchanged for a like aggregate principal amount of the notes issued by Realty Income. Prior to the completion of our merger with VEREIT on November 1, 2021, these notes were not the obligation of Realty Income. With respect to the notes originally issued by VEREIT OP that remained outstanding, we amended the indenture governing such notes to, among other things, eliminate substantially all of the restrictive covenants in such indenture.
In January 2022, we issued £250.0 million of 1.875% senior unsecured notes due January 2027 (the "January 2027 Notes") and £250.0 million of 2.500% senior unsecured notes due January 2042 (the "January 2042 Notes"). The public offering price for the January 2027 Notes was 99.487% of the principal amount, for an effective semi-annual yield to maturity of 1.974%, and the public offering price for the January 2042 Notes was 98.445% of the principal amount, for an effective semi-annual yield to maturity of 2.584%. Combined, the new issues of the January 2027 Notes and the January 2042 Notes havebonds were $21.5 billion, with a weighted average termmaturity of approximately 12.55.9 years and a weighted average effective semi-annual yield to maturityinterest rate of 3.9%. As of December 31, 2023, approximately 2.28%.
In December 2021, we completed the early redemption on all $750.0 million in principal amount94% of our total debt was fixed rate debt. See notes 7 through 10 to the consolidated financial statements for additional information about our outstanding 4.650% notes due Augustdebt, along with our debt financing activities during the year ended December 31, 2023 plus accrued and unpaid interest.below.
Note Issuances
During the year ended December 31, 20212023, we issued the following notes and bonds (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 Issuances | | Date of Issuance | | Maturity Date | | Principal amount used | | Price of par value | | Effective yield to maturity |
| 1.125% notes | | July 2021 | | July 2027 | | £ | 400 | | | 99.31 | % | | 1.24 | % |
| 1.750% notes | | July 2021 | | July 2033 | | £ | 350 | | | 99.84 | % | | 1.76 | % |
4.600% notes (1) | | November 2021 | | February 2024 | | $ | 485 | | | 100.00 | % | | 4.60 | % |
4.625% notes (1) | | November 2021 | | November 2025 | | $ | 544 | | | 100.00 | % | | 4.63 | % |
4.875% notes (1) | | November 2021 | | June 2026 | | $ | 596 | | | 100.00 | % | | 4.88 | % |
3.950% notes (1) | | November 2021 | | August 2027 | | $ | 594 | | | 100.00 | % | | 3.95 | % |
3.400% notes (1) | | November 2021 | | January 2028 | | $ | 598 | | | 100.00 | % | | 3.40 | % |
2.200% notes (1) | | November 2021 | | June 2028 | | $ | 497 | | | 100.00 | % | | 2.20 | % |
3.100% notes (1) | | November 2021 | | December 2029 | | $ | 596 | | | 100.00 | % | | 3.10 | % |
2.850% notes (1) | | November 2021 | | December 2032 | | $ | 699 | | | 100.00 | % | | 2.85 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Note Issuance | | Date of Issuance | | Maturity Date | | Principal amount | | Price of par value | | Effective yield to maturity |
| 5.050% Notes | | January 2023 | | January 2026 | | $ | 500.0 | | | 99.618 | % | | 5.189 | % |
| 4.850% Notes | | January 2023 | | March 2030 | | $ | 600.0 | | | 98.813 | % | | 5.047 | % |
| 4.700% Notes | | April 2023 | | December 2028 | | $ | 400.0 | | | 98.949 | % | | 4.912 | % |
| 4.900% Notes | | April 2023 | | July 2033 | | $ | 600.0 | | | 98.020 | % | | 5.148 | % |
| 4.875% Notes | | July 2023 | | July 2030 | | € | 550.0 | | | 99.421 | % | | 4.975 | % |
| 5.125% Notes | | July 2023 | | July 2034 | | € | 550.0 | | | 99.506 | % | | 5.185 | % |
| 5.750% Notes | | December 2023 | | December 2031 | | £ | 300.0 | | | 99.298 | % | | 5.862 | % |
| 6.000% Notes | | December 2023 | | December 2039 | | £ | 450.0 | | | 99.250 | % | | 6.075 | % |
| | | | | | | | | | |
| | | | | | | | | | |
(1)In January 2024, we issued $450.0 million of 4.750% senior unsecured notes due February 2029 and $800.0 million of5.125%senior unsecured notes due February 2034. In connection with our merger with VEREIT,the Merger, we also completed our debtthe $2.7 billion exchange offer to exchange allin principal of outstanding notes issued by VEREIT OP on November 9, 2021 for new notes issued by Realty Income, pursuant to which approximately 99.2% of the outstanding notes issued by VEREIT OP were exchanged. We issued $1,000 principal amount of Realty Notes for each validly tendered VEREIT Notes with $1,000 principal amount. For this reason, we denote our “Price of par value” as 100%. Prior Spirit OP.See note 21, Subsequent Events,to the completionconsolidated financial statements for further details.
Term Loans
In January 2023, we entered into a term loan agreement, permitting us to incur multicurrency term loans, up to an aggregate of our merger with VEREIT on November 1, 2021, these notes were not the obligation of Realty Income. With respect to the notes originally issued by VEREIT OP that remained outstanding, we amended the indenture governing such notes to, among other things, eliminate substantially all of the restrictive covenants$1.5 billion in such indenture.
We intend to allocate an equal amount of the net proceeds from the July 2021 Sterling-denominated offering of 1.125% notes due July 2027 of £400.0 million (the "July 2027 Notes"), which approximated $546.3 million, and the July 2021 Sterling-denominated offering of 1.750% notes due July 2033 of £350.0 million (the "July 2033 Notes"), which approximated $480.6 million, as converted at the applicable exchange rate on the closing of the offerings, to finance or refinance, in whole or in part, new or existing eligible green projects in the categories outlined in our Green Financing Framework, which is designed to align with the International Capital Markets Association ("ICMA") Green Bond Principles 2021. Pending the allocation of an amount equal to the net proceeds from the offering of the notes to eligible green projects, we may temporarily use all or a portion of the net proceeds to repay any outstanding indebtedness or for liability management activities, or invest such net proceeds in accordance with our cash investment policy.
All of our outstanding notes and bonds have fixed interest rates and contain various covenants, with which we remained in compliance astotal borrowings. As of December 31, 2021. Additionally,2023, we had $1.1 billion in multicurrency borrowings, including $90.0 million, £705.0 million, and €85.0 million in outstanding borrowings. The 2023 term loans mature in January 2025 with one remaining 12-month maturity extension available at our option. In conjunction with our 2023 term loans, we entered into interest rate swaps which fix our per annum interest rate. As of December 31, 2023, the exception of our £400.0 million of 1.625% senior unsecured notes issued in October 2020, our January 2027 Notes, our July 2027 Notes, our July 2033 Notes, and our January 2042 Notes, in each case whereeffective interest is paid annually,rate, after giving effect to the interest on our remaining senior unsecured note and bond obligations is paid semiannually.rate swaps, was 5.0%.
Covenants
The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our senior notes and bonds. These calculations, which are not based on U.S.accounting principles generally accepted accounting principles ("GAAP") measurements,in U.S. GAAP, are presented to investors to show our ability to incur additional debt under the terms of our senior notes and bonds as well as to disclose our current compliance with such covenants and are not measures of our liquidity or performance. The actual amounts as of December 31, 20212023, are:
| | | | | | | | |
| Note Covenants | Required | | | | | | | Actual |
Note Covenants | Required | Actual |
| Limitation on incurrence of total debt | < 60% of adjusted assets | 41.139.7 | % |
| Limitation on incurrence of secured debt | < 40% of adjusted assets | 3.11.6 | % |
Debt service coverage (trailing 12 months)(1) | > 1.5 x1.5x | 5.64.7x |
| Maintenance of total unencumbered assets | > 150% of unsecured debt | 252.9257.9 | % |
(1) Our debt service coverage ratio is calculated on a pro forma basis for the preceding four-quarter period on the assumptions that: (i) the incurrence of any debt (as defined in the covenants) incurred by us since the first day of such four-quarter period and the application of the proceeds therefrom (including to refinance other Debtdebt since the first day of such four-quarter period), (ii) the repayment or retirement of any of our debt since the first day of such four-quarter period, and (iii) any acquisition or disposition by us of any asset or group since the first day of such four quarters had in each case occurred on January 1, 2021,2023 and subject to certain additional adjustments. Such pro forma ratio has been prepared on the basis required by that debt service covenant, reflects various estimates and assumptions and is subject to other uncertainties, and therefore does not purport to reflect what our actual debt service coverage ratio would have been had transactions referred to in clauses (i), (ii) and (iii) of the preceding sentence occurred as of January 1, 2021,2023, nor does it purport to reflect our debt service coverage ratio for any future period. The following is our calculation of debt service and fixed charge coverage at December 31, 20212023 (in thousands, for trailing twelve months):
| | | | | |
| Net income available to common stockholders | $ | 872,309 |
| Plus: interest expense, excluding the amortization of deferred financing costs | 703,883 |
| Plus: provision for taxes | 52,021 |
| Plus: depreciation and amortization | 1,895,177 |
| Plus: provisions for impairment | 82,208 |
| Plus: pro forma adjustments | 360,009 |
| Less: gain on sales of real estate | (25,667) | |
| Income available for debt service, as defined | $ | 3,939,940 |
| Total pro forma debt service charge | $ | 837,945 |
| Debt service and fixed charge coverage ratio | 4.7x |
| | | | | |
Net income available to common stockholders
| $ | 359,456 | |
Plus: interest expense, excluding the amortization of deferred financing costs | 312,596 | |
Plus: loss on extinguishment of debt | 97,178 | |
Plus: provision for taxes | 31,657 | |
Plus: depreciation and amortization | 897,835 | |
Plus: provisions for impairment | 38,967 | |
Plus: pro forma adjustments | 949,305 | |
Less: gain on sales of real estate | (55,798) | |
Income available for debt service, as defined | $ | 2,631,196 | |
Total pro forma debt service charge | $ | 470,582 | |
Debt service and fixed charge coverage ratio | 5.6 | |
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 December 31, 2021, we had cash and cash equivalents totaling $258.6 million, inclusive of £105.1 million Sterling and €7.2 million Euro.
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 next twelve months. We intend, however, to use permanent or long-term capital to fund property acquisitions and to repay future borrowings under our credit facility and commercial paper program.
Credit Agency Ratings
The borrowing interest rates under our revolving credit facility are based upon our ratings assigned by credit rating agencies. As of December 31, 2021,2023, we were assigned the following investment grade corporate credit ratings on our senior unsecured notes and bonds: Moody’s Investors Service has assigned a rating of A3 with a “stable” outlook and Standard & Poor’s Ratings Group has assigned a rating of A- with a “stable” outlook. In addition, we were assigned the following ratings on our commercial paper at December 31, 2021:2023: Moody's Investors Service has assigned a rating of P-2 and Standard & Poor's Ratings Group has assigned a rating of A-2.
Based on our credit agency ratings as of December 31, 2021,2023, interest rates under our credit facility for U.S. borrowings would have been at the facility interest rate was LIBOR,SOFR, plus 0.775%0.725% with a SOFR adjustment charge of 0.10% and a revolving credit facility commitment fee of 0.125%, for all-in drawn pricing of 0.90%0.95% over LIBOR. OurSOFR, for British Pound Sterling borrowings, at the SONIA, plus 0.725% with a SONIA adjustment charge of 0.0326% and a revolving credit facility fee of 0.125%, for all-in drawn pricing of 0.8826% over SONIA, and for Euro Borrowings at one-month EURIBOR, plus 0.725%, and a revolving credit facility fee of 0.125%, for all-in drawn pricing of 0.85% over one-month EURIBOR. In addition, our credit facility provides that the interest raterates can range between: (i) LIBOR,SOFR/SONIA/EURIBOR, plus 1.45%1.40% if our credit rating is lower than BBB-/Baa3 or our senior unsecured debt is unrated and (ii) LIBOR,SOFR/SONIA/EURIBOR, plus 0.75%0.70% if our credit rating is A/A2 or higher. In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which rangeranges from: (i) 0.30% for a rating lower than BBB-/Baa3 or unrated, and (ii) 0.10% for a credit rating of A/A2 or higher. Our revolving credit facility and term loan facility were amended in December 2021 to include provisions for establishing alternative reference rates when LIBOR is no longer available.
We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease. 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.
Table of ObligationsMaterial Cash Requirements
The following table summarizes the maturity of each of our obligations as of December 31, 2021 (in2023 (dollars in millions):
| Year of
Maturity | Credit Facility and Commercial Paper Program(1) | | Notes and Bonds(2) | | Term Loan(3) | | Mortgages Payable (4) | | Interest (5) | | Ground Leases Paid by Realty Income(6) | | Ground Leases
Paid by Our
Clients(7) | | Other(8) | | Totals |
| 2022 | $ | 901.4 | | | $ | — | | | $ | — | | | $ | 271.1 | | | $ | 468.4 | | | $ | 9.2 | | | $ | 30.7 | | | $ | 353.9 | | | $ | 2,034.7 | |
| 2023 | 650.0 | | | — | | | — | | | 62.1 | | | 452.2 | | | 9.3 | | | 31.1 | | | 6.5 | | | 1,211.2 | |
| Credit Facility and Commercial Paper (1) | | | Credit Facility and Commercial Paper (1) | | Unsecured Term Loans (2) | | Mortgages Payable | | Senior Unsecured Notes and Bonds (3) | | Interest (4) | | Ground Leases Paid by the Company (5) | | Ground Leases Paid by Our Clients (6) | | Other (7) | | Totals |
| 2024 | 2024 | — | | | 850.0 | | | 250.0 | | | 733.0 | | | 401.0 | | | 9.0 | | | 31.1 | | | — | | | 2,274.1 | |
| 2025 | 2025 | — | | | 1,050.0 | | | — | | | 42.0 | | | 355.4 | | | 9.2 | | | 30.9 | | | — | | | 1,487.5 | |
| 2026 | 2026 | — | | | 1,575.0 | | | — | | | 1.2 | | | 304.0 | | | 9.3 | | | 28.7 | | | 1,918.2 | |
| 2027 | |
| 2028 | |
| Thereafter | Thereafter | — | | | 8,782.3 | | | — | | | 4.7 | | | 1,348.1 | | | 270.9 | | | 243.0 | | | — | | | 10,649.0 | |
| Totals | Totals | $ | 1,551.4 | | | $ | 12,257.3 | | | $ | 250.0 | | | $ | 1,114.1 | | | $ | 3,329.1 | | | $ | 316.9 | | | $ | 395.5 | | | $ | 360.4 | | | $ | 19,574.7 | |
(1) The initial term of the credit facility expires in March 2023June 2026 and includes, at our option, two six-month extensions. At December 31, 2021,2023, there were $650.0 million inno borrowings under our revolving credit facility. Thefacility, and commercial paper borrowingsprograms outstanding at December 31, 2021 totaled $901.4were $764.4 million, andmature which matured between January 20222024 and April 2022.February 2024.
(2) Excludes both non–cash net premiums recorded on notes payableThe maturity date for our 2023 term loans reflects the closing of $295.5 millionour previous twelve-month extension option and deferred financing costs of $53.1 million. The table of obligations also excludesassumes the January 2022 issuances of additional twelve-month extension available at the company's option is exercised.
£250.0 million(3) Excludes our January 2024 issuance of $450.0 million of 4.750% senior unsecured notes due January 2027February 2029 and £250.0$800.0 million of 5.125% senior unsecured notes due January 2042.
(3) Excludes deferred financing costs of $443,000.February 2034.
(4) Excludes both non–cash net premiums recorded on the mortgages payable of $28.7 million and deferred financing costs of $790,000.
(5)Interest on the commercial paper programs, term loan, notes, bonds,loans, mortgages payable, credit facility, and commercial paper programsenior unsecured notes and bonds has been calculated based on outstanding balances at period end through their respective maturity dates. Excludes interest fromon the January 20222024 issuances of £250.0$450.0 million of 1.875%unsecured senior unsecured notes due January 2027February 2029 and £250.0$800.0 million of 2.500%unsecured senior unsecured notes due January 2042.February 2034.
(6) (5)Realty Income We currently payspay the ground lessors directly for the rent under the ground leases.
(7)(6) Our clients, who are generally sub-clientssub-tenants clients under ground leases, are responsible for paying the rent under these ground leases. In the event our client fails to pay the ground lease rent, we are primarily responsible.
(8)(7) “Other” consists of $285.7$740.0 million of commitments under construction contracts, and $74.7$32.7 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements.
Investments in Unconsolidated Entities
As of December 31, 2023, our pro-rata share of secured debt of unconsolidated entities was approximately $659.2 million.
DIVIDEND POLICY
Distributions are paid monthly to holders of shares of our common stock.
Distributions are paid monthly to the limited partners holding common units of Realty Income, L.P., each on a per unit basis that is equal to the amount paid per share to our common stockholders.
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 taxable income (excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our taxable income (including net capital gains). In 2023, our cash distributions to common stockholders totaled $2.11 billion, or approximately 115.9% of estimated taxable income of $1.82 billion. Certain measures are available to us to reduce or eliminate our tax exposure as a REIT, and accordingly, no provision for federal income taxes, other than our taxable REIT subsidiaries (each, a "TRS"), has been made. Our estimated taxable income reflects non-cash deductions for depreciation and amortization. Our estimated taxable income is presented to show our compliance with REIT dividend requirements and is not a measure of our liquidity or operating performance. We intend to continue to make distributions to our stockholders that are sufficient to meet this dividend requirement and that will reduce or eliminate our exposure to income taxes. Furthermore, we believe our cash on hand and funds from operations are sufficient to support our current level of cash distributions to our stockholders. We distributed $3.051 per share to stockholders during 2023, representing 76.3% of our diluted Adjusted Funds from Operations Available to Common Stockholders ("AFFO") per share of $4.00.
Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, Funds from Operations Available to Common Stockholders ("FFO"), Normalized Funds from Operations Available to Common Stockholders ("Normalized FFO"), AFFO, cash flow from operations, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, our debt service requirements, and any other factors the Board of Directors may deem relevant. In addition, our credit facility commercial paper program, term loan,contains financial covenants that could limit the amount of distributions payable by us in the event of a default, and notes payable obligations are unsecured. Accordingly,which prohibit the payment of distributions on our common stock in the event that we have not pledgedfail to pay when due (subject to any assets as collateral for these obligations.applicable grace period) any principal or interest on borrowings under our credit facility.
Unconsolidated Investments
As a resultDistributions of our mergercurrent 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” is generally 20%. In general, dividends payable by REITs are not eligible for the reduced tax rate on qualified dividend income, except to the extent that certain holding requirements have been met with VEREIT,respect to the REIT’s stock and the REIT’s dividends are attributable to dividends received from certain taxable corporations (such as our TRSs) or to income that was subject to tax at the corporate or REIT level (for example, if we assumed an equity method investmentdistribute taxable income that we retained and paid tax on in three unconsolidated entities. We are responsiblethe prior taxable year). However, non-corporate stockholders, including individuals, generally may deduct up to fund20% of dividends from a REIT, other than capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning after December 31, 2017, and before January 1, 2026.
Distributions in excess of earnings and profits generally will first be treated as a non-taxable reduction in the stockholders’ basis in their stock, but not below zero. Distributions in excess of that basis generally will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 6.8% of the distributions to our proportionate sharecommon stockholders, made or deemed to have been made in 2023, were classified as a return of any operating cash deficits. There are no further material commitments related to these investments at this time. capital for federal income tax purposes.
RESULTS OF OPERATIONS
The debt held by the unconsolidated entities is secured by its properties, though is non-recourse to us.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, including the current market, the global credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and global credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.
Acquisitions During 2021
Belowfollowing is a listingcomparison of our acquisitions in the U.S. and Europeresults of operations for the year ended December 31, 2021 (excludes properties assumed on November 1, 20212023 compared to the year ended December 31, 2022.
Total Revenue
The following summarizes our total revenue (dollars in conjunction withthousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | | | | 2023 | | 2022 | | | | Change | | |
| Rental (excluding reimbursable) | | | | | | | $ | 3,683,949 | | | $ | 3,114,972 | | | | | $ | 568,977 | | | |
| Rental (reimbursable) | | | | | | | 274,201 | | | 184,685 | | | | | 89,516 | | | |
| Other | | | | | | | 120,843 | | | 44,024 | | | | | 76,819 | | | |
| Total revenue | | | | | | | $ | 4,078,993 | | | $ | 3,343,681 | | | | | $ | 735,312 | | | |
Rental Revenue (excluding reimbursable)
The table below summarizes our merger with VEREIT)rental revenue (excluding reimbursable) for the years ended December 31, 2023 and 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Properties | | Leasable Square Feet | | Investment
($ in thousands) | | Weighted Average Lease Term (Years) | | Initial Weighted Average Cash Lease Yield (1) |
Year ended December 31, 2021 (2) | | | | | | | | | |
Acquisitions - U.S. (in 43 states) | 714 | | | 14,727,335 | | | $ | 3,608,573 | | | 14.1 | | 5.5 | % |
Acquisitions - Europe (U.K. and Spain) | 129 | | | 9,196,345 | | | 2,558,909 | | | 11.6 | | 5.5 | % |
| Total Acquisitions | 843 | | | 23,923,680 | | | $ | 6,167,482 | | | 13.1 | | 5.5 | % |
Properties under Development (3) | 68 | | | 2,681,676 | | | 243,278 | | | 15.7 | | 6.0 | % |
Total (4) | 911 | | | 26,605,356 | | | $ | 6,410,760 | | | 13.2 | | 5.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Properties | | | | Years ended December 31, |
| | | | | | | | | 2023 | | 2022 | | Change |
| Properties acquired during 2023 & 2022 | | 2,608 | | | | | | | | $ | 808,797 | | | $ | 184,684 | | | $ | 624,113 | |
Same store rental revenue (1) | | 10,498 | | | | | | | | 2,851,747 | | | 2,799,549 | | | 52,198 | |
Constant currency adjustment (2) | | N/A | | | | | | | | (10,001) | | | (11,228) | | | 1,227 | |
| Properties sold during and prior to 2023 | | 312 | | | | | | | | 5,246 | | | 30,371 | | | (25,125) | |
| Straight-line rent and other non-cash adjustments | | N/A | | | | | | | | (34,721) | | | 20,871 | | | (55,592) | |
Vacant rents, development and other (3) | | 352 | | | | | | | | 60,097 | | | 83,266 | | | (23,169) | |
Other excluded revenue (4) | | N/A | | | | | | | | 2,784 | | | 7,459 | | | (4,675) | |
| Totals | | | | | | | | | | $ | 3,683,949 | | | $ | 3,114,972 | | | $ | 568,977 | |
(1)The initial weighted average cash lease yield for a property is generally computed as estimated contractual first year cash net operating income, which, in the case of a net leased property, is equal to the aggregate cash base rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that a client could default on the payment of contractual rent, we cannot provide assurance that
the actual return on the funds invested will remain at the percentages listed above. Contractual net operating income used in the calculation of initial average cash yield includes approximately $8.5 million received as settlement credits for 41 properties as reimbursement of free rent periodssame store rental revenue percentage increase for the year ended December 31, 2021.2023 as compared to the same period in 2022 is 1.9%.
In(2)For purposes of comparability, same store rental revenue is presented on a constant currency basis using the caseexchange rate as of a propertyDecember 31, 2023. None of the properties in France, Germany, Ireland, Italy, or Portugal met our same store pool definition for the periods presented.
(3)Relates to the aggregate of (i) rental revenue from 325 properties that were available for lease during part of 2023 or 2022, and (ii) rental revenue for 27 properties under development or expansion,completed developments that do not meet our same store pool definition for the periods presented.
(4)Primarily consists of reimbursements for tenant improvements and rental revenue that is not contractual base rent such as lease rate is generally fixed suchtermination.
For purposes of determining the same store rent property pool, we include all properties that rent varies based onwere owned for the actual total investment in order to provide a fixed rate of return. Whenentire year-to-date period, for both the lease does not providecurrent and prior year, except for a fixed rate of return on a propertyproperties during the current or prior year that; (i) were vacant at any time, (ii) were under development or expansion,redevelopment, or (iii) were involved in eminent domain and rent was reduced. Each of the initial weighted average cash lease yield is computed as follows: estimated cash net operating income (determined byexclusions from the lease)same store pool are separately addressed within the applicable sentences above, explaining the changes in rental revenue for the first full year of each lease, divided by our projected total investmentperiod.
Of the 14,262 in-place leases in the property, including land, construction and capitalized interest costs.
(2) Noneportfolio, which excludes 270 vacant units, 11,717, or 82.2%, were under leases that provide for increases in rents through: base rent increases tied to inflation (typically subject to ceilings), percentage rent based on a percentage of our investments during 2021 caused any one client to be 10%the clients’ gross sales, fixed increases, or a combination of two or more of the aforementioned rent provisions.
Rent based on a percentage of our total assets atclient's gross sales, or percentage rent, was $14.8 million and $14.9 million for the years ended December 31, 2021.
(3) Includes £7.0 millionof investments in U.K. development properties, converted at the applicable exchange rates on the funding dates.
(4) Our clients occupying the new properties are 83.6% retail2023 and 16.4% industrial, based on2022, respectively, which represents less than 1% of rental revenue. Approximately 40% of the rental revenue generated from acquisitions during 2021 is from our investment grade rated clients, their subsidiaries or affiliated companies.
Portfolio Discussion
Leasing Results
At December 31, 2021, we had 1642023, our portfolio of 13,458 properties was 98.6% leased with 193 properties available for lease, outas compared to 99.0% leased with 126 properties available for lease at December 31, 2022. It has been our experience that approximately 1% to 4% of 11,136 properties in our property portfolio which represents a 98.5% occupancy rate based onwill be available for lease at any given time; however, it is possible that the number of properties available for lease or sale could increase in our portfolio.the future, given the nature of economic cycles and other unforeseen global events.
Rental Revenue (reimbursable)
A number of our portfolio activityleases provide for the periods indicated below:
| | | | | |
Three months ended December 31, 2021 | |
Properties availablecontractually obligated reimbursements from clients for recoverable real estate taxes and operating expenses. The increase in contractually obligated reimbursements by our clients for lease at September 30, 2021 | 86 | |
Lease expirations (1)(2)
| 354 | |
Re-leases to same client | (210) | |
Re-leases to new client | (13) | |
Vacant dispositions | (53) | |
Properties available for lease at December 31, 2021 | 164 | |
| | | | | |
Year ended December 31, 2021 | |
Properties available for lease at December 31, 2020 | 140 | |
Lease expirations (1)(2)
| 529 | |
Re-leases to same client | (336) | |
Re-leases to new client | (36) | |
Vacant dispositions | (133) | |
Properties available for lease at December 31, 2021 | 164 | |
(1)Includes 103 net vacancies assumed from the combined effect of our merger with VEREIT and spin-off of office properties to Orion Office REIT Inc. in November 2021.
(2)Includes scheduled and unscheduled expirations (including leases rejected in bankruptcy), as well as future expirations resolved in the periods indicated above.
During the three months ended December 31, 2021, the annual new rent on re-leases was $49.09 million, as compared to the previous annual rent of $48.22 million on the same units, representing a rent recapture rate of 101.8% on the units re-leased. We re-leased six units to new clients without a period of vacancy, and nine units to new clients after a period of vacancy.
During the year ended December 31, 2021, the annual new rent on re-leases was $89.23 million,2023 as compared to the previous annual rent of $86.29 million onwith the same units, representingperiod in 2022 is primarily due to higher recoverable real estate tax taxes from overall portfolio growth.
Other Revenue
Other revenue primarily relates to interest income recognized on financing receivables for certain leases with above-market terms and interest income recognized on client loans and preferred equity investments. The increase in other revenue for the year ended December 31, 2023 as compared with the same period in 2022 is primarily due to higher interest income on financing receivables of $60.9 million driven by an increase in recent sale-leaseback transactions with above-market lease terms, in addition to an increase of $17.0 million from interest income earned on new loans and preferred equity investments entered into during the year.
Total Expenses
The following summarizes our total expenses (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | |
| | | | | | | 2023 | | 2022 | | | | Change | | |
| Depreciation and amortization | | | | | | | $ | 1,895,177 | | $ | 1,670,389 | | | | $ | 224,788 | | |
| Interest | | | | | | | 730,423 | | 465,223 | | | | 265,200 | | |
| Property (excluding reimbursable) | | | | | | | 42,763 | | 41,645 | | | | 1,118 | | |
| Property (reimbursable) | | | | | | | 274,201 | | 184,685 | | | | 89,516 | | |
| General and administrative | | | | | | | 144,536 | | 138,459 | | | | 6,077 | | |
| Provisions for impairment | | | | | | | 87,082 | | 25,860 | | | | 61,222 | | |
| Merger and integration-related costs | | | | | | | 14,464 | | 13,897 | | | | 567 | | |
| Total expenses | | | | | | | $ | 3,188,646 | | $ | 2,540,158 | | | | $ | 648,488 | | |
Total revenue (1) | | | | | | | $ | 3,804,792 | | $ | 3,158,996 | | | |
| | |
General and administrative expenses as a percentage of total revenue (1) | | | | | | | 3.8 | % | | 4.4 | % | | | |
| | |
Property expenses (excluding reimbursable) as a percentage of total revenue (1) | | | | | | | 1.1 | % | | 1.3 | % | | | |
| | |
(1) Excludes rental revenue (reimbursable).
Depreciation and Amortization
The increase in depreciation and amortization for the year ended December 31, 2023 as compared with the same period in 2022 is primarily due to overall portfolio growth from acquisitions.
Interest Expense
The following is a rent recapture ratesummary of 103.4% on the units re-leased. We re-leased 13 units to new clients without a period of vacancy, and 33 units to new clients after a period of vacancy.
As partcomponents of our re-leasing costs, we pay leasing commissions to unrelated, third party real estate brokers consistent with the commercial real estate industry standard, and sometimes provide rent concessions to our clients. We do not consider the collective impact of the leasing commissions or rent concessions to our clients to be material to our financial position or results of operations.interest expense (in thousands):
At December 31, 2021, our average annualized contractual rent was approximately $14.03 per square foot on the 10,972 leased properties in our portfolio. At December 31, 2021, we classified 33 properties, with a carrying amount of $30.5 million, as real estate and lease intangibles held for sale, net on our balance sheet. The expected sale of these properties does not represent a strategic shift that will have a major effect on our operations and financial | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | |
| | | | | 2023 | | 2022 | | |
| Interest on our credit facility, commercial paper, term loans, mortgages, senior unsecured notes and bonds, and interest rate swaps | | | | | $ | 788,344 | | $ | 523,384 | | |
| Credit facility commitment fees | | | | | 5,357 | | 4,908 | | |
| Amortization of debt origination and deferred financing costs | | | | | 26,670 | | 14,149 | | |
| (Gain) loss on interest rate swaps | | | | | (7,189) | | 718 | | |
| Amortization of net mortgage premiums | | | | | (12,803) | | (13,622) | | |
| Amortization of net note premiums | | | | | (60,657) | | (62,989) | | |
| Capital lease obligation | | | | | 1,509 | | 1,464 | | |
| Interest capitalized | | | | | (10,808) | | (2,789) | | |
| Interest expense | | | | | $ | 730,423 | | $ | 465,223 | | |
| Credit facility, commercial paper, term loans, mortgages and senior unsecured notes and bonds | | | | | | | | | |
| Average outstanding balances | | | | | $ | 20,537,222 | | $ | 16,460,928 | | |
| Weighted average interest rates | | | | | 3.83 | % | | 3.15 | % | | |
The increase in interest expense for the year ended December 31, 2023 as compared with the same period in 2022 is primarily due to higher average debt and weighted average interest. See notes to the accompanying consolidated financial statements for additional information regarding our indebtedness.
Property Expenses (excluding reimbursable)
Property expenses (excluding reimbursable) consist of costs associated with properties available for lease, non-net-leased properties and general portfolio expenses and include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections and legal fees.
The increase in property expenses (excluding reimbursable) for the year ended December 31, 2023 as compared with the same period in 2022 is consistentprimarily impacted by property tax and property management expenses.
Property Expenses (reimbursable)
Property expenses (reimbursable) consist of reimbursable property taxes and operating costs paid on behalf of our clients. The increase in property expenses (reimbursable) for the year ended December 31, 2023 is proportional to overall portfolio growth.
General and Administrative Expenses
General and administrative expenses are expenditures related to the operations of our company, including employee-related costs, professional fees, and other general overhead costs associated with running our existing disposition strategybusiness.
The increase in general and administrative expenses for the year ended December 31, 2023 as compared with the same period in 2022 is primarily due to further enhancehigher payroll-related compensation costs associated with the growth of the company.
Provisions for Impairment
Provisions for impairment consist of impairment on long-lived assets and allowances for credit losses on financing receivables and loans.
The increase in impairment for the year ended December 31, 2023 as compared with the same period in 2022 is primarily due to higher provisions for impairment associated with our real estate portfolioassets, summarized in the following table (dollars in millions):
| | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | |
| | | | | 2023 | | 2022 | | |
| Carrying value prior to impairment | | | | | $ | 194.5 | | | $ | 140.9 | | | |
Less: total provisions for impairment (1) | | | | | (82.2) | | | (25.9) | | | |
| Carrying value after impairment | | | | | $ | 112.3 | | | $ | 115.0 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1) Excludes provision for current expected credit loss of $4.9 million at December 31, 2023.
Merger and maximize portfolio returns.Integration-Related Costs
InvestmentsMerger and integration-related costs consist of advisory fees, attorney fees, accountant fees, and incremental and non-recurring costs necessary to convert data and systems, retain employees, and otherwise enable us to operate the acquired business or assets efficiently.
For the year ended December 31, 2023, we incurred $14.5 million of merger and integration-related costs, the majority of which was related to the Spirit merger that closed in Existing PropertiesJanuary 2024. For the year ended December 31, 2022, we incurred $13.9 million of merger and integration-related transaction costs in conjunction with our VEREIT merger.
During 2021, we capitalized costsGain on Sales of $21.9 million on existing properties in our portfolio, consisting of $6.3 million for re-leasing costs, $978,000 for recurring capital expenditures, and $14.6 million for non-recurring building improvements. In comparison, during 2020, we capitalized costs of $7.0 million on existing properties in our portfolio, consisting of $1.8 million for re-leasing costs, $198,000 for recurring capital expenditures, and $5.0 million for non-recurring building improvements.Real Estate
The majorityfollowing summarizes our property dispositions (dollars in millions):
| | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | |
| | | | | 2023 | | 2022 | | |
| Number of properties sold | | | | | 121 | | | 170 | | | |
| Net sales proceeds | | | | | $ | 117.4 | | | $ | 436.1 | | | |
| Gain on sales of real estate | | | | | $ | 25.7 | | | $ | 103.0 | | | |
Foreign Currency and parking lot resurfacing and replacements. The amounts of our capital expenditures can vary significantly, depending onDerivative (Loss) Gain, Net
We borrow in the rental market, credit worthiness of our clients, the lease term and the willingness of our clients to pay higher rental revenue over the termsfunctional currencies of the leases.
We define recurring capital expenditures as mandatory and recurring landlord capital expenditure obligations that have a limited useful life. We define non-recurring capital expenditures as property improvementscountries in which we invest additional capitalinvest. Net foreign currency gain and loss are primarily related to the remeasurement of intercompany debt from foreign subsidiaries.Derivative gain and loss primarily relates to mark-to-market adjustments on derivatives that extenddo not qualify for hedge accounting and settlement of designated derivatives reclassified from Accumulated Other Comprehensive Income ("AOCI").
Foreign currency and derivative (loss) gain, net for the useful lifeyear ended December 31, 2023 was a loss of $13.4 million, primarily due to foreign currency fluctuations related to the remeasurement of intercompany debt.
In June 2022, following the early prepayment of our Sterling-denominated intercompany loan receivable from our consolidated foreign subsidiaries, we terminated the four cross-currency swaps used to hedge the foreign currency exposure of the properties.
Increasesintercompany loan.As the hedge relationship was terminated and the future principal and interest associated with the prepaid intercompany loan will not occur, $20.0 million gain was reclassified from AOCI to 'Foreign currency and derivative (loss) gain, net' during the year ended December 31, 2022. The reclassification from AOCI was offset by $7.9 million in Monthly Dividends to Common Stockholders
We have continued our 53-year policy of paying monthly dividends. In addition, we increasedlosses from the dividend five times during 2021 and once during 2022. As of February 2022, we have paid 97 consecutive quarterly dividend increases and increased the dividend 114 times since our listingintercompany loan remeasurement on the NYSEfinal exchange.
Equity in 1994.Income and Impairment of Investment in Unconsolidated Entities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Month | | Month | | Monthly Dividend | | Increase |
| 2021 Dividend increases | | Declared | | Paid | | per share | | per share |
| 1st increase | | Dec 2020 | | Jan 2021 | | $ | 0.2345 | | | $ | 0.0005 | |
| 2nd increase | | Mar 2021 | | Apr 2021 | | $ | 0.2350 | | | $ | 0.0005 | |
| 3rd increase | | Jun 2021 | | Jul 2021 | | $ | 0.2355 | | | $ | 0.0005 | |
| 4th increase | | Sept 2021 | | Oct 2021 | | $ | 0.2360 | | | $ | 0.0005 | |
| 5th increase | | Nov 2021 | | Dec 2021 | | $ | 0.2460 | | | $ | 0.0100 | |
| | | | | | | | |
| 2022 Dividend Increases | | | | | | | | |
| 1st increase | | Dec 2021 | | Jan 2022 | | $ | 0.2465 | | | $ | 0.0005 | |
The dividends paid per share during 2021 totaled $2.833, as comparedloss for the year ended December 31, 2022 was primarily driven by an other than temporary impairment related to $2.794 during 2020, an increasethe sale of $0.039, or 1.4%. In November 2021, we also made a $2.060 tax distribution of Orion shares, that occurredthree equity method investments acquired in conjunction with the Orion Divestiture on November 12, 2021, after our merger with VEREIT onin November 1, 2021.
Other Income, Net
Certain miscellaneous non-recurring revenue is included in 'other income, net'. The fair market valuedecrease of these shares$6.7 million for tax distribution was determined to be $20.6272 per share, which was calculated using the five day volume weighted average share price after issuance.
The monthly dividend of $0.2465 per share represents a current annualized dividend of $2.958 per share, and an annualized dividend yield of approximately 4.1% based on the last reported sale price of our common stock on the NYSE of $71.59 onyear ended December 31, 2021. Although we expect2023 as compared with the same period in 2022 is primarily due to continuelower gains on insurance proceeds from recoveries on property losses exceeding our policycarrying value.
Income Taxes
Income taxes primarily consist of paying monthly dividends, we cannot guarantee that we will maintaininternational income taxes accrued or paid by us and our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will besubsidiaries, as well as state and local taxes. The increase in any future period.income taxes for the year ended December 31, 2023 as compared with the same period in 2022 is primarily attributable to higher taxable income in the UK; partially offset by lower UK tax rates.
RESULTS OF OPERATIONS
Critical Accounting Policies
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with U.S. GAAP and 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. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in note 21, Summary of Significant Accounting Policies, to our consolidated financial statements.
statements in this annual report on Form 10-K for the year ended December 31, 2023. In order to prepare our consolidated financial statements according to the rules and guidelines set forth by U.S. GAAP, many subjective judgments must be made with regard to critical accounting policies.
Allocation of the Purchase Price of Real Estate Acquisitions
Management must make significant assumptions in determining the fair value of assets acquired and liabilities assumed. When acquiring a property for investment purposes, we typically allocate the cost of real estate acquired, inclusive of transaction costs, to: (1) land, (2) building and improvements, and (3) identified intangible assets and liabilities, based in each case on their relative estimated fair values. Intangible assets and liabilities consist of above-market or below-market lease value and the value of in-place leases, as applicable. Additionally, above–marketabove-market rents on certain leases under which we are a lessor are accounted for as financing receivables amortizing over the lease term, while below–marketbelow-market rents on certain leases under which we are a lessor are accounted for as prepaid rent. In an acquisition of multiple properties, we must also allocate the purchase price among the properties. The allocation of the purchase price is based on our assessment of estimated fair value of the land, building and improvements, and identified intangible assets and liabilities and is often based upon the various characteristics of the market where the property is located. In addition, any assumed mortgages are recorded at their estimated fair values. The estimated fair values of our mortgages payable have been calculated by discounting the future cash flows using applicable interest rates that have been adjusted for factors, such as industry type, client investment grade, maturity date, and comparable borrowings for similar assets. The use of different assumptions in the allocation of the purchase price of the acquired properties and liabilities assumed could affect the timing of recognition of the related revenue and expenses.
Provisions for Impairment - Real Estate Assets
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. 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, a fair value analysis is performed and, to the extent the estimated fair value is less than the current book value, a provision for impairment is recorded to reduce the book value to estimated fair value. Key inputs that we utilize in this analysis include projected rental rates, estimated holding periods, 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 sheets. Our strategy of primarily holding properties, long-term, directly decreases the likelihood of their carrying values not being recoverable, thus requiring the recognition of an impairment. However, if our strategy, or one or more of the above assumptions were to change in the future, an impairment may need to be recognized. If events should occur that require us to reduce the carrying value of our real estate by recording provisions for impairment, they could have a material impact on our results of operations.
When assessing the collectability of future lease payments, one of the key factors we have considered during 2020 and 2021 has been the COVID-19 pandemic. We generally assess collectability based on an analysis of creditworthiness, economic trends, and other facts and circumstances related to our applicable clients. If the collection of substantially all of the future lease payments is less than probable, we will write-off the receivable balances associated with the lease and cease to recognize lease income, including straight-line rent, unless cash is received when due. Unless otherwise specified, references to reserves recorded as a reduction of rental revenue include amounts reserved for in the current period, as well as unrecognized contractual rental revenue and unrecognized straight-line rental revenue for leases accounted for on a cash basis. During 2021, we have entered into rent deferral agreements with certain clients, allowing them to pay rent to us over an extended time period for COVID-related receivables. Additionally, gradual improvements in certain client's financial positions have allowed us to re-assess, and potentially change, this cash basis accounting for outstanding receivables. References to reserve reversals recorded as increases to rental revenue include amounts where the accounting for recognition of rental revenue and straight-line rental revenue has been moved from the cash to the accrual basis. As of December 31, 2021, other than the information related to the reserves we have recorded to such date, we do not have any further client specific information that would change our assessment that collection of substantially all of the future lease payments under our existing leases is probable. However, there may be impacts in future periods that could change this assessment as the situation continues to evolve and as more information becomes available.
The COVID-19 pandemic and the measures taken to limit its spread are negatively impacting the economy across many industries, including the industries in which some of our clients operate. These impacts may continue and increase in severity as the duration or extent of the pandemic increases, which may, in turn, adversely impact the fair value estimates of our real estate and require the recording of impairments on our properties. As a result, we evaluated certain key assumptions involving fair value estimates of our real estate, recording of impairments on our properties and collectability of our accounts receivable for our clients. Due to more positive trends, we did not have to record any provisions for impairment on our theater properties during 2021. However, we continue to evaluate the
potential impacts of the COVID-19 pandemic and the measures taken to limit its spread on our business and industry segments, as the situation continues to evolve and more information becomes available.
The following is a comparison of our results of operations for the years ended December 31, 2021, 2020 and 2019.
Total Revenue
The following summarizes our total revenue (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Increase |
| | | 2021 | | 2020 | | 2019 | | 2021 versus 2020 | | 2020 versus 2019 |
| REVENUE | | | | | | | | | | |
| Rental (excluding reimbursable) | | $ | 1,960,107 | | | $ | 1,560,171 | | | $ | 1,415,733 | | | $ | 399,936 | | | $ | 144,438 | |
| Rental (reimbursable) | | 104,851 | | | 79,362 | | | 69,085 | | | 25,489 | | | 10,277 | |
| Other | | 15,505 | | | 7,554 | | | 3,345 | | | 7,951 | | | 4,209 | |
| Total revenue | | $ | 2,080,463 | | | $ | 1,647,087 | | | $ | 1,488,163 | | | $ | 433,376 | | | $ | 158,924 | |
Rental Revenue (excluding reimbursable)
The table below summarizes the increase in rental revenue (excluding reimbursable) in 2021 compared to 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, | Increase/(Decrease) |
| | Number of Properties | Square Footage (1) | 2021 | 2020 | $ Change | % Change |
| Properties acquired during 2021 & 2020 | | 4,953 | | 105,839,422 | | $ | 413,546 | | $ | 51,951 | | $ | 361,595 | | 696.0 | % |
| Same store rental revenue | | 6,046 | | 93,607,451 | | 1,457,648 | | 1,418,502 | | 39,146 | | 2.8 | % |
| Orion Divestiture | | 92 | | 10,074,923 | | 45,047 | | 50,401 | | (5,354) | | (10.6) | % |
Constant currency adjustment (2) | | N/A | N/A | 2,025 | | (2,861) | | 4,886 | | (170.8) | % |
| Properties sold during 2021 & 2020 | | 283 | | 5,930,654 | | 6,668 | | 21,919 | | (15,251) | | (69.6) | % |
| Straight-line rent and other non-cash adjustments | | N/A | N/A | 11,646 | | (3,587) | | 15,233 | | (424.7) | % |
Vacant rents, development and other (3) | | 137 | | 2,650,240 | | 23,527 | | 23,846 | | (319) | | (1.3) | % |
| Totals | | | | $ | 1,960,107 | | $ | 1,560,171 | | $ | 399,936 | | 25.6 | % |
(1)Excludes 5,869,364 square feet from properties ground leased to clients and 2,100,990 square feet from properties with no land or building ownership.
(2) For purposes of comparability, same store rental revenue is presented on a constant currency basis using the exchange rate as of December 31, 2021 of 1.35 GBP/USD. None of the properties in Spain met our same store pool definition for the periods presented. In addition, the same store pool excludes properties assumed on November 1, 2021 as a result of our merger with VEREIT.
(3) Relates to the aggregate of (i) rental revenue from properties (128 properties comprising 2,292,635 square feet) that were available for lease during part of 2021 or 2020, (ii) rental revenue for properties (nine properties comprising 357,605 square feet) under development, and (iii) rental revenue that is not contractual base rent such as lease termination settlements.
The table below summarizes the increase in rental revenue (excluding reimbursable) in 2020 compared to 2019 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, | Increase/(Decrease) |
| | Number of Properties | Square Footage | 2020 | 2019 | $ Change | % Change |
| Properties acquired during 2020 & 2019 | | 1,014 | | 22,388,061 | | $ | 282,038 | | $ | 85,039 | | $ | 196,999 | | 231.7 | % |
| Same store rental revenue | | 5,403 | | 84,641,826 | | 1,237,358 | | 1,259,303 | | (21,945) | | (1.7) | % |
| Properties sold during 2020 & 2019 | | 221 | | 4,234,228 | | 6,567 | | 22,389 | | (15,822) | | (70.7) | % |
| Straight-line rent and other non-cash adjustments | | N/A | N/A | 7,384 | | 15,177 | | (7,793) | | (51.3) | % |
Vacant rents, development and other (1) | | 180 | | 3,916,555 | | 26,824 | | 33,825 | | (7,001) | | (20.7) | % |
| Totals | | | | $ | 1,560,171 | | $ | 1,415,733 | | $ | 144,438 | | 10.2 | % |
(1)Relates to the aggregate of (i) rental revenue from properties (174 properties comprising 2,973,551 square feet) that were available for lease during part of 2020 or 2019, (ii) rental revenue for properties (six properties comprising 943,004 square feet) under development, and (iii) lease termination settlements.
For purposes of determining the same store rent property pool, we include all properties that were owned for the entire year-to-date period, for both the current and prior year, except for properties during the current or prior year that; (i) were vacant at any time, (ii) were under development or redevelopment, or (iii) were involved in eminent domain and rent was reduced. Each of the exclusions from the same store pool are separately addressed within the applicable sentences above, explaining the changes in rental revenue for the period.
Our calculation of same store rental revenue includes rent deferred for future payment as a result of lease concessions we granted in response to the COVID-19 pandemic and recognized under the practical expedient provided by the Financial Accounting Standards Board (FASB). Same store rental revenue in 2021 was negatively impacted by net reserves recorded as reductions of rental revenue of $6.6 million, compared to $32.9 million in2020. Same store rental revenue in 2020 was negatively impacted by net reserves recorded as reductions of rental revenue of$39.9 million compared to $1.4 million in 2019. Our calculation of same store rental revenue also includes uncollected rent for which we have not granted a lease concession. If these applicable amounts of rent deferrals and uncollected rent were excluded from our calculation of same store rental revenue, the increase for 2021 relative to 2020 would have been 7.7%.
Rental revenue was negatively impacted by rent reserves during 2021 and 2020, primarily due to the COVID-19 pandemic, particularly with respect to the ongoing disruption to the theater industry. As the COVID-19 pandemic did not affect our rent collections until April 2020, there was no related impact for the three months ended March 31, 2020. The following table summarizes reserves recorded as a reduction of rental revenue (in millions):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Rental revenue reserves | $ | 10.2 | | | $ | 44.1 | | | $ | 1.4 | |
| Straight-line rent reserves | 4.5 | | | 8.4 | | | 1.5 | |
| Total rental revenue reserves | $ | 14.7 | | | $ | 52.5 | | | $ | 2.9 | |
Of the 11,136 properties in the portfolio at December 31, 2021, 11,043, or 99.2%, are single-client properties and the remaining are multi-client properties. Of the 11,043 single-client properties, 10,883, or 98.6%, were net leased at December 31, 2021.
Of the 11,236 in-place leases in the portfolio, which excludes 208 vacant units, 9,639 or 85.8% were under leases that provide for increases in rental revenue through:
•Base rent increases tied to inflation (typically subject to ceilings);
•Percentage rent based on a percentage of the clients’ gross sales;
•Fixed increases; or
•A combination of two or more of the above rent provisions.
Percentage rent, which is included in rental revenue, was $6.5 million in 2021, $5.1 million in 2020, and $8.0 million in 2019. Percentage rent in 2021 was less than 1% of rental revenue and we anticipate percentage rent to be less than 1% of rental revenue in 2022.
At December 31, 2021, our portfolio of 11,136 properties was 98.5% leased with 164 properties available for lease, as compared to 97.9% leased, with 140 properties available for lease at December 31, 2020. It has been our experience that approximately 1% to 4% of our property portfolio will be unleased at any given time; however, it is possible that the number of properties available for lease or sale could increase in the future, given the nature of economic cycles and other unforeseen global events, such as the ongoing COVID-19 pandemic and the measures taken to limit its spread.
Rental Revenue (reimbursable)
A number of our leases provide for contractually obligated reimbursements from clients for recoverable real estate taxes and operating expenses. The increase in contractually obligated reimbursements by our clients in the periods presented is primarily due to the growth of our portfolio due to acquisitions.
Other Revenue
Other revenue primarily relates to interest income recognized on financing receivables for certain leases with above-market terms. The increases in 2021 and 2020 are due to additional leases with above-market terms, which is proportional to overall portfolio growth.
Total Expenses
The following summarizes our total expenses (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Increase (Decrease) |
| | | 2021 | | 2020 | | 2019 | | 2021
versus
2020 | | 2020
versus
2019 |
EXPENSES (1) | | | | | | | | | | |
| Depreciation and amortization | | $ | 897,835 | | | $ | 677,038 | | | $ | 593,961 | | | $ | 220,797 | | | $ | 83,077 | |
| Interest | | 323,644 | | | 309,336 | | | 290,991 | | | 14,308 | | | 18,345 | |
| Property (excluding reimbursable) | | 28,754 | | | 25,241 | | | 19,500 | | | 3,513 | | | 5,741 | |
| Property (reimbursable) | | 104,851 | | | 79,362 | | | 69,085 | | | 25,489 | | | 10,277 | |
General and administrative (2) | | 96,980 | | | 73,215 | | | 66,483 | | | 23,765 | | | 6,732 | |
| Provisions for impairment | | 38,967 | | | 147,232 | | | 40,186 | | | (108,265) | | | 107,046 | |
| Merger and integration-related costs | | 167,413 | | | — | | | — | | | 167,413 | | | — | |
| Total expenses | | $ | 1,658,444 | | | $ | 1,311,424 | | | $ | 1,080,206 | | | $ | 347,020 | | | $ | 231,218 | |
Total revenue (3) | | $ | 1,975,612 | | | $ | 1,567,725 | | | $ | 1,419,078 | | | | | |
General and administrative expenses as a percentage of total revenue (2)(3) | | 4.9 | % | | 4.4 | % | | 4.7 | % | | | | |
Property expenses (excluding reimbursable) as a percentage of total revenue (3) | | 1.5 | % | | 1.6 | % | | 1.4 | % | | | | |
(1) In 2021, we began presenting 'Income taxes,' which was previously presented in 'Expenses,' below a newly captioned subtotal for 'Income before income taxes' within our consolidated statements of income and comprehensive income. Prior year amounts have been reclassified to conform to the current year presentation.
(2) General and administrative expenses for 2020 included an executive severance charge related to the departure of our former Chief Financial Officer ("CFO") in March 2020. The total value of cash, stock compensation and professional fees incurred as a result of this severance was $3.5 million and was recorded to general and administrative expense. In order to present a normalized calculation of our general and administrative expenses as a percentage of total revenue for 2020, we have excluded this executive severance charge to arrive at a normalized general and administrative amount of $69.8 million which was used for our calculation.
(3) Excludes rental revenue (reimbursable). Total revenue for 2020 and 2019 was updated to reflect the reclassification of certain miscellaneous non-recurring revenue from other revenue to other income, net in the consolidated statements of income and comprehensive income.
Depreciation and Amortization
The increase in depreciation and amortization in 2021 and 2020 was primarily due to the acquisition of properties in 2021 and 2020, which was partially offset by property sales in those same periods. As discussed in the sections entitled “Funds from Operations Available to Common Stockholders ("FFO") and Normalized Funds from Operations Available to Common Stockholders ("Normalized FFO")" and “Adjusted Funds from Operations Available to Common Stockholders ("AFFO"),” depreciation and amortization is a non-cash item that is added back to net income available to common stockholders for our calculation of FFO, Normalized FFO, and AFFO.
Interest Expense
The following is a summary of the components of our interest expense (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| Interest on our credit facility, commercial paper, term loans, notes, mortgages and interest rate swaps | | $ | 320,370 | | | $ | 293,879 | | | $ | 277,802 | |
| Credit facility commitment fees | | 3,801 | | | 3,812 | | | 3,803 | |
| Amortization of debt origination and deferred financing costs | | 11,695 | | | 10,694 | | | 9,485 | |
| Loss on interest rate swaps | | 2,905 | | | 4,132 | | | 2,752 | |
| Amortization of net mortgage premiums | | (3,498) | | | (1,258) | | | (1,415) | |
| Amortization of net note premiums | | (10,349) | | | (1,754) | | | (995) | |
| Interest capitalized | | (1,926) | | | (480) | | | (751) | |
| Capital lease obligation | | 637 | | | 311 | | | 310 | |
| Interest on deferred financing leases | | 9 | | | — | | | — | |
| Interest expense | | $ | 323,644 | | | $ | 309,336 | | | $ | 290,991 | |
| | | | | | |
| Credit facility, commercial paper, term loans, mortgages and notes | | | | | | |
| Average outstanding balances (dollars in thousands) | | $ | 10,024,343 | | | $ | 8,240,829 | | | $ | 7,100,032 | |
| Average interest rates | | 3.11 | % | | 3.48 | % | | 3.89 | % |
The increase in interest expense from 2020 to 2021 is primarily due to the issuance of $4.65 billion of notes associated with the exchange offer in conjunction with our merger with VEREIT in November 2021, the issuance of senior unsecured notes during 2020 and 2021 outside of our merger with VEREIT, which included aggregate totals of $1.68 billion in principal of USD denominated notes and £1.15 billion in principal of Sterling denominated notes, partially offset by the early redemptions during 2021 and 2020 of $1.2 billion of notes, increases in amortization of net note and mortgage premiums, and lower average balances on our credit facility and commercial paper borrowings.
The increase in interest expense from 2019 to 2020 is primarily due to the October 2020 issuance of our 1.625% notes due 2030, May and July 2020 issuances of our 2031 Notes, the May 2019 issuance of our 2.730% notes due 2034, the June 2019 issuance of our 3.250% notes due 2029, and higher interest related to mortgages assumed during December 2019, partially offset by the January 2020 repayment of our 5.750% notes due January 2021, the June 2020 repayment of one of our $250.0 million term loans, and lower average interest rates.
For the year ended December 31, 2021, the weighted average interest rate on our:
•Revolving credit facility outstanding borrowings of $650.0 million, was 0.9%
•Commercial paper outstanding borrowings of $901.4 million was 0.2%;
•Term loan outstanding of $250.0 million (excluding deferred financing costs of $443,000) was swapped to fixed at 3.9%;
•Mortgages payable of $1.11 billion (excluding net premiums totaling $28.7 million and deferred financing costs of $790,000 on these mortgages) was 4.7%; and
•Notes and bonds payable of $12.26 billion (excluding unamortized net premiums of $295.5 million and deferred financing costs of $53.1 million) was 3.3%.
Property Expenses (excluding reimbursable)
Property expenses (excluding reimbursable) consist of costs associated with properties available for lease, non-net leased properties and general portfolio expenses. Expenses related to properties available for lease and non-net leased properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections and legal fees. General portfolio costs include, but are not limited to, insurance, legal, property inspections, and title search fees. At December 31, 2021, 164 properties were available for lease or sale, as compared to 140 at December 31, 2020 and 94 at December 31, 2019.
The increase in property expenses (excluding reimbursable) in 2021 is primarily due to the increase in portfolio size, resulting in higher utilities, repairs and maintenance, property-related legal expenses, property taxes, and reserves for contractually obligated reimbursements by our clients. The increase in property expenses in 2020 relative to 2019 is primarily due to reserves for contractually obligated reimbursements by our clients, an increase in repairs and maintenance expense, and an increase in portfolio size and the number of vacant properties at year-end.
Property Expenses (reimbursable)
The increase in property expenses (reimbursable) in both 2021 and 2020 was primarily attributable to our increased portfolio size, which contributed to higher operating expenses as a result of our acquisitions in 2021 and 2020, and an increase in property taxes paid on behalf of our clients.
General and Administrative Expenses
General and administrative expenses are expenditures related to the operations of our company, including employee-related costs, professional fees, and other general overhead costs associated with running our business.
The increase in general and administrative expenses for 2021 is primarily due to higher payroll-related costs and higher corporate-level professional fees.The increase in general and administrative expenses for 2020 was primarily due to a severance charge of $3.5 million for our former CFO, who departed the company in March 2020, higher payroll-related costs, and higher corporate–level professional fees, partially offset by lower costs for terminated acquisitions and travel.
Provisions for Impairment
The following table summarizes provisions for impairment during the periods indicated below (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Total provisions for impairment | $ | 39.0 | | | $ | 147.2 | | | $ | 40.2 | |
| Number of properties: | | | | | |
| Classified as held for sale | 16 | | | 1 | | | — | |
| Classified as held for investment | 11 | | | 34 | | | 3 | |
| Sold | 76 | | | 64 | | | 48 | |
During 2020, we identified the impact of the COVID-19 pandemic as an impairment triggering event for properties occupied by certain of our clients experiencing difficulties meeting their lease obligations to us. After considering the impacts of the COVID-19 pandemic on the key assumptions, we determined that the carrying values of 38 properties classified as held for investment for the year ended December 31, 2020 were not recoverable. As a result, we recorded provisions for impairment of $105.0 million for the year ended December 31, 2020 on the applicable properties impacted by the COVID-19 pandemic. Of the provisions for impairment recorded during 2020 for properties impacted by the COVID-19 pandemic, a total of 13 assets occupied by certain of our clients in the theater industry were impaired for $83.8 million, which reduced the carrying value of the properties from $123.4 million to their estimated fair value of $39.6 million. Impairments recorded on other properties during the year ended December 31, 2020 totaled $42.2 million.
Merger and Integration-related Costs
In conjunction with our merger with VEREIT and Orion Divestiture, we incurred approximately $167.4 million of merger and integration-related transaction costs during 2021. The merger and integration-related costs incurred to date primarily consist of advisory fees, attorney fees, accountant fees, SEC filing fees and additional integration costs that include incremental and non-recurring costs necessary to convert data and systems, retain employees and otherwise enable us to operate the acquired VEREIT assets efficiently. There were no merger and integration-related costs during 2020 or 2019.
Gain on Sales of Real Estate
The following summarizes our property dispositions (dollars in millions). These amounts exclude properties disposed from the spin-off of office properties to Orion Office REIT, Inc. in November 2021.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Number of properties sold | 154 | | | 126 | | | 93 | |
| Net sales proceeds | $ | 250.3 | | | $ | 262.5 | | | $ | 108.9 | |
| Gain on sales of real estate | $ | 55.8 | | | $ | 76.2 | | | $ | 30.0 | |
Foreign Currency and Derivative Gains, Net
We borrow in the functional currencies of the countries in which we invest. Foreign currency and derivative gains, net are primarily a result of intercompany debt with certain remeasurement transactions and mark-to-market adjustments on derivatives that do not qualify for hedge accounting.
Loss on Extinguishment of Debt
In December 2021, we completed the early redemption on all $750.0 million in principal amount of outstanding 4.650% notes due August 2023, plus accrued and unpaid interest. As a result of the early redemption, we recognized a $46.4 million loss on extinguishment of debt during 2021.
In October 2021, we completed the early redemption on $9.6 millionin principal of a mortgage due June 2022, plus accrued and unpaid interest. As a result of the early redemption, we recognized a loss of $315,000 on extinguishment of debt for 2021.
In September 2021, we completed the early redemption on $12.5 million in principal of a mortgage due June 2032, plus accrued and unpaid interest. As a result of the early redemption, we recognized a $4.0 million loss on extinguishment of debt during 2021.
In January 2021, we completed the early redemption on all $950.0 million in principal amount of outstanding 3.250% notes due October 2022, plus accrued and unpaid interest. As a result of the early redemption, we recognized a $46.5 million loss on extinguishment of debt during 2021.
In January 2020, we completed the early redemption on all $250.0 million in principal amount of outstanding 5.750% notes due January 2021, plus accrued and unpaid interest. As a result of the early redemption, we recognized a $9.8 million loss on extinguishment of debt during 2020.
Equity in Income of Unconsolidated Entities
Equity in income of unconsolidated entities for 2021 relates to three equity method investments that were acquired in our merger with VEREIT. There were no comparative investments during 2020 or 2019.
Other Income, Net
Beginning in 2021, certain miscellaneous non-recurring revenue has been reclassified from total revenue to other income, net in the consolidated statements of income and comprehensive income. Interest income from our money market accounts was higher for 2020 as compared to 2019, which is primarily due to higher average investment balances.
Income Taxes
Income taxes are for city and state income and franchise taxes, and for international income taxes accrued or paid by us and our subsidiaries. The increase in income taxes for 2021 and 2020 was primarily attributable to our increased volume of U.K. investments, which contributed to higher U.K. income taxes for both years.
Net Income Available to Common StockholdersNON-GAAP FINANCIAL MEASURES
The following summarizes our net income available to common stockholders (dollars in millions, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % (Decrease) |
| 2021 | | 2020 | | 2019 | | 2021
versus
2020 | | 2020
versus
2019 |
| Net income available to common stockholders | $ | 359.5 | | $ | 395.5 | | $ | 436.5 | | (9.1) | % | | (9.4) | % |
Net income per share (1) | $ | 0.87 | | $ | 1.14 | | $ | 1.38 | | (23.7) | % | | (17.4) | % |
(1) All per share amounts are presented on a diluted per common share basis.
The calculation to determine net income available to common stockholders includes provisions for impairment, gains from the sale of properties, and foreign currency gains and losses, which can vary from period to period based on timing and significantly impact net income available to the Company and available to common stockholders.
Net income available to common stockholders in 2021 was primarily impacted by the following transactions: (i) a $97.2 million loss on extinguishment of debt, which primarily includes $46.5 million related to the January 2021 early redemption of the 3.250% notes due October 2022 recorded in the three months ended March 31, 2021 and $46.4 million related to the December 2021 early redemption of the 4.650% notes due August 2023 recorded in the three months ended December 31, 2021, (ii) $167.4 million of merger and integration-related costs related to our merger with VEREIT and spin-off of office properties to Orion Office REIT Inc., (iii) $39.0 million of provisions for impairment, and (iv) $14.7 million in net reserves recorded as a reduction of rental revenue. Net income available to common stockholders in 2020 was primarily impacted by the following transactions: (i)$147.2 million of provisions for impairment, (ii) $52.5 million in net reserves recorded as a reduction of rental revenue, (iii) a $9.8 million loss on extinguishment of debt due to the January 2020 early redemption of the 5.750% notes due January 2021, and (iv) a $3.5 million executive severance charge for our former CFO. For 2019, the only comparable charges were $40.2 million in provisions for impairment and $2.9 million in reserves recorded as a reduction of rental revenue.
Adjusted Earnings before Interest, Taxes, Depreciation and Amortization for Real Estate (Adjusted("Adjusted EBITDAre")
The National Association of Real Estate Investment Trusts ("Nareit") came to the conclusion that a Nareit-definedNareit established an EBITDA metric for real estate companies (i.e., EBITDA for real estate, or EBITDAre) it believed would provide investors with a consistent measure to help make investment decisions among REITs. Our definition of “Adjusted EBITDAre” is generally consistent with the Nareit definition, other than our adjustments to remove foreign currency and derivative gainsgain and lossesloss, excluding gain and executive severance chargesloss from the settlement of foreign currency forwards not designated as hedges (which is consistent with our previous calculations of "Adjusted EBITDA"). We define Adjusted EBITDAre,EBITDAre, a non–GAAPnon-GAAP financial measure, for the most recent quarter as earnings (net income) before (i) interest expense, including non-cash loss (gain) on swaps, (ii) income and franchise taxes, (iii) lossgain on extinguishment of debt, (iv) real estate depreciation and amortization, (v) provisions for impairment, (vi) merger and integration-related costs, (vii) gain on sales of real estate, (viii) foreign currency and derivative gainsgain and losses,loss, net, (as described in the Adjusted Funds from Operations section),(ix) gain on settlement of foreign currency forwards, and (ix)(x) our proportionate share of interest expense and real estate depreciation and amortizationadjustments from unconsolidated entities. Our Adjusted EBITDAreEBITDAre may not be comparable to Adjusted EBITDAreEBITDAre reported by other companies or as defined by Nareit, and other companies may interpret or define Adjusted EBITDAre differently than we do. Management believes Adjusted EBITDAre to be a meaningful measure of a REIT’s performance because it provides a view of our operating performance, analyzes our ability to meet interest payment obligations before the effects of income tax, depreciation and amortization expense, provisions for impairment, gain on sales of real estate and other items, as defined above, that affect comparability, including the removal of non-recurring and non-cash items that industry observers believe are less relevant to evaluating the operating performance of a company. In addition, EBITDAreis widely followed by industry analysts, lenders, investors, rating agencies, and investors.others as a means of evaluating the operational cash generating capacity of a company prior to servicing debt obligations. Management also believes the use of an annualized quarterly Adjusted EBITDAre metric, which we refer to as Annualized Adjusted EBITDAre, is meaningful because it represents the Company’sour current earnings run rate for the period presented. Annualized Adjusted EBITDAre and Annualized Pro Forma Adjusted EBITDAre, as defined below, are also used to determine the vesting of performance share awards granted to executive officers. Annualized Adjusted EBITDAreshould be considered along with, but not as an alternative to net income as a measure of our operating performance. We define Annualized Pro Forma Adjusted EBITDAre as Annualized Adjusted EBITDAre, subject to certain adjustments to incorporate operating incomeAdjusted EBITDAre from properties we acquired or stabilized during the applicable quarter and to remove operating incomeAdjusted EBITDAre from properties we disposed of during the applicable quarter, and include transaction accounting adjustments in accordance with U.S. GAAP, giving pro forma effect to all transactions as if they occurred at the beginning of the applicable period. Our calculation includes all adjustments consistent with the requirements to present Adjusted EBITDAre on a pro forma basis in accordance with Article 11 of Regulation S-X. The Annualized Pro Forma Adjustments are consistent with the debt service coverage ratio calculated under financial covenants for our senior unsecured notes. We believe Annualized Pro Forma Adjusted EBITDAre is a useful non-GAAP supplemental measure, as it excludes properties that were no longer owned at the balance sheet date and includes the annualized rent from properties acquired during the quarter. OurManagement also uses our ratios of net debt-to-Annualized Adjusted EBITDAreand net debt-to-Annualizeddebt-to Annualized Pro Forma Adjusted EBITDAre, which are used by management as a measuremeasures of leverage arein assessing our financial performance, which is calculated as net debt (which we define as total debt per ourthe consolidated balance sheet,
sheets, excluding deferred financing costs and net premiums and discounts, but including our proportionate share onof debt from unconsolidated entities, less cash and cash equivalents), divided by annualized quarterly Adjusted EBITDAreand annualized Pro Forma Adjusted EBITDAre, respectively.
The following table summarizes our Annualizedis a reconciliation of net income (which we believe is the most comparable U.S. GAAP measure) to Adjusted EBITDAreand and Annualized Pro Forma Adjusted EBITDAre calculations for the periods indicated below (dollars in thousands):
| | For the Three Months Ended December 31, |
| Dollars in thousands | | 2021 | | 2020 | | 2019 |
Net income (1) | | $ | 4,467 | | | $ | 118,150 | | | $ | 129,553 | |
| Three months ended December 31, | | | Three months ended December 31, |
| 2023 | | | 2023 | | 2022 |
| Net income | |
| Interest | Interest | | 100,739 | | | 78,764 | | | 75,073 | |
| Loss on extinguishment of debt | Loss on extinguishment of debt | | 46,722 | | | — | | | — | |
| Income taxes | Income taxes | | 10,128 | | | 4,500 | | | 1,736 | |
| Depreciation and amortization | Depreciation and amortization | | 333,229 | | | 175,041 | | | 156,594 | |
| Provisions for impairment | Provisions for impairment | | 7,990 | | | 23,790 | | | 8,950 | |
| Merger and integration-related costs | Merger and integration-related costs | | 137,332 | | | — | | | — | |
| Gain on sales of real estate | Gain on sales of real estate | | (20,402) | | | (22,667) | | | (14,168) | |
| Foreign currency and derivative gains, net | | (1,880) | | | (3,311) | | | (1,792) | |
| Proportionate share of adjustments for unconsolidated entities | | 1,581 | | | — | | | — | |
| Foreign currency and derivative loss (gain), net | |
| Gain on settlement of foreign currency forwards | |
| Proportionate share of adjustments from unconsolidated entities | |
Quarterly Adjusted EBITDAre | Quarterly Adjusted EBITDAre | | $ | 619,906 | | | $ | 374,267 | | | $ | 355,946 | |
Annualized Adjusted EBITDAre (2)(1) | Annualized Adjusted EBITDAre (2)(1) | | $ | 2,479,624 | | | $ | 1,497,068 | | | $ | 1,423,784 | |
| Annualized Pro Forma Adjustments | Annualized Pro Forma Adjustments | | 358,560 | | | 25,910 | | | 77,793 | |
Annualized Pro Forma Adjusted EBITDAre | Annualized Pro Forma Adjusted EBITDAre | | $ | 2,838,184 | | | $ | 1,522,978 | | | $ | 1,501,577 | |
| Total debt per the consolidated balance sheets, excluding deferred financing costs and net premiums and discounts | |
| Proportionate share of unconsolidated entities debt, excluding deferred financing costs | |
| Less: Cash and cash equivalents | |
Net Debt (2) | |
| | Total debt per the consolidated balance sheet, excluding deferred financing costs and net premiums and discounts | | $ | 15,172,849 | | | $ | 8,852,036 | | | $ | 7,930,350 | |
| Proportionate share for unconsolidated entities debt, excluding deferred financing costs | | 86,006 | | | — | | | — | |
| Less: Cash and cash equivalents | | (258,579) | | | (824,476) | | | (54,011) | |
Net Debt (3) | | $ | 15,000,276 | | | $ | 8,027,560 | | | $ | 7,876,339 | |
Net Debt/Pro forma Adjusted EBITDAre (4)(5) | | 5.3 | | | 5.3 | | | 5.2 | |
Net Debt/Annualized Adjusted EBITDAre | |
Net Debt/Annualized Adjusted EBITDAre | |
Net Debt/Annualized Adjusted EBITDAre | | 5.6 | x | | 5.5 | x |
Net Debt/Annualized Pro Forma Adjusted EBITDAre | | Net Debt/Annualized Pro Forma Adjusted EBITDAre | 5.5 | x | | 5.3 | x |
(1)Net income for the three months ended December 31, 2021 was negatively impacted by $827,000 of rent reserves recorded as reductions of rental revenue, of which $5.6 million was related to straight-line rent receivables, net of reserve reversals of $(4.8) million. Net income for the three months ended December 31, 2020 was negatively impacted by $18.1 million of rent reserves recorded as reductions of rental revenue, of which $3.3 million relates to straight-line rent.
(2) We calculate Annualized Adjusted EBITDAre by multiplying the Quarterly Adjusted EBITDAre by four.
(3)(2) Net Debt is total debt per our consolidated balance sheet,sheets, excluding deferred financing costs and net premiums and discounts, but including our proportionate share onof debt from unconsolidated entities, less cash and cash equivalents.
(4) Net Debt/Annualized Adjusted EBITDAre was 6.0x forAs described above, the three months ended December 31, 2021, 5.4x for the three months ended December 31, 2020, and 5.5x for the three months ended December 31, 2019.
(5) During 2021, Net Debt was adjusted to exclude deferred financing costs and net premiums and discounts. Under the prior calculation of Net Debt, which included deferred financing costs and net premiums and discounts, Net Debt/Adjusted EBITDAre was 5.3x for the three months ended December 31, 2020, and Net Debt/Pro forma Adjusted EBITDAre was 5.2x for the three months ended December 31, 2020. The adjustment of Net Debt did not impact the calculations for the three months ended December 31, 2019, which were 5.5x for Net Debt/Adjusted EBITDAre and 5.2x for Net Debt/Pro forma Adjusted EBITDAre.
The Annualized Pro Forma Adjustments, which include transaction accounting adjustments in accordance with U.S. GAAP, consist of adjustments to incorporate operating incomethe Adjusted EBITDAre from properties we acquired or stabilized during the applicable quarter and to remove operating incomeAdjusted EBITDAre from properties we disposed of during the applicable quarter, giving pro forma effect to all transactions as if they occurred at the beginning of the applicable period. For the three months ended December 31, 2021, the Annualized Pro Forma adjustments are inclusive of the effects of the merger. The Annualized Pro Forma Adjustments areperiod, consistent with the debt service coverage ratio calculated under financial covenants for our senior unsecured notes and bonds.requirements of Article 11 of Regulation S-X. The following table summarizes our Annualized Pro formaForma Adjusted EBITDAreEBITDAre calculation for the periodsperiod indicated below:below (dollars in thousands):
| | Dollars in thousands | | 2021 | | 2020 | | 2019 |
| | Three months ended December 31, | | | | Three months ended December 31, |
| | 2023 | | | | 2023 | | 2022 |
| Annualized pro forma adjustments from properties acquired or stabilized | Annualized pro forma adjustments from properties acquired or stabilized | | $ | 400,575 | | | $ | 27,431 | | | $ | 77,431 | |
| Annualized pro forma adjustments from properties disposed | Annualized pro forma adjustments from properties disposed | | (42,015) | | | (1,521) | | | 362 | |
| Annualized Pro forma Adjustments | Annualized Pro forma Adjustments | | $ | 358,560 | | | $ | 25,910 | | | $ | 77,793 | |
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (FFO)("FFO") AND NORMALIZED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (Normalized FFO)
The following summarizes our FFO and ("Normalized FFO (dollars in millions, except per share data):FFO")
We define FFO, a non-GAAP measure, consistent with the National Association of Real Estate Investment Trusts' definition, as net income available to common stockholders, plus depreciation and amortization of real estate assets, plus provisions for impairments of depreciable real estate assets, and reduced by gainsgain on property sales. We define Normalized FFO, a non-GAAP financial measure, as FFO excluding merger and integration-related costs related to our merger with VEREIT. We define diluted FFO and diluted normalized FFO as FFO and normalized FFO adjusted for dilutive noncontrolling interests.
| | | | % Increase/(Decrease) |
| 2021 | | 2020 | | 2019 | | 2021
versus
2020 | | 2020
versus
2019 |
| | | Years ended December 31, | |
| | | Years ended December 31, | |
| | | Years ended December 31, | |
| | | | | | | 2023 | | | | | | | | | 2023 | | 2022 | | % Change |
| FFO available to common stockholders | FFO available to common stockholders | $ | 1,240.6 | | $ | 1,142.1 | | $ | 1,039.6 | | 8.6 | % | | 9.9 | % | FFO available to common stockholders | | | | | | | $ | 2,822.1 | | $ | 2,471.9 | | 14.2 | % |
FFO per share (1) | $ | 2.99 | | $ | 3.31 | | $ | 3.29 | | (9.7) | % | | 0.6 | % |
FFO per common share (1) | | FFO per common share (1) | | | | | | | $ | 4.07 | | $ | 4.04 | | 0.7 | % |
| Normalized FFO available to common stockholders | Normalized FFO available to common stockholders | $ | 1,408.0 | | $ | 1,142.1 | | $ | 1,039.6 | | 23.3 | % | | 9.9 | % | Normalized FFO available to common stockholders | | | | | | | $ | 2,836.6 | | $ | 2,485.8 | | 14.1 | % |
Normalized FFO per share (1) | $ | 3.39 | | $ | 3.31 | | $ | 3.29 | | 2.4 | % | | 0.6 | % |
Normalized FFO per common share (1) | | Normalized FFO per common share (1) | | | | | | | $ | 4.09 | | $ | 4.06 | | 0.7 | % |
(1) All per share amounts are presented on a diluted per common share basis.
FFO and Normalized FFO for 2021, 2020, and 2019 were primarily impacted by the same transactions listed under "Net Income Available To Common Stockholders" on page 59.
The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable U.S. GAAP measure) to FFO and Normalized 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 (in(dollars in thousands, except per share amounts):
-61- | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | | 2023 | | 2022 |
| Net income available to common stockholders | | | | | $ | 872,309 | | | $ | 869,408 | |
| Depreciation and amortization | | | | | 1,895,177 | | | 1,670,389 | |
| Depreciation of furniture, fixtures and equipment | | | | | (2,239) | | | (2,014) | |
| Provisions for impairment of real estate | | | | | 82,208 | | | 25,860 | |
| Gain on sales of real estate | | | | | (25,667) | | | (102,957) | |
Proportionate share of adjustments for unconsolidated entities (1) | | | | | 4,205 | | | 12,812 | |
| FFO adjustments allocable to noncontrolling interests | | | | | (3,855) | | | (1,605) | |
| FFO available to common stockholders | | | | | $ | 2,822,138 | | | $ | 2,471,893 | |
| FFO allocable to dilutive noncontrolling interests | | | | | 5,552 | | | 3,979 | |
| Diluted FFO | | | | | $ | 2,827,690 | | | $ | 2,475,872 | |
| | | | | | | |
| FFO available to common stockholders | | | | | $ | 2,822,138 | | | $ | 2,471,893 | |
| Merger and integration-related costs | | | | | 14,464 | | | 13,897 | |
| Normalized FFO available to common stockholders | | | | | $ | 2,836,602 | | | $ | 2,485,790 | |
| Normalized FFO allocable to dilutive noncontrolling interests | | | | | 5,552 | | | 3,979 | |
| Diluted Normalized FFO | | | | | $ | 2,842,154 | | | $ | 2,489,769 | |
| | | | | | | |
| FFO per common share: | | | | | | | |
| Basic | | | | | $ | 4.08 | | | $ | 4.04 | |
| Diluted | | | | | $ | 4.07 | | | $ | 4.04 | |
| | | | | | | |
| Normalized FFO per common share: | | | | | | | |
| Basic | | | | | $ | 4.10 | | | $ | 4.06 | |
| Diluted | | | | | $ | 4.09 | | | $ | 4.06 | |
| | | | | | | |
| Distributions paid to common stockholders | | | | | $ | 2,111,793 | | | $ | 1,813,432 | |
| FFO available to common stockholders in excess of distributions paid to common stockholders | | | | | $ | 710,345 | | | $ | 658,461 | |
| Normalized FFO available to common stockholders in excess of distributions paid to common stockholders | | | | | $ | 724,809 | | | $ | 672,358 | |
| Weighted average number of common shares used for FFO and Normalized FFO: | | | | | | | |
| Basic | | | | | 692,298 | | | 611,766 | |
| Diluted | | | | | 694,819 | | | 613,473 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Table(1)Includes an other than temporary impairment of Contents$8.5 million recognized during the year ended December 31, 2022 on our investment in unconsolidated entities, all of which were sold as of December 31, 2022. | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| Net income available to common stockholders | | $ | 359,456 | | | $ | 395,486 | | | $ | 436,482 | |
| Depreciation and amortization | | 897,835 | | | 677,038 | | | 593,961 | |
| Depreciation of furniture, fixtures and equipment | | (1,026) | | | (588) | | | (565) | |
| Provisions for impairment | | 38,967 | | | 147,232 | | | 40,186 | |
| Gain on sales of real estate | | (55,798) | | | (76,232) | | | (29,996) | |
| Proportionate share of adjustments for unconsolidated entities | | 1,931 | | | — | | | — | |
| FFO adjustments allocable to noncontrolling interests | | (785) | | | (817) | | | (477) | |
| FFO available to common stockholders | | $ | 1,240,580 | | | $ | 1,142,119 | | | $ | 1,039,591 | |
| FFO allocable to dilutive noncontrolling interests | | — | | | 1,418 | | | 1,403 | |
| Diluted FFO | | $ | 1,240,580 | | | $ | 1,143,537 | | | $ | 1,040,994 | |
| | | | | | |
| FFO available to common stockholders | | $ | 1,240,580 | | | $ | 1,142,119 | | | $ | 1,039,591 | |
| Merger and integration-related costs | | 167,413 | | | — | | | — | |
| Normalized FFO available to common stockholders | | $ | 1,407,993 | | | $ | 1,142,119 | | | $ | 1,039,591 | |
| Normalized FFO allocable to dilutive noncontrolling interests | | 1,642 | | | 1,418 | | | 1,403 | |
| Diluted Normalized FFO | | $ | 1,409,635 | | | $ | 1,143,537 | | | $ | 1,040,994 | |
| | | | | | |
| FFO per common share, basic and diluted | | $ | 2.99 | | | $ | 3.31 | | | $ | 3.29 | |
| Normalized FFO per common share: | | | | | | |
| Basic | | $ | 3.40 | | | $ | 3.31 | | | $ | 3.29 | |
| Diluted | | $ | 3.39 | | | $ | 3.31 | | | $ | 3.29 | |
| Distributions paid to common stockholders | | $ | 1,169,026 | | | $ | 964,167 | | | $ | 852,134 | |
| FFO available to common stockholders in excess of distributions paid to common stockholders | | $ | 71,554 | | | $ | 177,952 | | | $ | 187,457 | |
| Normalized FFO available to common stockholders in excess of distributions paid to common stockholders | | $ | 238,967 | | | $ | 177,952 | | | $ | 187,457 | |
| Weighted average number of common shares used for FFO: | | | | | | |
| Basic | | 414,535,283 | | | 345,280,126 | | | 315,837,012 | |
| Diluted | | 414,769,846 | | | 345,878,377 | | | 316,601,350 | |
| Weighted average number of common shares used for Normalized FFO: | | | | | | |
| Basic | | 414,535,283 | | | 345,280,126 | | | 315,837,012 | |
| Diluted | | 415,270,063 | | | 345,878,377 | | | 316,601,350 | |
We consider FFO and Normalized FFO to be appropriate supplemental measures of a REIT’s operating performance as they are based on a net income analysis of property portfolio performance that adds back items such as depreciation and impairments for FFO, and adds back merger and integration-related costs, for Normalized FFO. 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.
ADJUSTED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (AFFO)
The following summarizes our AFFO (dollars in millions, except per share data):("AFFO")
We define AFFO, a non-GAAP measure, as FFO adjusted for unique revenue and expense items, which we believe are not as pertinent to the measurement of our ongoing operating performance. We define diluted AFFO as AFFO adjusted for dilutive noncontrolling interests.
| | | | % Increase |
| 2021 | | 2020 | | 2019 | | 2021
versus
2020 | | 2020
versus
2019 |
| | | Years ended December 31, | |
| | | Years ended December 31, | |
| | | Years ended December 31, | |
| | | | | | | 2023 | | | | | | | | | 2023 | | 2022 | | % Change |
| AFFO available to common stockholders | AFFO available to common stockholders | $ | 1,488.8 | | $ | 1,172.6 | | $ | 1,050.0 | | 27.0 | % | | 11.7 | % | AFFO available to common stockholders | | | | | | | $ | 2,774.9 | | $ | 2,401.4 | | 15.6 | % |
AFFO per share (1) | $ | 3.59 | | $ | 3.39 | | $ | 3.32 | | 5.9 | % | | 2.1 | % |
AFFO per common share (1) | | AFFO per common share (1) | | | | | | | $ | 4.00 | | $ | 3.92 | | 2.0 | % |
(1) All per share amounts are presented on a diluted per common share basis.
AFFO during 2021 and 2020 was primarily impacted by reserves recorded as a reduction of rental revenue related to the COVID-19 pandemic. During the second half of 2021, reserves recorded as a reduction of rental revenue were partially offset by reserve reversals recorded as an increase to rental revenue where the accounting for recognition of rental revenue and straight-line rental revenue has been moved from the cash to the accrual basis.
We consider AFFO to be an appropriate supplemental measure of our performance. Most companies in our industry use a similar measurement, but they may use the term “CAD” (for Cash Available for Distribution), “FAD” (for Funds Available for Distribution) or other terms. Our AFFO calculations may not be comparable to AFFO, CAD or FAD reported by other companies, and other companies may interpret or define such terms differently than we do.
The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable U.S. GAAP measure) to Normalized 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 (in(dollars in thousands, except per share amounts):
| | | | 2021 | | 2020 | | 2019 |
| | | Years ended December 31, | |
| | | Years ended December 31, | |
| | | Years ended December 31, | |
| | | | | 2023 | | | | | | | 2023 | | 2022 |
Net income available to common stockholders (1) | Net income available to common stockholders (1) | | $ | 359,456 | | | $ | 395,486 | | | $ | 436,482 | |
Cumulative adjustments to calculate Normalized FFO (2)(1) | Cumulative adjustments to calculate Normalized FFO (2)(1) | | 1,048,537 | | | 746,633 | | | 603,109 | |
| Normalized FFO available to common stockholders | Normalized FFO available to common stockholders | | 1,407,993 | | | 1,142,119 | | | 1,039,591 | |
Executive severance charge (3) | | — | | | 3,463 | | | — | |
| Loss on extinguishment of debt | | 97,178 | | | 9,819 | | | — | |
| Gain on extinguishment of debt | |
| Amortization of share-based compensation | Amortization of share-based compensation | | 16,234 | | | 14,727 | | | 13,662 | |
Amortization of net debt premiums and deferred financing costs (4) | | (6,182) | | | 3,710 | | | 3,339 | |
| Loss on interest rate swaps | | 2,905 | | | 4,353 | | | 2,752 | |
Straight-line payments from cross-currency swaps (5) | | 2,228 | | | 2,573 | | | 4,316 | |
Amortization of net debt premiums and deferred financing costs (2) | |
| Non-cash (gain) loss on interest rate swaps | |
| Non-cash change in allowance for credit losses | |
Straight-line impact of cash settlement on interest rate swaps (3) | |
| Leasing costs and commissions | Leasing costs and commissions | | (6,201) | | | (1,859) | | | (2,102) | |
| Recurring capital expenditures | Recurring capital expenditures | | (1,202) | | | (198) | | | (801) | |
| Straight-line rent and expenses | | (61,350) | | | (26,502) | | | (28,674) | |
| Amortization of above and below-market leases | | 37,970 | | | 22,940 | | | 19,336 | |
| Straight-line rent and expenses, net | |
| Amortization of above and below-market leases, net | |
| Proportionate share of adjustments for unconsolidated entities | Proportionate share of adjustments for unconsolidated entities | | (1,948) | | | — | | | — | |
Other adjustments (6)(4) | Other adjustments (6)(4) | | 1,128 | | | (2,519) | | | (1,404) | |
| Total AFFO available to common stockholders | | $ | 1,488,753 | | | $ | 1,172,626 | | | $ | 1,050,015 | |
| AFFO available to common stockholders | |
| AFFO allocable to dilutive noncontrolling interests | AFFO allocable to dilutive noncontrolling interests | | 1,619 | | | 1,438 | | | 1,442 | |
| Diluted AFFO | Diluted AFFO | | $ | 1,490,372 | | | $ | 1,174,064 | | | $ | 1,051,457 | |
| | AFFO per common share: | AFFO per common share: | | | | | | |
| AFFO per common share: | |
| AFFO per common share: | |
| Basic | |
| Basic | |
| Basic | Basic | | $ | 3.59 | | | $ | 3.40 | | | $ | 3.32 | |
| Diluted | Diluted | | $ | 3.59 | | | $ | 3.39 | | | $ | 3.32 | |
| | Distributions paid to common stockholders | Distributions paid to common stockholders | | $ | 1,169,026 | | | $ | 964,167 | | | $ | 852,134 | |
| | Distributions paid to common stockholders | |
| Distributions paid to common stockholders | |
| AFFO available to common stockholders in excess of distributions paid to common stockholders | AFFO available to common stockholders in excess of distributions paid to common stockholders | | $ | 319,727 | | | $ | 208,459 | | | $ | 197,881 | |
| Weighted average number of common shares used for computation per share: | Weighted average number of common shares used for computation per share: | | | | | |
| Basic | Basic | | 414,535,283 | | | 345,280,126 | | | 315,837,012 | |
| Basic | |
| Basic | |
| Diluted | Diluted | | 415,270,063 | | | 345,878,377 | | | 316,601,350 | |
(1)As of December 31, 2021, there was $58.7 million of uncollected rent deferred as a result of lease concessions we granted in response to the COVID-19 pandemic and recognized under the practical expedient provided by the FASB and $41.3 million of uncollected rent for which we have not granted a lease concession.
(2)See reconciling items for Normalized FFO presented under “Funds from Operations Available to Common Stockholders (FFO)("FFO") and Normalized Funds from Operations Available to Common Stockholders (Normalized FFO)("Normalized FFO")"."
(3)The executive severance charge represents the incremental costs incurred upon our former CFO's departure in March 2020, consisting of $1.6 million of cash, $1.8 million of share-based compensation expense and $58,000 of professional fees.
(4) (2)Includes the amortization of net premiums and discounts on notes payable and assumption of our mortgages payable, which are being amortized over the life of the applicable debt, and costs incurred and capitalized upon issuance and exchange of our notes payable, assumption of our mortgages payable and issuance of our term loans, which are also being amortized over the lives of the applicable debt. No costs associated with our credit facility agreements or annual fees paid to credit rating agencies have been included.
(5) (3)Straight-line payments from cross-currencyRepresents the straight-line amortization of $72.0 million gain realized upon the termination of $500.0 million in notional interest rate swaps represent quarterly payments in U.S. dollars received by us from counterparties in exchange for associatedOctober 2022, over the term of the $750.0 million of 5.625% senior unsecured notes due October 2032.
(4)Includes non-cash foreign currency payments. Theselosses (gains) from remeasurement to USD, payments are fixed and determinable for the duration of the associated hedging transaction.
(6) Includes adjustments allocable to noncontrolling interests, obligations related to financing lease liabilities, mark-to-market adjustments on investments and derivatives that do not qualify for hedge accounting,are non-cash in nature, straight-line payments from cross-currency swaps, obligations related to financing lease liabilities, and foreign currency gains and losses as a result of intercompany debt and remeasurement transactions.adjustments allocable to noncontrolling interests.
We believe the non-GAAP financial measure AFFO provides useful information to investors because it is a widely accepted industry measure of the operating performance of real estate companies that is used by industry analysts and investors who look at and compare those companies. In particular, AFFO provides an additional measure to compare the operating performance of different REITs without having to account for differing depreciation assumptions and other unique revenue and expense items which are not pertinent to measuring a particular company’s on-going operating performance. Therefore, we believe that AFFO is an appropriate supplemental performance metric, and that the most appropriate U.S. GAAP performance metric to which AFFO should be reconciled is net income available to common stockholders.
Presentation of the information regarding FFO, Normalized 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, Normalized FFO, and AFFO in the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO, Normalized FFO, and AFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as alternatives to net income as an indication of our performance. FFO, Normalized FFO, and AFFO should not be considered as alternatives to reviewing our cash flows from operating, investing, and financing activities. In addition, FFO, Normalized FFO, and AFFO should not be considered as measures of liquidity, our ability to make cash distributions, or our ability to pay interest payments.
IMPACT OF INFLATION
Leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, or retail price index in the case of certain leases in the U.K. (typically subject to ceilings), or increases in the clients’ sales volumes. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.
Moreover, our use of net lease agreements tends to reduce our exposure to rising property expenses due to inflation because the client is responsible for property expenses. Inflation and increased costs may have an adverse impact on our clients if increases in their operating expenses exceed increases in revenue.
IMPACT OF RECENT ACCOUNTING STANDARDS
For information on the impact of new accounting standards on our business, see note 2 of the Notes to the Consolidated Financial Statements.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
We are exposed to economic risks from interest rates and foreign currency exchange rates. A portion of these risks is hedged, but the risks may affect our financial statements.
Interest Rates
We are exposed to interest rate changes primarily as a result of our credit facility and commercial paper program,programs, term loan,loans, mortgages payable, and long-term notes and bonds used to maintain liquidity and expand our real estate investment portfolio and operations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flow and to lower our overall borrowing costs. To achieve these objectives, we issue long-term notes and bonds, primarily at fixed rates.
In order to mitigate and manage the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, interest rate swaptions, interest rate locks and caps. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks, including counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. To limit counterparty credit risk, we will seek to enter into such agreements with major financial institutions with favorable credit ratings. There can be no assurance that we will be able to adequately protect against the foregoing risks or realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging activities. We do not enter into any derivative transactions for speculative or trading purposes.
The following table presents, by year of expected maturity, the principal amounts, average interest rates and estimated fair values of our fixed and variable rate debt as of December 31, 2021.2023. This information is presented to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in millions):
Expected Maturity Data
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year of maturity | | Fixed rate debt | | Weighted average rate on fixed rate debt | | Variable rate debt | | Weighted average rate on variable rate debt |
| 2022 | | $ | 271.1 | | | 4.93 | % | | $ | 901.4 | | | 0.38 | % |
| 2023 | | 62.1 | | | 4.45 | | | 650.0 | | | 1.74 | |
| 2024 | | 1,833.0 | | | 4.48 | | | — | | | — | |
| 2025 | | 1,092.0 | | | 4.22 | | | — | | | — | |
| 2026 | | 1,576.2 | | | 3.72 | | | — | | | — | |
| Thereafter | | 8,787.0 | | | 2.97 | | | — | | | — | |
Totals (1) | | $ | 13,621.4 | | | 3.41 | % | | $ | 1,551.4 | | | 0.95 | % |
Fair Value (2) | | $ | 14,519.3 | | | | | $ | 1,551.4 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year of Principal Due | Fixed rate debt | | Weighted average rate on fixed rate debt | | Variable rate debt | | Weighted average rate on variable rate debt |
| 2024 | $ | 1,840.5 | (1) | 4.48 | % | | $ | 764.4 | | | 4.37 | % |
| 2025 | 1,094.0 | | 4.23 | % | | — | | | — | |
| 2026 | 2,669.0 | (2) | 4.18 | % | | 500.0 | | (3) | 3.05 | % |
| 2027 | 2,050.1 | | 2.66 | % | | — | | | — | |
| 2028 | 2,051.1 | | 3.43 | % | | — | | | — | |
| Thereafter | 10,511.8 | | 3.91 | % | | — | | | — | |
Totals (4) | $ | 20,216.5 | | 3.84 | % | | $ | 1,264.4 | | | 3.85 | % |
Fair Value (5) | $ | 19,250.2 | | | | $ | 1,264.3 | | | |
(1)In conjunction with our $250.0 million senior unsecured term loan, which matures in March 2024, we entered into an interest rate swap, and as of December 31, 2023, the effective interest rate on this term loan, after giving effect to the interest rate swap, was 3.8%.
(2)The maturity date for our 2023 term loans reflects the closing of our previous twelve-month extension option and assumes the additional twelve-month extension available at the company's option is exercised. In conjunction with closing, we executed one-year variable-to-fixed interest rate swaps, which fix our per annum interest rate at 5.0% over the initial term. Accordingly, the 2023 term loans have been presented as fixed rate debt as of December 31, 2023 in the table above.
(3)In January 2023, we issued $500.0 million of 5.05% senior unsecured notes due January 13, 2026, which were callable at par beginning on January 13, 2024. In conjunction with the pricing of these senior unsecured notes due January 2026, we executed three-year, fixed-to-variable interest rate swaps totaling $500.0 million, which are subject to the counterparties' right to terminate the swaps at any time following the 2026 notes par call date.
(4)Excludes net premiums and discounts recorded on mortgages payable, net premiums recorded on notes payable, and deferred financing costs on term loans, mortgages payable, notes payable, and our term loan. At December 31, 2021, the unamortized balance of net premiumsbasis adjustment on mortgages payable is $28.7 million, the unamortized balance of net premiumsinterest rate swaps designated as fair value hedges on notes payable is $295.5 million, and the balancepayable.
(5)We base the estimated fair value of the publicly-traded fixed rate senior notes and bonds at December 31, 2021 on the indicative market prices and recent trading activity of our senior notes and bonds payable. We base the estimated fair value of our fixed rate mortgages and private senior notes payable at December 31, 20212023, on the relevant forward interest rate curve, plus an applicable credit-adjusted spread. We base the estimated fair value of the publicly traded fixed rate senior notes and bonds at December 31, 2023, on the indicative market prices and recent trading activity of our senior notes and bonds payable. We believe that the carrying values of the line of credit, borrowings, commercial paper borrowings, and term loan balancebalances reasonably approximate their estimated fair values at December 31, 2021.2023.
The table above incorporates only those exposures that exist as of December 31, 2021.2023. It does not consider those exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations, would depend on the exposures that arise during the period, our hedging strategies at the time, and interest rates.
At December 31, 2021,2023, our outstanding notes, bonds and mortgages payable, notes, and bonds had fixed interest rates. Interest on our revolving credit facility and commercial paper borrowings and term loan balanceloans is variable. However, the variable interest rate feature on our term loan hasloans have been mitigated by an interest rate swap agreement. Based on our revolving credit facility balance of $650.0 million atagreements. At December 31, 2021,2023, a 1% change in interest rates on our variable-rate debt would change our interest rate costs by $6.5 million per year.$12.6 million.
Foreign Currency Exchange Rates
We are exposed to foreign currency exchange variability related to investments in and earnings from our foreign investments. Foreign currency market risk is the possibility that our results of operations or financial position could be better or worse than planned because of changes in foreign currency exchange rates. We primarily hedge our foreign currency risk by borrowing in the currencies in which we invest thereby providing a natural hedge. We continuously evaluate and manage our foreign currency risk through the use of derivative financial instruments, including cross-currency swaps, currency exchange swaps, foreign currency collars, and foreign currency forward contracts with financial counterparties where practicable. Such derivative instruments are viewed as risk management tools and are not used for speculative or trading purposes. Additionally, our inability to redeploy rent receipts from our international operations on a timely basis subjects us to foreign exchange risk.
Item 8: Financial Statements and Supplementary Data
Table of Contents
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| B. | |
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| C. | |
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| D. | |
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| E. | |
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| F. | |
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| | Schedules not filed: All schedules, other than that indicated in the Table of Contents, have been omitted as the required information is either not material, inapplicable or the information is presented in the financial statements or related notes. |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Realty Income Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Realty Income Corporation and subsidiaries (the Company) as of December 31, 20212023 and 2020,2022, the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2021,2023, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20212023 and 2020,2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021,2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021,2023, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 202221, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Evaluation of the Fair Value of Land in Real Estate Acquisitions
As discussed in Note 54 to the consolidated financial statements, during 2021,2023 the Company acquired $6.4$8.2 billion of real estate properties. As discussed in Note 2,1, the purchase price of a real estate acquisition is typically allocated among the individual components of both tangible and intangible assets and liabilities acquired based on their estimated relative fair values.
We identified the evaluation of the fair value of land in real estate acquisitions as a critical audit matter. Specifically, the measurement of the fair values of land is dependent upon significant assumptions of market land values for which relevant external market data is not always readily available. There was a high degree of subjectiveSubjective and complex auditor judgment was required in evaluating the fair value measurements given the sensitivity of the fair value measurements to changes in these assumptions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to allocate the purchase price of real estate acquisitions. This included controls over the measurement of the fair value of land. For a selection of real estate acquisitions, we involved valuation professionals with specialized skills and knowledge who assisted in evaluating a selection of the Company’s acquired land values by comparing them to independently developed ranges using market data from industry transaction databases and published industry reports.
Business Combination
As discussed in Notes 2 and 3 to the consolidated financial statements, on November 1, 2021, the Company acquired VEREIT, Inc. for $12.1 billion. The transaction was accounted for as a business combination, and the acquired assets and assumed liabilities were recorded at their respective fair values. The Company estimates the fair value of each property acquired, which is then allocated to land, buildings and improvements, and identified intangible assets and liabilities based on their estimated fair values.
We identified the evaluation of the fair values of certain acquired properties and the allocation of purchase price to land as a critical audit matter. Specifically, the measurement of the fair values of certain acquired properties and allocation of purchase price to land is dependent upon significant assumptions for which relevant external market data is not always readily available. Such assumptions include market land values, market rental rates, and capitalization rates. There was a high degree of subjective and complex auditor judgment required to evaluate the fair value measurements given the sensitivity of the fair value measurements to changes in these assumptions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to allocate the purchase price of the VEREIT transaction. This included controls over the selection and review of the significant assumptions used to estimate the fair value of certain properties acquired and the allocation of purchase price to land. For a selection of properties, we involved valuation professionals with specialized skills and knowledge who assisted in evaluating the significant assumptions used to estimate the fair value measurements of certain acquired properties and allocation of purchase price to land. The evaluation included comparison of the Company’s assumptions noted above to independently developed ranges using market data from industry transaction databases, and published industry reports.
(signed)/s/ KPMG LLP
We have served as the Company’s auditor since 1993.
San Diego, California
February 23, 202221, 2024
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Realty Income Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Realty Income Corporation and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021,2023, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20212023 and 2020,2022, the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2021,2023, and the related notes and financial statement schedule III (collectively, the consolidated financial statements), and our report dated February 23, 202221, 2024 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired VEREIT, Inc. during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, VEREIT, Inc.’s internal control over financial reporting associated with total assets of $17.7 billion and total revenues of $176.3 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of VEREIT, Inc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
(signed)/s/ KPMG LLP
San Diego, California
February 23, 202221, 2024
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2021 and 2020
(in thousands, except per share and share count data)amounts)
| | | | 2021 | | 2020 |
| December 31, 2023 | | | December 31, 2023 | | December 31, 2022 |
| ASSETS | ASSETS | | | | |
| Real estate held for investment, at cost: | Real estate held for investment, at cost: | | | | |
| Real estate held for investment, at cost: | |
| Real estate held for investment, at cost: | |
| Land | |
| Land | |
| Land | Land | | $ | 10,753,750 | | | $ | 6,318,926 | |
| Buildings and improvements | Buildings and improvements | | 25,155,178 | | | 14,696,712 | |
| Total real estate held for investment, at cost | Total real estate held for investment, at cost | | 35,908,928 | | | 21,015,638 | |
| Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | | (3,949,798) | | | (3,549,486) | |
| Real estate held for investment, net | Real estate held for investment, net | | 31,959,130 | | | 17,466,152 | |
| Real estate and lease intangibles held for sale, net | Real estate and lease intangibles held for sale, net | | 30,470 | | | 19,004 | |
| Cash and cash equivalents | Cash and cash equivalents | | 258,579 | | | 824,476 | |
| Accounts receivable, net | Accounts receivable, net | | 426,768 | | | 285,701 | |
| Lease intangible assets, net | Lease intangible assets, net | | 5,275,304 | | | 1,710,655 | |
| Goodwill | Goodwill | | 3,676,705 | | | 14,180 | |
| Investment in unconsolidated entities | Investment in unconsolidated entities | | 140,967 | | | — | |
| Other assets, net | Other assets, net | | 1,369,579 | | | 420,117 | |
| Total assets | Total assets | | $ | 43,137,502 | | | $ | 20,740,285 | |
| | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | |
| LIABILITIES AND EQUITY | |
| LIABILITIES AND EQUITY | |
| Distributions payable | |
| Distributions payable | |
| Distributions payable | Distributions payable | | $ | 146,919 | | | $ | 85,691 | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | | 351,128 | | | 241,336 | |
| Lease intangible liabilities, net | Lease intangible liabilities, net | | 1,308,221 | | | 321,198 | |
| Other liabilities | Other liabilities | | 759,197 | | | 256,863 | |
| Line of credit payable and commercial paper | Line of credit payable and commercial paper | | 1,551,376 | | | — | |
| Term loans, net | | 249,557 | | | 249,358 | |
| Term loan, net | |
| Mortgages payable, net | Mortgages payable, net | | 1,141,995 | | | 300,360 | |
| Notes payable, net | Notes payable, net | | 12,499,709 | | | 8,267,749 | |
| Total liabilities | Total liabilities | | 18,008,102 | | | 9,722,555 | |
| Commitments and contingencies | | 0 | | 0 |
| Commitments and contingencies (Note 20) | | Commitments and contingencies (Note 20) | | | |
| Stockholders’ equity: | Stockholders’ equity: | |
| Common stock and paid in capital, par value $0.01 per share, 740,200,000 shares authorized, 591,261,991 and 361,303,445 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively | | 29,578,212 | | | 14,700,050 | |
| Common stock and paid in capital, par value $0.01 per share, 1,300,000 shares authorized, 752,460 and 660,300 shares issued and outstanding as of December 31, 2023, and December 31, 2022, respectively | |
| Common stock and paid in capital, par value $0.01 per share, 1,300,000 shares authorized, 752,460 and 660,300 shares issued and outstanding as of December 31, 2023, and December 31, 2022, respectively | |
| Common stock and paid in capital, par value $0.01 per share, 1,300,000 shares authorized, 752,460 and 660,300 shares issued and outstanding as of December 31, 2023, and December 31, 2022, respectively | |
| Distributions in excess of net income | Distributions in excess of net income | | (4,530,571) | | | (3,659,933) | |
| Accumulated other comprehensive income (loss) | | 4,933 | | | (54,634) | |
| Accumulated other comprehensive income | |
| Total stockholders’ equity | Total stockholders’ equity | | 25,052,574 | | | 10,985,483 | |
| Noncontrolling interests | Noncontrolling interests | | 76,826 | | | 32,247 | |
| Total equity | Total equity | | 25,129,400 | | | 11,017,730 | |
| Total liabilities and equity | Total liabilities and equity | | $ | 43,137,502 | | | $ | 20,740,285 | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 2021, 2020 and 2019
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| REVENUE | | | | | | |
| Rental (including reimbursable) | | $ | 2,064,958 | | | $ | 1,639,533 | | | $ | 1,484,818 | |
| Other | | 15,505 | | | 7,554 | | | 3,345 | |
| Total revenue | | 2,080,463 | | | 1,647,087 | | | 1,488,163 | |
| | | | | | |
| EXPENSES | | | | | | |
| Depreciation and amortization | | 897,835 | | | 677,038 | | | 593,961 | |
| Interest | | 323,644 | | | 309,336 | | | 290,991 | |
| Property (including reimbursable) | | 133,605 | | | 104,603 | | | 88,585 | |
| General and administrative | | 96,980 | | | 73,215 | | | 66,483 | |
| Provisions for impairment | | 38,967 | | | 147,232 | | | 40,186 | |
| Merger and integration-related costs | | 167,413 | | | — | | | — | |
| Total expenses | | 1,658,444 | | | 1,311,424 | | | 1,080,206 | |
| Gain on sales of real estate | | 55,798 | | | 76,232 | | | 29,996 | |
| Foreign currency and derivative gains, net | | 710 | | | 4,585 | | | 2,255 | |
| Loss on extinguishment of debt | | (97,178) | | | (9,819) | | | — | |
| Equity in income of unconsolidated entities | | 1,106 | | | — | | | — | |
| Other income, net | | 9,949 | | | 4,538 | | | 3,428 | |
| Income before income taxes | | 392,404 | | | 411,199 | | | 443,636 | |
| Income taxes | | (31,657) | | | (14,693) | | | (6,158) | |
| Net income | | 360,747 | | | 396,506 | | | 437,478 | |
| Net income attributable to noncontrolling interests | | (1,291) | | | (1,020) | | | (996) | |
| Net income available to common stockholders | | $ | 359,456 | | | $ | 395,486 | | | $ | 436,482 | |
| | | | | | |
| Amounts available to common stockholders per common share: | | | | | | |
| Net income | | | | | | |
| Basic | | $ | 0.87 | | | $ | 1.15 | | | $ | 1.38 | |
| Diluted | | $ | 0.87 | | | $ | 1.14 | | | $ | 1.38 | |
| | | | | | |
| Weighted average common shares outstanding: | | | | | | |
| Basic | | 414,535,283 | | | 345,280,126 | | | 315,837,012 | |
| Diluted | | 414,769,846 | | | 345,415,258 | | | 316,159,277 | |
| | | | | | |
| Other comprehensive income: | | | | | | |
| Net income available to common stockholders | | $ | 359,456 | | | $ | 395,486 | | | $ | 436,482 | |
| Foreign currency translation adjustment | | 9,119 | | | (2,606) | | | 186 | |
| Unrealized gain (loss) on derivatives, net | | 50,448 | | | (34,926) | | | (9,190) | |
| Comprehensive income available to common stockholders | | $ | 419,023 | | | $ | 357,954 | | | $ | 427,478 | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITYINCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 2021, 2020 and 2019
(in thousands, except per share count data)amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares of
common
stock | | Common
stock and
paid in
capital | | Distributions
in excess of
net income | | Accumulated other comprehensive income (loss) | | Total
stockholders’
equity | | Noncontrolling
interests | | Total
equity |
| Balance, December 31, 2018 | | 303,742,090 | | | $ | 10,754,495 | | | $ | (2,657,655) | | | $ | (8,098) | | | $ | 8,088,742 | | | $ | 32,236 | | | $ | 8,120,978 | |
| Net income | | — | | | — | | | 436,482 | | | — | | | 436,482 | | | 996 | | | 437,478 | |
| Other comprehensive loss | | — | | | — | | | — | | | (9,004) | | | (9,004) | | | — | | | (9,004) | |
| Distributions paid and payable | | — | | | — | | | (861,118) | | | — | | | (861,118) | | | (1,296) | | | (862,414) | |
| Share issuances, net of costs | | 29,818,978 | | | 2,117,983 | | | — | | | — | | | 2,117,983 | | | — | | | 2,117,983 | |
| Contributions by noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 11,370 | | | 11,370 | |
| Redemption of common units | | — | | | (6,866) | | | — | | | — | | | (6,866) | | | (14,257) | | | (21,123) | |
| Reallocation of equity | | — | | | (653) | | | — | | | — | | | (653) | | | 653 | | | — | |
| Share-based compensation, net | | 58,038 | | | 8,890 | | | — | | | — | | | 8,890 | | | — | | | 8,890 | |
| Balance, December 31, 2019 | | 333,619,106 | | | $ | 12,873,849 | | | $ | (3,082,291) | | | $ | (17,102) | | | $ | 9,774,456 | | | $ | 29,702 | | | $ | 9,804,158 | |
| Net income | | — | | | — | | | 395,486 | | | — | | | 395,486 | | | 1,020 | | | 396,506 | |
| Other comprehensive loss | | — | | | — | | | — | | | (37,532) | | | (37,532) | | | — | | | (37,532) | |
| Distributions paid and payable | | — | | | — | | | (973,128) | | | — | | | (973,128) | | | (1,596) | | | (974,724) | |
| Share issuances, net of costs | | 27,564,163 | | | 1,817,978 | | | — | | | — | | | 1,817,978 | | | — | | | 1,817,978 | |
| Contributions by noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 3,168 | | | 3,168 | |
| Reallocation of equity | | — | | | 47 | | | — | | | — | | | 47 | | | (47) | | | — | |
| Share-based compensation, net | | 120,176 | | | 8,176 | | | — | | | — | | | 8,176 | | | — | | | 8,176 | |
| Balance, December 31, 2020 | | 361,303,445 | | | $ | 14,700,050 | | | $ | (3,659,933) | | | $ | (54,634) | | | $ | 10,985,483 | | | $ | 32,247 | | | $ | 11,017,730 | |
| Net income | | — | | | — | | | 359,456 | | | — | | | 359,456 | | | 1,291 | | | 360,747 | |
| Other comprehensive income | | — | | | — | | | — | | | 59,567 | | | 59,567 | | | — | | | 59,567 | |
| Shares issued in merger | | 162,043,548 | | | 11,556,715 | | | — | | | — | | | 11,556,715 | | | 3,160 | | | 11,559,875 | |
| Orion Divestiture | | — | | | (1,140,769) | | | — | | | — | | | (1,140,769) | | | (1,352) | | | (1,142,121) | |
| Distributions paid and payable | | — | | | — | | | (1,230,094) | | | — | | | (1,230,094) | | | (1,868) | | | (1,231,962) | |
| Share issuances, net of costs | | 67,777,279 | | | 4,453,953 | | | — | | | — | | | 4,453,953 | | | — | | | 4,453,953 | |
| Contributions by noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 43,390 | | | 43,390 | |
| Reallocation of equity | | — | | | 42 | | | — | | | — | | | 42 | | | (42) | | | — | |
| Share-based compensation, net | | 137,719 | | | 8,221 | | | — | | | — | | | 8,221 | | | — | | | 8,221 | |
| Balance, December 31, 2021 | | 591,261,991 | | | $ | 29,578,212 | | | $ | (4,530,571) | | | $ | 4,933 | | | $ | 25,052,574 | | | $ | 76,826 | | | $ | 25,129,400 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years ended December 31, |
| | | | | | | 2023 | | 2022 | | 2021 |
| REVENUE | | | | | | | | | | |
| Rental (including reimbursable) | | | | | | $ | 3,958,150 | | | $ | 3,299,657 | | | $ | 2,064,958 | |
| Other | | | | | | 120,843 | | | 44,024 | | | 15,505 | |
| Total revenue | | | | | | 4,078,993 | | | 3,343,681 | | | 2,080,463 | |
| | | | | | | | | | |
| EXPENSES | | | | | | | | | | |
| Depreciation and amortization | | | | | | 1,895,177 | | | 1,670,389 | | | 897,835 | |
| Interest | | | | | | 730,423 | | | 465,223 | | | 323,644 | |
| Property (including reimbursable) | | | | | | 316,964 | | | 226,330 | | | 133,605 | |
| General and administrative | | | | | | 144,536 | | | 138,459 | | | 96,980 | |
| Provisions for impairment | | | | | | 87,082 | | | 25,860 | | | 38,967 | |
| Merger and integration-related costs | | | | | | 14,464 | | | 13,897 | | | 167,413 | |
| Total expenses | | | | | | 3,188,646 | | | 2,540,158 | | | 1,658,444 | |
| Gain on sales of real estate | | | | | | 25,667 | | | 102,957 | | | 55,798 | |
| Foreign currency and derivative (loss) gain, net | | | | | | (13,414) | | | (13,311) | | | 710 | |
| Gain (loss) on extinguishment of debt | | | | | | — | | | 367 | | | (97,178) | |
| Equity in income and impairment of investment in unconsolidated entities | | | | | | 2,546 | | | (6,448) | | | 1,106 | |
| Other income, net | | | | | | 23,789 | | | 30,511 | | | 9,949 | |
| Income before income taxes | | | | | | 928,935 | | | 917,599 | | | 392,404 | |
| Income taxes | | | | | | (52,021) | | | (45,183) | | | (31,657) | |
| Net income | | | | | | 876,914 | | | 872,416 | | | 360,747 | |
| Net income attributable to noncontrolling interests | | | | | | (4,605) | | | (3,008) | | | (1,291) | |
| Net income available to common stockholders | | | | | | $ | 872,309 | | | $ | 869,408 | | | $ | 359,456 | |
| | | | | | | | | | |
| Amounts available to common stockholders per common share: | | | | | | | | | | |
| | | | | | | | | | |
| Net income, basic and diluted | | | | | | $ | 1.26 | | | $ | 1.42 | | | $ | 0.87 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | | | |
| Basic | | | | | | 692,298 | | | 611,766 | | | 414,535 | |
| Diluted | | | | | | 693,024 | | | 612,181 | | | 414,770 | |
| | | | | | | | | | |
| Net income available to common stockholders | | | | | | $ | 872,309 | | | $ | 869,408 | | | $ | 359,456 | |
| Total other comprehensive gain | | | | | | | | | | |
| Foreign currency translation adjustment | | | | | | 64,326 | | | (55,154) | | | 9,119 | |
| Unrealized (loss) gain on derivatives, net | | | | | | (37,265) | | | 97,054 | | | 50,448 | |
| Total other comprehensive gain | | | | | | $ | 27,061 | | | $ | 41,900 | | | $ | 59,567 | |
| Comprehensive income available to common stockholders | | | | | | $ | 899,370 | | | $ | 911,308 | | | $ | 419,023 | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
Years ended December 31, 2023, 2022 and 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares of
common
stock | | Common
stock and
paid in
capital | | Distributions
in excess of
net income | | Accumulated other comprehensive income (loss) | | Total
stockholders’
equity | | Noncontrolling
interests | | Total
equity |
| Balance, December 31, 2020 | | 361,303 | | | $ | 14,700,050 | | | $ | (3,659,933) | | | $ | (54,634) | | | $ | 10,985,483 | | | $ | 32,247 | | | $ | 11,017,730 | |
| Net income | | — | | | — | | | 359,456 | | | — | | | 359,456 | | | 1,291 | | | 360,747 | |
| Other comprehensive income | | — | | | — | | | — | | | 59,567 | | | 59,567 | | | — | | | 59,567 | |
| Shares issued in merger | | 162,044 | | | 11,556,715 | | | — | | | — | | | 11,556,715 | | | 3,160 | | | 11,559,875 | |
| Orion Divestiture | | — | | | (1,140,769) | | | — | | | — | | | (1,140,769) | | | (1,352) | | | (1,142,121) | |
| Distributions paid and payable | | — | | | — | | | (1,230,094) | | | — | | | (1,230,094) | | | (1,868) | | | (1,231,962) | |
| Share issuances, net of costs | | 67,777 | | | 4,453,953 | | | — | | | — | | | 4,453,953 | | | — | | | 4,453,953 | |
| Contributions by noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 43,390 | | | 43,390 | |
| Reallocation of equity | | — | | | 42 | | | — | | | — | | | 42 | | | (42) | | | — | |
| Share-based compensation, net | | 138 | | | 8,221 | | | — | | | — | | | 8,221 | | | — | | | 8,221 | |
| Balance, December 31, 2021 | | 591,262 | | | $ | 29,578,212 | | | $ | (4,530,571) | | | $ | 4,933 | | | $ | 25,052,574 | | | $ | 76,826 | | | $ | 25,129,400 | |
| Net income | | — | | | — | | | 869,408 | | | — | | | 869,408 | | | 3,008 | | | 872,416 | |
| Other comprehensive income | | — | | | — | | | — | | | 41,900 | | | 41,900 | | | — | | | 41,900 | |
| Distributions paid and payable | | — | | | — | | | (1,832,030) | | | — | | | (1,832,030) | | | (4,125) | | | (1,836,155) | |
| Share issuances, net of costs | | 68,876 | | | 4,570,766 | | | — | | | — | | | 4,570,766 | | | — | | | 4,570,766 | |
| Contributions by noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 51,221 | | | 51,221 | |
| Reallocation of equity | | — | | | (3,210) | | | — | | | — | | | (3,210) | | | 3,210 | | | — | |
| Share-based compensation, net | | 162 | | | 13,741 | | | — | | | — | | | 13,741 | | | — | | | 13,741 | |
| Balance, December 31, 2022 | | 660,300 | | | $ | 34,159,509 | | | $ | (5,493,193) | | | $ | 46,833 | | | $ | 28,713,149 | | | $ | 130,140 | | | $ | 28,843,289 | |
| Net income | | — | | | — | | | 872,309 | | | — | | | 872,309 | | | 4,605 | | | 876,914 | |
| Other comprehensive income | | — | | | — | | | — | | | 27,061 | | | 27,061 | | | — | | | 27,061 | |
| Distributions paid and payable | | — | | | — | | | (2,141,252) | | | — | | | (2,141,252) | | | (9,340) | | | (2,150,592) | |
| Contributions by noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 40,097 | | | 40,097 | |
| Share issuance, net of costs | | 91,902 | | | 5,450,982 | | | — | | | — | | | 5,450,982 | | | — | | | 5,450,982 | |
| | | | | | | | | | | | | | |
| Share-based compensation, net | | 258 | | | 19,218 | | | — | | | — | | | 19,218 | | | — | | | 19,218 | |
| Balance, December 31, 2023 | | 752,460 | | | $ | 39,629,709 | | | $ | (6,762,136) | | | $ | 73,894 | | | $ | 32,941,467 | | | $ | 165,502 | | | $ | 33,106,969 | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2021, 2020 and 2019
(in thousands)
| | | | 2021 | | 2020 | | 2019 |
| Years ended December 31, | | | Years ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net income | |
| Net income | |
| Net income | Net income | | $ | 360,747 | | | $ | 396,506 | | | $ | 437,478 | |
| Adjustments to net income: | Adjustments to net income: | |
| Depreciation and amortization | Depreciation and amortization | | 897,835 | | | 677,038 | | | 593,961 | |
| Loss on extinguishment of debt | | 97,178 | | | 9,819 | | | — | |
| Depreciation and amortization | |
| Depreciation and amortization | |
| Amortization of share-based compensation | Amortization of share-based compensation | | 41,773 | | | 16,503 | | | 13,662 | |
| Non-cash revenue and expense adjustments | | (23,380) | | | (3,562) | | | (9,338) | |
| Non-cash revenue adjustments | |
| (Gain) loss on extinguishment of debt | |
| Amortization of net premiums on mortgages payable | Amortization of net premiums on mortgages payable | | (3,498) | | | (1,258) | | | (1,415) | |
| Amortization of net premiums on notes payable | Amortization of net premiums on notes payable | | (10,349) | | | (1,754) | | | (995) | |
| Amortization of deferred financing costs | Amortization of deferred financing costs | | 12,333 | | | 11,003 | | | 9,795 | |
| Loss on interest rate swaps | | 2,905 | | | 4,353 | | | 2,752 | |
| Foreign currency and derivative gains, net | | (710) | | | (4,585) | | | (2,255) | |
| (Gain) loss on interest rate swaps | |
| Foreign currency and unrealized derivative loss, net | |
| Gain on sales of real estate | Gain on sales of real estate | | (55,798) | | | (76,232) | | | (29,996) | |
| Equity income of unconsolidated entities | | (1,106) | | | — | | | — | |
| Equity in income and impairment of investment in unconsolidated entities | |
| Distributions from unconsolidated entities | Distributions from unconsolidated entities | | 365 | | | — | | | — | |
| Provisions for impairment on real estate | | 38,967 | | | 147,232 | | | 40,186 | |
| Provisions for impairment | |
| Change in assets and liabilities | Change in assets and liabilities | |
| Accounts receivable and other assets | |
| Accounts receivable and other assets | |
| Accounts receivable and other assets | Accounts receivable and other assets | | (38,292) | | | (79,240) | | | (8,954) | |
| Accounts payable, accrued expenses and other liabilities | Accounts payable, accrued expenses and other liabilities | | 3,219 | | | 19,720 | | | 24,056 | |
| Net cash provided by operating activities | Net cash provided by operating activities | | 1,322,189 | | | 1,115,543 | | | 1,068,937 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | CASH FLOWS FROM INVESTING ACTIVITIES | |
| Investment in real estate | Investment in real estate | | (6,313,076) | | | (2,283,130) | | | (3,572,581) | |
| Investment in real estate | |
| Investment in real estate | |
| Improvements to real estate, including leasing costs | Improvements to real estate, including leasing costs | | (19,080) | | | (8,708) | | | (23,536) | |
| Investment in unconsolidated entities | |
| Investment in loans | |
| Proceeds from sales of real estate | Proceeds from sales of real estate | | 250,536 | | | 259,459 | | | 108,911 | |
| Return of investment from unconsolidated entities | |
| Net proceeds from sale of unconsolidated entities | |
| Proceeds from note receivable | |
| Insurance proceeds received | |
| Non-refundable escrow deposits | Non-refundable escrow deposits | | (28,390) | | | — | | | (14,603) | |
| Return of investment from unconsolidated entities | | 38,345 | | | — | | | — | |
| Net cash paid in merger | Net cash paid in merger | | (366,030) | | | — | | | — | |
| Net cash used in investing activities | Net cash used in investing activities | | (6,437,695) | | | (2,032,379) | | | (3,501,809) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | CASH FLOWS FROM FINANCING ACTIVITIES | |
| Cash distributions to common stockholders | Cash distributions to common stockholders | | (1,169,026) | | | (964,167) | | | (852,134) | |
| Borrowings on line of credit and commercial paper program | | 9,082,206 | | | 3,528,042 | | | 2,816,632 | |
| Payments on line of credit and commercial paper program | | (7,508,332) | | | (4,246,755) | | | (2,365,368) | |
| Principal payment on term loan | | — | | | (250,000) | | | (70,000) | |
| Proceeds from notes and bonds payable issued | | 1,033,387 | | | 2,200,488 | | | 897,664 | |
| Cash distributions to common stockholders | |
| Cash distributions to common stockholders | |
| Borrowings on line of credit and commercial paper programs | |
| Payments on line of credit and commercial paper programs | |
| Proceeds from term loan | |
| | Proceeds from notes payable issued | |
| Proceeds from notes payable issued | |
| Proceeds from notes payable issued | |
| Principal payment on notes payable | Principal payment on notes payable | | (1,700,000) | | | (250,000) | | | — | |
| Principal payments on mortgages payable | |
| Payments upon extinguishment of debt | Payments upon extinguishment of debt | | (96,583) | | | (9,445) | | | — | |
| Principal payments on mortgages payable | | (66,575) | | | (108,789) | | | (20,723) | |
| Proceeds from common stock offerings, net | Proceeds from common stock offerings, net | | 1,263,235 | | | 728,883 | | | 845,061 | |
| Proceeds from dividend reinvestment and stock purchase plan | Proceeds from dividend reinvestment and stock purchase plan | | 11,232 | | | 9,109 | | | 8,437 | |
| Proceeds from At-the-Market (ATM) program | | 3,179,490 | | | 1,094,938 | | | 1,264,518 | |
| Net cash received from Orion Divestiture | | 593,484 | | | — | | | — | |
| Redemption of common units | | — | | | — | | | (21,123) | |
| Distributions to noncontrolling interests | Distributions to noncontrolling interests | | (1,707) | | | (1,596) | | | (1,342) | |
| Net receipts on derivative settlements | Net receipts on derivative settlements | | 3,266 | | | 4,106 | | | 4,881 | |
| Debt issuance costs | Debt issuance costs | | (13,405) | | | (19,456) | | | (9,129) | |
| Net cash received from Orion Divestiture | |
| Other items, including shares withheld upon vesting | Other items, including shares withheld upon vesting | | (33,552) | | | (23,279) | | | (4,772) | |
| Net cash provided by financing activities | Net cash provided by financing activities | | 4,577,120 | | | 1,692,079 | | | 2,492,602 | |
| Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | | 20,076 | | | 4,431 | | | (9,796) | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | (518,310) | | | 779,674 | | | 49,934 | |
| Cash, cash equivalents and restricted cash, beginning of year | | 850,679 | | | 71,005 | | | 21,071 | |
| Cash, cash equivalents and restricted cash, end of year | | $ | 332,369 | | | $ | 850,679 | | | $ | 71,005 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | |
| Cash, cash equivalents and restricted cash, beginning of period | |
| Cash, cash equivalents and restricted cash, end of period | |
For supplemental disclosures, see note 15.18, Supplemental Disclosures of Cash Flow Information.
The accompanying notes to consolidated financial statements are an integral part of these statements.
REALTY INCOME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020, and 20192023
1.Organization and Operation Summary of Significant Accounting Policies
Realty Income Corporation (“Realty Income,” the “Company,” “we,” “our” or “us”) was founded in 1969 and is organized as a Maryland corporation. We invest in commercial real estate and have elected to be taxed as a real estate investment trust ("REIT"). We are listed on the New York Stock Exchange ("NYSE") under the symbol “O”.
Over the past 53 years, we have been acquiring and managing freestanding commercial properties that generate rental revenue under long-term net lease agreements with our commercial clients. AtAs of December 31, 2021,2023, we owned 11,136or held interests in a diversified portfolio of 13,458 properties located in all 50 states of the United States (U.S.("U.S.") states,, Puerto Rico, the United Kingdom (U.K.("U.K."), France, Germany, Ireland, Italy, Portugal, and Spain, containingwith approximately 210.1272.1 million leasable square feet. square feet of leasable space.
Information with respect to number of properties, leasable square feet, average initial lease term and initial weighted average cash lease yield is unaudited. Unless otherwise indicated, all dollar amounts are expressed in U.S. dollars.
In November 2021, we completed our merger with VEREIT, Inc. (VEREIT). For more details, please see note 3, Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture.
2.Summary of Significant Accounting Policies and Procedures and New Accounting Standards
Basis of Presentation. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“("U.S. GAAP”GAAP"). Intercompany accounts and transactions are eliminated in consolidation. The U.S. Dollar (“USD”("USD") is our reporting currency. Unless otherwise indicated, all dollar amounts are expressed in USD.
For our consolidated subsidiaries whose functional currency is not the USD, we translate their financial statements into USD at the time we consolidate those subsidiaries’ financial statements. Generally, assets and liabilities are translated at the exchange rate in effect at the balance sheet date. The resulting translation adjustments are included in 'Accumulated other comprehensive income', ("AOCI"), on our consolidated balance sheets. Certain balance sheet items, primarily equity and capital-related accounts, are reflected at the historical exchange rate. Income statement accounts are translated using the average exchange rate for the period.
We and certain of our consolidated subsidiaries have intercompany and third-party debt that is not denominated in our functional currency. When the debt is remeasured to the functional currency of the entity, a gain or loss can result. The resulting adjustment is reflected in 'Foreign currency and derivative (loss) gain, net' in our consolidated statements of income and comprehensive income. In the statement of cash flows, cash flows denominated in foreign currencies are translated using the exchange rates in effect at the time of the respective cash flows or at average exchange rates for the period, depending on the nature of the cash flow items.
Principles of ConsolidationConsolidation.. These consolidated financial statements include the accounts of Realty Income and all other entities in which we have a controlling financial interest. We evaluate whether we have a controlling financial interest in an entity in accordance with Accounting Standards Codification (“ASC”("ASC") 810,, Consolidation.
Voting interest entities ("VOEs") are entities considered to have sufficient equity at risk and which the equity holders have the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. We consolidate voting interest entities in which we have a controlling financial interest, which we typically have through holding of a majority of the entity’s voting equity interests.
Variable interest entities (“VIEs”("VIEs") are entities that lack sufficient equity at risk or where the equity holders either do not have the obligation to absorb losses, do not have the right to receive residual returns, do not have the right to make decisions about the entity’s activities, or some combination of the above. A controlling financial interest in a VIE is present when an entity has a variable interest, or a combination of variable interests, that provides the entity with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. An entity that meets both conditions above is deemed the primary beneficiary and consolidates the VIE. We reassess our initial evaluation of whether an entity is a VIE when certain reconsideration events occur. We reassess our determination of whether we are the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.
At December 31, 2023, we are considered the primary beneficiary of Realty Income, L.P. and certain investments, including investments in joint ventures. Below is a summary of selected financial data of such consolidated VIEs, included on our consolidated balance sheets at December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Net real estate | $ | 2,866,272 | | $ | 920,032 | |
| Total assets | $ | 3,588,720 | | $ | 1,082,346 | |
| Total liabilities | $ | 134,366 | | $ | 60,127 | |
The portion of a consolidated entity not owned by us is recorded as a noncontrolling interest. Noncontrolling interests are reflected on our consolidated balance sheets as a component of equity. Noncontrolling interestinterests that waswere created or assumed as part of a business combination or asset acquisition waswere recognized at fair value as of the date of the transaction (see note 11,12, Noncontrolling Interests).
Reclassification. Certain prior period amounts have been reclassified to conform to the current year presentation.
Value-added tax receivable is included in 'Other assets, net', on our consolidated balance sheets. Previously, this was categorized as 'Accounts receivable, net' on our consolidated balance sheets.
Use of EstimatesEstimates.. The consolidated financial statements were prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenuerevenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications. Certain reclassifications have been made to the prior years' consolidated financial statements to conform to current year presentation. We began presenting 'Goodwill,' which was previously presented in 'Other assets, net,' in a separate caption within our consolidated balance sheets. In addition, we began presenting 'Income taxes,' which was previously presented in 'Expenses,' below a newly captioned subtotal for 'Income before income taxes' within our consolidated statements of income and comprehensive income. Furthermore, we began presenting
'Other income, net' which consists of certain miscellaneous non-recurring revenue previously presented in 'Other' within 'Revenue,' in a separate caption within our consolidated statements of income and comprehensive income. These reclassifications have no effect on net income, total assets, accumulated earnings or cash flow statements as previously reported.
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, plus income attributable to dilutive shares and convertible common units 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. For more detail, see note
The following is a reconciliation of the denominator of the basic net income 17, Net Income per common share computation to the denominator of the diluted net income per common share computation:
| | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| Weighted average shares used for the basic net income per share computation | | 414,535,283 | | | 345,280,126 | | | 315,837,012 | |
| Incremental shares from share-based compensation | | 234,563 | | | 135,132 | | | 322,265 | |
| Weighted average shares used for diluted net income per share computation | | 414,769,846 | | | 345,415,258 | | | 316,159,277 | |
| Unvested shares from share-based compensation that were anti-dilutive | | 45,404 | | | 70,581 | | | 8,113 | |
| Weighted average partnership common units convertible to common shares that were anti-dilutive | | 500,217 | | | 463,119 | | | 442,073 | |
Cash Equivalents and Restricted Cash. We consider all short-term, highly liquid investments that are readily convertible to cash and have an original maturity of three months or less at the time of purchase to be cash equivalents. Restricted cash includes cash proceeds from the sale of assets held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges under Section 1031 of the U.S. Internal Revenue Code, impounds related to mortgages payable and cash that is not immediately available to Realty Income (i.e. escrow deposits for future acquisitions).
Cash accounts maintained on behalf of Realty Income in demand deposits at commercial banks and money market funds may exceed federally insured levels or may be held in accounts without any federal insurance or any other insurance or guarantee. However, Realty Income has not experienced any losses in such accounts.
Income Taxes. We have elected to be taxed as a REIT, under the Internal Revenue Code of 1986, as amended. 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 taxable net income in the U.S., we generally will not be required to pay U.S. 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 ("TRS"). A TRS is a subsidiary of a REIT that is subject to federal, state and local income taxes, as applicable. Our use of TRS entities enables us to engage in certain business activities while complying with the REIT qualification requirements and to retain any income generated by these businesses for reinvestment without the requirement to distribute those earnings. For our international territories, we are liable for taxes in the United Kingdom and Spain. Accordingly, provisions have been made for U.K. and Spain income taxes. Therefore, the income taxes recorded on our consolidated statements of income and comprehensive income represent amounts accrued or paid by Realty Income and its subsidiaries for U.S. income taxes on our TRS entities, city and state income and franchise taxes, and income taxes for the U.K. and Spain.
Earnings and profits that determine the taxability of distributions to stockholders differ from net income reported for financial reporting purposes primarily due to differences in the estimated useful lives and methods used to compute depreciation and the carrying value (basis) of the investments in properties for tax purposes, among other things.
We regularly analyze our various international, federal and state filing positions and only recognize the income tax effect in our financial statements when certain criteria regarding uncertain income tax positions have been met. We believe that our income tax positions would more likely than not be sustained upon examination by all relevant taxing authorities. Therefore, no provisions for uncertain tax positions have been recorded on our consolidated financial statements.
Lease Revenue Recognition and Accounts ReceivableReceivable.. The majority of our leases are accounted for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. Any rental revenue contingent upon our client’s sales, or percentage rent, is recognized only after our client exceeds their sales breakpoint. Rental increases based upon changes in the consumer price indexesindices are recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements. Contractually obligated rental revenue from our clients for recoverable real estate taxes and operating expenses are included in contractually obligated reimbursements by our clients, a component of rental revenue, in the period when such costs are incurred. Taxes and operating expenses paid directly by our clients are recorded on a net basis.
Other revenue includes certain property-related revenue not included in rental revenue and interest income recognized on financing receivables for certain leases with above-market terms.
The COVID-19 pandemic and the measures taken to limit its spread are negatively impacting the economy across many industries, including the industries in which some of our clients operate. These impacts may continue as the duration and severity of the pandemic increases. As a result, we have closely monitored the collectability of our accounts receivable and continue to evaluate the potential impacts of the COVID-19 pandemic and the measures taken to limit its spread on our business and industry segments as the situation continues to evolve and more information becomes available.
We continue to assess the probability of collecting substantially all of the lease payments to which we are entitled under the original lease contract as required under TopicASC 842,Leases. We assess the collectability of our future lease payments based on an analysis of creditworthiness, economic trends (including trends arising from the COVID-19 pandemic) and other facts and circumstances related to the applicable clients. If we conclude the
collection of substantially all of lease payments under a lease is less than probable, rental revenue recognized for that lease is limited to cash received going forward, existing operating lease receivables, including those related to straight-line rental revenue, must be written off as an adjustment to rental revenue, and no further operating lease receivables are recorded for that lease until such future determination is made that substantially all lease payments under that lease are now considered probable. If we subsequently conclude that the collection of substantially all lease payments under a lease is probable, a reversal of lease receivables previously written off is recognized.
Loans Receivable. The majority of concessions grantedloans we acquired during 2023 are classified as held for investment andare carried at their amortized cost basis. We recognize interest income on loans receivable using the effective-interest method. Direct costs associated with originating loans, along with any premium or discount, are deferred and amortized as an adjustment to our clients during 2020 and 2021 as a resultinterest income over the term of the COVID-19 pandemic have been rent deferrals withloan using the original lease term unchanged.effective interest method. When management identifies the full recovery of the contractually specified payments of principal and interest of a loan is less than probable, we evaluate the expected loss amount and place it on non-accrual status. We currently anticipate future concessions will be similar. In accordance withmade the guidance provided byaccounting policy election to record accrued interest on our loan portfolio separate from our loan receivable and other lending investments. These loans and the Financial Accounting Standards Board (FASB) staff, we have elected to accountrelated interest receivable are presented in 'Other assets, net' on our consolidated balance sheets.
Allowance for these leases as if the right of deferral existed in the lease contract and therefore continue to recognize lease revenue in accordance with the lease contract in effect. In limited circumstances, the undiscounted cash flows resulting from deferrals granted increased significantly from original lease terms,Credit Losses. The allowance for credit losses, which required us to account for these as lease modifications, and resulted in an insignificant impact to consolidated rental revenue during 2020 and 2021. Similarly, rent abatements granted, which are also accounted for as lease modifications, impacted our rental revenue by an insignificant amount during 2020 and 2021.
Unless otherwise specified, references to reservesis recorded as a reduction to loans receivable and financing receivable within 'Other assets, net' on our consolidated balance sheets, is measured using a probability of rental revenue include amounts reserveddefault method based on our client's respective credit ratings and the expected value of the underlying collateral upon its repossession. Included in our model are factors that incorporate forward-looking information. Allowance for credit losses is presented in the current period, as well as unrecognized contractual rental revenue'Provisions for impairment' in our consolidated statements of income and unrecognized straight-line rental revenue for leases accounted for on a cash basis. The following table summarizes reservesto rental revenue (in millions):comprehensive income.
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Rental revenue reserves | | $ | 10.2 | | | $ | 44.1 | | | $ | 1.4 | |
| Straight-line rent reserves | | 4.5 | | | 8.4 | | | 1.5 | |
| Total rental revenue reserves | | $ | 14.7 | | | $ | 52.5 | | | $ | 2.9 | |
As ofDuring the year ended December 31, 2021, other than the information related to the reserves recorded to date,2023, we do not have any further client specific information that would change our assessment that collectionrecognized a provision for credit losses of substantially all$4.9 million, which includes $2.5 million of the future lease payments under our existing leases is probable. However, since the conversations regarding rent collections for our clients affected by the COVID-19 pandemic are ongoingallowances on loans receivable and we do not currently know the types$2.4 million of future concessions, if any, that will ultimately be granted, there may be impacts in future periods that could change this assessment as the situation continues to evolve and as more information becomes available. We also evaluated certain properties impacted by the COVID-19 pandemic for impairment (see note 14, Financial Instruments and Fair Value Measurements).allowances on financing receivables.
Gain on Sales of Real Estate. When real estate is sold, the carrying amount of the applicable assets is derecognized with a corresponding gain from the sale recognized in our consolidated statements of income and comprehensive income. We record a gain on sale of real estate pursuant to provisions under ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets. We determine whether we would have a controlling financial interest in the property after the sale. We record a gain from the sale of real estate provided that various criteria, relating to the terms of the sale and any subsequent involvement by us with the real estate, have been met.
Allocation of the Purchase Price of Real Estate Acquisitions. We evaluate whether or not substantially all of the value of acquired assets is concentrated in a single identifiable asset or group of identifiable assets to determine whether a transaction is accounted for as an asset acquisition or a business combination. A majority of our
acquisitions qualify as asset acquisitions, and the transaction costs associated with those acquisitions are capitalized. However, our merger with VEREIT comprises both an input and substantive process that together significantly contributes toOn the ability to create outputs and therefore would be considered a business. As a result, the merger with VEREIT qualified as a business combination and, accordingly,other hand, we expense the transaction costs have been expensed and categorizedcategorize them as merger and integration-related costs on our consolidated statements of income and comprehensive income. In accordance withincome for transactions that qualify as a business combination. For business combinations, we recognize the amount of any purchase consideration that exceeds the fair value of all identified assets acquired and liabilities assumed as goodwill and may record measurement period adjustments within one year of the acquisition date as permitted under ASC Topic 805, Business Combinations, adjustments to the allocated purchase price are able to be made within one year of the closing date of our merger with VEREIT as acquisition date uncertainties are resolved (for more details on our merger with VEREIT, please see note 3, Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture).
When acquiring a property for investment purposes,For asset acquisitions, we typically allocate the cost of real estate acquired, inclusive of transaction costs, to: (1) land, (2) building and improvements, and (3) identified intangible assets and liabilities, based in each case on their relative estimated fair values. Intangible assets and liabilities consist of above-market or below-market lease value of in-place leases and the value of in-place leases, as applicable. Additionally, above-market rents on certain leases under which we are a lessor are accounted for as financing receivables amortizing over the lease term, while below-market rents on certain leases under which we are a lessor are accounted for as
prepaid rent. In an acquisition of multiple properties, we must also allocate the purchase price among the properties. The allocation of the purchase price is based on our assessment of estimated fair values of the land, building and improvements, and identified intangible assets and liabilities, utilizing market-based evidence and is often based upon various characteristics of the market where the property is located.commonly applied valuation approaches. In addition, any assumed notes payable or mortgages are recorded at their estimated fair values. The estimated fair values of our mortgages payable have been calculated by discounting the future cash flows using applicable interest rates that have been adjusted for factors, such as industry type, client investment grade, maturity date, and comparable borrowings for similar assets. The use of different assumptions in the allocation of the purchase price of the acquired properties and liabilities assumed could affect the timing of recognition of the related revenue and expenses.
Our estimated fair value determinations are based on management’s judgment, utilizing various factors, including: market land and building values, market rental rates, discount rates and capitalization rates. Our methodology for measuring and allocating the fair value of real estate acquisitions includes both observable market data (categorized as level 2 on the three-level valuation hierarchy of ASC Topic 820, Fair Value Measurement)Measurement), and unobservable inputs that reflect our own internal assumptions (categorized as level 3 under ASC Topic 820). Given the significance of the unobservable inputs we believe the allocations of fair value of real estate acquisitions should be categorized as level 3 under ASC Topic 820. From time to time, we have used, and may continue to use, the assistance of independent third parties specializing in real estate valuations to prepare our purchase price allocations.
The allocation of tangible assets (which includes land and buildings/improvements) of an acquired property with an in-place lease is based upon relative fair value. Land is typically valued utilizing the sales comparison (or market) approach. Buildings and improvements are typically valued under the replacement cost approach. In allocating the fair value to identified intangibles for above-market or below-market leases, an amount is recorded based on the present value of the difference between (i) the contractual amount to be paid pursuant to the in-place lease and (ii) our estimate of fair market lease rate for the corresponding in-place lease, measured over the remaining assumed contract term of the lease. The value of in-place leases is determined by our estimated costs related to acquiring a client and the carrying costs that would be incurred over the vacancy period to locate a client if the property were vacant, considering market conditions and costs to execute similar leases at the time of acquisition.
The values of the above-market and below-market leases are amortized over the term of the respective leases, including any bargain renewal options, as an adjustment to rental revenue on our consolidated statements of income and comprehensive income. The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to depreciation and amortization expense over the remaining periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are recorded to revenue or expense as appropriate.
Real Estate and Lease Intangibles Held for Sale. We generally reclassify assets to held for sale when the disposition has been approved, there are no known contingencies relating to the sale and the consummation of the disposition is considered probable within one year. Upon classifying a real estate investment as held for sale, we will no longer recognize depreciation expense related to the depreciable assets of the property. Assets held for sale are recorded at the lower of carrying value or estimated fair value, less the estimated cost to dispose of the assets. Twenty-nine properties were classified as held for sale at December 31, 2023.
If circumstances arise that we previously considered unlikely and, as a result, we decide not to sell a property previously classified as held for sale, we will reclassify the property as held for investment. We measure and record
a property that is reclassified as held for investment at the lower of (i) its carrying value 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 estimated fair value at the date of the subsequent decision not to sell.
NaN properties were classified as held for sale at December 31, 2021.
Investment in Unconsolidated Entities. We account for our investmentInvestments in unconsolidated entity arrangementsentities of which we are not considered the primary beneficiary, include VIEs and are accounted for using the equity method of accounting as we have the ability to exercise significant influence but not control, over operating and financing policies of these investments. We have determined that noneinitially recognize the fair value of our contribution as an equity method investment. We subsequently adjust these balances for our proportionate share of net earnings/losses of the unconsolidated entities, would be considered variable interest entities ("VIE") underdistributions received and contributions made. Transaction costs related to the applicable accounting guidance. Ourformation of equity method investments were acquiredare also capitalized, resulting in our merger with VEREIT. As a result, the investments were recorded at fair value and subsequently will be adjusted for our share of equity in the entities' earnings and distributions received. The step-up in fair value was allocated to the individual investment assets and liabilities andbasis difference. This basis difference is being amortized over the estimated useful life of the respective underlying tangible real estate assets the lease termand/or liabilities. The carrying value of the intangible real
estate assets, and the remaining term of the assumed debt. Investment in unconsolidated entitiesour investment is included in the accompanying'Investment in unconsolidated entities' on our consolidated balance sheets. We record our proportionate share of net income from the unconsolidated entities in other'Equity in income netand impairment of investment in theunconsolidated entities' in our consolidated statements of income and comprehensive income. With regard to distributions from unconsolidated entities, we have elected the nature of distribution approach as the information is available to us to determine the nature of the underlying activity that generated the distributions. In accordance with such approach, cash flows generated from the operations of an unconsolidated entity are classified as a return on investment (cash inflow from operating activities) and cash flows that are generated from other activities, such as property sales, debt refinancing or sale and redemptions of our investments of our investments are classified as a return of investment (cash inflow from investing activities). Our contribution to the unconsolidated entities or any distributions from them as returns of investment are classified as investing activities.
Our investment in unconsolidated entities includes preferred interests. Upon acquisition, we assess whether such investment should be considered debt or equity securities based on investment terms. As of December 31, 2023, our investment balance includes preferred interests classified as equity securities without a readily determinable fair value, for which we elect to apply the measurement alternative and record the value of the investment at cost, less any applicable impairment.
Goodwill. Upon the closing of a business combination, after identifying all tangible and intangible assets and liabilities, the excess consideration paid over the fair value of the assets and liabilities acquired and assumed, respectively, represents goodwill. In connection with our merger with VEREIT, we recorded goodwill as a result of consideration exceeding the net assets acquired. Goodwill has not yet been allocated to our individual operating segments; the allocation is pending the finalization of our purchase accounting.
Deferred Financing Costs. Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining or originating financing. Deferred financing costs, other than those associated with the line of credit, are presented on theour consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. Deferred financing costs related to the line of credit are included in other'other assets, netnet' in the accompanying consolidated balance sheets. These costs are amortized to interest expense over the terms of the respective financing agreements that approximates with the effective interest method.
Depreciation and Amortization. Land, buildings and improvements are recorded and stated at cost. Major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives, while ordinary repairs and maintenance are expensed as incurred. Buildings and improvements that are under redevelopment, or are being developed, are carried at cost and no depreciation is recorded on these assets. Additionally, amounts essential to the development of the property, such as pre-construction, development, construction, interest and other costs incurred during the period of development are capitalized. We cease capitalization when the property is available for occupancy upon substantial completion of property improvements to accommodate the client's use, but in any event no later than one year from the completion of major construction activity.
Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:
| | | | | |
| Buildings | 25 years orto 35 years |
| Building improvements | 4 to 35 years |
| Equipment | 5 to 25 years |
| Lease commissions and property improvements to accommodate the client's use | The shorter of the term of the related lease or useful life |
| Acquired in-place leases | Remaining terms of the respective leases |
Provisions for Impairment - Real Estate Assets. 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. 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, a fair value analysis is performed and, to the extent the estimated fair value is less than the current book value, a provision for impairment is recorded to reduce the book value to estimated fair value. Key assumptions that we utilize in this analysis include projected rental rates, estimated holding periods, capital expenditures and property sales capitalization rates. For further details, see note 13, Fair Value Measurements.
Provisions for Impairment - Goodwill. Goodwill is not amortized, but is subject to impairment reviews annually, or more frequently if necessary. Goodwill is qualitatively assessed to determine whether a quantitative impairment assessment is necessary. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized, and the asset is written down to its estimated fair value. We perform our annual goodwill impairment assessment as of June 30. During the years ended December 31, 2021, 20202023, 2022 and 20192021, there were no impairments of goodwill.
Provisions for Impairment - Investment in Unconsolidated Entities. WhenDuring our ownership of properties that are accounted for under the equity method and considered unconsolidated entities, and when circumstances indicate that a decrease in the value of an equity method investment has occurred that is other than temporary, we recognize an impairment loss, should be recognized.which requires significant judgment. To determine whether anthe impairment loss is other-than-temporary, we consider whether it has the ability and intent to hold the investment until the carrying value is fully recovered. We evaluate the recoverabilityimpairment of our investment in unconsolidated entities in accordance with accounting standards for equity investments by first reviewing each investment for indicators of impairment. If indicators are present, we estimate the fair value of the
investment. investments. If the carrying value of the investment is greater than the estimated fair value, we make an assessment of whether the impairment is temporary or other-than-temporary. In making this assessment, we consider the length of time and the extent to which fair value has been less than cost, the financial condition and near-term prospects of the entity, and our intent and ability to retain itsthe interest long enough for a recovery in market value. If we conclude thatThe investment is then reduced to its estimated fair value if conclusions indicate the impairment is other than temporary, the investment is reduced to its estimated fair value. The evaluation of an investment in an unconsolidated entity for potential impairment requires significant judgment. Since our merger with VEREIT in November 2021, when we assumed our first unconsolidated entities, through December 31, 2021, there have been no impairments of equity method investments.temporary.
Equity Offering Costs. Underwriting commissions and offering costs have been reflected as a reduction of additional paid-in-capital on our consolidated balance sheets.
Derivative and Hedging Activities. Derivatives are financial arrangements among two or more parties with returns linked to or “derived” from an underlying equity, debt, commodity, other asset, liability, interest rate, foreign exchange rate or another index, or the occurrence or nonoccurrence of a specified event. The settlement of a derivative is determined by its underlying notional amount specified in the contract. Derivative contracts may be entered into outright or embedded within a non-derivative host contract, and may be listed, traded on exchanges or privately negotiated directly between two parties.
We actively manage our riskinterest rate and foreign currency exposures which arisearising from our liquidity and funding activities using derivative instruments which hedge for interest rate risk, foreign exchange risk, or both.instruments. We record all derivatives on the balance sheet at fair value. The majority of inputs used to value our derivatives fall within level 2 of the fair value hierarchy. The recognition of changes in the fair value of derivatives is recorded in net income unless the derivative is designated inas a cash flow or net investment hedge, accounting relationship in which case the change in fair value is recorded in other comprehensive income until such time as theand subsequently reclassified to a designated hedged item impacts net income.
Income Taxesaccount. We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. 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 taxable 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 (“TRS”). A TRS is a subsidiary of a REIT that is subject to federal, state and local income taxes, as applicable. Our use of a TRS enables us to engage in certain business activities while complying with the REIT qualification requirements and to retain any income generated by these businesses for reinvestment without the requirement to distribute those earnings. The income taxes recorded on our consolidated statements of income and comprehensive income represent amounts accrued or paid in the periods during which the hedged transaction affects earnings.
Segment Reporting. Our business is characterized as owning and leasing commercial properties under long-term, mostly triple net lease agreements (whereby clients are responsible for property taxes, insurance and maintenance
costs), and these economic characteristics are similar across various property types, geographic locations, and industries in which our clients operate. Information reviewed by Realty Incomeour chief operating decision maker in evaluating performance and its subsidiaries for cityallocating resources are primarily operating results and state income and franchise taxes and income taxescash flow analysis for the U.K.overall company. Therefore, we operate and Spain.manage the business in one operating and reportable segment.
ASC 280, Segment Reporting, requires certain entity-wide annual disclosures for entities with a single reportable segment. The following table disaggregates domestic and international revenue by major asset types and geographic regions (in millions):
Earnings | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2023 |
| | U.S. | | U.K. | | Other (1) | | Total |
| Retail | | $ | 2,754.2 | | | $ | 374.0 | | | $ | 65.4 | | | $ | 3,193.6 | |
| Industrial | | 515.4 | | | 43.7 | | | — | | | 559.1 | |
Other (2) | | 205.5 | | | — | | | — | | | 205.5 | |
| Rental (including reimbursable) | | $ | 3,475.1 | | | $ | 417.7 | | | $ | 65.4 | | | $ | 3,958.2 | |
| Other revenue | | | | | | | | 120.8 | |
| Total revenue | | | | | | | | $ | 4,079.0 | |
| | | | | | | | |
| | 2022 |
| | U.S. | | U.K. | | Other (1) | | Total |
| Retail | | $ | 2,455.9 | | | $ | 243.3 | | | $ | 30.9 | | | $ | 2,730.1 | |
| Industrial | | 465.2 | | | 30.2 | | | — | | | 495.4 | |
Other (2) | | 74.2 | | | — | | | — | | | 74.2 | |
| Rental (including reimbursable) | | $ | 2,995.3 | | | $ | 273.5 | | | $ | 30.9 | | | $ | 3,299.7 | |
| Other revenue | | | | | | | | 44.0 | |
| Total revenue | | | | | | | | $ | 3,343.7 | |
| | | | | | | | |
| | 2021 |
| | U.S. | | U.K. | | Other (1) | | Total |
| Retail | | $ | 1,566.7 | | | $ | 138.9 | | | $ | 4.2 | | | $ | 1,709.8 | |
| Industrial | | 261.5 | | | 9.6 | | | — | | | 271.1 | |
Other (2) | | 84.1 | | | — | | | — | | | 84.1 | |
| Rental (including reimbursable) | | $ | 1,912.3 | | | $ | 148.5 | | | $ | — | | | $ | 2,065.0 | |
| Other revenue | | | | | | | | 15.5 | |
| Total revenue | | | | | | | | $ | 2,080.5 | |
| | | | | | | | |
(1) Other includes properties in Spain, starting in September 2021, in Italy, starting in October 2022,in Ireland, starting in June 2023, and profits that determinein France, Germany, and Portugal starting in December 2023.
(2) Other includes the taxabilityfollowing asset types: office, agriculture and gaming.
Long-lived assets include items such as property, plant, equipment and right-of-use assets subject to operating and finance leases. As of distributions to stockholders differ from net income reported for financial reporting purposes due to differencesDecember 31, 2023, no individual country or asset-type represented more than 10% of total revenue, other than as presented in the estimated useful lives and methods used to compute depreciation and the carrying value (basis)tables above. In addition, as of December 31, 2023, no individual country or asset-type represented more than 10% of the investmentstotal assets, other than as presented in the tables below. The following table disaggregates domestic and international total long-lived assets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2023 | | 2022 |
| | U.S. | | U.K. | | Other (1) | | Total | | U.S. | | U.K. | | Other (1) | | Total |
| Long-lived assets | | $ | 36,577.1 | | | $ | 6,787.1 | | | $ | 1,496.1 | | | $ | 44,860.3 | | | $ | 33,685.6 | | | $ | 4,596.1 | | | $ | 582.7 | | | $ | 38,864.4 | |
| Remaining assets | | | | | | | | 12,919.1 | | | | | | | | | 10,808.7 | |
| Total assets | | | | | | | | $ | 57,779.4 | | | | | | | | | $ | 49,673.1 | |
(1) Other includes properties for tax purposes, among other things.in Spain, starting in September 2021, in Italy, starting in October 2022,in Ireland, starting in June 2023, and in France, Germany, and Portugal, starting in December 2023.
We regularly analyze our various federal and state filing positions and only recognize
Recent Accounting Standards Not Yet Adopted.
In December 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-09, Income Taxes, to enhance income tax effectdisclosures, provide more information about tax risks and opportunities present in our financial statements when certain criteria regarding uncertainworldwide operations, and to disaggregate existing income tax positions have been met. We believe that our income tax positions would more likely than not be sustained upon examination by all relevant taxing authorities. Therefore, no provisions for uncertain income tax positions have been recorded in our financial statements.
Recently Issued Accounting Standards. In July 2021, the FASB issued ASU 2021-05 establishing Topic 842, Lessors - Certain Leases with Variable Lease Payments. ASU 2021-05 improves ASC 842 classification guidance as it relates to a lessor's accounting for certain leases with variable lease payments. This guidance requires a lessor to classify a lease with variable payments that do not depend on an index or rate as an operating lease if either a sales-type lease or direct financing lease classification would trigger a day-one loss. Thisdisclosures. The guidance is effective for reportingannual periods beginning after December 15, 2021,2024 on a prospective basis, with earlythe option to apply the standard retrospectively. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2021-05 on our consolidated financial statements.statement disclosures.
In March 2020, theNovember 2023, FASB issued Accounting Standards Update ASU 2020-042023-07, Segment Reporting, establishing improvements to reportable segments disclosures to enhance segment reporting under Topic 848, Reference Rate Reform.280. This ASU 2020-04 contains practical expedients for reference rate reform related activitiesaims to change how public entities identify and aggregate operating segments and apply quantitative thresholds to determine their reportable segments. This ASU also requires public entities that impact debt, leases, derivatives and other contracts.operate as a single reportable segment to provide all segment disclosures in Topic 280, not just entity level disclosures. The guidance is optionalwill be effective for fiscal years beginning after December 15, 2023 and is effective between March 12, 2020interim periods within fiscal years beginning after December 15, 2024 and December 31, 2022. The guidance maythe amendments should be elected over time as reference rate reform activities occur.applied retrospectively to all periods presented in the financial statements. We are currently evaluating the impact
that the expected market transition from the London Interbank Offered Rate, commonly referred to as LIBOR, to alternative references rates will have on our financial statements as well as the applicability of the aforementioned expedients and exceptions provided in ASU 2020-04.statement disclosures.
3.2. Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture
Merger with VEREIT
On April 29, 2021, we entered into an Agreement and Plan of Merger, as amended, or the Merger Agreement, with VEREIT, its operating partnership, VEREIT Operating Partnership, L.P., or VEREIT OP, and 2 newly formed subsidiaries. Pursuant to the terms of the Merger Agreement, (i) one of the newly formed subsidiaries of us agreed to merge with and into VEREIT OP, with VEREIT OP as the surviving entity, which we refer to as the Partnership Merger, and (ii) immediately thereafter, VEREIT agreed to merge with and into the other newly formed subsidiary of us, with our subsidiary as the surviving corporation, which we refer to collectively as the merger.
The primary reason for the Merger is to expand our size, scale and diversification, in order to further enhance our competitive advantages and accelerate our investment activities.
On November 1, 2021, we completed our acquisition of VEREIT, Inc. ("VEREIT"), and the merger was consummated. Pursuant to the terms of the Merger Agreement and subject to the terms thereof, upon the consummation of the merger, (i) each outstanding share of VEREIT common stock, and each outstanding common partnership unit of VEREIT OPOperating Partnership, L.P., ("VEREIT OP") owned by any of its partners other than VEREIT, Realty Income or their respective affiliates, was automatically converted into 0.705 of newly issued shares of our common stock, or in certain instances, Realty Income L.P. units, and (ii) each VEREIT OP outstanding common unit owned by VEREIT, Realty Income or their respective affiliates remained outstanding as partnership interests in the surviving entity. Each outstanding VEREIT stock option and restricted stock unit that were unvested as of November 1, 2021 were converted into equivalent options and restricted stock units, in each case with respect to the share of the Company's common stock, using the equity award exchange ratio in accordance with the Merger Agreement. For more details, see note 16, Common Stock Incentive Plan.
Our merger with VEREIT has been accounted for using the acquisition method of accounting in accordance with ASC, 805, Business Combinations, with Realty Income as the accounting acquirer, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair value. The fair value of the consideration transferred on the date of the acquisition is as follows (in thousands, except share and per share data):
| | | | | | | | |
Shares of VEREIT common stock and VEREIT OP common units exchanged (1)
| | 229,304,035 | |
Exchange Ratio | | 0.705 |
| | 161,659,345 |
Less: Fractional shares settled in cash | | (1,545) |
Shares of Realty Income common stock and Realty Income L.P. units issued | | 161,657,800 |
Adjusted opening price of Realty common stock on November 1, 2021 (2)
| | $ | 71.236 | |
Fair value of Realty common stock issued to former holders of VEREIT common stock and VEREIT OP common units | | $ | 11,515,855 | |
Fair value of VEREIT's equity-based compensation awards attributable to pre-combination services (3)
| | 44,020 | |
Total non-cash consideration | | 11,559,875 | |
Cash paid for fractional shares | | 110 | |
VEREIT indebtedness paid off in connection with the merger (4)
| | 500,414 | |
Consideration transferred | | $ | 12,060,399 | |
(1) Includes 229,152,001 shares of VEREIT common stock and 152,034 VEREIT OP common units outstanding as of November 1, 2021. Under the Merger Agreement, these shares and units were converted to Realty Income common stock, or in certain instances, Realty Income L.P. units, at an Exchange Ratio of 0.705 per share of VEREIT common stock or VEREIT OP common unit, as applicable.
(2) The fair value of Realty Income common stock issued to former holders of VEREIT common stock and VEREIT OP common units is based on the per share opening price of Realty Income common stock of $71.00 on November 1, 2021 (which traded on an ex-dividend basis), adjusted for the monthly dividend of $0.236 per share that former holders of VEREIT common stock and VEREIT OP common units were eligible to receive when such dividend was paid on November 15, 2021.
(3) Represents the fair value of fully vested deferred stock unit awards of VEREIT common stock (“VEREIT DSU Awards”) which were converted into Realty Income common stock upon our merger with VEREIT, as well as the estimated fair value of the Realty Income replacement employee and executive stock options and restricted stock units that were granted at the closing date of our merger with VEREIT and which were attributable to pre-combination services.
(4) Represents the outstanding balance of the VEREIT revolving credit facility paid off by Realty Income in connection with the merger. The amount shown in the table above was based upon the balance outstanding immediately prior to November 1, 2021.
A. Preliminary Purchase Price Allocation
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
| | | | | | | | |
ASSETS | | |
Land | | $ | 3,037,751 | |
Buildings | | 8,685,049 | |
Total real estate held for investment | | 11,722,800 | |
Cash and cash equivalents | | 128,411 | |
Accounts receivable | | 53,355 | |
Lease intangible assets (1)
| | 3,227,381 | |
Goodwill | | 3,662,848 | |
Investment in unconsolidated entities | | 194,876 | |
Other assets | | 318,776 | |
Total assets acquired | | $ | 19,308,447 | |
| | |
LIABILITIES | | |
Accounts payable and accrued expenses | | $ | 139,836 | |
Lease intangible liabilities (2)
| | 953,730 | |
Other liabilities | | 337,052 | |
Mortgages payable | | 869,113 | |
Notes payable | | 4,946,965 | |
Total liabilities assumed | | $ | 7,246,696 | |
Net assets acquired, at fair value | | $ | 12,061,751 | |
| | |
Noncontrolling interests | | $ | 1,352 | |
Total purchase price | | $ | 12,060,399 | |
(1) The weighted average amortization period for acquired lease intangible assets is 9.3 years.
(2) The weighted average amortization period for acquired lease intangible liabilities is 26.1 years.
The assessment of fair value is preliminary and is based on information that was available to management at the time the consolidated financial statements were prepared. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. The finalization of our purchase accounting assessment could result in changes in the valuation of assets acquired and liabilities assumed up to a year after the date of our merger with VEREIT, which could be material.
Due to the timing and complexity of the merger, we recorded the assets acquired and liabilities assumed at their preliminary estimated fair values. As of December 31, 2021, we had not finalized the determination of fair values allocated to certain assets and liabilities, including land, buildings, lease intangible assets, lease intangible liabilities, and the allocation of goodwill. The preliminary purchase price allocation is subject to change as we complete our analysis of the fair value at the date of the transactions, which could have an impact on the consolidated financial statements.
A preliminary estimate of approximately $3.66 billion has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. The recognized goodwill is attributable to expected synergies and benefits arising from the merger transaction, including anticipated financing and overhead cost savings, potential economies of scale benefits in both customer and vendor relationships and the employee workforce onboarded from VEREIT following the closing of the transaction. Goodwill has not yet been allocated to our individual operating segments; the allocation is pending the
finalization of our purchase accounting. None of the goodwill recognized is expected to be deductible for tax purposes.
B. Merger and Integration-relatedIntegration-Related Costs
In conjunction with our merger with VEREIT, we incurred approximately $161.4 million ofmerger-related transaction costs duringof $4.8 million, $13.9 million, and $167.4 million for the yearyears ended December 31, 2023, 2022, and 2021, which were included in the $167.4 million of mergerrespectively. Merger and integration-related costs within our consolidated statements of income and comprehensive income. The merger and integration-related costs primarily consist of advisory fees, including success-based fees, attorney fees, accountant fees, SECpublic filing fees and additional integration costs that include incremental and non-recurring costs necessary to convert data and systems, retain employees and otherwise enable us to operate the acquired businessesbusiness or assets efficiently.
C. B. Unaudited Pro Forma Financial Information
Our consolidated results of operations for the year ended December 31, 2021 include $176.3 million of revenues and $36.7 million of net lossincome associated with the results of operations of VEREIT OP from the merger closing date to December 31, 2021.OP.
The following unaudited pro forma information presents a summary of our combined results of operations for the yearsyear ended December 31, 2021 and 2020 as if our merger with VEREIT had occurred on January 1, 2020 (in millions, except per share data). The following pro forma financial information is not necessarily indicative of the results of operations had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences betweenresults. In accordance with ASC 805, Business Combinations, the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses. The following information excludes the impact of the spin-off of office assets to Orion Office REIT Inc. ("Orion").
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Total revenues | $ | 3,082.9 | | | $ | 2,828.0 | |
| Net income | $ | 762.9 | | | $ | 317.2 | |
| Basic and diluted earnings per share | $ | 1.39 | | | $ | 0.62 | |
| | | | | | | | | | | | | | | |
| | | | | Year ended December 31, 2021 | | |
| | | | | | | | | |
| Total revenues | | | | | | | $ | 3,084.3 | | | |
| Net income | | | | | | | $ | 734.6 | | | |
| Basic and diluted earnings per share | | | | | | | $ | 1.27 | | | |
The unaudited pro forma financial information above includes the following nonrecurring significant adjustment made to account for certain costs incurred as if our merger with VEREIT had been completed on January 1, 2020: merger and integration-related costs of $167.4 million were excluded within the pro forma financial information for 2021, but included for 2020.
D. Litigation Relating to the Merger
Purported stockholders of VEREIT filed 12 lawsuits challenging disclosures related to the merger (Stein v. VEREIT, Inc., et. al., Case No. 1:21-cv-01409 (D. Ct. Md., June 7, 2021) (the “Stein Complaint”); Bowles v. VEREIT, Inc., et. al., Case No. 1:21-cv-00845 (D. Ct. Del., June 10, 2021) (the “Bowles Complaint”); Leach v. VEREIT, Inc., et. al., Case No. 1:21-cv-05270 (D. Ct. S.D.N.Y., June 14, 2021) (the “Leach Complaint”); Jenkins v. VEREIT, Inc., et. al., Case No. 1:21-cv-05286 (D. Ct. S.D.N.Y., June 15, 2021) (the “Jenkins Complaint”); Tacka v. VEREIT, Inc., et. al., Case No. 1:21-cv-05357 (D. Ct. S.D.N.Y., June 17, 2021) (the “Tacka Complaint”); Congregation Zichron Moishe v. VEREIT, Inc., et. al., Case No. 1:21-cv-01729 (D. Ct. Colo., June 24, 2021) (the “Congregation Zichron Moishe Complaint”); Mishra v. VEREIT, Inc., et al., Case No. 1:21-cv-01758 (D. Colo. June 28, 2021) (the “Mishra Complaint”); Walker v. VEREIT, Inc., et. al., Case No. 1:21-cv-01791 (D. Ct. Colo. July 1, 2021) (the “Walker Complaint”); Ciccotelli v. VEREIT, Inc., et. al., Case No. 2:21-cv-02983 (D. Ct. E.D. Pa. July 2, 2021) (the “Ciccotelli Complaint”); Upton v. VEREIT, Inc., et. al., Case No. 1:21-cv-06129 (D. Ct. S.D.N.Y July 16, 2021) (the “Upton Complaint”); Matten v. VEREIT, Inc., et al., Case No. 1:21-cv-06212 (S.D.N.Y. July 21, 2021) (the “Matten Complaint”); and Halberstam v. VEREIT, Inc., et al., Case No. 1:21-cv-02000 (D. Colo. July 23, 2021 (the “Halberstam Complaint”)). Purported stockholders of Realty Income filed 1 lawsuit challenging the disclosures related to the merger (Boyko v. Realty Income Corp., et. al., Case No. 1:21-cv-01653 (D. Ct. Colo., June 16, 2021) (the “Boyko Complaint,” and collectively, the “Complaints”)). A stockholder of Realty Income also sent the Company a demand disclosure letter on June 30, 2021 (the “Demand Letter”).
The Stein, Leach, Tacka, Matten and Halberstam Complaints named VEREIT and the members of the VEREIT board of directors as defendants. The Congregation Zichron Moishe, Mishra, Walker and Upton Complaints named VEREIT, VEREIT OP, and the members of the VEREIT board of directors as defendants. The Bowles and Ciccotelli Complaints named VEREIT, the members of the VEREIT board of directors, VEREIT OP, Realty Income, Merger2021.
Sub 1 and Merger Sub 2 as defendants. The Jenkins Complaint named VEREIT, the members of the VEREIT board of directors, Realty Income, Merger Sub 1 and Merger Sub 2 as defendants. The Boyko Complaint named Realty Income and the members of the Realty Income board of directors as defendants. The Demand Letter was addressed to Realty Income and the members of the Realty Income board of directors.
The Complaints each alleged generally that the entities and individual defendants named in such Complaint violated Section 14(a) and Rule 14a-9 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act by preparing and disseminating a registration statement that misstates or omits certain allegedly material information. The Demand Letter included similar allegations. Furthermore, the Jenkins Complaint also alleged that: (1) members of the VEREIT board of directors breached their fiduciary duties by entering into the transactions contemplated by the Merger Agreement through a flawed and unfair process and by failing to disclose all material information to VEREIT’s stockholders; and (2) VEREIT, Realty Income, Merger Sub 1 and Merger Sub 2 each aided and abetted such breach of fiduciary duty by the VEREIT board of directors.
Each Complaint sought, among other things, injunctive relief enjoining the consummation of the Merger, and, if the Merger was consummated, rescission or rescissory damages and an award of the plaintiff’s costs, including attorneys’ and experts’ fees. The defendants believed that all of the claims asserted in the Complaints were without merit. On July 30, 2021, VEREIT filed a Form 8-K containing supplemental disclosures regarding the merger and related transactions in response to allegations set forth in the Complaints and the Demand Letter. In light of these additional disclosures, between August 2, 2021 and October 27, 2021, plaintiffs’ counsel in all of the cases voluntarily dismissed their respective complaints.
Orion Divestiture
Following of the closing of our merger with VEREIT, we contributed 92 office real estate assets, a consolidated real estate venture holding 1one office asset, and an unconsolidated real estate venture holding 5five office assets to a wholly owned subsidiary named Orion Office REIT Inc., or Orion. On November 12, 2021, we distributed the outstanding shares of Orion common stock to our shareholders (including legacy VEREIT stockholders who received shares of our common stock in our merger with VEREIT) on a pro rata basis at a rate of 1one share of Orion common stock for every ten shares of Realty Income common stock held on November 12, 2021, the applicable record date, which we refer to as the Orion Divestiture.date. The fair market value of these shares for tax distribution was determined to be $20.6272 per share, which was calculated using the five dayfive-day volume weighted average share price after issuance. For more detail, see note 12, 16, Distributions Paid and Payable. Following the Orion Divestiture, Orion began operating as a separate, independent public company.
In conjunction with the Orion Divestiture, we incurred approximately $1.9 million and $6.0 million of transaction costs during the year ended December 31, 2022 and 2021, which were included in the $167.4 million of merger'Merger and integration-related costscosts' within our consolidated statements of income and comprehensive income.
As part of the Orion Divestiture, Orion paid us a dividend of $425.0 million and reimbursed $170.2 million to us for the early redemption of mortgage loans underlying the contributed assets prior to the effectuation of the Orion Divestiture. The distribution of Orion resulted in the derecognition of net assets of $1.74 billion, which net of the aforementioned cash payments of $595.2 million, resulted in a reduction to additional paid in capital of $1.14 billion.
In connection with the divestiture, we entered into certain agreements with Orion to effect our legal and structural separation, including a transition services agreement (TSA) and reverse TSA to provide certain administrative and other services for a limited time, and tax matters. As of December 31, 2021, those agreements are still in effect.
4.3. Supplemental Detail for Certain Components of Consolidated Balance Sheets (in thousands):
| | | | | | | | | | | | | | |
| A. | Accounts Receivable, net, consist of the following at: | December 31, 2021 | | December 31, 2020 |
| Straight-line rent receivables, net | $ | 231,943 | | | $ | 174,074 | |
| Client receivables, net | 194,825 | | | 111,627 | |
| | $ | 426,768 | | | $ | 285,701 | |
| | | | | | | | | | | | | | |
| A. | Accounts receivable, net, consist of the following at: | December 31, 2023 | | December 31, 2022 |
| Straight-line rent receivables, net | $ | 516,692 | | | $ | 363,993 | |
| Client receivables, net | 193,844 | | | 179,244 | |
| | $ | 710,536 | | | $ | 543,237 | |
| | | | | | | | | | | | | | | | | |
| B. | Lease intangible assets, net, consist of the following at: | | December 31, 2021 | | December 31, 2020 |
| In-place leases | | $ | 4,791,846 | | | $ | 1,840,704 | |
| Accumulated amortization of in-place leases | | (804,050) | | | (744,375) | |
| Above-market leases | | 1,591,382 | | | 866,567 | |
| Accumulated amortization of above-market leases | | (303,874) | | | (252,241) | |
| | | $ | 5,275,304 | | | $ | 1,710,655 | |
| | | | | | | | | | | | | | | | | |
| C. | Other assets, net, consist of the following at: | | December 31, 2021 | | December 31, 2020 |
| Right of use asset - operating leases, net | | $ | 631,515 | | | $ | 112,049 | |
| Financing receivables | | 323,921 | | | 131,291 | |
| Right of use asset - financing leases | | 218,332 | | | 118,585 | |
| Restricted escrow deposits | | 68,541 | | | 21,220 | |
| Derivative assets and receivables – at fair value | | 29,593 | | | 10 | |
| Non-refundable escrow deposits | | 28,560 | | | 1,000 | |
| Prepaid expenses | | 18,062 | | | 11,795 | |
| Corporate assets, net | | 10,915 | | | 8,598 | |
| Investment in sales type leases | | 7,492 | | | — | |
| Impounds related to mortgages payable | | 5,249 | | | 4,983 | |
| Note receivable | | 4,455 | | | — | |
| Credit facility origination costs, net | | 4,352 | | | 7,705 | |
| Other items | | 18,592 | | | 2,881 | |
| | | $ | 1,369,579 | | | $ | 420,117 | |
| | | | | | | | | | | | | | | | | |
| D. | Accounts payable and accrued expenses consist of the following at: | | December 31, 2021 | | December 31, 2020 |
| Notes payable - interest payable | | $ | 108,227 | | | $ | 83,219 | |
| Derivative liabilities and payables – at fair value | | 70,617 | | | 73,356 | |
| Property taxes payable | | 36,173 | | | 23,413 | |
| Accrued property expenses | | 27,344 | | | 5,401 | |
| Accrued costs on properties under development | | 19,665 | | | 12,685 | |
| Accrued income taxes | | 19,152 | | | 8,077 | |
| Value-added tax payable | | 11,297 | | | 5,182 | |
| Merger and integration-related costs | | 10,699 | | | — | |
| Mortgages, term loans, and credit line - interest payable | | 3,874 | | | 1,044 | |
| Other items | | 44,080 | | | 28,959 | |
| | | $ | 351,128 | | | $ | 241,336 | |
| | | | | | | | | | | | | | | | | |
| E. | Lease intangible liabilities, net, consist of the following at: | | December 31, 2021 | | December 31, 2020 |
| Below-market leases | | $ | 1,460,701 | | | $ | 460,895 | |
| Accumulated amortization of below-market leases | | (152,480) | | | (139,697) | |
| | | $ | 1,308,221 | | | $ | 321,198 | |
| | | | | | | | | | | | | | | | | |
| F. | Other liabilities consist of the following at: | | December 31, 2021 | | December 31, 2020 |
| Lease liability - operating leases, net | | $ | 461,748 | | | $ | 114,559 | |
| Rent received in advance and other deferred revenue | | 242,122 | | | 130,231 | |
| Lease liability - financing leases | | 43,987 | | | 6,256 | |
| Security deposits | | 11,340 | | | 5,817 | |
| | | $ | 759,197 | | | $ | 256,863 | |
| | | | | | | | | | | | | | |
| B. | Lease intangible assets, net, consist of the following at: | December 31, 2023 | | December 31, 2022 |
| In-place leases | $ | 5,500,404 | | | $ | 5,324,565 | |
| Accumulated amortization of in-place leases | (1,746,377) | | | (1,409,878) | |
| Above-market leases | 1,811,400 | | | 1,697,367 | |
| Accumulated amortization of above-market leases | (549,319) | | | (443,688) | |
| Other items | 1,799 | | | — | |
| | $ | 5,017,907 | | | $ | 5,168,366 | |
| | | | | | | | | | | | | | |
| C. | Other assets, net, consist of the following at: | December 31, 2023 | | December 31, 2022 |
| Financing receivables, net | $ | 1,570,943 | | | $ | 933,116 | |
| Right of use asset - financing leases | 706,837 | | | 467,920 | |
| Right of use asset - operating leases, net | 594,712 | | | 603,097 | |
| Loan receivable, net | 205,339 | | | — | |
| Value-added tax receivable | 100,672 | | | 24,726 | |
| Prepaid expenses | 33,252 | | | 28,128 | |
| Impounds related to mortgages payable | 53,005 | | | 18,152 | |
| Derivative assets and receivables – at fair value | 21,170 | | | 83,100 | |
| Corporate assets, net | 12,948 | | | 12,334 | |
| Credit facility origination costs, net | 12,264 | | | 17,196 | |
| Restricted escrow deposits | 6,247 | | | 37,627 | |
| Interest receivable | 6,139 | | | — | |
| Investment in sales type lease | 6,056 | | | 5,951 | |
| Non-refundable escrow deposits | 200 | | | 5,667 | |
| Other items | 38,859 | | | 39,939 | |
| | $ | 3,368,643 | | | $ | 2,276,953 | |
| | | | | | | | | | | | | | |
| D. | Accounts payable and accrued expenses consist of the following at: | December 31, 2023 | | December 31, 2022 |
| Notes payable - interest payable | $ | 218,811 | | | $ | 129,202 | |
| Derivative liabilities and payables – at fair value | 119,620 | | | 64,724 | |
| Property taxes payable | 78,809 | | | 45,572 | |
| Accrued costs on properties under development | 65,967 | | | 26,559 | |
| Value-added tax payable | 64,885 | | | 23,375 | |
| Accrued income taxes | 61,070 | | | 22,626 | |
| Accrued property expenses | 54,208 | | | 25,290 | |
| Mortgages, term loans, and credit line - interest payable | 8,580 | | | 5,868 | |
| Other items | 66,576 | | | 55,921 | |
| | $ | 738,526 | | | $ | 399,137 | |
| | | | | | | | | | | | | | |
| E. | Lease intangible liabilities, net, consist of the following at: | December 31, 2023 | | December 31, 2022 |
| Below-market leases | $ | 1,728,027 | | | $ | 1,617,870 | |
| Accumulated amortization of below-market leases | (321,174) | | | (238,434) | |
| | $ | 1,406,853 | | | $ | 1,379,436 | |
| | | | | | | | | | | | | | |
| F. | Other liabilities consist of the following at: | December 31, 2023 | | December 31, 2022 |
| Lease liability - operating leases, net | $ | 425,213 | | | $ | 440,096 | |
| Rent received in advance and other deferred revenue | 312,195 | | | 269,645 | |
| Lease liability - financing leases | 44,345 | | | 49,469 | |
| Security deposits | 28,250 | | | 15,577 | |
| Other acquisition liabilities | 1,647 | | | — | |
| | $ | 811,650 | | | $ | 774,787 | |
4. Investments in Real Estate
We acquire land, buildings and improvements necessary for the successful operationsA. Acquisitions of commercial clients.
A.Acquisitions during 2021 and 2020Real Estate
Below is a summary of our acquisitions for the year ended December 31, 2021 (information is unaudited and excludes properties assumed on November 1, 2021 in conjunction with our merger with VEREIT)2023 (unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Properties | | Leasable Square Feet | | Investment
($ in thousands) | | Weighted Average Lease Term (Years) | | Initial Weighted Average Cash Lease Yield (1) |
Year ended December 31, 2021 (2) | | | | | | | | | |
Acquisitions - U.S. (in 43 states) | 714 | | | 14,727,335 | | | $ | 3,608,573 | | | 14.1 | | 5.5 | % |
Acquisitions - Europe (U.K. and Spain) | 129 | | | 9,196,345 | | | 2,558,909 | | | 11.6 | | 5.5 | % |
| Total Acquisitions | 843 | | | 23,923,680 | | | $ | 6,167,482 | | | 13.1 | | 5.5 | % |
Properties under Development (3) | 68 | | | 2,681,676 | | | 243,278 | | | 15.7 | | 6.0 | % |
Total (4) | 911 | | | 26,605,356 | | | $ | 6,410,760 | | | 13.2 | | 5.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Properties | | Leasable
Square Feet
(in thousands, unaudited) | | Investment
($ in millions) | | Weighted
Average
Lease Term
(Years) | | Initial Weighted Average Cash Lease Yield (1) |
| | | | | | | | | |
| Acquisitions - U.S. | 838 | | | 15,030 | | | $ | 3,802.3 | | | 15.9 | | 6.9 | % |
Acquisitions - Europe | 177 | | | 14,737 | | | 3,080.4 | | | 13.7 | | 7.1 | % |
| Total acquisitions | 1,015 | | | 29,767 | | | $ | 6,882.7 | | | 14.9 | | 7.0 | % |
Properties under development (2) | 390 | | | 8,094 | | | 1,270.3 | | | 16.4 | | 6.8 | % |
Total (3) | 1,405 | | | 37,861 | | | $ | 8,153.0 | | | 15.1 | | 7.0 | % |
(1)The initial weighted average cash lease yield for a property is generally computed as estimated contractual first year cash net operating income, which, in the case of a net leased property, is equal to the aggregate cash base rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that a client could default on the payment of contractual rent (defined as the monthly aggregate cash amount charged to clients, inclusive of monthly base rent receivables), we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above. Contractual net operating income used in the calculation of initial weighted average cash lease yield includes approximately $8.5$4.4 million received as settlement credits for 41 properties as reimbursement of free rent periods for the year ended December 31, 2021.2023.
In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does not provide for a fixed rate of return on a property under development or expansion, the initial weighted average cash lease yield is computed as follows: estimated cash net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs.
(2) None of our investments during 2021 caused any one client to be 10% or more of our total assets at December 31, 2021.
(3)Includes £7.0£34.3 millionof investments in U.K. development properties and €29.3 million of investment in Spain development properties, converted at the applicable exchange raterates on the funding date.dates.
(4) (3)Our clients occupying the new properties are 83.6%88.7% retail, 8.5% industrial, and 16.4% industrial,2.8% other property types based on rental revenue.net operating income. Approximately 40%31.4% of the rental revenuenet operating income generated from acquisitions during 2021the year ended December 31, 2023 is from our investment grade rated clients, their subsidiaries, or affiliated companies.
Acquired properties accounted for as asset acquisitions
The aggregate purchase price of the assets acquired during the year ended December 31, 2021, which had no associated contingent consideration, were2023 has been allocated as follows (in millions):
| | Acquisitions - U.S. | | Acquisitions - U.K. | | Acquisitions - Spain |
| Year ended December 31, 2021 | (USD) | | (£ Sterling) | | (€ Euro) |
| Acquisitions - USD | | | Acquisitions - USD | | Acquisitions - Sterling | | Acquisitions - Euro |
Land (1) | Land (1) | $ | 1,059.3 | | | £ | 422.3 | | | € | 108.4 | |
| Buildings and improvements | Buildings and improvements | 1,795.8 | | | 904.3 | | | 168.8 | |
Lease intangible assets (2) | Lease intangible assets (2) | 579.8 | | | 249.0 | | | 37.8 | |
Other assets (3) | Other assets (3) | 503.7 | | | 40.4 | | | 21.9 | |
Lease intangible liabilities (4) | Lease intangible liabilities (4) | (92.2) | | | (6.8) | | | — | |
Other liabilities (5) | Other liabilities (5) | (130.6) | | | (0.3) | | | (16.5) | |
| $ | 3,715.8 | | | £ | 1,608.9 | | | € | 320.4 | |
| $ | |
(1) U.K.Sterling-denominated land includes£5.5 £7.1 million of right of use assets under long-term ground leases.
(2)The weighted average amortization period for acquired lease intangible assets is 12.811.3 years.
(3)U.S.USD-denominated other assets consistsconsist entirely of $161.5financing receivables with above-market terms. Sterling-denominated other assets primarily consist of£66.1 million of financing receivables with above-market terms $76.7and £191.1 million of right-of-use assets accounted for as finance leases, $5.8 million in investments in sales-type leases, and $259.7 million of right of use assets under ground leases accounted for as operating leases. U.K.Euro-denominated other assets consistsconsist of £7.2€17.4 million of financing receivables with above-market terms, £33.2€10.6 million of right-of-use assets accounted for as finance leases and £13,000 of right of use assets under ground leases accounted for as operating leases. Spain other assets consists entirely of financing receivables with above-market terms.
(4) The weighted average amortization period for acquired lease intangible liabilities is15.9 years.
(5) U.S. other liabilities consists of $27.1€7.2 million of deferred rent on certain below-market leases, $67.4 million of lease liabilities under ground leases accounted for as operating leases, and $36.1 million for lease liabilities under financing leases. U.K. other liabilities consists of £288,000 of a GBP mortgage premium and £13,000 of lease liabilities under ground leases. Spain other liabilities consists entirely of deferred rent on certain below-market leases.
Acquired properties accounted for as asset acquisitions during 2021 generated total revenues of $136.6 million and net income of $25.8 million during the year ended December 31, 2021.
Below is a summary of our acquisitions for the year ended December 31, 2020 (unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Properties | | Leasable Square Feet | | Investment
($ in thousands) | | Weighted Average Lease Term (Years) | | Initial Weighted Average Cash Lease Yield |
Year Ended December 31, 2020 (1) | | | | | | | | | |
Acquisitions - U.S. (in 30 states) | 202 | | | 5,476,009 | | | $ | 1,302,220 | | | 14.9 | | 5.8 | % |
Acquisitions - U.K. (2) | 24 | | | 2,120,256 | | | 920,934 | | | 10.8 | | 6.1 | % |
| Total Acquisitions | 226 | | | 7,596,265 | | | $ | 2,223,154 | | | 13.2 | | 5.9 | % |
| Properties under Development - U.S. | 18 | | | 1,601,095 | | | 84,127 | | | 15.3 | | 5.6 | % |
Total (3) | 244 | | | 9,197,360 | | | $ | 2,307,281 | | | 13.2 | | 5.9 | % |
(1)None of our investments during 2020 caused any one client to be 10% or more of our total assets at December 31, 2020.
(2)Represents investments of£707.8 million Sterling during the year ended December 31, 2020 converted at the applicable exchange rate on the date of acquisition.
(3)Our clients occupying the new properties are 86.6% retail and 13.4% industrial, based on rental revenue. Approximately 61% of the rental revenue generated from acquisitions during 2020 is from our investment grade rated clients, their subsidiaries or affiliated companies.
Acquired properties accounted for as asset acquisitions during the year ended December 31, 2020, which had no associated contingent consideration, were allocated as follows (in millions):
| | | | | | | | |
| Acquisitions - U.S. | Acquisitions - U.K. |
| Year Ended December 31, 2020 | (USD) | (£ Sterling) |
Land (1) | $ | 338.4 | | £ | 253.4 | |
| Buildings and improvements | 760.0 | | 259.1 | |
Lease intangible assets (2) | 206.6 | | 145.3 | |
Other assets (3) | 52.6 | | 50.6 | |
Lease intangible liabilities (4) | (9.3) | | (0.6) | |
Other liabilities (5) | (0.9) | | — | |
| $ | 1,347.4 | | £ | 707.8 | |
(1) U.K. land includes £88.8 million of right of use assets under long-term ground leases.
(2) The weighted average amortization period for acquired lease intangible assets is 15.8 years.
(3) U.S. other assets consists of $51.9 million of financing receivables with above-market terms and $689,000 of right of use assets under ground leases. U.K. other assets consists entirely of right of useright-of-use assets under ground leases.
(4)The weighted average amortization period for acquired lease intangible liabilities is 16.716.9 years.
(5)U.S.USD-denominated other liabilities consistentirely of deferred rent on certain below-market leases. Sterling-denominated other liabilities primarily consist of £2.3 million of deferred rent on certain below-market leases and £0.2 million of lease liabilities under financing leases. Euro-denominated other liabilities consists entirelyof €1.6 million of deferred rent on certain below-market leases, €4.4 million of lease liabilities under ground leases.leases, €2.1 million of lease liabilities under financing leases, and €1.5 million of other liabilities.
AcquiredThe properties accounted for as asset acquisitions during 2020 generated total revenues of $54.6 million and net income of $19.4 millionacquired during the year ended December 31, 2020.2023 generated total revenue and net income of $302.3 million and $152.4 million, respectively.
B.Investments in Existing Properties
During 2021,the year ended December 31, 2023, we capitalized costs of $21.9$59.8 million on existing properties in our portfolio, consisting of $6.3$49.6 million for non-recurring building improvements, $9.9 million for re-leasing costs, $978,000and $0.3 million for recurring capital expenditures and $14.6 million for non-recurring building improvements.expenditures. In comparison, during 2020,the year ended December 31, 2022, we capitalized costs of $7.0$96.7 million on existing properties in our portfolio, consisting of $1.8$88.3 million for non-recurring building improvements, $5.2 million for re-leasing costs, $198,000and $3.2 million for recurring capital expenditures and $5.0 million for non-recurring building improvements.expenditures.
C.Properties with Existing Leases
Of the $6.41 billion we invested during 2021, which excludes the 3,895 properties assumed in conjunction with our merger with VEREIT on November 1, 2021, approximately $5.02 billion was used to acquire 557 properties with existing leases. In comparison, of the $2.31 billion we invested during 2020, approximately $1.86 billion was used to acquire 127 properties with existing leases. The value of the in-place and above-market leases is recorded to lease'Lease intangible assets, netnet' on our consolidated balance sheets, and the value of the below-market leases is recorded to lease'Lease intangible liabilities, netnet' on our consolidated balance sheets.
The values of the in-place leases are amortized as depreciation and amortization expense. The amounts amortized to expense for all of our in-place leases, for the years ended December 31, 2023, 2022 and 2021 2020, and 2019 were $247.5$651.1 million, $134.6$634.9 million, and $112.0$247.6 million, respectively.
The values of the above-market and below-market leases are amortized over the term of the respective leases, including any bargain renewal options, as an adjustment to rental revenue onin our consolidated statements of income and comprehensive income. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for the years ended December 31, 2023, 2022 and 2021 2020, and 2019 were $54.6$61.5 million, $30.9$55.6 million, and $22.1$35.4 million, respectively. If a lease was 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 estimated impact during the next five years and thereafter related to the amortization of the above-market and below-market lease intangibles and the amortization of the in-place lease intangibles at December 31, 2021 (in2023 (dollars in thousands):
| | Net
increase (decrease) to
rental revenue | | Increase to
amortization
expense |
| 2022 | | $ | (59,676) | | | $ | 611,012 | |
| 2023 | | (57,819) | | | 524,957 | |
| Net increase (decrease) to rental revenue | | | Net increase (decrease) to rental revenue | | Increase to amortization expense |
| 2024 | 2024 | | (51,873) | | | 465,087 | |
| 2025 | 2025 | | (46,018) | | | 396,948 | |
| 2026 | 2026 | | (37,220) | | | 353,006 | |
| 2027 | |
| 2028 | |
| Thereafter | Thereafter | | 273,319 | | | 1,636,786 | |
| Totals | Totals | | $ | 20,713 | | | $ | 3,987,796 | |
D.Gain on Sales of Real Estate
The following table summarizes our property dispositionsproperties sold during the periods indicated below (dollars in millions). These amounts exclude properties disposed from the spin-off of office properties to Orion Office REIT Inc. in November 2021.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Number of properties | 154 | | | 126 | | | 93 | |
| Net sales proceeds | $ | 250.3 | | | $ | 262.5 | | | $ | 108.9 | |
| Gain on sales of real estate | $ | 55.8 | | | $ | 76.2 | | | $ | 30.0 | |
These property sales do not represent a strategic shift that will have a major effect on our operations and financial results, and therefore do not require presentation as discontinued operations.: | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| Number of properties | | | | | 121 | | | 170 | | | 154 | |
| Net sales proceeds | | | | | $ | 117.4 | | | $ | 436.1 | | | $ | 250.3 | |
| Gain on sales of real estate | | | | | $ | 25.7 | | | $ | 103.0 | | | $ | 55.8 | |
E.
Investment
5. Investments in Unconsolidated Entities
The following is a summary of our investments in unconsolidated entities as of December 31, 20212023 and 2022 (in thousands):
| | Ownership % (1) | | Number of Properties | | Carrying Amount of Investment as of (2) | Equity in Income (2) |
| Ownership % | | | Ownership % | | Number of Properties | | Carrying Amount(1) of Investment as of |
| Investment | Investment | December 31, 2021 | | December 31, 2021 | | December 31, 2021 | Investment | As of December 31, 2023 | | 12/31/2023 | | 12/31/2022 |
| Bellagio Las Vegas Joint Venture - Common Equity Interest | |
| Bellagio Las Vegas Joint Venture - Preferred Equity Interest | |
| Data Center Development Joint Venture | |
| Industrial Partnerships | Industrial Partnerships | 20% | | 7 | | $ | 140,967 | | | $ | 1,106 | |
| Total investment in unconsolidated entities | |
(1) Our ownership interest reflects legal ownership interest. Legal ownership may, at times, not equal our economic interest in the listed properties because of various provisions in certain entity agreements regarding capital contributions, distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns. As a result, our actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with legal ownership interests.
(2) Our unconsolidated entities are a result of our merger with VEREIT. The total carrying amount of the investments was greater than the underlying equity in net assets (i.e., basis difference) by$100.3 $2.2 millionas of December 31, 2021.2023.
Equity in income and impairment of investment in unconsolidated entities consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| Investment | | 2023 | | 2022 | | 2021 |
| Bellagio Las Vegas Joint Venture - Common Equity Interest | | $ | 2,139 | | | $ | — | | | $ | — | |
| Data Center Development Joint Venture | | — | | | — | | | — | |
| Industrial Partnerships | | 407 | | | (6,448) | | | 1,106 | |
| Equity in income and impairment of investment in unconsolidated entities | | $ | 2,546 | | | $ | (6,448) | | | $ | 1,106 | |
A. Bellagio Las Vegas Joint Venture Interests
In October 2023, we invested $951.4 million to acquire common and preferred interests from Blackstone Real Estate Trust, Inc. ("BREIT") in a joint venture that owns a 95.0% interest in the real estate of The difference relatesBellagio Las Vegas. The investment included $301.4 million of common equity in the joint venture in exchange for an indirect interest of 21.9% in the property and a $650.0 million preferred equity interest in the joint venture. The unconsolidated entity had total debt outstanding of $3.0 billion as of December 31, 2023, all of which was non-recourse to us with limited customary exceptions.
The Company's preferred equity investment entitles it to certain preferential cumulative distributions out of operating and capital proceeds pursuant to the terms and conditions of the preferred equity. There is no maturity date on the preferred equity investment, which bears interest of 8.1%, payable monthly in arrears in cash, with rate increases commencing in year 7. BREIT may cause the joint venture to redeem all or a step-upportion of the preferred equity investment, and Realty Income may cause the joint venture to redeem all or a portion of the preferred equity investment if BREIT or its affiliates cease to control the joint venture, in fair valueeach case, for a cash payment equaling the sum of the amount to be redeemed plus, prior to the first anniversary of the transaction, a redemption fee of 3.0%, or, after the first anniversary and prior to the fourth anniversary of the transaction, a redemption fee of 2.0%. Interest income is determined by applying the interest rate to the sum of the outstanding balance of preferred equity and any accrued but unpaid interests. During the year ended December 31, 2023, we recognized interest income of $13.0 million included within 'Other revenue' in our consolidated statements of income and comprehensive income.
We have determined that this joint venture is a VIE, and we are not the primary beneficiary as we do not have power to direct activities that most significantly impact the joint venture's economic performance. As a holder of preferred interests, we do not receive any additional voting rights, nor do we have conversion and redemption rights. Our maximum exposure to loss associated with this VIE is limited to our common and preferred equity investments.
B. Data Center Development Joint Venture
In November 2023, we established a joint venture with Digital Realty Trust, Inc. ("Digital Realty") to support the development of two build-to-suit data centers in Northern Virginia. We invested $201.2 million to acquire an 80.0% equity interest in the venture, while Digital Realty maintains a 20.0% interest. We have determined that this joint venture is a VIE. While we have an 80.0% interest in the joint venture, we are not the primary beneficiary because we do not have power to direct activities that significantly impact the joint venture's economic performance as we were not engaged when the joint venture partner initially developed the construction plan and entered into the lease agreement. Digital Realty is the managing member, and we do not have substantive kick-out rights. We will continuously evaluate whether we are the primary beneficiary as the power to direct activities that most significantly affect economic performance can change over the life of the joint venture. Our maximum exposure to loss associated with this VIE is limited to our equity investment and our pro rata share of the remaining $117.7 million of estimated development costs for the first phase of the project.
C. Industrial Partnerships
All seven assets held by our industrial partnerships were sold during the year ended December 31, 2022. As the portion of the net proceeds applied to our investment basis that we expected to receive at closing was less than our $121.4 million carrying amount of investment in unconsolidated entities, we recognized an other than temporary impairment of $8.5 million during the year ended December 31, 2022. The other than temporary impairments are included in 'Equity in income and impairment of investment in unconsolidated entities' in our consolidated statements of income and comprehensive income for the periods presented.
6. Investments in Loans
The following table presents information about our loans as of December 31, 2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Allowance | | Carrying Amount (1) |
| Senior Secured Note Receivable | | $ | 174,337 | | | $ | (2,498) | | | $ | 171,839 | |
| Mortgage Loan | | 33,500 | | | — | | | 33,500 | |
| Total | | $ | 207,837 | | | $ | (2,498) | | | $ | 205,339 | |
(1) The total carrying amount of the investment netin loans excludes accrued interest of $3.4 million as of December 31, 2023, which is recorded to 'Other assets, acquirednet' on our consolidated balance sheets.
A. Senior Secured Note Receivable
In November 2023, the Company purchased a Sterling-denominated senior secured note with a principal amount of £142.0 million, equivalent to $180.9 million as of December 31, 2023. The interest only note bears interest at Sterling Overnight Indexed Average (“SONIA”) plus 6.75% and matures in connection withOctober 2029. The Company paid £136.7 million for the merger with VEREIT on November 1, 2021.note and accounted for the discount at amortized cost. The step up in fair value was allocated to the individual investment assets and liabilities anddiscount is being amortized over the estimated useful life of the respective underlying tangible real estate assets, the lease term of the intangible real estate assets, andnote.
B. Mortgage Loan
In October 2023, the remaining term of the mortgages payable. Prior to November 1, 2021, we did not own any unconsolidated entities.
AsCompany issued a result of the merger with VEREIT, we assumed a preferred equity interest in the development of 1 distribution center for which we were entitled to receive a cumulative preferred return of 9% per year on the initial contribution of $22.8$33.5 million along with a share in the profit earned in the event of the sale of the property to a third party. Under the acquisition method of accounting, this preferred equity interest was adjusted to its fair value of $38.1 million at the time of the merger. During December 2021, the distribution center was sold to a third party and we received proceeds of $38.3 million and recorded a $0.2 million gain on disposition.
The aggregate debt outstanding for unconsolidated entities was $431.8 million as of December 31, 2021,mortgage loan which is non-recourse to us. As ourcollateralized by nine automotive service properties located across seven different states. The interest only equity method investment resulted from our merger with VEREIT on November 1, 2021, there was no debt relating to unconsolidated entities as of December 31, 2020.
Each of us and our unconsolidated entity partners areloan bears interest at 8.25% subject to the provisions of the applicable entity agreements, which include provisions for when additional contributions may be required to fund certain cash shortfalls.annual increases and matures in October 2038.
6.7. RevolvingCredit Facility and Commercial Paper ProgramPrograms
A. Credit Facility
We have a $3.0$4.25 billion unsecured revolving multicurrency credit facility with an initial term that expiresmatures in March 2023 andJune 2026, includes two six-month extensions that can be exercised at our option, 2 six-month extensions. The revolving credit facilityand allows us to borrow in up to 14 currencies, including U.S. dollars, andUSD. Our revolving credit facility also has a $1.0 billion expansion option, which is subject to obtaining lender commitments. Under our revolving credit facility, our current investment grade credit ratings as of December 31, 2021 provide for financingUSD borrowings at LIBORthe Secured Overnight Financing Rate ("SOFR"), plus 0.775%0.725% with a SOFR adjustment charge of 0.10% and a revolving credit facility commitment fee of 0.125%, for all-in pricing of 0.90%0.95% over LIBOR. The borrowing rate is subject to an interest rate floorSOFR, British Pound Sterling at
the SONIA, plus 0.725% with a SONIA adjustment charge of 0.0326% and may change if our investment grade credit ratings change. We also have other interest rate options available to us under our revolving credit facility. Oura revolving credit facility is unsecuredfee of 0.125%, for all-in pricing of 0.8826% over SONIA, and accordingly, we have not pledged any assets as collateral for this obligation.
LIBOR is in the process of being discontinued. While certain U.S. dollar LIBOR settings will continue to be published on the current basis until June 30, 2023, all other LIBOR settings either are no longer being published or are being published only forEuro Borrowings at one-month Euro Interbank Offered Rate (“EURIBOR”), plus 0.725%, and a limited time and only on a “synthetic” basis (i.e., not on the basis of submissions made by panel banks). The regulator of the administrator of LIBOR has prohibited any new use of LIBOR by firms subject to its supervision, and certain regulators in the United States have stated that no new contracts using U.S. dollar LIBOR should be entered into after 2021. Our revolving credit facility and term loan facility were amended in December 2021 to include provisionsfee of 0.125%, for establishing alternative reference rates when LIBOR is no longer available.all-in pricing of 0.85% over one-month EURIBOR.
AtAs of December 31, 2021, credit facility origination costs of $4.4 million are included in other assets, net, as compared to $7.7 million at December 31, 2020, on our consolidated balance sheet. These costs are being amortized over the remaining term of our revolving credit facility.
At December 31, 2021,2023, we had a borrowing capacity of $2.35$4.25 billion available on our revolving credit facility (subject to customary conditions to borrowing) and anno outstanding balance of $650.0 million, as compared to noan outstanding balance at December 31, 2020.2022 of $2.0 billion, comprised of€1.8 billion Euro and £70.0 million Sterling borrowings.
The weighted average interest rate on outstanding borrowings under our revolving credit facility was 0.9%4.8% during 2021 and 1.5% during 2020. Atthe year ended December 31, 2021,2023, and 1.8% during the weighted average interest rate on borrowings outstanding under our revolving credit facility was 0.9%.year ended December 31, 2022. Our revolving credit facility is subject to various leverage and interest coverage ratio limitations, and at December 31, 2021, 2023,we were in compliance with the covenants onunder our revolving credit ffacility.
As of December 31, 2023, credit facility origination costs ofacility.$12.3 millionare included in 'Other assets, net', as compared to $17.2 million at December 31, 2022, on our consolidated balance sheets. These costs are being amortized over the remaining term of our revolving credit facility.
B. Commercial Paper ProgramPrograms
We have a U.S. dollar-denominatedUSD-denominated unsecured commercial paper program. Under the terms of the program, under which we may issue from time to time unsecured commercial paper notes up to a maximum aggregate amount outstanding of $1.0 billion. $1.5 billion, as well as a Euro-denominated unsecured commercial paper program, which permits us to issue additional unsecured commercial notes up to a maximum aggregate amount of $1.5 billion (or foreign currency equivalent). Our Euro-denominated unsecured commercial paper program may be issued in USD or various foreign currencies, including but not limited to, Euros, Sterling, Swiss Francs, Yen, Canadian Dollars, and Australian Dollars, in each case, pursuant to customary terms in the European commercial paper market.
The commercial paper ranks on a parity in right of payment with all of our other unsecured senior indebtedness outstanding from time to time, including borrowings under our revolving credit facility, our term loanloans and our outstanding senior unsecured notes. Proceeds from commercial paper borrowings are used for general corporate purposes. At
As of December 31, 2021, 2023,the balance of borrowings outstanding under our commercial paper programprograms was $901.4$764.4 million, including €583.0 million of Euro-denominated borrowings, as compared to no$701.8 million outstanding commercial paper borrowings, including €361.0 million of EUR borrowings, at December 31, 2020.2022. The weighted average interest rate on outstanding borrowings under our commercial paper programprograms was 0.2%4.8% for 2021 and 0.3% from inception of the plan in August 2020 throughyear ended December 31, 2020.2023, and 1.6% for the year ended December 31, 2022. As of December 31, 2023, our weighted average interest rate on outstanding borrowings under our commercial paper programs was 4.4%. We use our $3.0$4.25 billion revolving credit facility as a liquidity backstop for the repayment of the notes issued under the commercial paper program.programs. The commercial paper borrowings generally carry a term of less than six months. Thea year.
We regularly review our credit facility and commercial paper borrowings outstanding atprograms and may seek to extend, renew or replace our credit facility and commercial paper programs, to the extent we deem appropriate.
8. Term Loans
In January 2023, we entered into a term loan agreement, permitting us to incur multicurrency term loans, up to an aggregate of $1.5 billion in total borrowings. As of December 31, 20212023, we had $1.1 billion in multicurrency borrowings, including $90.0 million, £705.0 million, and €85.0 million in outstanding borrowings. The 2023 term loans mature betweenin January 20222025, with one remaining twelve-month maturity extension available at our option. Our A3/A- credit ratings provide for a borrowing rate of 80 basis points over the applicable benchmark rate, which includes adjusted SOFR for USD-denominated loans, adjusted SONIA for Sterling-denominated loans, and April 2022.
7.Term Loans
EURIBOR for Euro-denominated loans. In October 2018, in conjunction with entering into our current revolving credit facility,2023 term loans, we entered into interest rate swaps which fix our per annum interest rate. As of December 31, 2023, the effective interest rate, after giving effect to the interest rate swaps, was 5.0%.
We also have a $250.0 million senior unsecured term loan, which matures in March 2024. Borrowing under this term loan bears interest at the current one-month LIBOR, plus 0.85%. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annumand as of December 31, 2023, the effective interest rate on this term loan, at 3.89%after giving effect to the interest rate swap, was 3.8%.
At December 31, 2021,2023, deferred financing costs of $443,0000.1 million are included net of the term loanloans principal balance, as compared to $642,000$0.2 million related to our $250.0 million term loan at December 31, 2020,2022, on our consolidated balance sheet.sheets. These costs are being amortized over the remaining term of the term loan.loans. As of December 31, 2023, we were in compliance with the covenants contained in the term loans.
8.9. Mortgages Payable
During 2021,the year ended December 31, 2023, we made $66.6$22.0 million in principal payments, including the full repayment of 7two mortgages in full for $63.0$17.4 million. During 2020,the year ended December 31, 2022, we made $108.8$312.2 million in principal payments, including the full repayment of 912 mortgages in full for $103.4 million. During 2021, we assumed 11 mortgages totaling $881.1 million in principal, including10 mortgages from our merger with VEREIT totaling $839.1 million and a Sterling-denominated mortgage on 1 property totaling £31.0$308.0 million. No mortgages were assumed during 2020.the year ended December 31, 2023. We assumed eight mortgages on 17 properties totaling $45.1 million during the year ended December 31, 2022. Assumed mortgages are secured by the properties on which the debt was placed and are considered non-recourse debt with limited customary exceptions which vary from loan to loan.
In September 2021, we completed the early redemption on $12.5 million in principal of a mortgage due June 2032, plus accrued and unpaid interest. As a result of the early redemption, we recognized a loss of $4.0 million on extinguishment of debt for 2021.
In October 2021, we completed the early redemption on $9.6 millionin principal of a mortgage due June 2022, plus accrued and unpaid interest. As a result of the early redemption, we recognized a loss of $315,000 on extinguishment of debt for 2021.
Our 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 December 31, 2021,2023, we were in compliance with these covenants.
The balance of our deferred financing costs, which are classified as part of mortgages'Mortgages payable, net,net', on our consolidated balance sheets, was $0.4 million and $0.8 million at December 31, 20212023 and 2020 was $790,000 and $973,000,2022, respectively. These costs are being amortized over the remaining term of each mortgage.
The following table summarizes our mortgages payable as of December 31, 20212023 and 2020, respectively2022 (dollars in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As Of | | Number of Properties(1) | | Weighted Average Stated Interest Rate(2) | | Weighted Average Effective Interest Rate(3) | | Weighted
Average
Remaining
Years Until
Maturity | | Remaining
Principal
Balance | | Unamortized
Premium
and Deferred
Finance Costs
Balance, net | | Mortgage
Payable
Balance |
| 12/31/2021 | | 267 | | | 4.8 | % | | 3.5 | % | | 1.8 | | $ | 1,114,129 | | | $ | 27,866 | | | $ | 1,141,995 | |
| 12/31/2020 | | 68 | | | 4.9 | % | | 4.6 | % | | 2.9 | | $ | 299,631 | | | $ | 729 | | | $ | 300,360 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As Of | Number of Properties (1) | | Weighted Average Stated Interest Rate (2) | | Weighted Average Effective Interest Rate (3) | | Weighted
Average
Remaining
Years Until
Maturity | | Remaining
Principal
Balance | | Unamortized Premium (Discount) and Deferred Financing Costs Balance, net | | Mortgage
Payable
Balance |
| December 31, 2023 | 131 | | 4.8 | % | | 3.3 | % | | 0.4 | | $ | 822.4 | | | $ | (0.8) | | | $ | 821.6 | |
| December 31, 2022 | 136 | | 4.8 | % | | 3.3 | % | | 1.4 | | $ | 842.3 | | | $ | 11.6 | | | $ | 853.9 | |
(1)At December 31, 2021,2023, there were 2216 mortgages on 267 properties. At131 properties and at December 31, 2020,2022, there were 18 mortgages on 68136 properties. With the exception of 1one Sterling-denominated mortgage which is paid quarterly, the mortgages require monthly payments with principal payments due at maturity. At December 31, 20212023 and December 31, 2020,2022, all mortgages were at fixed interest rates.
(2) Stated interest rates ranged from 3.0% to 6.9%and 3.8% to 6.9% at each of December 31, 20212023 and 2020,December 31, 2022, respectively.
(3) Effective interest rates ranged from 2.6%0.5% to 6.0%6.6% and 4.0%2.7% to 5.5%6.6% at each of December 31, 20212023 and 2020,December 31, 2022, respectively.
The following table summarizes the maturity of mortgages payable as of December 31, 2023, excluding $0.8 million related to unamortized net premiums of $28.7 milliondiscounts and deferred financing costs of$790,000, as of December 31, 2021 (in(dollars in millions):
| | Year of Maturity | Year of Maturity | Principal | Year of Maturity | | Principal |
| 2022 | $ | 271.1 | |
| 2023 | 62.1 | |
| 2024 | 2024 | 733.0 | | 2024 | | $ | 740.5 |
| 2025 | 2025 | 42.0 | | 2025 | | 44.0 |
| 2026 | 2026 | 1.2 | | 2026 | | 12.0 |
| 2027 | | 2027 | | 22.3 |
| 2028 | | 2028 | | 1.3 |
| Thereafter | Thereafter | 4.7 | | Thereafter | | 2.3 |
| Totals | Totals | $ | 1,114.1 | | Totals | | $ | 822.4 |
10. Notes Payable
A. General
OurAt December 31, 2023, our senior unsecured notes and bonds consist ofare USD-denominated, Sterling-denominated, and Euro-denominated. Foreign-denominated notes are converted at the applicable exchange rate on the balance sheet date. The following are sorted by maturity date (in millions)thousands):
| | | | | | | | | | | | | | | | | |
| Principal Amount (Currency Denomination) | | Carrying Value (USD) as of |
| | | December 31, 2021 | | December 31, 2020 |
3.250% notes, $450 issued in October 2012 and $500 issued in December 2017, both due in October 2022 (1) | $ | 950 | | | $ | — | | | $ | 950 | |
4.650% notes, issued in July 2013 and due in August 2023 (2) | $ | 750 | | | — | | | 750 | |
4.600% notes, $500 issued February 2014, of which $485 was exchanged in November 2021, both due in February 2024 (3) | $ | 500 | | | 500 | | | — | |
| 3.875% notes, issued in June 2014 and due in July 2024 | $ | 350 | | | 350 | | | 350 | |
| 3.875% notes, issued in April 2018 and due in April 2025 | $ | 500 | | | 500 | | | 500 | |
4.625% notes, $550 issued October 2018, of which $544 was exchanged in November 2021, both due in November 2025 (3) | $ | 550 | | | 550 | | | — | |
| 0.750% notes, issued December 2020 and due in March 2026 | $ | 325 | | | 325 | | | 325 | |
4.875% notes, $600 issued June 2016, of which $596 was exchanged in November 2021, both due in June 2026 (3) | $ | 600 | | | 600 | | | — | |
| 4.125% notes, $250 issued in September 2014 and $400 issued in March 2017, both due in October 2026 | $ | 650 | | | 650 | | | 650 | |
| 3.000% notes, issued in October 2016 and due in January 2027 | $ | 600 | | | 600 | | | 600 | |
| 1.125% notes, issued in July 2021 and due in July 2027 | £ | 400 | | | 541 | | | — | |
3.950% notes, $600 issued August 2017, of which $594 was exchanged in November 2021, both due in August 2027 (3) | $ | 600 | | | 600 | | | — | |
| 3.650% notes, issued in December 2017 and due in January 2028 | $ | 550 | | | 550 | | | 550 | |
3.400% notes, $600 issued June 2020, of which $598 was exchanged in November 2021, both due in January 2028 (3) | $ | 600 | | | 600 | | | — | |
2.200% notes, $500 issued November 2020, of which $497 was exchanged in November 2021, both due in June 2028 (3) | $ | 500 | | | 500 | | | — | |
| 3.250% notes, issued in June 2019 and due in June 2029 | $ | 500 | | | 500 | | | 500 | |
3.100% notes, $600 issued December 2019, of which $596 was exchanged in November 2021, both due in December 2029 (3) (4) | $ | 599 | | | 599 | | | — | |
| 1.625% notes, issued in October 2020 and due December 2030 | £ | 400 | | | 541 | | | 547 | |
| 3.250% notes, $600 issued in May 2020 and $350 issued in July 2020, both due in January 2031 | $ | 950 | | | 950 | | | 950 | |
2.850% notes, $700 issued November 2020, of which $699 was exchanged in November 2021, both due in December 2032 (3) | $ | 700 | | | 700 | | | — | |
| 1.800% notes, issued in December 2020 and due in March 2033 | $ | 400 | | | 400 | | | 400 | |
| 1.750% notes, issued in July 2021 and due in July 2033 | £ | 350 | | | 474 | | | — | |
| 2.730% notes, issued in May 2019 and due in May 2034 | £ | 315 | | | 427 | | | 431 | |
| 5.875% bonds, $100 issued in March 2005 and $150 issued in June 2011, both due in March 2035 | $ | 250 | | | 250 | | | 250 | |
| 4.650% notes, $300 issued in March 2017 and $250 issued in December 2017, both due in March 2047 | $ | 550 | | | 550 | | | 550 | |
| Total principal amount | | | $ | 12,257 | | | $ | 8,303 | |
| Unamortized net premiums and deferred financing costs | | | 243 | | | (35) | |
| | | | $ | 12,500 | | | $ | 8,268 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Carrying Value (USD) as of |
| | Maturity Dates | | Principal (Currency Denomination) | | December 31, 2023 | | December 31, 2022 |
| 4.600% Notes due 2024 | | February 6, 2024 | | $ | 499,999 | | | $ | 499,999 | | | $ | 499,999 | |
| 3.875% Notes due 2024 | | July 15, 2024 | | $ | 350,000 | | | 350,000 | | | 350,000 | |
| 3.875% Notes due 2025 | | April 15, 2025 | | $ | 500,000 | | | 500,000 | | | 500,000 | |
| 4.625% Notes due 2025 | | November 1, 2025 | | $ | 549,997 | | | 549,997 | | | 549,997 | |
| 5.050% Notes due 2026 | | January 13, 2026 | | $ | 500,000 | | | 500,000 | | | — | |
| 0.750% Notes due 2026 | | March 15, 2026 | | $ | 325,000 | | | 325,000 | | | 325,000 | |
| 4.875% Notes due 2026 | | June 1, 2026 | | $ | 599,997 | | | 599,997 | | | 599,997 | |
| 4.125% Notes due 2026 | | October 15, 2026 | | $ | 650,000 | | | 650,000 | | | 650,000 | |
1.875% Notes due 2027 (1) | | January 14, 2027 | | £ | 250,000 | | | 318,450 | | | 301,225 | |
| 3.000% Notes due 2027 | | January 15, 2027 | | $ | 600,000 | | | 600,000 | | | 600,000 | |
1.125% Notes due 2027 (1) | | July 13, 2027 | | £ | 400,000 | | | 509,520 | | | 481,960 | |
| 3.950% Notes due 2027 | | August 15, 2027 | | $ | 599,873 | | | 599,873 | | | 599,873 | |
| 3.650% Notes due 2028 | | January 15, 2028 | | $ | 550,000 | | | 550,000 | | | 550,000 | |
| 3.400% Notes due 2028 | | January 15, 2028 | | $ | 599,816 | | | 599,816 | | | 599,816 | |
| 2.200% Notes due 2028 | | June 15, 2028 | | $ | 499,959 | | | 499,959 | | | 499,959 | |
| 4.700% Notes due 2028 | | December 15, 2028 | | $ | 400,000 | | | 400,000 | | | — | |
| 3.250% Notes due 2029 | | June 15, 2029 | | $ | 500,000 | | | 500,000 | | | 500,000 | |
| 3.100% Notes due 2029 | | December 15, 2029 | | $ | 599,291 | | | 599,291 | | | 599,291 | |
| 4.850% Notes due 2030 | | March 15, 2030 | | $ | 600,000 | | | 600,000 | | | — | |
| 3.160% Notes due 2030 | | June 30, 2030 | | £ | 140,000 | | | 178,332 | | | 168,686 | |
4.875% Notes due 2030 (1) | | July 6, 2030 | | € | 550,000 | | | 607,915 | | | — | |
1.625% Notes due 2030 (1) | | December 15, 2030 | | £ | 400,000 | | | 509,520 | | | 481,960 | |
| 3.250% Notes due 2031 | | January 15, 2031 | | $ | 950,000 | | | 950,000 | | | 950,000 | |
5.750% Notes due 2031 (1) | | December 5, 2031 | | £ | 300,000 | | | 382,140 | | | — | |
| 3.180% Notes due 2032 | | June 30, 2032 | | £ | 345,000 | | | 439,461 | | | 415,691 | |
| 5.625% Notes due 2032 | | October 13, 2032 | | $ | 750,000 | | | 750,000 | | | 750,000 | |
| 2.850% Notes due 2032 | | December 15, 2032 | | $ | 699,655 | | | 699,655 | | | 699,655 | |
| 1.800% Notes due 2033 | | March 15, 2033 | | $ | 400,000 | | | 400,000 | | | 400,000 | |
1.750% Notes due 2033 (1) | | July 13, 2033 | | £ | 350,000 | | | 445,830 | | | 421,715 | |
| 4.900% Notes due 2033 | | July 15, 2033 | | $ | 600,000 | | | 600,000 | | | — | |
| 2.730% Notes due 2034 | | May 20, 2034 | | £ | 315,000 | | | 401,247 | | | 379,544 | |
5.125% Notes due 2034 (1) | | July 6, 2034 | | € | 550,000 | | | 607,915 | | | — | |
| 5.875% Bonds due 2035 | | March 15, 2035 | | $ | 250,000 | | | 250,000 | | | 250,000 | |
| 3.390% Notes due 2037 | | June 30, 2037 | | £ | 115,000 | | | 146,487 | | | 138,563 | |
6.000% Notes due 2039 (1) | | December 5, 2039 | | £ | 450,000 | | | 573,210 | | | — | |
2.500% Notes due 2042 (1) | | January 14, 2042 | | £ | 250,000 | | | 318,450 | | | 301,225 | |
| 4.650% Notes due 2047 | | March 15, 2047 | | $ | 550,000 | | | 550,000 | | | 550,000 | |
| Total principal amount | | $ | 18,562,064 | | | $ | 14,114,156 | |
Unamortized net premiums, deferred financing costs, and cumulative basis adjustment on fair value hedge (2) | | 40,255 | | | 163,857 | |
| | | | | | | | |
| | | | | | | $ | 18,602,319 | | | $ | 14,278,013 | |
(1)In January 2021, we completed Interest paid annually. Interest on the early redemption of all$950.0 millionremaining senior unsecured notes and bond obligations included in principal amount.the table is paid semi-annually.
(2) In December 2021, we completedJanuary 2023, in conjunction with the early redemptionpricing of all $750.0 million in principal amount.
(3) In connection with our merger with VEREIT, we completed our debt exchange offer to exchange certain outstanding notes issued by VEREIT on November 9, 2021 for new notes issued by Realty Income. Please refer to Exchange Offers Associated with our Merger with VEREIT below for more details. Prior to the completion of our merger with VEREIT on November 1, 2021, these notes were not the obligation of Realty Income.
(4) These notes were originally issued by VEREIT in December of 2019 for the principal amount of $600 million. The amount of Realty Income debt issued through the Exchange Offers was $599 million, resulting from cancellations due to late tenders that forfeited the early participation premium of $30 per $1,000 principal amount and cash paid in lieu of fractional shares.
In January 2022, we issued £250.0 million of 1.875% senior unsecured notes due January 2027 and £250.0 million2026, we entered into three-year, fixed-to-variable interest rate swaps, which are accounted for as fair value hedges. See note 14, Derivative Instruments for further details.
The following table summarizes the maturity of our notes and bonds payable as of December 31, 2021,2023, excluding $40.3 million related to unamortized net premiums, of $295.5 million and deferred financing costs, of $53.1 million (inand basis adjustment on interest rate swaps designated as fair value hedges (dollars in millions):
| | Year of Maturity | Year of Maturity | | Principal | Year of Maturity | | Principal |
| | 2024 | 2024 | | $ | 850 | |
| 2025 | 2025 | | 1,050 | |
| 2026 | 2026 | | 1,575 | |
| 2027 | |
| 2028 | |
| Thereafter | Thereafter | | 8,782 | |
| Totals | Totals | | $ | 12,257 | |
As of December 31, 2021,2023, the weighted average interest rate on our notes and bonds payable was 3.3%3.8%, and the weighted average remaining years until maturity was 7.76.7 years.
Interest incurred on all of the notes and bonds was $598.6 million, $431.3 million, and $286.4 million for the years ended December 31, 2023, 2022 and 2021, $252.0 million for 2020 and $233.5 million for 2019. The interest rate on each of these notes and bonds is fixed.respectively.
Our outstanding notes and bonds are unsecured; accordingly, we have not pledged any assets as collateral for these or any other obligations. Additionally, with the exception of our £400.0 million of 1.625% senior unsecured notes issued in October 2020, our £400.0 million of 1.125% senior unsecured notes issued in July 2021, £350.0 million of 1.750% senior unsecured notes also issued in July 2021, our £250.0 million of 1.875% senior unsecured notes issued in January 2022, and £250.0 million of 2.500% senior unsecured notes also issued in January 2022, in each case where interest is paid annually, interest on our remaining senior unsecured 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. At December 31, 2021,2023, we were in compliance with these covenants.
B. Note Issuances
During the years ended December 31, 2023 and 2022 we issued the following notes and bonds (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 Issuances | | Date of Issuance | | Maturity Date | | Principal amount | | Price of par value | | Effective yield to maturity |
| 5.050% Notes | | January 2023 | | January 2026 | | $ | 500.0 | | (1) | 99.618 | % | | 5.189 | % |
| 4.850% Notes | | January 2023 | | March 2030 | | $ | 600.0 | | | 98.813 | % | | 5.047 | % |
| 4.700% Notes | | April 2023 | | December 2028 | | $ | 400.0 | | | 98.949 | % | | 4.912 | % |
| 4.900% Notes | | April 2023 | | July 2033 | | $ | 600.0 | | | 98.020 | % | | 5.148 | % |
| 4.875% Notes | | July 2023 | | July 2030 | | € | 550.0 | | | 99.421 | % | | 4.975 | % |
| 5.125% Notes | | July 2023 | | July 2034 | | € | 550.0 | | | 99.506 | % | | 5.185 | % |
| 5.750% Notes | | December 2023 | | December 2031 | | £ | 300.0 | | | 99.298 | % | | 5.862 | % |
| 6.000% Notes | | December 2023 | | December 2039 | | £ | 450.0 | | | 99.250 | % | | 6.075 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 Issuances | | Date of Issuance | | Maturity Date | | Principal amount | | Price of par value | | Effective yield to maturity |
| 1.875% Notes | | January 2022 | | January 2027 | | £ | 250.0 | | | 99.487 | % | | 1.974 | % |
| 2.500% Notes | | January 2022 | | January 2042 | | £ | 250.0 | | | 98.445 | % | | 2.584 | % |
| 3.160% Notes | | June 2022 | | June 2030 | | £ | 140.0 | | | 100.000 | % | | 3.160 | % |
| 3.180% Notes | | June 2022 | | June 2032 | | £ | 345.0 | | | 100.000 | % | | 3.180 | % |
| 3.390% Notes | | June 2022 | | June 2037 | | £ | 115.0 | | | 100.000 | % | | 3.390 | % |
| 5.625% Notes | | October 2022 | | October 2032 | | $ | 750.0 | | | 99.879 | % | | 5.641 | % |
(1) In January 2023, we issued $500 million of 5.05% senior unsecured notes due January 13, 2026, which were callable at par beginning on January 13, 2024.
In January 2024, we issued $450.0 million of 4.750%senior unsecured notes due February 2029 and $800.0 million of5.125%senior unsecured notes due February 2034.See note 21, Subsequent Events, for further details.
C. Note Repayments
We have redeemed the following principal amounts (in millions) of certain outstanding notes, prior to their maturity. As a result of these early redemptions, we have recognized the following losses on extinguishment of debt (in millions) recognized in our consolidated statements of income and comprehensive income:income. There were no comparable repayments for the years ended December 31, 2023 or 2022.
| | | | | | | | | | | | | | | | | | | | |
| | | | Loss on Extinguishment of Debt |
| 2021 Repayments | | Principal Amount (1) | | Amount of Loss | | Period Recognized |
| 4.650% notes due August 2023 redeemed in December 2021 | | $ | 750.0 | | | $ | 46.4 | | | December 31, 2021 |
| 3.250% notes due October 2022 redeemed in January 2021 | | $ | 950.0 | | | $ | 46.5 | | | March 31, 2021 |
| 2020 Repayments | | | | | | |
| 5.750% notes due January 2021 redeemed in January 2020 | | $ | 250.0 | | | $ | 9.8 | | | March 31, 2020 |
| | | | | | | | | | | | | | | | | | | | |
| | | | Loss on Extinguishment of Debt |
| 2021 Repayments | | Principal Amount (1) | | Amount of Loss | | Period Recognized |
| 4.650% notes due August 2023 redeemed in December 2021 | | $ | 750.0 | | | $ | 46.4 | | | December 31, 2021 |
| 3.25% notes due October 2022 redeemed in January 2021 | | $ | 950.0 | | | $ | 46.5 | | | March 31, 2021 |
| | | | | | |
(1) The redeemed principal amounts presented exclude the amounts we paid in accrued and unpaid interest.
11. Issuances of Common Stock
.A. At-the-Market ("ATM") Program
In August 2023, we replaced our prior ATM program with a new ATM program, pursuant to which we may offer and sell up to 120.0 million shares of common stock (1) by us to, or through, a consortium of banks acting as our sales agents or (2) by a consortium of banks acting as forward sellers on behalf of any forward purchasers contemplated thereunder, in each case by means of ordinary brokers' transactions on the NYSE under the ticker symbol "O" at prevailing market prices or at negotiated prices. Upon settlement, subject to certain exceptions, we may elect, in our sole discretion, to cash settle or net share settle all or any portion of our obligations under any forward sale agreement, in which cases we may not receive any proceeds (in the case of cash settlement) or will not receive any proceeds (in the case of net share settlement), and we may owe cash (in the case of cash settlement) or shares of our common stock (in the case of net share settlement) to the relevant forward purchaser. Of the 120.0 million shares of our common stock available for sale under the prior ATM program at its inception, a total of 101.8 million of those shares were sold, the remainder of which were terminated. As of December 31, 2023, we had 81.3 millionshares remaining for future issuance under our new ATM program. We anticipate maintaining the availability of our ATM program in the future, including the replenishment of authorized shares issuable thereunder.
The following table outlines common stock issuances pursuant to our ATM programs (dollars in millions, shares in thousands):
-91- | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
Shares of common stock issued under the ATM program(1) | | | | | 91,699 | | 68,608 | | 46,291 |
| Gross proceeds | | | | | $ | 5,483.2 | | | $ | 4,599.4 | | | $ | 3,207.9 | |
| Sales agents' commissions and other offering expenses | | | | | (43.7) | | | (43.4) | | | (28.4) | |
| Net proceeds | | | | | $ | 5,439.5 | | | $ | 4,556.0 | | | $ | 3,179.5 | |
C. Note Issuances
During the three year period ended December 31, 2021 we issued the following notes2023, 91.1 million shares were sold and bonds (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 Issuances | | Date of Issuance | | Maturity Date | | Principal amount used | | Price of par value | | Effective yield to maturity |
| 1.125% notes | | July 2021 | | July 2027 | | £ | 400 | | | 99.31 | % | | 1.24 | % |
| 1.750% notes | | July 2021 | | July 2033 | | £ | 350 | | | 99.84 | % | | 1.76 | % |
4.600% notes (1) | | November 2021 | | February 2024 | | $ | 485 | | | 100.00 | % | | 4.60 | % |
4.625% notes (1) | | November 2021 | | November 2025 | | $ | 544 | | | 100.00 | % | | 4.63 | % |
4.875% notes (1) | | November 2021 | | June 2026 | | $ | 596 | | | 100.00 | % | | 4.88 | % |
3.950% notes (1) | | November 2021 | | August 2027 | | $ | 594 | | | 100.00 | % | | 3.95 | % |
3.400% notes (1) | | November 2021 | | January 2028 | | $ | 598 | | | 100.00 | % | | 3.40 | % |
2.200% notes (1) | | November 2021 | | June 2028 | | $ | 497 | | | 100.00 | % | | 2.20 | % |
3.100% notes (1) | | November 2021 | | December 2029 | | $ | 596 | | | 100.00 | % | | 3.10 | % |
2.850% notes (1) | | November 2021 | | December 2032 | | $ | 699 | | | 100.00 | % | | 2.85 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Issuances | | Date of Issuance | | Maturity Date | | Principal amount used | | Price of par value | | Effective yield to maturity |
3.250% notes (2) | | May 2020 | | January 2031 | | $ | 600 | | | 98.99 | % | | 3.36 | % |
3.250% notes (2) | | July 2020 | | January 2031 | | $ | 350 | | | 108.24 | % | | 2.34 | % |
| 1.625% notes | | October 2020 | | December 2030 | | £ | 400 | | | 99.19 | % | | 1.71 | % |
| 0.750% notes | | December 2020 | | March 2026 | | $ | 325 | | | 99.19 | % | | 0.91 | % |
| 1.800% notes | | December 2020 | | March 2033 | | $ | 400 | | | 98.47 | % | | 1.94 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 Issuances | | Date of Issuance | | Maturity Date | | Principal amount used | | Price of par value | | Effective yield to maturity |
| 2.730% notes | | May 2019 | | May 2034 | | £ | 315 | | | 100.00 | % | | 2.73 | % |
| 3.250% notes | | June 2019 | | June 2029 | | $ | 500 | | | 99.36 | % | | 3.33 | % |
(1) In connection with our merger with VEREIT, we completed our debt exchange offer to exchange all outstanding notes issued by VEREIT OP on November 9, 2021 for new notes issued by Realty Income,91.7 million shares were settled pursuant to forward sale confirmations. In addition, as of December 31, 2023, 6.2 million shares of common stock subject to forward sale confirmations have been executed, but not settled, at a weighted average initial gross price of $55.03 per share. We currently expect to fully settle forward sale agreements outstanding by June 30, 2024, representing $337.8 million in net proceeds, for which approximately 99.2% of the outstanding notes issued by VEREIT OP were exchanged. We issued $1,000 principal amount of Realty Notes for each validly tendered VEREIT Notes with $1,000 principal amount. For this reason, we denote our “Price of par value” as 100%. Prior to the completion of our merger with VEREIT on November 1, 2021, these notes were not the obligation of Realty Income. With respect to the notes originally issued by VEREIT OP that remained outstanding, we amended the indenture governing such notes to, among other things, eliminate substantially all of the restrictive covenants in such indenture. Additional details regarding the exchange offers are provided in the Exchange Offers Associated with our Merger with VEREIT section below.weighted average forward price at December 31, 2023 was $54.70 per share.
(2)
In July 2020, we issued $350.0 million
B. Dividend Reinvestment and Stock Purchase Plan ("DRSPP")
Our DRSPP, provides our common stockholders, as well as new investors, with a convenient and economical method of 3.250% senior unsecured notes due January 2031 (the "2031 Notes"), which constituted a further issuancepurchasing our common stock and reinvesting their distributions. Our DRSPP also allows our current stockholders to buy additional shares of and formed a single series with, the $600.0 million of 2031 Notes issued in May 2020.
We intend to allocate an equal amount of the net proceeds from the July 2021 Sterling-denominated offering of 1.125% notes due 2027 of £400.0 million, which approximated $546.3 million, and the July 2021 Sterling-denominated offering of 1.750% notes due 2033 of £350.0 million, which approximated $480.6 million, as converted at the applicable exchange rate on the closing of the offerings, to finance or refinance, in whole or in part, new or existing eligible green projects in the categories outlined in our Green Financing Framework, which is designed to align with the International Capital Markets Association ("ICMA") Green Bond Principles 2021. Pending the allocation of an amount equal to the net proceeds from the offering of the notes to eligible green projects, we may temporarily usecommon stock by reinvesting all or a portion of the net proceedstheir distributions. Our DRSPP authorizes up to repay any outstanding indebtedness or26.0 million common shares to be issued. At December 31, 2023, we had 11.0 million shares remaining for liability management activities, or invest such net proceeds in accordance withfuture issuance under our cash investment policy.DRSPP program.
The net proceeds of $391.3 million from the December 2020 offering of 1.800% notes due 2033 and the net proceeds of $320.3 million from the December 2020 offering of 0.750% notes due 2026 were used, along with available cash and additional borrowings, as necessary,following table outlines common stock issuances pursuant to redeemour DRSPP program (dollars in January 2021 all $950 millionmillions, shares in aggregate principal amount of our outstanding 3.25% notes due 2022 at the applicable redemption price, plus accrued interest and, to the extent not used for those purposes, to fund investment opportunities and for other general corporate purposes.thousands):
The net proceeds from the October 2020 Sterling-denominated offering of £400.0 million approximated $508.2 million, as converted at the applicable exchange rate on the closing of the offering, and were used to repay GBP-denominated borrowings outstanding under our $3.0 billion revolving credit facility, to settle an outstanding | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| Shares of common stock issued under the DRSPP program | | | | | 198 | | 176 | | | 168 | |
| Gross proceeds | | | | | $ | 11.5 | | | $ | 11.7 | | | $ | 11.2 | |
GBP/USD currency exchange swap arrangement and, to the extent not used for those purposes, to fund investment opportunities and for other general corporate purposes.
The net proceeds of $376.6 million from the July 2020 note offering and the net proceeds of $590.0 million from the May 2020 note offering were used to repay borrowings under our credit facility, to fund potential investment opportunities and for other general corporate purposes.
The gross proceeds from the May 2019 Sterling-denominated private placement of £315.0 million approximated $400.9 million, as converted at the applicable exchange rate on the closing of the offering, and were used to fund our initial investment in U.K. properties.
The net proceeds of$493.5 million from the June 2019 note offering were used to repay borrowings outstanding under our credit facility, to fund investment opportunities, and for other general corporate purposes.
D. Exchange Offers Associated with our Merger with VEREIT
As part of our merger with VEREIT, Realty Income exchanged the following notes issued by VEREIT OP with notes of identical terms issued by Realty Income (in millions):
| | | | | | | | | | | |
| Series of VEREIT Notes | Tenders and Consents Received as of the Expiration Date (1) | | Percentage of Total Outstanding Principal Amount of Such Series of VEREIT Notes |
| 4.600% Notes due 2024 | $485 | | 97.06% |
| 4.625% Notes due 2025 | $544 | | 98.95% |
| 4.875% Notes due 2026 | $596 | | 99.29% |
| 3.950% Notes due 2027 | $594 | | 99.02% |
| 3.400% Notes due January 2028 | $598 | | 99.66% |
| 2.200% Notes due June 2028 | $497 | | 99.42% |
| 3.100% Notes due 2029 | $597 | | 99.48% |
| 2.850% Notes due 2032 | $700 | | 99.93% |
(1)The amount of VEREIT notes exchanged are higher than the amount that Realty Income issued as a result of cancellations due to late tenders that forfeited the early participation premium of $30 per $1,000 principal amount and cash paid in lieu of fractional shares.
To induce holders of the VEREIT OP notes to participate in the exchange, Realty Income offered noteholders electing to exchange their notes a cash payment equal to 10 basis points of the note principal amount held. Across the various note classes, Realty Income had a success rate of approximately 99.2% on the exchange, resulting in a cash payment of $4.6 million to participating noteholders. The exchange was accounted for as a modification of the existing VEREIT OP notes assumed in our merger with VEREIT. The interest rate, interest payment dates, redemption terms and maturity of each series of Realty Income notes issued by Realty Income in the exchange offers were the same as those of the corresponding series of VEREIT notes exchanged. With respect to the notes originally issued by VEREIT OP that remained outstanding, we amended the indenture governing such notes to, among other things, eliminate substantially all of the restrictive covenants in such indenture.
10.Issuances of Common Stock
A.C. Issuance of Common Stock in Connection with VEREIT Acquisition
On November 1, 2021, we completed our acquisition of VEREIT. As a result of the merger, former VEREIT common stockholders, VEREIT OP common unitholders and awardees of vested share awards separated from Realty Income and received approximately 162 million shares of Realty Income common stock, based on the shares of VEREIT common stock and common units of VEREIT OP outstanding as of October 29, 2021. For further details, please refer to note 3, Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture.
B.D. Issuances of Common Stock in Overnight Underwritten Public Offerings
In JulyDuring 2021, we issued 9,200,000an aggregate of 21.3 million shares of common stock, including 1,200,0002.8 million shares purchased by the underwriters upon the exercise of their option to purchase additional shares. After deducting underwriting discounts, of $2.9 million, the aggregate net proceeds of $594.1 million were primarily used to repay borrowings under our $1.0$1.3 billion commercial paper program, to fund potential investment opportunities and for other general corporate purposes.
In January 2021, we issued 12,075,000 shares of common stock, including 1,575,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares. After deducting underwriting discounts
of $19.3 million, the net proceeds of $669.6 million were used to fund property acquisitions andinvestment opportunities, for general corporate purposes and working capital.
In March 2020, we issued 9,690,500 shares of common stock, including 690,500 shares purchased byThere were no comparative offerings during the underwriters upon the exercise of their option to purchase additional shares. The net proceeds of $728.9 million were used to repay borrowings under our credit facility, to fund investment opportunities, and for other general corporate purposes.
In May 2019, we issued 12,650,000 shares of common stock. The net proceeds of $845.4 million were used to repay borrowings under our credit facility, to fund investment opportunities, and for other general corporate purposes.
C.At-the-Market (ATM) Program
Under our "at-the-market" equity distribution plan, or our ATM program, up to 69,088,433 shares of common stock may be offered and sold (1) by us to, or through, a consortium of banks acting as our sales agents or (2) by a consortium of banks acting as forward sellers on behalf of any forward purchasers contemplated thereunder, in each case by means of ordinary brokers' transactions on the New York Stock Exchange ("NYSE": O) at prevailing market prices or at negotiated prices. Atyears ended December 31, 2021, we had 29,387,491 shares remaining for future issuance under our ATM program. We anticipate maintaining the availability2023 or 2022.
12. Noncontrolling Interests
As of our ATM program in the future, including the replenishment of authorized shares issuable thereunder.
The following table outlines common stock issuances pursuant to our ATM program (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Shares of common stock issued under the ATM program | 46,290,540 | | 17,724,374 | | 17,051,456 | |
| Gross proceeds | $ | 3,207.9 | | | $ | 1,094.9 | | | $ | 1,274.5 | |
D.Dividend Reinvestment and Stock Purchase Plan
Our Dividend Reinvestment and Stock Purchase Plan ("DRSPP") provides our common stockholders, as well as new investors, with a convenient and economical method of purchasing our common stock and reinvesting their distributions. Our DRSPP also allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions. Our DRSPP authorizes up to 26,000,000 common shares to be issued. At December 31, 2021,2023, we had 11,335,379 shares remaining for future issuance under our DRSPP program.
The following table outlines common stock issuances pursuant to our DRSPP program (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Shares of common stock issued under the DRSPP program | 168,000 | | 149,289 | | 117,522 | |
| Gross proceeds | $ | 11.2 | | | $ | 9.1 | | | $ | 8.4 | |
Our DRSPP includes a waiver approval process, allowing larger investors or institutions, per a formal approval process, to purchase shares at a small discount, if approved by us. We did not issue shares under the waiver approval process during 2021, 2020 or 2019.11.Noncontrolling Interests
There are 4have seven entities with noncontrolling interests that we consolidate, including an operating partnership, Realty Income, L.P., 2 development joint ventures, 1 acquiredand interests in May 2021, 1 acquired inconsolidated property partnerships not wholly-owned by us.
At December 2020, and a joint venture acquired in 2019. From time to time, we complete the acquisitions of assets in by issuing additional31, 2023, outstanding common partnership units in Realty Income, L.P. as consideration for the acquisitions. In November 2021, we issued 300,604 common partnership units in Realty Income, L.P. in connection with the acquisition of 7 properties and recorded $20.4 million of non-controlling interests. In December 2021, we issued 240,586 common partnership units in Realty Income, L.P. in connection with the acquisition of 1 property and recorded $16.6 million of non-controlling interests. In addition, during November 2021 we issued 56,400 of common partnership units in Realty Income, L.P. in exchange for VEREIT OP units in connection with our merger with VEREIT and recorded noncontrolling interests of $1.8 million. At December 31, 2021, outstanding common partnership units in Realty
Income, L.P. represent 4.2%represented 6.9% ownership interest in Realty Income L.P. We hold the remaining 95.8%93.1% interest and consolidate the entity.
None of our common partnership units have voting rights. Common partnership units 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 1.02934 due to the Orion Divestiture, subject to certain exceptions. Prior to the Orion Divestiture, the conversion ratio was one to one. These issuances 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 determined that the units meet the requirements to qualify for presentation as permanent equity.
In May 2021 and December 2020, we completed the respective acquisition of a development property by acquiring a controlling interest in a joint venture. We are the managing member of these 2 joint ventures, and possess the ability to control the business and manage the affairs of these entities. At December 31, 2021, we and our subsidiaries held an 72.4% interest in the joint venture established in May 2021 and an 94.5% interest in the joint venture established in December 2020.
In December 2019, we completed the acquisition of 9 properties by acquiring a controlling interest in a joint venture. We are the managing member of this joint venture, and possess the ability to control the business and manage the affairs of this entity. At December 31, 2021, we and our subsidiaries held an 89.9% interest, and consolidated this entity in our consolidated financial statements.
The following table represents the change in the carrying value of all noncontrolling interests through December 31, 20212023 (in thousands):
| | Realty Income, L.P. units (1) | |
| Realty Income, L.P. units (1) | |
| Realty Income, L.P. units (1) | |
| Carrying value at December 31, 2021 | |
| Carrying value at December 31, 2021 | |
| Carrying value at December 31, 2021 | |
Contributions (2) | |
Contributions (2) | |
Contributions (2) | |
| | | Realty Income, L.P. units (1) | | Other
Noncontrolling
Interests | | Total |
| Carrying value at December 31, 2019 | | $ | 24,596 | | | $ | 5,106 | | | $ | 29,702 | |
| Reallocation of equity | Reallocation of equity | | (47) | | | — | | | (47) | |
| Additions to noncontrolling interest | | — | | | 3,168 | | | 3,168 | |
| | Reallocation of equity | |
| | Reallocation of equity | |
| Distributions | |
| Distributions | |
| Distributions | Distributions | | (1,297) | | | (299) | | | (1,596) | |
| Allocation of net income | Allocation of net income | | 848 | | | 172 | | | 1,020 | |
| Carrying value at December 31, 2020 | | $ | 24,100 | | | $ | 8,147 | | | $ | 32,247 | |
| Contributions | | 36,975 | | | 6,415 | | | 43,390 | |
| Issued in merger | | 3,160 | | | — | | | 3,160 | |
| Orion divestiture | | (1,352) | | | — | | | (1,352) | |
| Reallocation of equity | | (42) | | | — | | | (42) | |
| Distributions | | (1,574) | | | (294) | | | (1,868) | |
| Allocation of net income | Allocation of net income | | 1,149 | | | 142 | | | 1,291 | |
| Carrying value at December 31, 2021 | | $ | 62,416 | | | $ | 14,410 | | | $ | 76,826 | |
| Allocation of net income | |
| Carrying value at December 31, 2022 | |
| Carrying value at December 31, 2022 | |
| Carrying value at December 31, 2022 | |
Contributions (3) | |
Contributions (3) | |
Contributions (3) | |
Distributions (4) | |
Distributions (4) | |
Distributions (4) | |
| Allocation of net income | |
| Allocation of net income | |
| Allocation of net income | |
| | Carrying value at December 31, 2023 | |
| | Carrying value at December 31, 2023 | |
| | Carrying value at December 31, 2023 | |
(1) 242,0071,795,167 units were issued on March 30, 2018, 131,790outstanding as of both December 31, 2023 andDecember 31, 2022. 1,060,709 units were issued on April 30, 2018, 89,322 units were issued on March 28, 2019, 56,400 units were issued on November 1, 2021, 300,604 units were issued on November 30, 2021, and 240,586 units were issued on December 30, 2021. 1,060,709 units remained outstanding as of December 31, 2021.
(2) In September 2022, we issued 734,458 common partnership units in Realty Income, L.P. in connection with the acquisition of nine properties and recorded $51.2 million of contributions to noncontrolling interests.
(3) Primarily related to contributions of $39.2 million for the issuance of a 5.0% joint venture interest as partial consideration paid on property acquisitions. The remaining amount represents contributions for two development joint ventures.
(4) Includes a non-cash reduction of noncontrolling interest of $1.5 million from our partner's responsibility to absorb construction cost overages for a development joint venture during the year ended December 31, 2023.
At December 31, 2021 and 2020, respectively,2023, we are considered the primary beneficiary of Realty Income, L.P. and certainother VIEs. For further information,see note 1, Summary of our joint venture investments were considered variable interest entities, or VIEs, in which we were deemed the primary beneficiary based on our controlling financial interests. Below is a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets at December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
| Net real estate | | $ | 688,229 | | | $ | 635,963 | |
| Total assets | | $ | 795,670 | | | $ | 723,668 | |
| Total liabilities | | $ | 57,057 | | | $ | 47,962 | |
12.Distributions Paid and Payable
We pay monthly distributions to our common stockholders. The following is a summary of monthly distributions paid per common share for 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | |
| Month | | 2021 | | 2020 | | 2019 |
| January | | $ | 0.2345 | | | $ | 0.2275 | | | $ | 0.2210 | |
| February | | 0.2345 | | | 0.2325 | | | 0.2255 | |
| March | | 0.2345 | | | 0.2325 | | | 0.2255 | |
| April | | 0.2350 | | | 0.2330 | | | 0.2260 | |
| May | | 0.2350 | | | 0.2330 | | | 0.2260 | |
| June | | 0.2350 | | | 0.2330 | | | 0.2260 | |
| July | | 0.2355 | | | 0.2335 | | | 0.2265 | |
| August | | 0.2355 | | | 0.2335 | | | 0.2265 | |
| September | | 0.2355 | | | 0.2335 | | | 0.2265 | |
| October | | 0.2360 | | | 0.2340 | | | 0.2270 | |
| November | | 0.2360 | | | 0.2340 | | | 0.2270 | |
| December | | 0.2460 | | | 0.2340 | | | 0.2270 | |
| Total | | $ | 2.8330 | | | $ | 2.7940 | | | $ | 2.7105 | |
The following presents the federal income tax characterization of distributions paid or deemed to be paid per common share for the years:
| | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| Ordinary income | | $ | 1.5146899 | | | $ | 2.2798764 | | | $ | 2.1206964 | |
| Nontaxable distributions | | 3.2925615 | | | 0.4902835 | | | 0.5898036 | |
Total capital gain distribution (1) | | 0.0854609 | | | 0.0238401 | | | — | |
Totals (2) | | $ | 4.8927123 | | | $ | 2.7940000 | | | $ | 2.7105000 | |
(1) Unrecaptured Section 1250 Gain of $0.0649153, or 1.327% of the total common dividends paid in 2021, and Section 897 Gain of $0.0854609, or 1.747% of the total common dividends paid in 2021, both represent additional characterization of, and are part of, total capital gain distribution.
(2) The amount distributed in 2021 includes the $2.060 tax distribution of Orion shares, that occurred in conjunction with the Orion Divestiture on November 12, 2021, after our merger with VEREIT on November 1, 2021. The fair market value of these shares for tax distribution was determined to be $20.6272 per share, which was calculated using the five day volume weighted average share price after issuance.
At December 31, 2021, a distribution of $0.2465 per common share was payable and was paid in January 2022. At December 31, 2020, a distribution of $0.2345 per common share was payable and was paid in January 2021.
13.LessorOperating Leases
At December 31, 2021, we owned 11,136 properties in all 50 U.S. states, Puerto Rico, the U.K. and Spain. Of the 11,136 properties, 11,043, or 99.2%, are single-client properties, and the remaining are multi-client properties. At December 31, 2021, 164 properties were available for lease or sale.
Substantially all of our leases are net leases where our client pays or reimburses us for property taxes and assessments, maintains the interior and exterior of the building and leased premises, and carries insurance coverage for public liability, property damage, fire and extended coverage.
Rental revenue based on a percentage of our client's gross sales, or percentage rents, was $6.5 million for 2021, $5.1 million in 2020, and $8.0 million for 2019.
At December 31, 2021, minimum future annual rental revenue to be received on the operating leases for the next five years and thereafter are as follows (in thousands):
| | | | | | | | | | | | | | |
| | Future Minimum Operating Lease Payments | | Future Minimum Direct Financing Lease Payments (1) |
| 2022 | | $ | 2,900,002 | | | $ | 1,925 | |
| 2023 | | 2,824,724 | | | 1,565 | |
| 2024 | | 2,683,176 | | | 510 | |
| 2025 | | 2,533,231 | | | 169 | |
| 2026 | | 2,362,933 | | | 171 | |
| Thereafter | | 14,918,244 | | | 484 | |
| Totals | | $ | 28,222,310 | | | $ | 4,824 | |
(1) Related to 18 properties which are subject to direct financing leases and, therefore, revenue is recognized as rental income on the discounted cash flows of the lease payments. Amounts reflect undiscounted cash flows to be received by the Company under the lease agreements on these respective properties.
No individual client's rental revenue, including percentage rents, represented more than 10% of our total revenue for each of the years ended December 31, 2021, 2020 or 2019.
14.Financial Instruments and13. Fair Value Measurements
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 exit price).
ASC 820, Fair Value Measurements and Disclosures, sets forth a fair value hierarchy that categorizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
•Level 1 – Unadjusted quotedQuoted market prices in active markets
Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted quoted prices for identical assets orand liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis.
•Level 2 – Valuation Technique Using Observable Inputs
Financial instruments classifiedinputs other than Level 1 prices such as Level 2 are valued using quoted prices for identical instruments in markets that are not considered to be active, or quoted prices for similar assets or liabilities, quoted prices in markets that are not active, markets, or valuation techniques in which all significantother market-corroborated inputs are observable, or can be corroborated by observable market data for substantially the entire contractual term of the financial asset or liability.
•Level 3 – Valuation Technique Using Significant Unobservable Inputs
Financial instruments are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data (unobservable inputs). Such inputs are generally determined based on observable inputs of a similar nature, historical observations onunobservable and significant to the level of the inputs, or other analytical techniques.overall fair value measurement
We evaluate our hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from period to period. Changes in the type of inputs may result in a reclassification for certain assets. We have not historically had changes in classifications and do not expect that changes in classifications between levels will be frequent.
The following tables present the carrying values and estimated fair values of financial instruments as of December 31, 2023 and 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | | | Hierarchy Level |
| | Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | |
Loans receivable (1) | | $ | 205.3 | | | $ | — | | | $ | 171.8 | | | $ | 33.5 | |
| Derivative assets | | 21.2 | | | — | | | 21.2 | | | — | |
| Total assets | | $ | 226.5 | | | $ | — | | | $ | 193.0 | | | $ | 33.5 | |
| Liabilities: | | | | | | | | |
| Mortgages payable | | $ | 822.4 | | $ | — | | | $ | — | | | $ | 814.5 | |
| Notes and bonds payable | | 18,562.1 | | — | | | 17,603.7 | | | — | |
| Derivative liabilities | | 119.6 | | | — | | | 119.6 | | | — | |
| Total liabilities | | $ | 19,504.1 | | | $ | — | | | $ | 17,723.3 | | | $ | 814.5 | |
(1) Considering the proximity of time between the issuance and measurement of the two loans acquired during the fourth quarter of 2023, we have concluded that the carrying value reasonably approximates the estimated fair value at December 31, 2023. We determined our investment in mortgage loan is categorized as level 3 of the fair value hierarchy given our experience with mortgage borrowings.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | | | Hierarchy Level |
| | Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | |
| Derivative assets | | $ | 83.1 | | | $ | — | | | $ | 83.1 | | | $ | — | |
| Total assets | | $ | 83.1 | | | $ | — | | | $ | 83.1 | | | $ | — | |
| Liabilities: | | | | | | | | |
| Mortgages payable | | $ | 842.3 | | $ | — | | | $ | — | | | $ | 810.4 | |
| Notes and bonds payable | | 14,114.2 | | — | | | 12,522.8 | | | — | |
| Derivative liabilities | | 64.7 | | | — | | | 64.7 | | | — | |
| Total liabilities | | $ | 15,021.2 | | | $ | — | | | $ | 12,587.5 | | | $ | 810.4 | |
A. Financial Instruments Not Measured at Fair Value on theour Consolidated Balance Sheets
The fair value of short-term financial instruments such as cash and cash equivalents, accounts receivable, escrow deposits, loans receivable, accounts payable, distributions payable, line of credit payable and commercial paper borrowings, and other liabilities approximate their carrying value in the accompanying consolidated balance sheets, due to their short-term nature. The aggregate fair value of our term loans approximates carrying value due to the frequent repricing of the variable interest rate charged on the borrowing.
The following table reflects the carrying amounts and estimated fair values of our financial instruments not carriedmeasured at fair value are disclosed as followson our consolidated balance sheets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
| | Carrying value | | Fair value | | Carrying value | | Fair value |
Mortgages payable (1) | | $ | 822.4 | | $ | 814.5 | | | $ | 842.3 | | $ | 810.4 | |
Notes and bonds payable (2) | | $ | 18,562.1 | | $ | 17,603.7 | | | $ | 14,114.2 | | $ | 12,522.8 | |
| | | | | | | | | | | | | | |
| At December 31, 2021 | | Carrying value | | Estimated fair value |
Mortgages payable assumed in connection with acquisitions (1) | | $ | 1,114.1 | | | $ | 1,154.7 | |
Notes and bonds payable (2) | | $ | 12,257.3 | | | $ | 13,114.5 | |
| | | | |
| At December 31, 2020 | | Carrying value | | Estimated fair value |
Mortgages payable assumed in connection with acquisitions (1) | | $ | 299.6 | | | $ | 309.4 | |
Notes and bonds payable (2) | | $ | 8,302.4 | | | $ | 9,324.0 | |
((1)1)Excludes non-cash net premiums or discounts recorded on the mortgages payable. The unamortized balance of these net premiums is $28.7discounts was $0.4 million at December 31, 2021,2023, and $1.7$12.4 million of net premiums at December 31, 2020.2022. Also excludes deferred financing costs of $790,000$0.4 million at December 31, 2021,2023, and $973,000$0.8 million at December 31, 2020.2022.
(2)Excludes non-cash net premiums and discounts recorded on notes payable. The unamortized balance of the net premiums was $295.5$125.3 million at December 31, 2021,2023, and $14.6$224.6 million at December 31, 2020.2022. Also excludes deferred financing costs of $53.1$83.8 million and a favorable basis adjustment on interest rate swaps designated as fair value hedges of $1.3 million at December 31, 20212023, and $49.2$60.7 million of deferred financing costs at December 31, 2020.2022.
The estimated fair values of our mortgages payable assumed in connection with acquisitions and private senior notes payable have been calculated by discounting the future cash flows using an interest rate based upon the relevant forward interest rate 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 mortgages payable is categorized as level three on3 of the three-level valuationfair value hierarchy.
The estimated fair values of our publicly-traded senior notes and bonds payable are based upon indicative market prices and recent trading activity of our senior notes and bonds payable, including the senior notes and bonds payable assumed in the debt exchange offer on November 9, 2021 in connection with our merger with VEREIT.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 notes and bonds payable is categorized as level two on2 of the three-level valuationfair value hierarchy.
B. Financial Instruments Measured at Fair Value on a Recurring Basis
For derivative assets and liabilities, we may utilize interest rate swaps, interest rate swaptions, and forward-starting swaps to manage interest rate risk, and cross-currency swaps, currency exchange swaps, foreign currency forwards and foreign currency collarsforwards to manage foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, spot and forward rates, as well as option volatility.
Derivative fair values also include credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within level two2 on the three-level valuationfair value hierarchy, the credit valuation adjustments associated with our derivatives utilize level three inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by ourselves and our counterparties. However, at December 31, 20212023, and 2020,2022, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety are classified as level two. For more details on our derivatives, see note 14, Derivative Instruments.
C. Items Measured at Fair Value on a Non-Recurring Basis
Impairment of Real Estate Investments
Certain financial and nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments only under certain circumstances, such as when an impairment write-down occurs.
During 2020, we identified the impact of the COVID-19 pandemic as an impairment triggering event for properties occupied by certain clients experiencing difficulties meeting their lease obligations to us. After considering the impacts of the COVID-19 pandemic on the key assumptions noted above, we determined that the carrying values of 38 properties classified as held for investment for the year ended December 31, 2020 were not recoverable. As a result, we recorded provisions for impairment of $105.0 million for the year ended December 31, 2020 on the applicable properties impacted by the COVID-19 pandemic. Of the provisions for impairment recorded during 2020
Depending on impairment triggering events during the applicable period, impairments are typically recorded for properties impacted by the COVID-19 pandemic, a total of 13 assets occupied by certain of our clientssold, in the theater industry were impaired for $83.8 million,which reduced the carrying valueprocess of the properties from $123.4 million to their estimated fair valuebeing sold, vacant, in bankruptcy, or experiencing difficulties with collection of $39.6 million. Impairments recorded on other properties during the year ended December 31, 2020 totaled $42.2 million.rent.
The following table summarizes our provisions for impairment on real estate investments during the periods indicated below (dollars in(in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Total provisions for impairment | $ | 39.0 | | | $ | 147.2 | | | $ | 40.2 | |
| Number of properties: | | | | | |
| Classified as held for sale | 16 | | | 1 | | | — | |
| Classified as held for investment | 11 | | | 34 | | | 3 | |
| Sold | 76 | | | 64 | | | 48 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| Carrying value prior to impairment | | | | | $ | 194.5 | | | $ | 140.9 | | | $ | 169.2 | |
Less: total provisions for impairment (1) | | | | | (82.2) | | | (25.9) | | | (39.0) | |
| Carrying value after impairment | | | | | $ | 112.3 | | | $ | 115.0 | | | $ | 130.2 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1) Excludes provision for current expected credit loss of $4.9 million at December 31, 2023.
The valuation of impaired assets is determined using valuation techniques including discounted cash flow analysis, analysis of recent comparable sales transactions and purchase offers received from third parties, which are Level 3 inputs. We may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of such real estate. Estimating future cash flows is highly subjective and estimates can differ materially from actual results.
14. Derivative Instruments
In the normal course of business, our operations are exposed to economic risks from interest rates and foreign currency exchange rates. We may enter into derivative financial instruments to offset these underlying economic risks.
Derivative Designated as Hedging Instruments - Cash Flow Hedges
In orderWe entered into foreign currency forward contracts to sell GBP, USD, and EUR and buy EUR, USD, and GBP to hedge the foreign currency risk associated with interest payments on intercompany loans denominated in British Pound Sterling or GBP, during the second quarter of 2021, we initiated a hedging strategy to enter into foreign currency forward contracts to sell GBP("GBP") and buy U.S. Dollars, or USD. These foreign currency forwards are designated as cash flow hedges.Euro ("EUR"). Forward points on the forward contracts are included in the assessment of hedge effectiveness. Amounts reported in other comprehensive income (loss) related to foreign currency derivative contracts will be reclassified to other gains and (losses) in the same period during which the hedged forecasted transactions affect earnings.
As of December 31, 2021, we had 1We executed variable-to-fixed interest rate swap in place on our $250.0 million unsecured term loan. Our objective in using derivatives isswaps to add stability to interest expense and to manage our exposure to interest rate movements. We designated thismovements associated with our term loans. To mitigate the impact of fluctuating interest rates, we also entered into interest rate swapswaption agreements during March 2023, structuring them as a cash flow hedge in accordance with Topic 815, Derivatives and Hedging. This interest rate swap is recorded on the consolidated balances sheets at fair value. Changes to fair value are recorded to accumulated other comprehensive income, or AOCI, and are amortized through interest expense over the term of the associated debt.
In February 2020, we entered into 5 forward starting treasury rate locks with notional amounts totaling $500.0 million. The treasury rate locks were entered into to hedge our exposure to the changes in the 10-year US treasury ratesswaption corridors, in anticipation of potential future debt offerings duringissuing USD denominated bonds. Interest rate swaption corridors are a combination of two swaption positions. Specifically, we purchased a payer swaption, an option that allows us to enter into a swap where we will pay the first half of 2020. The treasuryfixed rate locks were designated as cash flow hedges, with any changes in fair value recorded in AOCI. Uponand receive the initial issuancefloating rate of the 2031 Notes in May 2020,swap, and we amortizedalso sold a payer swaption, an option that provides the AOCI balance overcounterparty with the termright to enter into a swap where we will receive the fixed rate and pay the floating rate of the 2031 Notes. In June 2020, all 5 treasury rate locks were terminated and we entered into 6 forward starting interest rate swaps with notional amounts totaling $500.0 million in a cashless settlement ofswap. The total premium paid for the terminated treasury rate locks. The forward starting swaps were entered into to hedge our exposure to the changes in the 3-month USD-LIBOR swap rate in anticipation of potential future debt offerings through a current estimated range ending in 2023. The forward starting swapsMarch 2023 transaction was $7.6 million. All three hedging instruments are designated as cash flow hedges, with any changes in fair value recorded in AOCI. Upon issuance of the 2031 Notes during July 2020, the AOCI balance associated with 4 of the forward starting swaps with a notional amount of $350.0 millionhedges.
Derivative Designated as Hedging Instruments - Fair Value Hedges
Periodically, we amortized over the term of the notes. However, we elected not to terminate the 4 forward startingenter into and designate fixed-to-floating interest rate swaps to manage interest rate risk by managing our mix of fixed-rate and redesignatedvariable-rate debt. These swaps involve the receipt of fixed-rate amounts for variable interest rate payments over the life of the swaps in a new hedging relationship for a future debt issuancewithout exchange of the underlying principal amount. We also designate some of our cross-currency swaps as fair value hedges as we use them to hedge our exposure to theforeign currency risk associated with changes in the 10-year US treasuryspot rates in anticipation of potential future debt offerings between May 2020 and December 2023. Upon the December 2020 issuance of $325.0 million of 0.750% notes due March 2026 and $400.0 million of 1.800% notes due March 2033, the AOCI balance associated with 6 of the forward starting swaps with a notional amount of $500.0 million began amortizing over the term. The AOCI balance being amortized representson foreign-denominated debt. For these hedging instruments, we have elected to exclude the change in fair value on 4of the cross-currency swaps with a notional amount of $350.0 millionrelated to both time value and cross-currency basis spread from the July issuanceassessment of hedge effectiveness (the "excluded component"). Changes in the fair value of the 2031 notescross-currency swaps attributable to these excluded components are recorded to other comprehensive income and subsequently recognized in 'Foreign currency and derivative (loss) gain, net' on a systematic and rational basis, as net cash settlements and interest accruals on the respective cross currency swaps occur, over the remaining life of the hedging instruments.
Derivative Designated as Hedging Instruments - Net Investment Hedges
During the fourth quarter of 2023, we designated the three existing cross-currency swaps that had not been designated as hedging instruments through the December note issuancesthird quarter of 2023 as net investment hedges to mitigate the risks associated with our investment in EUR-denominated foreign operations. These cross-currency swaps qualify as net investment hedges under the criteria prescribed in accordance with ASC Topic 815-20, Hedging - General. We use the spot method of assessing hedge effectiveness and apply the change in fair value from the 2 remaining forward starting swaps with a notional amount of $150.0 million from their June 2020 inception through the December note issuances. The notional amounts of the 6 swaps were first appliedconsistent election to the $400.0 million of 1.800% notes due March 2033, with the remaining $100.0 million of notional applied to the $325.0 million of 0.750% notes due March 2026. However, we elected not to terminate any of the 6 forward starting interest rate swaps, and redesignated the swaps in a new hedging relationship to hedge our exposure to the changes in the 10-year US treasury rates in anticipation of potential future debt offerings between December 2020 and December 2023.excluded component by
recognizing changes in the size of the initial net investment resulting from the terminationfair value of the treasury rate locks being rolled into them, 2hedging instruments attributable to the excluded component in the same manner as described above. Any difference between the change in the fair value of the 6 forward starting swaps were determined to be hybrid debt instruments containing embedded at-market swap derivative instruments. As a result, we have bifurcated the derivative instrumentexcluded components and the debt instrument for those 2 forward starting interest rate swaps for accounting purposes. The remaining 4 forward starting interest rates swaps are accounted for as derivative instruments.
The following table summarizes the amount of unrealized gain (loss) on derivativesamounts recognized in earnings is reported in other comprehensive income (loss) duringas part of the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| Derivatives in Cash Flow Hedging Relationships | | 2021 | | 2020 | | 2019 |
| Currency swaps | | $ | 8,232 | | | $ | (2,169) | | | $ | (971) | |
| Interest rate swaps | | 34,659 | | | (32,757) | | | (8,219) | |
| Foreign currency forwards | | 7,557 | | | — | | | — | |
| Total unrealized gain (loss) on derivatives | | $ | 50,448 | | | $ | (34,926) | | | $ | (9,190) | |
foreign cumulative translation adjustment. The following table summarizesgain or loss on the amountportion of gain (loss) on derivatives reclassified from accumulatedthe derivative instruments included in the assessment of effectiveness is reported in other comprehensive income (loss)as part of the 'Foreign currency translation adjustment' line item, to the extent the relationship is highly effective. If the company’s net investment changes during a reporting period, the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| Derivatives in Cash Flow Hedging Relationships | | Location of Gain (Loss) Recognized in Income | | 2021 | | 2020 | | 2019 |
| Currency swaps | | Foreign currency and derivative gain (loss), net | | $ | 3,541 | | | $ | (3,617) | | | $ | (5,472) | |
| Interest rate swaps | | Interest expense | | (10,343) | | | (11,434) | | | (3,436) | |
| Net decrease to net income | | | | $ | (6,802) | | | $ | (15,051) | | | $ | (8,908) | |
We expect to reclassify $9.4 million from AOCI as an increase to interest expense relating to interest rate swaps and $3.3 million from AOCI to foreign currency gain relating to cross-currency swaps withinhedge relationship will be assessed for whether a de-designation is warranted (only if the next twelve months.hedge notional amount is outside of prescribed tolerance).
Derivatives Not Designated as Hedging Instruments
Based on our potential exposure to changes in foreign currency exchange rate, primarily in British Pound Sterling and, to a lesser extent, the Euro, we initiated a program in the third quarter of 2021 toWe enter into foreign currency collars. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. Our foreign currency collars generally have maturities of five months or less and are not designated as hedge instruments for accounting purposes. The gains or loss on these derivative contracts are recognized in other income, net based on the changes in fair value. As of December 31, 2021, we had no outstanding foreign currency collars.
In addition, from time to time we enter into currency exchange swap agreements to reduce the effects of currency exchange rate fluctuations between the British Pound SterlingUSD, our reporting currency, and Euro.GBP and EUR. These derivative contracts generally mature within two monthsone year and are not designated as hedge instruments for accounting purposes. As the currency exchange swap is not accounted for as a hedging instrument, the change in fair value is recorded in earnings through the caption entitled 'Foreign currency and derivative gains,(loss) gain, net' in theour consolidated statements of income and comprehensive income.
The net gain from derivatives not designated in hedging relationships for 2021 totaled $9.7 million and resulted from short term currency exchange swaps and foreign currency collars. The net loss from derivatives not designated in hedging relationships for 2020 totaled $14.5 million and resulted from short term currency exchange swaps.
The following table summarizes the terms and fair values of our derivative financial instruments at December 31, 20212023 and December 31, 20202022 (dollars in millions):
| | Derivative Type | Derivative Type | Number of Instruments (1) | Accounting Classification | Notional Amount as of December 31, | Weighted Average Strike Rate (2) | Maturity Date (3) | Fair Value - asset (liability) as of December 31, |
| | Derivative Type | |
| Derivative Type | | Number of Instruments (1) | | Notional Amount as of | Weighted Average Strike Rate (2) | Maturity Date (3) | Fair Value - asset (liability) as of |
| Derivatives Designated as Hedging Instruments | Derivatives Designated as Hedging Instruments | 2021 | 2020 | | 2021 | 2020 | Derivatives Designated as Hedging Instruments | December 31, 2023 | | December 31, 2022 | | | December 31, 2023 | | December 31, 2022 |
| | Interest rate swap | 1 | Derivative | $ | 250.0 | | $ | 250.0 | 3.04% | 03/2024 | $ | (11.9) | | $ | (22.6) | |
Cross-currency swaps (4) | 4 | Derivative | 166.3 | | 166.4 | (5) | 05/2034 | (13.8) | | (21.4) | |
| Interest rate swaps | |
| Interest rate swaps | |
| Interest rate swaps | |
| Interest rate swaptions | |
Cross-currency swaps - Fair Value (5) | |
Cross-currency swaps - Net Investment (5) | |
| Foreign currency forwards | Foreign currency forwards | 32 | Derivative | 176.1 | | 0.0 | (6) | 01/2022 - 08/2024 | 7.6 | | — | |
Forward-starting swaps (7) | 4 | Derivative | 300.0 | | 300.0 | 1.86% | 11/2032 - 06/2033 | (3.2) | | (16.5) | |
Forward-starting swaps (7) | 2 | Hybrid debt | 200.0 | | 200.0 | 1.93% | 11/2032 - 06/2033 | (5.1) | | (12.8) | |
| | | $ | 1,092.4 | | $ | 916.4 | | | $ | (26.4) | | $ | (73.3) | |
| Derivatives not Designated as Hedging Instruments | |
Currency exchange swaps (8) | 4 | Derivative | 1,639.5 | | 625.0 | (9) | 01/2022 - 02/2022 | (14.7) | | (8.2) | |
| | | | | $ | |
| | | | $ | |
| | | | $ | |
| Derivatives not Designated as Hedging Instruments | |
| Currency exchange swaps | |
| Currency exchange swaps | |
| Currency exchange swaps | |
Cross-currency swaps (5) | |
| | | | $ | |
| | | $ | |
| | | $ | |
| Total of all Derivatives | Total of all Derivatives | $ | 2,731.9 | | $ | 1,541.4 | | | $ | (41.1) | | $ | (81.5) | |
(1)This column represents the number of instruments outstanding as of December 31, 2021.2023.
(2)Weighted average strike rate is calculated using the current notional value as of December 31, 2021.2023.
(3)This column represents maturity dates for instruments outstanding as of December 31, 2021.2023.
(4)Represents 4 British Pound Sterling, or GBP cross-currency swapsRepresent purchased payer swaptions with notional amounta strike rate of $166.3 million.3.75% and sold payer swaptions with a strike rate of 4.25%.
(5)GBPIn October 2022, we entered into six cross-currency swaps to exchange €612 million for $600 million maturing in October 2032. We redesignated $280 million of three cross-currency swaps as net investment hedges in December 2023.
(6)USD fixed rates initially at 4.82%rate of 5.625% and escalating to 10.96%, and USDEUR weighted average fixed rate at9.78%of 4.681%.
(6)(7)USD fixed rate of 5.625% and EUR weighted average fixed rate of 4.716%.
(8)Weighted average forward GBP-USD exchange rate of1.41.
(7)There were 5 treasury rate locks entered into during February 2020 that were terminated in June 2020 and converted into 6 forward starting interest rate swaps through a cashless settlement. For full discussion of the hedging arrangements for these 6 forward starting swaps, please refer to Derivative Designated as Hedging Instruments above.
(8)Represents 2 British Pound Sterling, or GBP currency exchange swaps with notional amount of $1.36 billion and 2 Euro, or EUR currency exchange swaps with notional amount of $275.9 million. 1.30.
(9)Weighted average Forwardexchange rates of 1.27 for GBP-USD exchange rate of 1.34 and Weighted Average Forward EUR-USD exchange rate of 1.16.0.86 for EUR-GBP.
We measure our derivatives at fair value and include the balances within 'Other assets, net' and 'Accounts payable and accrued expenses' on our consolidated balance sheets.
We have agreements with each of our derivative counterparties containing provisions under which we could be declared in default on our derivative obligations if repayment of our indebtedness is accelerated by the lender due to our default.
The following table summarizes the amount of unrealized gain (loss) on derivatives and foreign currency translation adjustments in other comprehensive income (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| Derivatives in Cash Flow Hedging Relationships | | | | | 2023 | | 2022 | | 2021 |
| Cross-currency swaps | | | | | $ | — | | | $ | (5,091) | | | $ | 8,232 | |
| Interest rate swaps | | | | | (11,171) | | | 98,310 | | | 34,659 | |
| Foreign currency forwards | | | | | (13,349) | | | 8,540 | | | 7,557 | |
| Interest rate swaptions | | | | | 1,857 | | | — | | | — | |
| Total derivatives in cash flow hedging relationships | | | | | $ | (22,663) | | | $ | 101,759 | | | $ | 50,448 | |
| Derivatives in Fair Value Hedging Relationships | | | | | | | | | |
| Cross-currency swaps - Fair Value | | | | | $ | (14,602) | | | $ | (4,705) | | | $ | — | |
| | | | | | | | | |
| Total derivatives in fair value hedging relationships | | | | | $ | (14,602) | | | $ | (4,705) | | | $ | — | |
| Total unrealized (loss) gain on derivatives, net | | | | | $ | (37,265) | | | $ | 97,054 | | | $ | 50,448 | |
| Derivatives in Net Investment Hedging Relationships | | | | | | | | | |
| Cross-currency swaps - Net Investment | | | | | $ | (4,272) | | | $ | — | | | $ | — | |
| Total unrealized loss recorded in foreign currency translation adjustment | | | | | $ | (4,272) | | | $ | — | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The following table summarizes the amount of gain (loss) on derivatives reclassified from AOCI (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Years ended December 31, |
| Derivatives in Cash Flow Hedging Relationships | | Location of Gain (Loss) Recognized in Income | | | | | 2023 | | 2022 | | 2021 |
| Cross-currency swaps | | Foreign currency and derivative (loss) gain, net | | | | | $ | — | | | $ | 30,814 | | | $ | 3,541 | |
| Interest rate swaps | | Interest expense | | | | | 15,794 | | | (4,487) | | | (10,343) | |
| Foreign currency forwards | | Foreign currency and derivative (loss) gain, net | | | | | 4,251 | | | 2,139 | | | — | |
| Interest rate swaptions | | Interest expense | | | | | (6,859) | | | — | | | — | |
| Total derivatives in cash flow hedging relationships | | | | | | | $ | 13,186 | | | $ | 28,466 | | | $ | (6,802) | |
| Derivatives in Fair Value Hedging Relationships | | | | | | | | | | | |
| Cross-currency swaps - Fair Value | | Foreign currency and derivative (loss) gain, net | | | | | $ | 1,415 | | | $ | (29,708) | | | $ | — | |
| Total derivatives in fair value hedging relationships | | | | | | | $ | 1,415 | | | $ | (29,708) | | | $ | — | |
| Derivatives in Net Investment Hedging Relationships | | | | | | | | | | | |
| Cross-currency swaps - Net Investment | | Foreign currency and derivative (loss) gain, net | | | | | $ | 62 | | | $ | — | | | $ | — | |
| Total derivatives in net investment hedging relationships | | | | | | | $ | 62 | | | $ | — | | | $ | — | |
Net increase (decrease) to net income | | | | | | | $ | 14,663 | | | $ | (1,242) | | | $ | (6,802) | |
We expect to reclassify $8.0 million from AOCI as a decrease to interest expense relating to interest rate swaps and interest rate swaptions and $3.6 million from AOCI to foreign currency gain relating to foreign currency forwards within the next twelve months.
The following table details our foreign currency and derivative gains (losses), net included in income (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| Realized foreign currency and derivative gain (loss), net: | | | | | | | | | |
| Gain on the settlement of undesignated derivatives | | | | | $ | 18,051 | | | $ | 204,392 | | | $ | 24,392 | |
| Gain on the settlement of designated derivatives reclassified from AOCI | | | | | 5,728 | | | 3,245 | | | 3,541 | |
| Gain (loss) on the settlement of transactions with third parties | | | | | 583 | | | (553) | | | (134) | |
| Total realized foreign currency and derivative gain, net | | | | | $ | 24,362 | | | $ | 207,084 | | | $ | 27,799 | |
| | | | | | | | | |
| Unrealized foreign currency and derivative gain (loss), net: | | | | | | | | | |
| (Loss) gain on the change in fair value of undesignated derivatives | | | | | $ | (5,231) | | | $ | 29,316 | | | $ | (14,714) | |
| Loss on remeasurement of certain assets and liabilities | | | | | (32,545) | | | (249,711) | | | (12,375) | |
| Total unrealized foreign currency and derivative loss, net | | | | | $ | (37,776) | | | $ | (220,395) | | | $ | (27,089) | |
| Total foreign currency and derivative (loss) gain, net | | | | | $ | (13,414) | | | $ | (13,311) | | | $ | 710 | |
15. LessorOperating Leases
At December 31, 2023, we owned or held interests in 13,458properties. Of the 13,458 properties, 13,197, or98.1%, are single-client properties, and the remaining are multi-client properties. At December 31, 2023, 193 properties were available for lease or sale. The majority of our derivative transactions include credit support annex collateral agreements with derivative counterparties requiring collateral postingleases are accounted for as operating leases.
The vast majority of our leases are net leases where our client pays or reimburses us for property taxes and assessments and carries insurance coverage for public liability, property damage, fire, and extended coverage.
Rent based on changes in valuea percentage of our client's gross sales, or percentage rent, for the years ended December 31, 2023, 2022, and 2021 was$14.8 million, $14.9 million, and $6.5 million, respectively.
At December 31, 2023, minimum future annual rental revenue to be received on the operating leases for the next five years and thereafter are as follows (in thousands):
| | | | | | | | | | | | | | |
| | Future Minimum Operating Lease Payments | | Future Minimum Direct Financing and Sale-Type Lease Payments (1) |
| 2024 | | $ | 4,006,574 | | | $ | 1,037 | |
| 2025 | | 3,918,126 | | | 812 | |
| 2026 | | 3,747,064 | | | 814 | |
| 2027 | | 3,531,235 | | | 751 | |
| 2028 | | 3,222,392 | | | 710 | |
| Thereafter | | 24,768,619 | | | 25,139 | |
| Totals | | $ | 43,194,010 | | | $ | 29,263 | |
(1) Related to six properties which are subject to direct financing leases and, therefore, revenue is recognized as rental income on the discounted cash flows of the derivative. Aslease payments. Amounts reflected are the cash rent on these respective properties.Twoproperties are subject to sales-type leases and, therefore, revenue is recognized as sales-type lease income on the discounted cash flows of the lease payments. Amounts reflected are the cash rent on these respective properties.
No individual client’s rental revenue, including percentage rents, represented more than 10% of our total revenue for each of the years ended December 31, 20212023, 2022, and December 31, 2020, no collateral has been posted related to such arrangements.2021.
16. Distributions Paid and Payable
We pay monthly distributions to our common stockholders. The following is a summary of monthly distributions paid per common share for the periods indicated below:
| | | | | | | | | | | | | | | | | |
| |
| 2023 | | 2022 | | 2021 |
| January | $ | 0.2485 | | $ | 0.2465 | | | $ | 0.2345 | |
| February | 0.2485 | | 0.2465 | | | 0.2345 | |
| March | 0.2545 | | 0.2465 | | | 0.2345 | |
| April | 0.2550 | | 0.2470 | | | 0.2350 | |
| May | 0.2550 | | 0.2470 | | | 0.2350 | |
| June | 0.2550 | | | 0.2470 | | | 0.2350 | |
| July | 0.2555 | | | 0.2475 | | | 0.2355 | |
| August | 0.2555 | | | 0.2475 | | | 0.2355 | |
| September | 0.2555 | | | 0.2475 | | | 0.2355 | |
| October | 0.2560 | | 0.2480 | | | 0.2360 | |
| November | 0.2560 | | 0.2480 | | | 0.2360 | |
| December | 0.2560 | | 0.2480 | | | 0.2460 | |
| Total | $ | 3.0510 | | | $ | 2.9670 | | | $ | 2.8330 | |
At December 31, 2023, a distribution of $0.2565 per common share was payable and was paid in January 2024. At December 31, 2022, a distribution of $0.2485 per common share was payable and was paid in January 2023.
The following presents the federal income tax characterization of distributions paid or deemed to be paid per common share for the years:
| | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| Ordinary income | | $ | 2.8434500 | | | $ | 2.7867654 | | | $ | 1.5146899 | |
| Nontaxable distributions | | 0.2075500 | | | — | | | 3.2925615 | |
| Total capital gain distribution | | — | | | 0.1802346 | | | 0.0854609 | |
Totals (1) | | $ | 3.0510000 | | | $ | 2.9670000 | | | $ | 4.8927123 | |
(1) The amount distributed in 2021 includes the $2.060 tax distribution of Orion shares, that occurred in conjunction with the Orion Divestiture on November 12, 2021, after our merger with VEREIT on November 1, 2021. The fair market value of these shares for tax distribution was determined to be $20.6272 per share, which was calculated using the five-day volume weighted average share price after issuance.
17. 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, plus income attributable to dilutive shares and convertible common units 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 (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| Weighted average shares used for the basic net income per share computation | | | | | 692,298 | | | 611,766 | | | 414,535 | |
| Incremental shares from share-based compensation | | | | | 349 | | | 395 | | | 235 | |
| Dilutive effect of forward ATM offerings | | | | | 377 | | | 20 | | | — | |
| Weighted average shares used for diluted net income per share computation | | | | | 693,024 | | | 612,181 | | | 414,770 | |
| Unvested shares from share-based compensation that were anti-dilutive | | | | | 117 | | | 32 | | | 45 | |
| Weighted average partnership common units convertible to common shares that were anti-dilutive | | | | | 1,795 | | | 1,292 | | | 500 | |
| Weighted average forward ATM offerings that were anti-dilutive | | | | | 759 | | | 644 | | | — | |
18. Supplemental Disclosures of Cash Flow Information
The following table summarizes our supplemental cash flow information during the periods indicated below (in thousands):
| | 2021 | | 2020 | | 2019 |
| Years ended December 31, | | | Years ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| Supplemental disclosures: | Supplemental disclosures: | |
| Cash paid for interest | |
| Cash paid for interest | |
| Cash paid for interest | Cash paid for interest | $ | 355,483 | | | $ | 285,617 | | | $ | 275,303 | |
| Cash paid for income taxes | Cash paid for income taxes | $ | 19,676 | | | $ | 13,128 | | | $ | 4,221 | |
| Cash paid for merger and integration-related costs | Cash paid for merger and integration-related costs | $ | 157,115 | | | $ | — | | | $ | — | |
| Non-cash activities: | Non-cash activities: | |
| Increase (decrease) in net derivative liability position at fair value | $ | (40,489) | | | $ | 55,205 | | | $ | — | |
| Net (decrease) increase in fair value of derivatives | |
| Net (decrease) increase in fair value of derivatives | |
| Net (decrease) increase in fair value of derivatives | |
| Increase in noncontrolling interests from property acquisitions | |
Mortgages assumed at fair value (1) | Mortgages assumed at fair value (1) | $ | 911,525 | | | $ | — | | | $ | 130,765 | |
| Notes payable assumed at fair value | Notes payable assumed at fair value | $ | 4,946,965 | | | $ | — | | | $ | — | |
Issuance of common partnership units of Realty Income, L.P. (2) | |
| Non-cash assets and liabilities assumed in merger | Non-cash assets and liabilities assumed in merger | $ | 11,559,875 | | | $ | — | | | $ | — | |
| Non-cash assets and liabilities distributed in Orion Divestiture | Non-cash assets and liabilities distributed in Orion Divestiture | $ | 1,142,121 | | | $ | — | | | $ | — | |
Adoption of Accounting Standards Codifications Topic 842, Leases | $ | — | | | $ | — | | | $ | 131,982 | |
Issuance of common partnership units of Realty Income, L.P. (2) | $ | 38,783 | | | $ | — | | | $ | 6,286 | |
| Acquisition of a controlling interest | $ | — | | | $ | — | | | $ | 5,084 | |
(1)For the year ended December 31, 2021, includes £31.0 million Sterling, converted at the applicable exchange rate on the date of transaction, for 1one mortgage and $869.1 million, estimated at fair value, for 10ten mortgages from our merger with VEREIT.
(2)For the year ended December 31, 2022, includes 734,458 common partnership units of Realty Income L.P. that were issued in connection with the acquisition of nine properties. For the year ended December 31, 2021, includes $1.8 million for the issuance of 56,400 units on November 1, 2021 that were a result of our merger with VEREIT, $20.4 million for the issuance of 300,604 units on November 30, 2021 that were a partial consideration for an acquisition of properties, and $16.6 million for the issuance of 240,586 units on December 30, 2021 that were issued to a new partner in connection with an industrial property contribution. For 2019, includes $6.3 million for the issuance of 89,322 units on March 28, 2019 that were a partial consideration for an acquisition of properties.
The following table provides a reconciliation of cash and cash equivalents reported within theon our consolidated balance sheets to the total of the cash, cash equivalents, and restricted cash reported within theour consolidated statements of cash flows (in thousands):
| | December 31, 2023 | | | December 31, 2023 | | December 31, 2022 |
| | Cash and cash equivalents shown in the consolidated balance sheets | |
| | Cash and cash equivalents shown in the consolidated balance sheets | |
| | | | | | December 31, 2021 | | December 31, 2020 |
| Cash and cash equivalents shown in the consolidated balance sheets | Cash and cash equivalents shown in the consolidated balance sheets | | $ | 258,579 | | | $ | 824,476 | |
Restricted escrow deposits (1) | Restricted escrow deposits (1) | | 68,541 | | | 21,220 | |
Impounds related to mortgages payable (1) | Impounds related to mortgages payable (1) | | 5,249 | | | 4,983 | |
| Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | | $ | 332,369 | | | $ | 850,679 | |
(1) Included within other'other assets, netnet' on theour consolidated balance sheets (see note 4)3, Supplemental Detail for Certain Components of Consolidated Balance Sheets). These amounts consist of cash that we are legally entitled to, but that is not immediately available to us. As a result, these amounts were considered restricted as of the dates presented.
16.19. Common Stock Incentive Plan
In March 2021, our Board of Directors adopted, and in May 2021, stockholders approved, the Realty Income 2021 Incentive Award Plan or 2021 Plan, to enable us to motivate, attract and retain the services of directors, employees and consultants, considered essential to our long-term success.(the "2021 Plan"). The 2021 Plan offers our directors, employees, and consultants an opportunity to own our stock and/or rights that will reflect our growth, development and financial success. Except as noted below, the aggregate number of shares of our common stock subject to options, stock purchase rights or SPR,("SPR"), stock appreciation rights or SAR,("SAR"), and other awards, will be no more 8,924,231than 8.9 million shares. The maximum number of shares that may be subject to options, SPR, SAR and other awards granted under the plan to any individual in any calendar year may not exceed 3,200,000,3.2 million, and the maximum aggregate amount of cash that may be paid in cash during any calendar year with respect to one or more shares payable in cash shall be $10.0 million. The 2021 Plan replaced the Realty Income Corporation 2012 Incentive Award Plan or the (the"2012 Plan,Plan"), which was set to expire in March 2022. No2022 and from which no further awards will be granted under the 2012 Plan.have been granted. The disclosures below incorporate activity for both the 2012 Plan and the 2021 Plan.
In connection with the Merger,our merger with VEREIT, shares which remained available for issuance under the VEREIT, Inc. 2021 Equity Incentive Plan immediately prior to the closing of the merger (as adjusted by the Exchange Ratio) may be used for awards under the 2021 Plan and will not reduce the shares authorized for grant under the 2021 Plan, to the extent that awards using such shares (i) are permitted without stockholder approval under applicable stock exchange rules, (ii) are made only to VEREIT service providers or individuals who become Realty Income service providers following the date of the consummation of the merger, and (iii) are only granted under the 2021 Plan during the period commencing on the date of the consummation of the merger and ending on June 2, 2031. As a result,6,186,101 6.2 million additional shares arewere available for issuance under the 2021 Plan.
The amount of share-based compensation costs recognized in general'General and administrative expense onadministrative' in our consolidated statements of income and comprehensive income was $26.2 million, $21.6 million, and $16.2 million during the years ended December 31, 2023, 2022, and 2021, $16.5 million during 2020 (including $1.8 million of accelerated share-based compensation costs for our former Chief Financial Officer ("CFO")) and $13.7 million during 2019.respectively.
InAlso, in connection with the Merger,merger, each outstanding VEREIT, Inc. stock option and restricted stock unit that were unvested as of November 1, 2021 were converted into equivalent options and restricted stock units, in each case with respect to shares of the Company's common stock, using the equity award exchange ratio in accordance with the merger agreement. The converted awards issued by Realty Income have identical terms to the original VEREIT, Inc. award grant. On November 1, 2021, we issued 442,4180.4 million shares of Realty Income common stock in settlement of equity awards that vested upon the separation of certain former-VEREIT employees and directors in connection with the merger. This issuance is excluded from the Restricted Stock Units and Stock Options sections below, as the awards were not granted under the 2021 Plan. The aggregate fair value of the converted awards was $71.6 million, of which i.) $44.0 million related to pre-combination services and is included in the consideration transferred in the merger (please refer to Note 3, Merger with VEREIT and Orion Divestiture), ii.) $25.6 million of expense was recognized during November in merger and integration-related costs related to the acceleration of vesting upon the separation of certain employees in connection with the merger, and iii.) $2.0 million will be amortized through general and administrative expenses over the remaining vesting term for former VEREIT, Inc. employees who were retained by Realty Income. The following disclosures are inclusive of converted awards for former VEREIT employees continuing as employees of Realty Income, which are reflected as grants, as the replacement awards represent newly issued awards settled in Realty Income common shares.
In connection with the Orion Divestiture, each stock option, restricted stock unit and performance award outstanding at November 12, 2021 was entitled to an equitable adjustment equal to the ratio of the five-day volume weighted average per-share price of Realty Income common stock prior to the Orion Divestiture divided by the five-day volume weighted average per-share of Realty Income common stock following the Orion Divestiture, resulting in an adjustment factor of approximately 1.002342. The equitable adjustment was considered a modification in accordance with the provisions of ASC 718, Compensation-Stock Compensation. As a result, we compared the fair value of each award immediately prior to the equitable adjustment to the fair value immediately after the equitable adjustment to measure incremental compensation cost, if any. The equitable adjustment did not result in any incremental fair value. Therefore, no stock-based compensation expense was recorded as of result of the modification. The following disclosures are inclusive of these adjustments, which has been labeled 'Equitable adjustment - Orion Divestiture' throughout.
A. Restricted Stock
The following table summarizes our common stock grant activity under our 2021 and 2012 Plans.activity:
| | | | | 2021 | | 2020 | | 2019 | | | 2023 | | 2022 | | 2021 |
| Number of shares | | Weighted average price(1) | | Number of shares | | Weighted average price(1) | | Number of shares | | Weighted average price(1) |
| | Number of shares | | | | Number of shares | | Weighted average price (1) | | Number of shares | | Weighted average price (1) | | Number of shares | | Weighted average price (1) |
| Outstanding nonvested shares, beginning of year | Outstanding nonvested shares, beginning of year | | 219,482 | | | $ | 63.69 | | | 259,698 | | | $ | 58.39 | | | 307,821 | | | $ | 53.44 | |
| Shares granted | | 133,052 | | | $ | 64.27 | | | 103,473 | | | $ | 67.84 | | | 87,327 | | | $ | 69.83 | |
Shares granted (2) | |
| Shares vested | Shares vested | | (124,505) | | | $ | 61.57 | | | (141,486) | | | $ | 56.94 | | | (126,363) | | | $ | 54.45 | |
| Shares forfeited | Shares forfeited | | (15,399) | | | $ | 65.09 | | | (2,203) | | | $ | 66.48 | | | (9,087) | | | $ | 55.71 | |
| Outstanding nonvested shares, end of each period | Outstanding nonvested shares, end of each period | | 212,630 | | | $ | 65.20 | | | 219,482 | | | $ | 63.69 | | | 259,698 | | | $ | 58.39 | |
(1) Grant date fair value.
(2) Our restricted stock awards granted to employees vest over a service periods not exceeding four-years. Additionally effective November 1, 2022, and applied retroactively for all outstanding awards, we have a retirement provision whereby the vesting date for eligible participants is accelerated based on certain criteria.
The vesting schedule for shares granted to non-employee directors is as follows:
•For directors with less than six years of service at the date of grant, shares vest in 33.33% annual increments upon re-election to the Board at each of the three Annual Meetings of Stockholders following the grant date;
•For directors with six years of service at the date of grant, shares vest in 50% annual increments upon re-election to the Board at each of the two Annual Meetings of Stockholders following the grant date;
•For directors with seven years of service at the date of grant, shares are 100% vested upon re-election to the Board in the following year; and
•For directors with eight or more years of service at the date of grant, there is immediate vesting as of the date the shares of stock are granted.
During May
For the years ended December 31, 2023, 2022, and 2021, respectively, we granted 40,000, 40,000, and 36,000 total shares of restricted stock granted to the independent members of our Board of Directors in connection with our annual awards of which 24,000 shares vested immediately,in May 2023, 2022 and 12,000 shares vest in equal parts over a three-year service period.2021, respectively. In addition, in November 2021, we granted 8,000 shares of restricted stock to the new members of our Board of Directors, which vest in equal parts over a three-year service period.
Our restricted stock In connection with our annual awards, granted to employees typically20,000, 20,000, and 24,000 shares vested immediately and 20,000, 20,000, and 12,000 shares vest annually in equal parts over a four-yearthree-year service period. Duringperiod for the years ended December 31, 2023, 2022, and 2021, 89,052 shares were granted to our employees, and vest over a four-year service period.respectively.
As of December 31, 2021,2023, the remaining unamortized share-based compensation expense related to restricted stock totaled $9.2$14.9 million, which is being amortized on a straight-line basis over the service period of each applicable award. The amount of share-based compensation is based on the fair value of the stock at the grant date. We define the grant date as the date the recipient and Realty Income have a mutual understanding of the key terms and conditions of the award, and the recipient of the grant begins to benefit from, or be adversely affected by, subsequent changes in the price of the shares.
B. Restricted Stock Units
During 2023, 2022 and 2021, and in connection with our merger with VEREIT Inc., we also granted restricted stock units that primarily vest over service periods of three or four-years and have the same economic rights as shares of restricted stock:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2022 | | 2021 |
| | Number of restricted stock units | | Weighted average price (1) | | Number of restricted stock units | | Weighted average price (1) | | Number of restricted stock units | | Weighted average price (1) |
| Outstanding nonvested shares, beginning of year | | 58,513 | | | $ | 67.91 | | | 67,367 | | | $ | 69.69 | | | 18,670 | | | $ | 70.38 | |
Equitable adjustment - Orion Divestiture (2) | | — | | | | | — | | | | | 109 | | | |
| Shares granted | | 15,065 | | | $ | 66.41 | | | 24,820 | | | $ | 66.82 | | | 71,956 | | | $ | 68.96 | |
| Shares vested | | (29,492) | | | $ | 70.30 | | | (26,917) | | | $ | 70.55 | | | (23,368) | | | $ | 66.96 | |
| Shares forfeited | | (1,474) | | | $ | 71.02 | | | (6,757) | | | $ | 71.14 | | | — | | | |
| Outstanding nonvested shares, end of each period | | 42,612 | | | $ | 65.62 | | | 58,513 | | | $ | 67.91 | | | 67,367 | | | $ | 69.69 | |
| | | | | | | | | | | | |
(1) Grant date fair value.
(2) Effective with the Orion Divestiture on November 12, 2021, outstanding equity awards were adjusted by a conversion ratio of 1.002342 per one Realty Income share then held.
As of December 31, 2023, the remaining share-based compensation expense related to the restricted stock units totaled $1.1 millionand is being recognized on a straight-line basis over the service period. The amount of share-based compensation for the restricted stock units is based on the fair value of our common stock at the grant date. The expense amortization period for restricted stock units is the lesser of the four-year service period or the period over which the awardee reaches the qualifying retirement age. For employees who have already met the qualifying retirement age, restricted stock units are fully expensed at the grant date.
C. Performance Shares
During 2021, 20202023, 2022 and 2019,2021, we granted annual performance share awards, as well as dividend equivalent rights, to our executive officers. The number of performance shares that vest for each of the three years is based on the achievement of the following performance goals:
| | Weighting for year granted |
| | Weighting for year granted | | | | Weighting for year granted |
| Annual Performance Awards Metrics | Annual Performance Awards Metrics | | 2021 | | 2020 | | 2019 | Annual Performance Awards Metrics | | 2023 | | 2022 | | 2021 |
| Total shareholder return (“TSR”) ranking relative to MSCI US REIT Index | Total shareholder return (“TSR”) ranking relative to MSCI US REIT Index | | 70 | % | | 70 | % | | 45 | % | Total shareholder return (“TSR”) ranking relative to MSCI US REIT Index | | 55 | % | | 55 | % | | 70 | % |
| TSR ranking relative to J.P. Morgan Net Lease Peer Group | | N/A | | N/A | | 26 | % |
| Dividend per share Growth Rate | | 15 | % | | 15 | % | | 16 | % |
Debt-to-Adjusted EBITDAre Ratio | | N/A | | N/A | | 13 | % |
| | Dividend per share growth rate | |
| Dividend per share growth rate | |
| Dividend per share growth rate | | | 20 | % | | 20 | % | | 15 | % |
Net Debt-to-Pro Forma Adjusted EBITDAre Ratio | | Net Debt-to-Pro Forma Adjusted EBITDAre Ratio | | 25 | % | | 25 | % | | N/A |
Net Debt-to-Adjusted EBITDAre Ratio | Net Debt-to-Adjusted EBITDAre Ratio | | 15 | % | | 15 | % | | N/A | Net Debt-to-Adjusted EBITDAre Ratio | | N/A | | N/A | | 15 | % |
The annual performance shares are earned based on our performance related to our metrics above, and vest 50% on the first and second January 1 after the end of the three-year performance period, subject to continued service. The performance period for the 2019 performance awards began on January 1, 2019 and ended on December 31, 2021. The performance period for the 2020 performance awards began on January 1, 2020 and will end on
December 31, 2022. The performance period for the 2021 performance awards began on January 1, 2021 and ended on December 31, 2023. The performance period for the 2022 performance awards began on January 1, 2022 and will end on December 31, 2023.2024. The performance period for the 2023 performance awards began on January 1, 2023 and will end on December 31, 2025.
On November 15, 2021, the Compensation Committee approved a one-time grant of performance share awards and a one-time cash bonus to certain of our named executives in connection with the completion of our merger with VEREIT and the transactions contemplated thereby, including the Orion Divestiture (the "VEREIT Transaction"). The awards were made to reward the executives for the successful consummation of the VEREIT Transaction and were intended to retain and motivate the executives to achieve optimal synergies and incentivize further growth from the merger. The performance shares arewere earned based on our performance related to AFFOAdjusted Funds from Operations Available to Common Stockholders ("AFFO") accretion (50% weighting) and general and administrative expense synergies (50% weighting), and vestvested 50% upon the completion of the performance period.The remaining 50% will vestvested on the one-year anniversary of the completion of the applicable performance period. All vesting is subject to continued service. The performance period iswas one year for the AFFO accretion targets from January 1, 2022 to December 31, 2022, and was two years for the general and administrative expense synergies from January 1, 2022 to December 31, 2023.
The fair value of the annual performance shares was estimated on the date of grant using a Monte Carlo Simulation model. The fair value of the one-time performance shares was based on the fair value of our common stock at the grant date and is dependent on the probability of satisfying the performance conditions stipulated in the award grant. The following table summarizes our performance share grant activity, inclusive of annual performance shares and the one-time performance shares related to the merger with VEREIT:
| | 2021 | | 2020 | | 2019 |
| Number of performance shares | | Weighted average price(1) | | Number of performance shares | | Weighted average price(1) | | Number of performance shares | | Weighted average price(1) |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
| | Number of performance shares | | | | Number of performance shares | | Weighted average price (1) | | Number of performance shares | | Weighted average price (1) | | Number of performance shares | | Weighted average price (1) |
| Outstanding nonvested shares, beginning of year | Outstanding nonvested shares, beginning of year | | 291,759 | | | $ | 69.73 | | | 304,663 | | | $ | 62.25 | | | 223,392 | | | $ | 58.78 | |
Equitable adjustment - Orion Divestiture (2) | Equitable adjustment - Orion Divestiture (2) | | 752 | | | — | | | — | | |
Shares granted(3) | | 257,149 | | | $ | 64.18 | | | 136,729 | | | $ | 79.98 | | | 128,581 | | | $ | 65.34 | |
| Shares granted | |
| Shares granted | |
| Shares granted | |
| Shares vested | Shares vested | | (109,113) | | | $ | 62.52 | | | (139,012) | | | $ | 63.66 | | | (47,310) | | | $ | 54.27 | |
| Shares forfeited | Shares forfeited | | (52,408) | | | $ | 65.83 | | | (10,621) | | | $ | 66.64 | | | — | | |
| Outstanding nonvested shares, end of each period | Outstanding nonvested shares, end of each period | | 388,139 | | | $ | 68.09 | | | 291,759 | | | $ | 69.73 | | | 304,663 | | | $ | 62.25 | |
(1) Grant date fair value.
(2) Effective with the Orion Divestiture on November 12, 2021, outstanding equity awards were adjusted by a conversion ratio of 1.002342 per one Realty Income share then held.
(3) 194,053 shares granted relate to annual performance grants and 63,096 shares granted relate to one-time grant of performance shares.
As of December 31, 2021,2023, the remaining share-based compensation expense related to the performance shares totaled $14.6$17.4 millionand is being recognized on a tranche-by-tranche basis over the service period.
D. Stock UnitsOptions
During 2021, 2020 and 2019, and inIn connection with our merger with VEREIT we also granted restrictedin 2021, 709,426 stock units that primarily vest over service periodsoptions were converted with a weighted average exercise price of three or four-years and have the same economic rights as shares of restricted stock:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| | Number of restricted stock units | | Weighted average price(1) | | Number of restricted stock units | | Weighted average price(1) | | Number of restricted stock units | | Weighted average price(1) |
| Outstanding nonvested shares, beginning of year | | 18,670 | | | $ | 70.38 | | | 15,511 | | | $ | 59.82 | | | 14,968 | | | $ | 54.62 | |
Equitable adjustment - Orion Divestiture (2) | | 109 | | | | | — | | | | | — | | | |
| Shares granted | | 71,956 | | | $ | 68.96 | | | 9,966 | | | $ | 78.79 | | | 5,482 | | | $ | 69.58 | |
| Shares vested | | (23,368) | | | $ | 66.96 | | | (6,807) | | | $ | 58.63 | | | (4,939) | | | $ | 54.90 | |
| Shares forfeited | | — | | | | | — | | | | | — | | | |
| Outstanding nonvested shares, end of each period | | 67,367 | | | $ | 69.69 | | | 18,670 | | | $ | 70.38 | | | 15,511 | | | $ | 59.82 | |
(1) Grant date fair value.
(2) Effective with the Orion Divestiture on November 12, 2021,$53.80 per option. There were no outstanding equity awards were adjusted by a conversion ratio of 1.002342 per one Realty Income share then held.
The amount of share-based compensation for the restricted stock units is based on the fair value of our common stock at the grant date. The expense amortization period for restricted stock units is the lesser of the four-year service period or the period over which the awardee reaches the qualifying retirement age. For employees who have already met the qualifying retirement age, restricted stock units are fully expensed at the grant date. As of December 31, 2021, the remaining share-based compensation expense relatedoptions prior to the restricted stock units totaled $1.7 millionVEREIT merger, and is being recognized on a straight-line basis over the service period.
D. Stock Options
During 2021, we also grantedno additional stock options in connection with our merger with VEREIT. The following inputs and assumptions were used to calculate the weighted-average fair values of the options granted at the date of grant as follows:have since been granted.
The fair value of the stock options as of their grant date is determined using the Black-Scholes option pricing model, which requires the input of assumptions including expected terms, expected volatility, dividend yield and risk freerisk-free rate.
The following table summarizes ourAs of December 31, 2023, we had 28,343 outstanding nonvested stock option activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of stock options | | Weighted average exercise price(1) | | Weighted average remaining contractual term (Years) | | Aggregate intrinsic value |
| Outstanding nonvested options, beginning of year | | — | | | | | | | |
| Options granted | | 709,426 | | | $ | 53.80 | | | | | |
Equitable adjustment - Orion Divestiture (2) | | 1,547 | | | | | | | |
| Options exercised | | (395,903) | | | $ | 54.54 | | | | | |
| Options forfeited | | — | | | | | | | |
| Outstanding nonvested options, end of each period | | 315,070 | | | $ | 52.89 | | | 2.4 | | $ | 5,891,639 | |
(1) Grant date fair value.
(2) Effectiveoptions with the Orion Divestiture on November 12, 2021, outstanding equity awards were adjusted by a conversion ratioweighted average exercise price of 1.002342$54.50 per one Realty Income share then held.option. Their weighted average remaining contractual term is 4.8 years.
Compensation expense for stock options is recognized on a straight-line basis over the service period described above. InDuring the years ended December 31, 2023, we recorded no expense related to stock options. During each of the years ended December 31, 2022 and 2021, we recorded $68,000less than $0.1 million of expense related to stock options. As of December 31, 2021,2023, there was $57,000 of unrecognized compensationno unamortized expense relatedrelating to our outstanding stock options with a weighted-average remaining term of 0.2 years.options.
17.Segment Information
We evaluate performance and make resource allocation decisions on an industry by industry basis. For financial reporting purposes, we have grouped our clients into 60 activity segments. All of the properties are incorporated into one of the applicable segments. Unless otherwise specified, all segments listed below are located within the U.S. Because almost all of our leases require our clients to pay or reimburse us for operating expenses, rental revenue is the only component of segment profit and loss we measure. Our investments in industries outside of the U.S. are managed as separate operating segments.
The following tables set forth certain information regarding the properties owned by us, classified according to the business of the respective clients (in thousands):
| | | | | | | | | | | | | | |
| Assets, as of December 31: | | 2021 | | 2020 |
| Segment net real estate: | | | | |
| Automotive service | | $ | 852,151 | | | $ | 328,340 | |
| Beverages | | 362,570 | | | 347,366 | |
| Child care | | 347,680 | | | 216,718 | |
| Convenience stores - U.S. | | 2,844,800 | | | 2,101,005 | |
| Dollar stores | | 2,303,906 | | | 1,420,210 | |
| Drug stores | | 2,182,432 | | | 1,555,106 | |
| Financial services | | 576,065 | | | 374,508 | |
| General merchandise - U.S. | | 1,289,735 | | | 730,806 | |
Grocery stores - U.S. (1) | | 1,517,237 | | | 907,634 | |
Grocery stores - U.K. (1) | | 1,963,057 | | | 1,131,760 | |
| Health and fitness | | 1,325,932 | | | 1,050,791 | |
| Health care - U.S. | | 670,864 | | | 289,244 | |
| Home furnishings - U.S. | | 583,564 | | | 109,631 | |
| Home improvement - U.S. | | 946,870 | | | 608,222 | |
| Home improvement - U.K. | | 780,308 | | | 187,289 | |
| Restaurants - casual dining | | 2,016,017 | | | 515,226 | |
| Restaurants - quick service - U.S. | | 2,689,806 | | | 1,062,918 | |
| Theaters - U.S. | | 750,877 | | | 767,117 | |
| Transportation services | | 1,039,220 | | | 729,640 | |
| Wholesale club | | 865,658 | | | 407,584 | |
| Other non-reportable segments | | 6,080,123 | | | 2,644,041 | |
| Total net real estate | | $ | 31,988,872 | | | $ | 17,485,156 | |
| Intangible assets: | | | | |
| Automotive service | | 125,543 | | | 55,018 | |
| Beverages | | 17,452 | | | 9,401 | |
| Child care | | 33,449 | | | 19,848 | |
| Convenience stores - U.S. | | 275,548 | | | 121,151 | |
| Dollar stores | | 366,319 | | | 77,176 | |
| Drug stores | | 355,779 | | | 167,975 | |
| Financial services | | 92,986 | | | 14,611 | |
| General merchandise - U.S. | | 254,343 | | | 108,646 | |
Grocery stores - U.S. (1) | | 378,181 | | | 181,764 | |
Grocery stores - U.K. (1) | | 426,714 | | | 282,211 | |
| Health and fitness | | 125,586 | | | 67,537 | |
| Health care - U.S. | | 103,143 | | | 21,032 | |
| Home furnishings - U.S. | | 210,654 | | | 9,336 | |
| Home improvement - U.S. | | 207,637 | | | 97,228 | |
| Home improvement - U.K. | | 158,667 | | | 57,369 | |
| Restaurants - casual dining | | 416,653 | | | 20,553 | |
| Restaurants - quick service - U.S. | | 270,092 | | | 47,517 | |
| Theaters - U.S. | | 33,527 | | | 28,292 | |
| Transportation services | | 125,971 | | | 53,902 | |
| Wholesale club | | 155,032 | | | 36,165 | |
| Other non-reportable segments | | 1,142,849 | | | 233,923 | |
Goodwill (2) | | 3,676,705 | | | 14,180 | |
| Other corporate assets | | 2,195,800 | | | 1,530,294 | |
| Total assets | | $ | 43,137,502 | | | $ | 20,740,285 | |
(1) During 2021, we invested in 43 properties in Spain. As of December 31, 2021, grocery stores - Spain was not a reportable segment.
(2) Goodwill has not yet been allocated to our individual operating segments; the allocation is pending the finalization of our purchase accounting.
| | | | | | | | | | | | | | | | | | | | |
| Revenue for the years ended December 31, | | 2021 | | 2020 | | 2019 |
| Segment rental revenue: | | | | | | |
| Automotive service | | $ | 47,830 | | | $ | 35,090 | | | $ | 32,365 | |
| Beverages | | 37,284 | | | 32,771 | | | 31,807 | |
| Child care | | 36,425 | | | 35,643 | | | 31,749 | |
| Convenience stores - U.S. | | 217,175 | | | 189,658 | | | 166,755 | |
| Dollar stores | | 149,136 | | | 126,719 | | | 102,695 | |
| Drug stores | | 153,174 | | | 140,993 | | | 127,853 | |
| Financial services | | 36,831 | | | 30,531 | | | 30,189 | |
| General merchandise - U.S. | | 72,442 | | | 49,352 | | | 35,366 | |
Grocery stores - U.S. (1) | | 88,360 | | | 78,106 | | | 69,691 | |
Grocery stores - U.K. (1) | | 100,500 | | | 51,459 | | | 17,819 | |
| Health and fitness | | 115,878 | | | 104,744 | | | 105,896 | |
| Health care - U.S. | | 33,579 | | | 25,563 | | | 21,011 | |
| Home furnishings - U.S. | | 21,457 | | | 12,447 | | | 10,490 | |
| Home improvement - U.S. | | 62,076 | | | 46,392 | | | 42,351 | |
| Home improvement - U.K. | | 34,470 | | | 4,224 | | | — | |
| Restaurants - casual dining | | 71,338 | | | 46,265 | | | 45,238 | |
| Restaurants - quick service - U.S. | | 115,758 | | | 88,163 | | | 92,018 | |
| Theaters - U.S. | | 90,792 | | | 78,653 | | | 87,698 | |
| Transportation services | | 71,955 | | | 64,131 | | | 66,500 | |
| Wholesale club | | 46,061 | | | 38,713 | | | 38,117 | |
| Other non-reportable segments and contractually obligated reimbursements by our clients | | 462,437 | | | 359,916 | | | 329,210 | |
| Rental (including reimbursable) | | 2,064,958 | | | 1,639,533 | | | 1,484,818 | |
| Other | | 15,505 | | | 7,554 | | | 3,345 | |
| Total revenue | | $ | 2,080,463 | | | $ | 1,647,087 | | | $ | 1,488,163 | |
(1) During 2021, we invested in 43 properties in Spain. As of December 31, 2021, grocery stores - Spain was not a reportable segment.
18.20. 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 December 31, 2021,2023, we had commitments of $74.7$32.7 million, forwhich primarily relate to re-leasing costs, recurring capital expenditures, and non-recurring building improvements. In addition, as of December 31, 2021,2023, we had committed $285.7$740.0 million under construction contracts the majority ofrelated to development projects, which is expected to be paid in the next twelve months.have estimated rental revenue commencement dates between January 2024 and January 2025.
We have certain properties that are subject to ground leases, which are accounted for as operating leases.
At December 31, 2021,2023, minimum future rental payments for the next five years and thereafter are as follows (in millions):
| | Operating Leases | | Finance Leases | | Total |
| 2022 | | $ | 38.3 | | | $ | 1.6 | | | $ | 39.9 | |
| 2023 | | 38.8 | | | 1.6 | | | 40.4 | |
| | Operating Leases | | | | Operating Leases | | Finance
Leases | | Total |
| 2024 | 2024 | | 38.7 | | | 1.4 | | | 40.1 | |
| 2025 | 2025 | | 38.8 | | | 1.3 | | | 40.1 | |
| 2026 | 2026 | | 36.7 | | | 1.3 | | | 38.0 | |
| 2027 | |
| 2028 | |
| Thereafter | Thereafter | | 468.5 | | | 45.4 | | | 513.9 | |
| Total | Total | | $ | 659.8 | | | $ | 52.6 | | | $ | 712.4 | |
Present value adjustment for remaining lease payments (1) | Present value adjustment for remaining lease payments (1) | | (198.1) | | | (8.6) | | |
| Total lease liability | Total lease liability | | $ | 461.7 | | | $ | 44.0 | | |
| Total lease liability | |
| Total lease liability | |
(1) The discount rates are specific for individual leases primarily based on the lease term. The range of discount rates used to calculate the present value of the operating lease payments is 0.41%0.94% to 5.50%6.42% and for finance lease payments is 0.54%1.14% to 5.50%6.21%. The weighted average discount rate was derived from estimated incremental borrowing rates based on our credit quality, as we did not have any borrowings at the balance sheet date with comparable terms to our lease agreements. At December 31, 2021,2023, the weighted average discount rate for operating leases is 3.15%3.66% and the weighted average remaining lease term is 21.523.1 years. At December 31, 2021,2023, the weighted average discount rate for finance leases is 3.55%3.47% and the weighted average remaining lease term is 22.822.6 years.
19.21. Subsequent Events
A. Dividend PaymentsDividends
In January and February 2022,2024, we declared a dividend of $0.2465,$0.2565 per share to our common stockholders, which was paid in February 2024. In addition, in February 2024, we declared a dividend of $0.2565, which will be paid in February 2022 and March 2022, respectively.2024.
B. Note IssuancesAgreement and Plan of Merger
On January 23, 2024, we completed our acquisition of Spirit in an all-stock transaction. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, the transaction was subject to the approval of Spirit’s stockholders and satisfaction of other customary closing conditions.
Pursuant to the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger, (i) each outstanding share of Spirit common stock, par value $0.05 per share (other than the Excluded Common Shares (as defined in the Merger Agreement)) automatically converted into 0.762 of a newly issued share of our common stock, subject to adjustment as set forth in the Merger Agreement, and cash in lieu of fractional shares, and (ii) each outstanding share of Spirit’s 6.000% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share,converted into the right to receive one share of newly issued Realty Income 6.000% Series A Cumulative Redeemable Preferred Stock, having substantially the same terms as the Spirit Series A Preferred Stock.
In connection with our merger with Spirit, we completed the $2.7 billion exchange in principal of outstanding notes issued by Spirit Realty, L.P. (“Spirit OP”), a wholly owned subsidiary of the Company following the Merger, for new notes issued by Realty Income and entered into $800.0 million and $500.0 million term loan agreements, which provide for the assumption of Spirit OP's existing term loan agreements.
Due to the close proximity of the acquisition date and the Company's filing of its annual report on Form 10-K for the year ended December 31, 2023, the initial accounting for the business combination is incomplete, and therefore we are unable to disclose the information required by ASC 805, Business Combinations. Such information will be included in the Company's subsequent Form 10-Q.
C. Notes Issuance
In January 2022,2024, we issued £250.0$450.0 million of 1.875%4.750% senior unsecured notes due January 2027February 2029 (the "January 2027 Notes"“2029 Notes”), and £250.0$800.0 million of 2.500%5.125% senior unsecured notes due January 2042February 2034 (the "January 2042 Notes"“2034 Notes”). The public offering price for the January 20272029 Notes was 99.487%99.225% of the principal amount for an effective semi-annualannual yield to maturity of 1.974%4.923%, and the public offering price for the January 20422034 Notes was 98.445%98.910% of the principal amount for an effective semi-annualannual yield to maturity of 2.584%5.265%. Combined,Interest on the new issues of the January 20272029 Notes and the January 20422034 Notes haveis paid semi-annually.
D. ATM Forward Offerings
As of February 20, 2024, ATM forward agreements for a weighted average termtotal of 10.8 million shares remain unsettled with total expected net proceeds of approximately 12.5 years and a weighted average effective semi-annual yield to maturity$605 million of approximately 2.28%.which 4.6 million shares were executed in January 2024.
Item 9:AChanges In and Disagreements With Accountants on Accounting and Financial Disclosure
We have had no disagreements with our independent registered public accounting firm on accounting matters or financial disclosure, nor have we changed accountants in the two most recent fiscal years.None.
Item 9A:Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of and for the yearquarter ended December 31, 2021,2023, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.
Based on the foregoing, our Chief
Executive Officer and ChiefChief Financial Officer concluded that as of December 31, 2023 our disclosure controls and procedures were effective and were operating at a reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer, Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Management has used the framework set forth in the report entitled “Internal Control--Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of the end of the most recent fiscal year. KPMG LLP has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting.
The Company acquired VEREIT during 2021, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2021, VEREIT's internal control over financial reporting associated with total assets of $17.7 billion and total revenues of $176.3 million included in the (consolidated) financial statements of the Company as of and for the year ended December 31, 2021.
Submitted on February 23, 202221, 2024 by,
Sumit Roy, President, Chief Executive Officer
Christie B. Kelly,Jonathan Pong, Executive Vice President, Chief Financial Officer, and Treasurer
Changes in Internal Controls
As a result of our merger with VEREIT in November 2021, we are operating two separate enterprise resource planning (ERP) systems to generate our financial statements. In 2022, we plan to integrate these two ERP platforms into one primary system. We have updated our internal controls over financial reporting, as necessary, to accommodate modifications to our business processes for these parallel ERP systems, as we work towards enhanced automated controls through a central platform. Except as described above, thereThere have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 20212023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Item 9B:Other Information
NoneDirector and Officer Trading Arrangements
Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None
PART III
Item 10:Directors, Executive Officers and Corporate Governance
The information required by this item is set forth under the captions “Board of Directors” and “Executive Officers of the Company” and “Delinquent Section 16(a) Reports” in our definitive Proxy Statement for the 20222024 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A, and is incorporated herein by reference. The Annual Meeting of Stockholders is presently scheduled to be held on May 17, 2022.
Item 11:Executive Compensation
The information required by this item is set forth under the caption “Executive Compensation” in our definitive Proxy Statement for the 20222024 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A, and is incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in our definitive Proxy Statement for the 20222024 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A, and is incorporated herein by reference.
Item 13:Certain Relationships, Related Transactions and Director Independence
The information required by this item is set forth under the caption “Related Party Transactions” in our definitive Proxy Statement for the 20222024 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A, and is incorporated herein by reference.
Item 14:Principal Accounting Fees and Services
Our independent registered public accounting firm is KPMG LLP, San Diego, CA, Auditor Firm ID: 185.
The information required by this item is set forth under the caption “Independent Registered Public Accounting Firm Fees and Services” in our definitive Proxy Statement for the 20222024 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A, and is incorporated herein by reference.
PART IV
Item 15:Exhibits and Financial Statement Schedules
A. The following documents are filed as part of this report.
1. Financial Statements (see Item 8)
a. Reports of Independent Registered Public Accounting Firm
b. Consolidated Balance Sheets,
December 31, 20212023 and 2020
2022
c. Consolidated Statements of Income and Comprehensive Income,
Years ended December 31, 2021, 20202023, 2022 and 2019
2021
d. Consolidated Statements of Equity,
Years ended December 31, 2021, 20202023, 2022 and 2019
2021
e. Consolidated Statements of Cash Flows,
Years ended December 31, 2021, 20202023, 2022 and 2019
2021
f. Notes to Consolidated Financial Statements
2. Financial Statement Schedule.Schedules. Reference is made to page F-1 of this report for Schedule III Real Estate and Accumulated Depreciation (electronically filed with the Securities and Exchange Commission).
a. Schedule III Real Estate and Accumulated Depreciation
Schedules not Filed: All schedules, other than those indicated in the Table of Contents, have been omitted as the required information is either not material, inapplicable or the information is presented in the financial statements or related notes.
3. Exhibits
Articles of Incorporation and By-Laws
| | | | | | | | | | | |
| Exhibit No. | | Description | |
| Plans of acquisition, reorganization, arrangement, liquidation or succession | | | |
| 2.1 | | Agreement and Plan of Merger, dated as of April 29, 2021, by and among Realty Income Corporation, Rams MD Acquisition Sub I, Inc., Rams Acquisition Sub II, LLC, VEREIT, Inc. and VEREIT Operating Partnership, L.P (filed as exhibit 2.1 to the Company's Form 8-K, filed on April 30, 2021 (File No. 001-13374), and incorporated herein by reference). | |
| 2.2 | | First Amendment to Agreement and Plan of Merger, dated as of June 25, 2021, by and among Realty Income Corporation, Rams MD Acquisition Sub I, Inc., Rams Acquisition Sub II, LLC, VEREIT, Inc. and VEREIT Operating Partnership, L.P (filed as exhibit 2.1 to the Company's Form 8-K, filed on June 25, 2021 (File No. 001-13374), and incorporated herein by reference). | |
| 2.3 | | SeparationAgreement and Distribution Agreement,Plan of Merger, dated as of November 12, 2021,October 29, 2023, by and among Realty Income Corporation, Orion Office REITSaints MD Acquisition Sub, Inc., and Orion Office REIT LP.Spirit Realty Capital, Inc. (filed as exhibit 2.1 to the Company's Form 8-K, filed on November 18, 2021October 30, 2023 and incorporated herein by reference). | |
| Bylaws | |
| 3.1 | | | |
| 3.2 | | | |
3.23.3 | | | |
3.33.4 | | | |
3.43.5 | | | |
3.53.6 | | | |
3.63.7 | | | |
| 3.8 | | | |
| | | | | | | | | | | |
3.73.9 | | | |
3.83.10 | | | |
3.93.11 | | | |
3.103.12 | | | |
3.113.13 | | | |
3.123.14 | | | |
3.133.15 | | | |
| 3.16 | | | | |
| | | | | | | | | | | |
| Instruments defining the rights of security holders, including indentures | |
| 4.1 | | | |
| 4.2 | | | |
| 4.3 | | | |
| 4.4 | | | |
| 4.5 | | | |
| 4.6 | | | |
| 4.7 | | | |
| 4.8 | | | |
| 4.9 | | | |
| 4.10 | | | |
| 4.11 | | | |
| 4.12 | | | |
| 4.13 | | | |
| 4.14 | | | |
| 4.15 | | | |
| 4.16 | | | |
| 4.17 | | | |
| | | | | | | | | | | |
| 4.18 | | | |
| 4.19 | | | |
4.20*4.20 | | | |
4.21 | | | |
4.224.21 | | | |
4.234.22 | | Officers' Certificate, dated May 8, 2020, pursuant to Sections 201, 301 and 303 of the Indenture dated October 28, 1998 between the Company and The Bank of New York Mellon Trust Company, N.A., as successor trustee, establishing a series of securities entitled "3.250% Notes due 2031." (filed as exhibit 4.3 to the Company's Form 8-K, filed on May 8, 2020, (File No. 001-13374),and incorporated herein by reference). | |
4.244.23 | | Officers' Certificate, dated July 16, 2020, pursuant to Sections 201, 301 and 303 of the Indenture dated October 28, 1998 between the Company and The Bank of New York Mellon Trust Company, N.A., as successor trustee, re-opening a series of securities entitled "3.250% Notes due 2031." (filed as exhibit 4.3 to the Company's Form 8-K, filed on July 16, 2020, (File No. 001-13374),and incorporated herein by reference). | |
4.254.24 | | | |
| | | | | | | | | | | |
4.264.25 | | | |
4.274.26 | | | |
4.284.27 | | | |
4.294.28 | | | |
4.304.29 | | | |
4.314.30 | | | |
4.324.31 | | | |
| 4.32 | | | |
| 4.33 | | | |
| 4.34 | | | |
| 4.35 | | Indenture, dated as of February 6, 2014, among ARC Properties Operating Partnership, L.P., Clark Acquisition, LLC, the guarantors named therein and U.S. Bank National Association, as trustee (filed(filed as exhibit 4.1 to VEREIT, Inc. Inc.'s Form 8-K, filed on February 7, 2014 (File No. 001-35263), and incorporated herein by reference).. | |
4.344.36 | | | |
4.354.37 | | First Supplemental Indenture, dated as of February 9, 2015, by and among ARC Properties Operating Partnership, L.P., American Realty Capital Properties, Inc. and U.S. Bank National Association(filed (filed as exhibit 4.14.1 to VEREIT, Inc.'s Form 8-K, filed on February 13, 2015(File No. 001-35263),and incorporated herein by reference). | |
| 4.38 | | | |
| 4.39 | | | |
| 4.40 | | | |
| 4.41 | | | |
| 4.42 | | | |
| 4.43 | | | |
| | | | | | | | | | | |
4.364.44 | | | |
4.37 | | | |
4.38 | | | |
4.39 | | | |
4.40 | | | |
4.41 | | | |
4.42 | | Second Supplemental Indenture, dated as of November 1, 2021, by an among Rams MD Subsidiary I, Inc., VEREIT Operating Partnership, L.P., VEREIT, Inc. and U.S. Bank National Association, as trustee (filed as exhibit 4.10 to the Company's Form 8-K, filed on November 1, 2021 (File No. 001-13374), and incorporated herein by reference). | |
4.434.45 | | Third Supplemental Indenture, dated as of November 9, 2021, by and among VEREIT Operating Partnership, L.P., Rams MD Subsidiary I, Inc. (f/k/a VEREIT, Inc.) and U.S. Bank National Association, as trustee (filed as exhibit 4.1 to the Company's Form 8-K, filed on November 15, 2021 15(File No. 001-13374),, 2021 and incorporated herein by reference). | |
4.444.46 | | | |
4.45 | | | |
4.464.47 | | | |
4.474.48 | | | |
4.484.49 | | | |
4.494.50 | | | |
4.504.51 | | | |
4.514.52 | | | |
4.524.53 | | | |
| 4.54 | | Officers’ Certificate dated January 14,October 13, 2022 pursuant to Sections 201, 301 and 303 of the Indenture dated as of October 28, 1998 between the Company and The Bank of New York Mellon Trust Company, N.A., as successor trustee, establishing the terms of a new series of debt securities entitled “1.875%“5.625% Notes due 2027”2032” and including the form of debt securities of such series (filed as exhibit 4.3 to the Company’s Form 8-K, filed on October 13, 2022 (File No. 001-13374), and incorporated herein by reference) | |
| 4.55 | | | |
| 4.56 | | | |
| 4.57 | | | |
| 4.58 | | | |
4.534.59 | | | |
| 4.60 | | | |
| 4.61 | | | |
| 4.62 | | | |
| 4.63 | | | |
| 4.64 | | | |
| 4.65 | | | |
| 4.66 | | | |
| 4.67 | | | |
| 4.68 | | | |
| | | | | | | | | | | |
| 4.69 | | | |
| 4.70 | | | |
| 4.71 | | First Supplemental Indenture, dated as of August 18, 2016, among Spirit Realty, L.P., Spirit Realty Capital, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the form of the notes and the guarantee (filed as Exhibit 4.2 to Spirit Realty Capital, Inc.’s Current Report on Form 8-K (File No. 001-36004) previously filed on August 19, 2016 and incorporated by reference herein). | |
| 4.72 | | Second Supplemental Indenture, dated as of June 27, 2019, among Spirit Realty, L.P., Spirit Realty Capital, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the form of the notes and the guarantee (filed as Exhibit 4.2 to Spirit Realty Capital, Inc.’s Current Report on Form 8-K, filed on June 27, 2019 (File No. 001-36004) and incorporated by reference herein). | |
| 4.73 | | Third Supplemental Indenture, dated as of September 16, 2019, among Spirit Realty, L.P., Spirit Realty Capital, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the form of the notes and the guarantee (filed as Exhibit 4.2 to Spirit Realty Capital, Inc.’s Current Report on Form 8-K, filed on September 16, 2019 (File No. 001-36004) and incorporated by reference herein). | |
| 4.74 | | Fourth Supplemental Indenture, dated as of September 16, 2019, among Spirit Realty, L.P., Spirit Realty Capital, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the form of the notes and the guarantee (filed as Exhibit 4.3 to Spirit Realty Capital, Inc.’s Current Report on Form 8-K, filed on September 16, 2019 (File No. 001-36004) and incorporated by reference herein). | |
| 4.75 | | Fifth Supplemental Indenture, dated as of August 6, 2020, among Spirit Realty, L.P., Spirit Realty Capital, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the form of the notes and the guarantee (filed as Exhibit 4.3 to Spirit Realty Capital, Inc.’s Current Report on Form 8-K, filed on August 6, 2020 (File No. 001-36004) and incorporated by reference herein). | |
| 4.76 | | Sixth Supplemental Indenture, dated as of March 3, 2021, among Spirit Realty, L.P., Spirit Realty Capital, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the form of the notes and the guarantee (filed as Exhibit 4.3 to Spirit Realty Capital, Inc.’s Current Report on Form 8-K, filed on March 3, 2021 (File No. 001-36004) and incorporated by reference herein). | |
| 4.77 | | Seventh Supplemental Indenture, dated as of March 3, 2021, among Spirit Realty, L.P., Spirit Realty Capital, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the form of the notes and the guarantee (filed as Exhibit 4.3 to Spirit Realty Capital, Inc.’s Current Report on Form 8-K, filed March 3, 2021 (File No. 001-36004) and incorporated by reference herein)4. | |
| 4.78 | | Eighth Supplemental Indenture, dated as of January 23, 2024, by and among Spirit Realty, L.P., 2022Saints MD Subsidiary, Inc. (f/k/a Spirit Realty Capital, Inc.), as guarantor, and U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as trustee (filed as exhibit no. 4.9 to the Company’s Form 8-K, filed on January 24, 2024 (File No. 001-13374) and incorporated herein by reference). | |
4.544.79 | | | |
| 4.80 | | | |
| 4.81 | | | |
| 4.82 | | | |
| 4.83 | | | |
| 4.84 | | | |
| 4.85 | | | |
| 4.86 | | Officers’ Certificate, dated as of January 23, 2024, pursuant to Sections 201, 301 and 303 of the Indenture, dated as of October 28, 1998, between Realty Income Corporation and The Bank of New York Mellon Trust Company, N.A., as successor trustee, establishing the terms of a new series of debt securities entitled “4.450% Notes due 2026,” a new series of debt securities entitled “3.200% Notes due 2027,” a new series of debt securities entitled “2.100% Notes due 2028,” a new series of debt securities entitled “4.000% Notes due 2029,” a new series of debt securities entitled “3.400% Notes due 2030,” a new series of debt securities entitled “3.200% Notes due 2031” and a new series of debt securities entitled “2.700% Notes due 2032” and including the forms of debt securities of each such series (filed as exhibit 4.18 to the Company’s Form 8-K, filed on January 24, 2024 (File No. 001-13374) and incorporated herein by reference). | |
| 4.87 | | | |
| 4.88* | | | |
| Material Contracts | |
| 10.1+ | | | |
| 10.2+ | | | |
| | | | | | | | | | | |
| 10.3+ | | | |
| 10.4+ | | | |
| 10.5+ | | | |
| 10.6+ | | | |
| 10.7+ | | | |
| 10.8+ | | | |
| 10.9+ | | | |
| 10.10+ | | | |
| 10.11+ | | | |
| 10.12+ | | | |
| 10.13+ | | | |
| 10.14+ | | | |
| 10.15+ | | | |
| 10.16+ | | | |
| 10.17+ | | | |
| 10.18+ | | | |
| 10.19+ | | | |
| 10.20+ | | | |
10.21+* | | | |
10.22+* | | | |
10.23+* | | | |
10.24+* | | | |
10.2510.25+ | | | |
| 10.26+ | | | |
| 10.27+ | | | |
| 10.28+ | | | |
| | | | | | | | | | | |
| 10.29+ | | | |
| 10.30 | | Consent Letter, dated July 20, 2021, among the Company, as Borrower, the lenders party thereto, Wells Fargo Bank, National Association, as Administrative Agent, and the other parties named therein (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 22, 2021 (File No. 001-13374) and incorporated herein by reference). | |
10.2610.31 | | | |
10.2710.32 | | | |
| 10.33 | | | |
| 10.34 | | First Amendment to Third Amended and Restated Credit Agreement, dated December 21, 2023, by and among the Company, as Borrower, the lenders party thereto, Wells Fargo Bank, National Association, as Administrative Agent, and the other parties named therein (filed as exhibit no. 10.1 to the Company’s Form 8-K filed on December 21, 2023 (File No. 001-13374) and incorporated herein by reference). | |
| 10.35 | | | |
| 10.36 | | Term Loan Agreement, dated January 6, 2023, by and among Realty Income Corporation, as borrower, the lender parties thereto, as lenders, and Toronto Dominion (Texas) LLC, as administrative agent (filed as exhibit 10.1 to the Company’s Form 8-K, filed on January 6, 2023 (File No. 001-13374) and incorporated herein by reference). | |
| 10.37 | | Amendment and Restatement to Term Loan Agreement, dated January 22, 2024, by and among Realty Income Corporation, as Borrower, the lender parties thereto, as lenders, and Wells Fargo Bank, National Association, as Administrative Agent (filed as exhibit no. 10.1 to the Company’s Form 8-K, filed on January 24, 2024 (File No. 001-13374) and incorporated herein by reference). | |
| 10.38 | | Amendment and Restatement to Term Loan Agreement, dated January 22, 2024, by and among Realty Income Corporation, as Borrower, the lender parties thereto, as lenders, and Wells Fargo Bank, National Association, as Administrative Agent (filed as exhibit no. 10.2 to the Company’s Form 8-K, filed on January 24, 2024 (File No. 001-13374) and incorporated herein by reference). | |
| Policy Relating to Recovery of Erroneously Awarded Compensation | |
| 97.1*+ | | | |
| Subsidiaries of the Registrant | |
| 21.1* | | | |
| Consents of Experts and Counsel | |
| 23.1* | | | |
23.2* | | | |
23.3* | | | |
| | | | | | | | | | | |
| Certifications | | | |
| 31.1* | | | |
| 31.2* | | | |
| 32** | | | |
| |
| Interactive Data Files | |
| | | |
101*101.INS* | | The following materials from Realty Income Corporation’s Annual Report on Form 10-K forInline XBRL Instance Document - the year ended December 31, 2021, formattedinstance document does not appear in Extensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, (v) Notes to Consolidated Financial Statements, and (vi) Schedule III Real Estate and Accumulated Depreciation.the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 104* | | The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2021, formattedCover Page Interactive Data File (formatted as Inline XBRL and contained in Inline Extensible Business Reporting Language.
Exhibit 101) | |
| | | |
| * Filed herewith. | |
| **Furnished herewith. | |
+ Indicates a management contract or compensatory plan or arrangement.arrangement | |
| |
Item 16: Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REALTY INCOME CORPORATION
| | | | | | | | | | | | | | |
| By: | /s/SUMIT ROY | | Date: February 23, 202221, 2024 |
| | Sumit Roy | | |
| | President, Chief Executive Officer | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| By: | /s/MICHAEL D. MCKEE | | Date: February 23, 202221, 2024 |
| | Michael D. McKee | | |
| | Non-Executive Chairman of the Board of Directors |
| | | | |
| By: | /s/KATHLEEN R. ALLEN, Ph.D. | | Date: February 23, 2022 |
| Kathleen R. Allen, Ph.D. | | |
| Director | | |
| | | |
By: | /s/PRISCILLA ALMODOVAR | | Date: February 23, 202221, 2024 |
| Priscilla Almodovar | | |
| Director | | |
| | | |
| By: | /s/JACQUELINE BRADY | | Date: February 23, 202221, 2024 |
| Jacqueline Brady | | |
| Director | | |
| | | |
| By: | /s/A. LARRY CHAPMAN | | Date: February 23, 202221, 2024 |
| | A. Larry Chapman | | |
| | Director | | |
| | | | |
| By: | /s/REGINALD H. GILYARD | | Date: February 23, 202221, 2024 |
| | Reginald H. Gilyard | | |
| | Director | | |
| | | |
| By: | /s/MARY HOGAN PREUSSE | | Date: February 23, 202221, 2024 |
| Mary Hogan Preusse | | |
| Director | | |
| | | | |
| By: | /s/PRIYA CHERIAN HUSKINS | | Date: February 23, 202221, 2024 |
| | Priya Cherian Huskins | | |
| | Director | | |
| | | |
| By: | /s/GERARDO I. LOPEZ | | Date: February 23, 202221, 2024 |
| | Gerardo I. Lopez | | |
| | Director | | |
| | | | |
| By: | /s/GREGORY T. MCLAUGHLIN | | Date: February 23, 202221, 2024 |
| | Gregory T. McLaughlin | | |
| | Director | | |
| | | | | | | | | | | | | | |
| By: | /s/RONALD L. MERRIMAN | | Date: February 23, 202221, 2024 |
| | Ronald L. Merriman | | |
| | Director | | |
| | | | |
| By: | /s/SUMIT ROY | | Date: February 23, 202221, 2024 |
| | Sumit Roy | | |
| | Director, President, Chief Executive Officer |
| | (Principal Executive Officer) | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | |
| By: | /s/CHRISTIE B. KELLYJONATHAN PONG | | Date: February 23, 202221, 2024 |
| Christie B. KellyJonathan Pong | | |
| Executive Vice President, Chief Financial Officer and Treasurer |
| (Principal Financial Officer) | | |
| | | | |
| By: | /s/SEAN P. NUGENT | | Date: February 23, 202221, 2024 |
| | Sean P. Nugent | | |
| | Senior Vice President, Controller, Principal Accounting Officer |
| | (Principal Accounting Officer) | | |
| | | | |
REALTY INCOME CORPORATION AND SUBSIDIARIES
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBERAs of December 31, 20212023
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Initial Cost to Company | Cost Capitalized Subsequent to Acquisition | | Gross Amount at Which Carried at Close of Period (Notes 3, 4 and 6) | | | | | | | | |
| Description | Number of Properties (Note 1) | Encumbrances (Note 2) | Land | Buildings, Improvements and Acquisition Fees | Improvements | Carrying Costs | | Land | Buildings, Improvements and Acquisition Fees | Total | Accumulated Depreciation (Note 5) | Date of Construction | Date Acquired | |
| | | | | | | | | | | | | | | | | | |
| U.S. | | | | | | | | | | | | | | | | | | |
| Advertising | 6 | $ | — | | $ | 18,736 | | $ | 70,501 | | $ | — | | $ | — | | | $ | 18,736 | | $ | 70,501 | | $ | 89,237 | | $ | 1,467 | | 2009 | | | 11/1/2006 | - | 3/26/2021 | |
| Aerospace | 5 | 24,133 | | 6,891 | | 98,840 | | 223 | | — | | | 6,891 | | 99,063 | | 105,954 | | 31,484 | | 1994 | - | 2013 | 6/20/2011 | - | 6/27/2013 | |
| Apparel stores | 61 | 58,252 | | 133,371 | | 388,122 | | 3,611 | | 199 | | | 133,371 | | 391,932 | | 525,303 | | 54,990 | | 1972 | - | 2021 | 10/30/1987 | - | 9/29/2021 | |
| Automotive collision services | 139 | — | | 100,475 | | 232,512 | | 2,688 | | 10 | | | 100,475 | | 235,210 | | 335,685 | | 41,218 | | 1920 | - | 2020 | 8/30/2002 | - | 12/17/2021 | |
| Automotive parts | 397 | 1,316 | | 156,461 | | 371,138 | | 5,189 | | 827 | | | 156,461 | | 377,154 | | 533,615 | | 85,069 | | 1969 | - | 2020 | 8/6/1987 | - | 11/30/2021 | |
| Automotive service | 566 | — | | 354,282 | | 573,469 | | 9,393 | | 145 | | | 354,282 | | 583,007 | | 937,289 | | 85,135 | | 1920 | - | 2021 | 10/2/1985 | - | 12/29/2021 | |
| Automotive tire services | 233 | — | | 175,415 | | 463,613 | | 5,541 | | 83 | | | 175,415 | | 469,237 | | 644,652 | | 131,817 | | 1947 | - | 2021 | 11/27/1985 | - | 12/22/2021 | |
| Beverages | 22 | — | | 221,076 | | 192,768 | | — | | — | | | 221,076 | | 192,768 | | 413,844 | | 51,274 | | 1989 | - | 2020 | 6/25/2010 | - | 3/26/2021 | |
| Child care | 314 | — | | 139,891 | | 314,270 | | 5,165 | | 798 | | | 139,891 | | 320,233 | | 460,124 | | 112,444 | | 1958 | - | 2020 | 12/22/1981 | - | 12/23/2021 | |
| Consumer electronics | 28 | — | | 52,492 | | 156,569 | | 1,753 | | 52 | | | 52,492 | | 158,374 | | 210,866 | | 14,409 | | 1991 | - | 2020 | 6/9/1997 | - | 5/10/2021 | |
| Consumer goods | 9 | 17,990 | | 24,063 | | 259,397 | | 894 | | — | | | 24,063 | | 260,291 | | 284,354 | | 30,303 | | 1987 | - | 2013 | 1/22/2013 | - | 9/22/2015 | |
| Convenience stores | 1,531 | — | | 1,418,472 | | 1,851,665 | | (650) | | 145 | | | 1,418,472 | | 1,851,160 | | 3,269,632 | | 424,834 | | 1922 | - | 2021 | 3/3/1995 | - | 12/29/2021 | |
| Crafts and novelties | 48 | — | | 97,796 | | 280,412 | | 2,730 | | 440 | | | 97,796 | | 283,582 | | 381,378 | | 23,000 | | 1974 | - | 2020 | 11/26/1996 | - | 7/7/2021 | |
| Diversified industrial | 17 | 59,628 | | 48,262 | | 267,151 | | 16,178 | | — | | | 48,262 | | 283,329 | | 331,591 | | 19,518 | | 1951 | - | 2021 | 9/19/2012 | - | 11/3/2021 | |
| Dollar stores | 2,291 | 81,736 | | 755,179 | | 1,905,858 | | 2,728 | | 9 | | | 755,179 | | 1,908,595 | | 2,663,774 | | 359,863 | | 1935 | - | 2021 | 2/3/1998 | - | 12/29/2021 | |
| Drug stores | 572 | 273,625 | | 730,548 | | 1,834,218 | | 4,783 | | 100 | | | 730,548 | | 1,839,101 | | 2,569,649 | | 387,210 | | 1965 | - | 2015 | 9/30/1998 | - | 12/22/2021 | |
| Education | 15 | — | | 8,040 | | 25,577 | | 519 | | 103 | | | 8,040 | | 26,199 | | 34,239 | | 16,830 | | 1980 | - | 2000 | 12/19/1984 | - | 6/28/2006 | |
| Energy | 34 | — | | 25,905 | | 82,959 | | — | | — | | | 25,905 | | 82,959 | | 108,864 | | 396 | | 1963 | - | 2014 | 11/1/2021 | - | 11/1/2021 | |
| Entertainment | 21 | — | | 76,619 | | 159,428 | | 819 | | — | | | 76,619 | | 160,247 | | 236,866 | | 7,887 | | 1978 | - | 2021 | 3/26/1998 | - | 9/11/2014 | |
| Equipment services | 20 | — | | 17,640 | | 73,252 | | 650 | | — | | | 17,640 | | 73,902 | | 91,542 | | 13,422 | | 1979 | - | 2014 | 7/3/2003 | - | 12/2/2019 | |
| Financial services | 373 | 135,381 | | 183,413 | | 473,009 | | (1,061) | | 101 | | | 183,413 | | 472,049 | | 655,462 | | 79,403 | | 1807 | - | 2015 | 3/10/1987 | - | 6/29/2018 | |
| Food processing | 9 | 28,171 | | 33,718 | | 221,840 | | 260 | | — | | | 33,718 | | 222,100 | | 255,818 | | 24,944 | | 1988 | - | 2021 | 9/26/2012 | - | 7/28/2021 | |
| General merchandise | 234 | 48,392 | | 379,088 | | 1,015,644 | | (3,578) | | 535 | | | 379,088 | | 1,012,601 | | 1,391,689 | | 101,952 | | 1954 | - | 2021 | 8/6/1987 | - | 12/22/2021 | |
| Grocery stores | 214 | 99,893 | | 441,128 | | 1,259,955 | | 2,287 | | 325 | | | 441,128 | | 1,262,567 | | 1,703,695 | | 186,454 | | 1948 | - | 2021 | 5/26/1988 | - | 12/28/2021 | |
| Health and beauty | 5 | — | | 4,509 | | 47,162 | | — | | — | | | 4,509 | | 47,162 | | 51,671 | | 4,579 | | 2005 | - | 2017 | 11/1/2006 | - | 4/13/2018 | |
| Health and fitness | 131 | — | | 321,558 | | 1,290,661 | | 8,316 | | 172 | | | 321,558 | | 1,299,149 | | 1,620,707 | | 294,775 | | 1940 | - | 2021 | 5/31/1995 | - | 3/19/2020 | |
| Health care | 208 | 24,366 | | 140,638 | | 579,119 | | 5,940 | | 224 | | | 140,638 | | 585,283 | | 725,921 | | 55,052 | | 1922 | - | 2021 | 12/18/1984 | - | 12/22/2021 | |
| Home furnishings | 165 | 41,472 | | 161,347 | | 451,739 | | 5,495 | | 128 | | | 161,347 | | 457,362 | | 618,709 | | 35,142 | | 1960 | - | 2020 | 1/24/1984 | - | 12/22/2021 | |
| Home improvement | 128 | 23,722 | | 379,212 | | 669,277 | | 2,834 | | 63 | | | 379,212 | | 672,174 | | 1,051,386 | | 104,516 | | 1950 | - | 2021 | 12/22/1986 | - | 7/28/2021 | |
| Insurance | 2 | 10,998 | | 1,444 | | 3,984 | | — | | — | | | 1,444 | | 3,984 | | 5,428 | | 22 | | 2000 | - | 2012 | 11/1/2021 | | | |
| Jewelry | 5 | — | | 5,369 | | 58,702 | | — | | — | | | 5,369 | | 58,702 | | 64,071 | | 3,203 | | 1997 | - | 2008 | 1/22/2013 | - | 1/22/2013 | |
| Machinery | 2 | — | | 2,717 | | 40,453 | | — | | — | | | 2,717 | | 40,453 | | 43,170 | | 5,124 | | 2010 | - | 2021 | 7/31/2012 | - | 9/1/2021 | |
| Motor vehicle dealerships | 35 | — | | 157,478 | | 223,488 | | — | | — | | | 157,478 | | 223,488 | | 380,966 | | 62,945 | | 1962 | - | 2018 | 5/13/2004 | - | 3/29/2021 | |
| Office supplies | 8 | — | | 14,225 | | 42,870 | | 855 | | 349 | | | 14,225 | | 44,074 | | 58,299 | | 11,348 | | 1995 | - | 2016 | 1/29/1997 | - | 12/2/2019 | |
| Other manufacturing | 10 | — | | 20,504 | | 164,250 | | 1,325 | | 240 | | | 20,504 | | 165,815 | | 186,319 | | 13,655 | | 1989 | - | 2018 | 1/22/2013 | - | 12/30/2021 | |
| Packaging | 11 | 1,430 | | 32,527 | | 178,997 | | 2,480 | | — | | | 32,527 | | 181,477 | | 214,004 | | 38,907 | | 1965 | - | 2016 | 6/3/2011 | - | 12/20/2017 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Initial Cost to Company | Cost Capitalized Subsequent to Acquisition | | Gross Amount at Which Carried at Close of Period (Notes 3, 4 and 6) | | | | | | | | |
| Description | Number of Properties (Note 1) | Encumbrances (Note 2) | Land | Buildings, Improvements and Acquisition Fees | Improvements | Carrying Costs | | Land | Buildings, Improvements and Acquisition Fees | Total | Accumulated Depreciation (Note 5) | Date of Construction | Date Acquired | |
| | | | | | | | | | | | | | | | | | |
| U.S. | | | | | | | | | | | | | | | | | | |
| Advertising | 4 | $— | $18,677 | $70,647 | $— | $— | | $18,677 | $70,647 | $89,324 | $5,541 | 1990 | - | 2009 | 3/26/2021 | - | 11/1/2021 | |
| Aerospace | 6 | 24,133 | | 9,280 | | 104,596 | | 3,297 | | — | | | 9,280 | | 107,893 | | 117,173 | | 48,022 | | 1951 | - | 2013 | 6/20/2011 | - | 11/1/2021 | |
| Apparel | 79 | 53,577 | | 162,647 | | 450,233 | | 7,454 | | 199 | | | 162,647 | | 457,886 | | 620,533 | | 84,459 | | 1962 | - | 2022 | 10/30/1987 | - | 3/22/2023 | |
| Automotive Collision Service | 221 | — | | 165,204 | | 397,470 | | 22,135 | | 10 | | | 165,204 | | 419,615 | | 584,819 | | 65,871 | | 1920 | - | 2023 | 8/30/2002 | - | 12/21/2023 | |
| Automotive Parts | 407 | — | | 160,113 | | 387,057 | | 6,358 | | 827 | | | 160,113 | | 394,242 | | 554,355 | | 113,720 | | 1969 | - | 2020 | 8/6/1987 | - | 3/22/2023 | |
| Automotive Service | 808 | — | | 629,606 | | 1,221,922 | | 84,848 | | 144 | | | 629,606 | | 1,306,914 | | 1,936,520 | | 152,030 | | 1920 | - | 2023 | 10/2/1985 | - | 12/21/2023 | |
| Automotive Tire Services | 270 | — | | 221,879 | | 476,681 | | 27,802 | | 81 | | | 221,879 | | 504,564 | | 726,443 | | 157,639 | | 1947 | - | 2023 | 11/27/1985 | - | 10/18/2023 | |
| Beverage | 18 | — | | 183,323 | | 185,539 | | — | | — | | | 183,323 | | 185,539 | | 368,862 | | 61,713 | | 1950 | - | 2020 | 6/25/2010 | - | 6/28/2022 | |
| Child Care | 320 | — | | 149,289 | | 348,591 | | 5,658 | | 728 | | | 149,289 | | 354,977 | | 504,266 | | 128,677 | | 1957 | - | 2023 | 12/22/1981 | - | 12/7/2023 | |
| Consumer Electronics | 27 | — | | 57,535 | | 158,334 | | 2,145 | | 51 | | | 57,535 | | 160,530 | | 218,065 | | 24,810 | | 1991 | - | 2020 | 6/9/1997 | - | 8/22/2023 | |
| Consumer Goods | 9 | 17,990 | | 24,077 | | 259,494 | | 925 | | — | | | 24,077 | | 260,419 | | 284,496 | | 45,221 | | 1987 | - | 2013 | 1/22/2013 | - | 11/1/2021 | |
| Convenience Stores | 2,076 | — | | 1,884,822 | | 2,846,162 | | 23,970 | | 145 | | | 1,884,822 | | 2,870,277 | | 4,755,099 | | 599,684 | | 1922 | - | 2023 | 3/3/1995 | - | 12/21/2023 | |
| Crafts and Novelties | 53 | — | | 104,873 | | 312,117 | | 2,174 | | 440 | | | 104,873 | | 314,731 | | 419,604 | | 47,880 | | 1974 | - | 2022 | 11/26/1996 | - | 3/22/2023 | |
| Diversified Industrial | 22 | 49,838 | | 57,865 | | 360,336 | | 17,976 | | — | | | 57,865 | | 378,312 | | 436,177 | | 38,147 | | 1954 | - | 2021 | 9/19/2012 | - | 3/22/2023 | |
| Dollar Stores | 2,899 | 1,983 | | 919,277 | | 2,588,243 | | 6,854 | | 9 | | | 919,277 | | 2,595,106 | | 3,514,383 | | 533,523 | | 1925 | - | 2023 | 2/3/1998 | - | 12/21/2023 | |
| Drug Stores | 594 | 254,729 | | 775,846 | | 2,159,983 | | 4,143 | | 100 | | | 775,846 | | 2,164,226 | | 2,940,072 | | 529,688 | | 1958 | - | 2015 | 9/30/1998 | - | 8/24/2023 | |
| Education | 19 | — | | 28,362 | | 58,918 | | 4,514 | | 103 | | | 28,362 | | 63,535 | | 91,897 | | 17,061 | | 1957 | - | 2009 | 12/19/1984 | - | 11/22/2022 | |
| Energy | 32 | — | | 23,442 | | 74,471 | | 297 | | — | | | 23,442 | | 74,768 | | 98,210 | | 4,644 | | 1963 | - | 2014 | 11/1/2021 | - | 11/1/2021 | |
| Entertainment | 28 | — | | 97,433 | | 219,535 | | 26,632 | | — | | | 97,433 | | 246,167 | | 343,600 | | 17,115 | | 1960 | - | 2021 | 3/31/1999 | - | 6/30/2023 | |
| Equipment Services | 30 | — | | 31,703 | | 102,090 | | 1,424 | | — | | | 31,703 | | 103,514 | | 135,217 | | 18,730 | | 1965 | - | 2022 | 7/3/2003 | - | 12/15/2023 | |
| Financial Services | 357 | 135,382 | | 177,065 | | 455,777 | | (6,538) | | 101 | | | 177,065 | | 449,340 | | 626,405 | | 109,972 | | 1807 | - | 2015 | 3/10/1987 | - | 3/22/2023 | |
| Food Processing | 13 | — | | 24,968 | | 184,897 | | 25,804 | | — | | | 24,968 | | 210,701 | | 235,669 | | 21,523 | | 1991 | - | 2023 | 12/20/2012 | - | 9/15/2023 | |
| General Merchandise | 273 | 7,592 | | 432,290 | | 1,228,772 | | (1,155) | | 535 | | | 432,290 | | 1,228,152 | | 1,660,442 | | 185,927 | | 1954 | - | 2023 | 8/6/1987 | - | 12/6/2023 | |
| Gaming | 1 | — | | 419,464 | | 1,277,403 | | — | | — | | | 419,464 | | 1,277,403 | | 1,696,867 | | 39,539 | | 2019 | - | 2019 | 12/1/2022 | - | 12/1/2022 | |
| Grocery | 244 | 69,243 | | 580,352 | | 1,500,504 | | 8,557 | | 325 | | | 580,352 | | 1,509,386 | | 2,089,738 | | 287,504 | | 1947 | - | 2021 | 9/30/2003 | - | 6/1/2023 | |
| Health and Beauty | 8 | — | | 6,696 | | 49,339 | | 2,542 | | — | | | 6,696 | | 51,881 | | 58,577 | | 8,221 | | 1999 | - | 2017 | 2/23/1999 | - | 3/22/2023 | |
| Health and Fitness | 141 | — | | 351,092 | | 1,562,037 | | 12,618 | | 172 | | | 351,092 | | 1,574,827 | | 1,925,919 | | 404,359 | | 1943 | - | 2023 | 5/31/1995 | - | 8/23/2023 | |
| Health Care | 493 | 68,360 | | 341,653 | | 1,151,285 | | 24,848 | | 225 | | | 341,653 | | 1,176,358 | | 1,518,011 | | 122,778 | | 1922 | - | 2023 | 12/18/1984 | - | 12/18/2023 | |
| Home Furnishings | 180 | 41,472 | | 206,189 | | 561,998 | | 10,253 | | 128 | | | 206,189 | | 572,379 | | 778,568 | | 72,276 | | 1960 | - | 2021 | 1/24/1984 | - | 5/10/2023 | |
| Home Improvement | 172 | 15,916 | | 526,157 | | 935,456 | | 5,976 | | 63 | | | 526,157 | | 941,495 | | 1,467,652 | | 171,569 | | 1863 | - | 2022 | 12/22/1986 | - | 6/13/2023 | |
| Insurance | 3 | 10,998 | | 2,204 | | 6,838 | | — | | — | | | 2,204 | | 6,838 | | 9,042 | | 422 | | 2000 | - | 2012 | 11/1/2021 | - | 10/17/2022 | |
| Jewelry | 5 | — | | 5,367 | | 58,688 | | — | | — | | | 5,367 | | 58,688 | | 64,055 | | 7,596 | | 1997 | - | 2008 | 1/22/2013 | - | 11/1/2021 | |
| Machinery | 4 | — | | 6,577 | | 69,225 | | — | | — | | | 6,577 | | 69,225 | | 75,802 | | 8,837 | | 1969 | - | 2021 | 7/31/2012 | - | 3/22/2023 | |
| Motor Vehicle Dealerships | 64 | — | | 229,924 | | 421,181 | | 1,700 | | — | | | 229,924 | | 422,881 | | 652,805 | | 93,690 | | 1962 | - | 2023 | 11/29/2003 | - | 11/30/2023 | |
| Office Supplies | 6 | — | | 12,603 | | 38,026 | | 1,147 | | 339 | | | 12,603 | | 39,512 | | 52,115 | | 8,419 | | 1978 | - | 2014 | 5/30/1997 | - | 11/1/2021 | |
| Other Manufacturing | 16 | — | | 28,025 | | 202,510 | | 3,248 | | 240 | | | 28,025 | | 205,998 | | 234,023 | | 24,822 | | 1979 | - | 2018 | 1/22/2013 | - | 12/15/2022 | |
REALTY INCOME CORPORATION AND SUBSIDIARIES
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (continued)
AS OF DECEMBERAs of December 31, 20212023
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Initial Cost to Company | Cost Capitalized Subsequent to Acquisition | | Gross Amount at Which Carried at Close of Period (Notes 3, 4 and 6) | | | | | | | | |
| Description | Number of Properties (Note 1) | Encumbrances (Note 2) | Land | Buildings, Improvements and Acquisition Fees | Improvements | Carrying Costs | | Land | Buildings, Improvements and Acquisition Fees | Total | Accumulated Depreciation (Note 5) | Date of Construction | Date Acquired | |
| | | | | | | | | | | | | | | | | | |
| Paper | 2 | $ | — | | $ | 2,462 | | $ | 11,935 | | $ | 45 | | $ | — | | | $ | 2,462 | | $ | 11,980 | | $ | 14,442 | | $ | 4,264 | | 2002 | - | 2006 | 5/2/2011 | - | 12/21/2012 | |
| Pet supplies and services | 69 | 2,509 | | 92,269 | | 239,274 | | 5,824 | | 239 | | | 92,269 | | 245,337 | | 337,606 | | 31,419 | | 1950 | - | 2019 | 12/22/1981 | - | 12/21/2021 | |
| Restaurants - casual dining | 872 | 12,823 | | 682,720 | | 1,473,921 | | (1,305) | | 1,635 | | | 682,720 | | 1,474,251 | | 2,156,971 | | 140,937 | | 1965 | - | 2018 | 5/16/1984 | - | 12/22/2021 | |
| Restaurants - quick service | 1,854 | — | | 933,402 | | 1,949,141 | | 3,226 | | 201 | | | 933,402 | | 1,952,568 | | 2,885,970 | | 196,159 | | 1926 | - | 2021 | 12/9/1976 | - | 12/22/2021 | |
| Shoe stores | 6 | — | | 7,008 | | 41,779 | | 316 | | 215 | | | 7,008 | | 42,310 | | 49,318 | | 11,940 | | 1990 | - | 2008 | 3/26/1998 | - | 12/22/2021 | |
| Sporting goods | 54 | 12,255 | | 110,343 | | 356,901 | | 5,132 | | 178 | | | 110,343 | | 362,211 | | 472,554 | | 33,899 | | 1950 | - | 2020 | 10/17/2001 | - | 12/1/2021 | |
| Telecommunications | 3 | — | | 2,872 | | 10,133 | | 364 | | 11 | | | 2,872 | | 10,508 | | 13,380 | | 2,178 | | 1990 | - | 2016 | 6/26/1998 | - | 12/10/2015 | |
| Theaters | 80 | — | | 232,084 | | 751,408 | | 9,906 | | — | | | 232,084 | | 761,314 | | 993,398 | | 242,521 | | 1930 | - | 2018 | 7/27/2000 | - | 8/13/2019 | |
| Transportation services | 87 | 21,468 | | 172,271 | | 1,049,411 | | 3,048 | | 402 | | | 172,271 | | 1,052,861 | | 1,225,132 | | 185,910 | | 1967 | - | 2016 | 4/1/2003 | - | 7/30/2021 | |
| Warehousing and storage | 2 | — | | 1,767 | | 11,571 | | — | | — | | | 1,767 | | 11,571 | | 13,338 | | 55 | | 1954 | - | 1979 | 11/1/2021 | - | 11/1/2021 | |
| Wholesale clubs | 52 | 92,716 | | 295,580 | | 691,965 | | — | | — | | | 295,580 | | 691,965 | | 987,545 | | 121,888 | | 1985 | - | 2019 | 9/30/2011 | - | 12/23/2021 | |
| Other | 14 | — | | 18,854 | | 48,760 | | 798 | | — | | | 18,854 | | 49,558 | | 68,412 | | 6,426 | | 1969 | - | 2018 | 8/18/1986 | - | 12/22/2021 | |
| | | | | | | | | | | | | | | | | | |
| Europe | | | | | | | | | | | | | | | | | | |
| Apparel stores | 1 | — | | 7,327 | | 32,842 | | — | | — | | | 7,327 | | 32,842 | | 40,169 | | 665 | | 2004 | | | 4/19/2021 | - | 4/19/2021 | |
| Automotive service | 3 | — | | 1,815 | | 5,534 | | — | | — | | | 1,815 | | 5,534 | | 7,349 | | 175 | | 1974 | - | 1994 | 3/9/2021 | - | 3/9/2021 | |
| Convenience stores | 1 | — | | 3,296 | | 2,662 | | — | | — | | | 3,296 | | 2,662 | | 5,958 | | 4 | | 2020 | | | 12/21/2021 | - | 12/21/2021 | |
| Diversified industrial | 1 | — | | 5,041 | | 14,002 | | — | | — | | | 5,041 | | 14,002 | | 19,043 | | 257 | | 2020 | | | 7/22/2021 | - | 7/22/2021 | |
| Food processing | 4 | — | | 25,728 | | 72,305 | | — | | — | | | 25,728 | | 72,305 | | 98,033 | | 192 | | 1950 | - | 1984 | 12/10/2021 | - | 12/10/2021 | |
| General merchandise | 2 | — | | 4,342 | | 14,525 | | — | | — | | | 4,342 | | 14,525 | | 18,867 | | 77 | | 2019 | - | 2021 | 8/25/2021 | - | 12/7/2021 | |
| Grocery stores UK | 60 | 41,853 | | 838,856 | | 1,179,547 | | 754 | | — | | | 838,856 | | 1,180,301 | | 2,019,157 | | 56,100 | | 1940 | - | 2021 | 5/23/2019 | - | 12/21/2021 | |
| Grocery stores ES | 43 | — | | 123,264 | | 191,946 | | — | | — | | | 123,264 | | 191,946 | | 315,210 | | 944 | | 1910 | - | 2005 | 9/16/2021 | - | 12/27/2021 | |
| Health care | 2 | — | | 8,819 | | 17,177 | | — | | — | | | 8,819 | | 17,177 | | 25,996 | | 1,003 | | 2000 | | | 3/23/2020 | - | 3/23/2020 | |
| Home furnishings | 3 | — | | 6,495 | | 19,380 | | — | | — | | | 6,495 | | 19,380 | | 25,875 | | 425 | | 2005 | - | 2019 | 4/9/2021 | - | 9/30/2021 | |
| Home improvement | 50 | — | | 294,239 | | 496,548 | | — | | — | | | 294,239 | | 496,548 | | 790,787 | | 10,479 | | 1890 | - | 2016 | 7/31/2020 | - | 12/20/2021 | |
| Restaurants - quick service | 1 | — | | 758 | | 2,019 | | — | | — | | | 758 | | 2,019 | | 2,777 | | 69 | | 2007 | | | 3/17/2021 | - | 3/17/2021 | |
| Theaters | 1 | — | | 1,547 | | — | | — | | — | | | 1,547 | | — | | 1,547 | | — | | 2011 | | | 12/18/2019 | - | 12/18/2019 | |
| Warehousing and storage | 1 | — | | 56,049 | | 52,003 | | — | | — | | | 56,049 | | 52,003 | | 108,052 | | 1,176 | | 2011 | | | 12/18/2019 | - | 12/18/2019 | |
| | | | | | | | | | | | | | | | | | |
| 11,137 | $ | 1,114,129 | | $ | 10,769,697 | | $ | 25,059,558 | | $ | 115,475 | | $ | 7,929 | | | $ | 10,769,697 | | $ | 25,182,962 | | $ | 35,952,659 | | $ | 3,963,753 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Initial Cost to Company | Cost Capitalized Subsequent to Acquisition | | Gross Amount at Which Carried at Close of Period (Notes 3, 4 and 6) | | | | | | | | |
| Description | Number of Properties (Note 1) | Encumbrances (Note 2) | Land | Buildings, Improvements and Acquisition Fees | Improvements | Carrying Costs | | Land | Buildings, Improvements and Acquisition Fees | Total | Accumulated Depreciation (Note 5) | Date of Construction | Date Acquired | |
| Packaging | 18 | $626 | $45,730 | $237,725 | $2,480 | $— | | $45,730 | $240,205 | $285,935 | $52,665 | 1956 | - | 2016 | 6/3/2011 | - | 1/5/2023 | |
| Paper | 2 | — | | 2,462 | | 11,935 | | 45 | | — | | | 2,462 | | 11,980 | | 14,442 | | 5,122 | | 2002 | - | 2006 | 5/2/2011 | - | 12/21/2012 | |
| Pet Supplies and Services | 140 | — | | 130,787 | | 376,248 | | 26,557 | | 239 | | | 130,787 | | 403,044 | | 533,831 | | 54,428 | | 1945 | - | 2023 | 12/22/1981 | - | 12/15/2023 | |
| Restaurants-Casual | 836 | 12,823 | | 654,015 | | 1,473,143 | | 722 | | 1,531 | | | 654,015 | | 1,475,396 | | 2,129,411 | | 256,294 | | 1965 | - | 2019 | 5/16/1984 | - | 4/10/2023 | |
| Restaurants-Quick Service | 1,814 | — | | 939,921 | | 1,960,658 | | 3,593 | | 174 | | | 939,921 | | 1,964,425 | | 2,904,346 | | 336,068 | | 1926 | - | 2023 | 12/9/1976 | - | 10/25/2023 | |
| Shoe Stores | 6 | — | | 6,992 | | 41,985 | | 341 | | 215 | | | 6,992 | | 42,541 | | 49,533 | | 14,544 | | 1990 | - | 2008 | 3/26/1998 | - | 12/22/2021 | |
| Sporting Goods | 47 | 12,255 | | 107,608 | | 366,711 | | 5,185 | | 178 | | | 107,608 | | 372,074 | | 479,682 | | 58,030 | | 1950 | - | 2020 | 10/17/2001 | - | 3/22/2023 | |
| Telecommunications | 7 | — | | 9,303 | | 14,392 | | 683 | | 11 | | | 9,303 | | 15,086 | | 24,389 | | 3,681 | | 1964 | - | 2016 | 6/26/1998 | - | 10/17/2022 | |
| Theaters | 76 | — | | 221,786 | | 739,058 | | 10,719 | | — | | | 221,786 | | 749,777 | | 971,563 | | 298,810 | | 1930 | - | 2014 | 7/27/2000 | - | 11/1/2021 | |
| Transportation Services | 87 | — | | 177,691 | | 1,059,854 | | 11,424 | | 402 | | | 177,691 | | 1,071,680 | | 1,249,371 | | 256,618 | | 1967 | - | 2016 | 4/1/2003 | - | 4/5/2022 | |
| Warehousing and Storage | 2 | — | | 1,442 | | 15,178 | | — | | — | | | 1,442 | | 15,178 | | 16,620 | | 3,390 | | 1979 | - | 2007 | 1/22/2013 | - | 11/1/2021 | |
| Wholesale Club | 54 | 6,787 | | 306,006 | | 713,020 | | — | | — | | | 306,006 | | 713,020 | | 1,019,026 | | 178,110 | | 1985 | - | 2019 | 9/30/2011 | - | 8/11/2022 | |
| Other | 16 | — | | 31,434 | | 54,994 | | 3,916 | | — | | | 31,434 | | 58,910 | | 90,344 | | 9,830 | | 1986 | - | 2021 | 8/18/1986 | - | 4/10/2023 | |
| | | | | | | | | | | | | | | | | | |
| Europe | | | | | | | | | | | | | | | | | | |
| Apparel | 3 | — | | 20,751 | | 79,223 | | — | | — | | | 20,751 | | 79,223 | | 99,974 | | 4,649 | | 1990 | - | 2005 | 4/19/2021 | - | 3/30/2023 | |
| Automotive Parts | 2 | — | | 3,918 | | 7,737 | | — | | — | | | 3,918 | | 7,737 | | 11,655 | | 204 | | 1980 | - | 1996 | 6/17/2022 | - | 9/28/2023 | |
| Automotive Tire Services | 3 | — | | 1,707 | | 5,206 | | — | | — | | | 1,707 | | 5,206 | | 6,913 | | 581 | | 1974 | - | 1994 | 3/9/2021 | - | 3/9/2021 | |
| Consumer Electronics | 2 | — | | 8,988 | | 24,686 | | 602 | | — | | | 8,988 | | 25,288 | | 34,276 | | 717 | | 1997 | - | 2006 | 3/4/2022 | - | 9/29/2023 | |
| Convenience Stores | 2 | — | | 5,284 | | 3,301 | | — | | — | | | 5,284 | | 3,301 | | 8,585 | | 213 | | 1982 | - | 2020 | 12/21/2021 | - | 9/20/2023 | |
| Diversified Industrial | 5 | — | | 29,505 | | 57,817 | | 922 | | — | | | 29,505 | | 58,739 | | 88,244 | | 2,055 | | 1980 | - | 2020 | 7/22/2021 | - | 3/30/2023 | |
| Drug Stores | 1 | — | | — | | — | | — | | — | | | — | | — | | — | | — | | 1990 | - | 1990 | 1/31/2023 | - | 1/31/2023 | |
| Energy | 1 | — | | 9,562 | | 10,678 | | — | | — | | | 9,562 | | 10,678 | | 20,240 | | 600 | | 2020 | - | 2020 | 1/13/2022 | - | 1/13/2022 | |
| Entertainment | 1 | — | | 22,768 | | 35,888 | | — | | — | | | 22,768 | | 35,888 | | 58,656 | | 2,823 | | 1993 | - | 1993 | 1/13/2022 | - | 1/13/2022 | |
| Food Processing | 7 | — | | 33,485 | | 90,850 | | 1,911 | | — | | | 33,485 | | 92,761 | | 126,246 | | 4,795 | | 1950 | - | 2021 | 11/30/2021 | - | 2/23/2023 | |
| General Merchandise | 23 | — | | 191,349 | | 232,095 | | 19,656 | | — | | | 191,349 | | 251,751 | | 443,100 | | 9,191 | | 1980 | - | 2023 | 8/25/2021 | - | 10/17/2023 | |
| Grocery | 176 | 38,732 | | 1,541,454 | | 2,312,185 | | 2,361 | | — | | | 1,541,454 | | 2,314,546 | | 3,856,000 | | 185,616 | | 1800 | - | 2022 | 5/23/2019 | - | 12/1/2023 | |
| Health and Fitness | 2 | — | | 29,102 | | 28,456 | | — | | — | | | 29,102 | | 28,456 | | 57,558 | | 1,659 | | 2004 | - | 2020 | 3/24/2022 | - | 1/31/2023 | |
| Health Care | 6 | — | | 27,163 | | 52,355 | | — | | — | | | 27,163 | | 52,355 | | 79,518 | | 3,801 | | 1969 | - | 2006 | 3/23/2020 | - | 9/7/2022 | |
| Home Furnishings | 12 | — | | 89,533 | | 113,961 | | — | | — | | | 89,533 | | 113,961 | | 203,494 | | 7,629 | | 1980 | - | 2019 | 4/9/2021 | - | 4/4/2023 | |
| Home Improvement | 92 | — | | 729,656 | | 938,924 | | 1,478 | | — | | | 729,656 | | 940,402 | | 1,670,058 | | 61,997 | | 1890 | - | 2016 | 7/31/2020 | - | 12/6/2023 | |
| Motor Vehicle Dealerships | 3 | — | | 16,376 | | 28,146 | | — | | — | | | 16,376 | | 28,146 | | 44,522 | | 1,879 | | 1990 | - | 2005 | 2/11/2022 | - | 9/27/2022 | |
| Other Manufacturing | 2 | — | | 40,179 | | 13,169 | | — | | — | | | 40,179 | | 13,169 | | 53,348 | | 614 | | 1912 | - | 1968 | 4/6/2022 | - | 6/22/2022 | |
| Restaurants-Quick Service | 1 | — | | 713 | | 1,899 | | — | | — | | | 713 | | 1,899 | | 2,612 | | 230 | | 2007 | - | 2007 | 3/17/2021 | - | 3/17/2021 | |
| Sporting Goods | 92 | — | | 264,736 | | 478,111 | | 892 | | — | | | 264,736 | | 479,003 | | 743,739 | | 8,693 | | 1950 | - | 2018 | 8/5/2022 | - | 12/28/2023 | |
| Theaters | 1 | — | | 1,455 | | — | | — | | — | | | 1,455 | | — | | 1,455 | | — | | 2011 | - | 2011 | 12/18/2019 | - | 12/18/2019 | |
| Transportation Services | 3 | — | | 13,166 | | 28,600 | | 1,142 | | — | | | 13,166 | | 29,742 | | 42,908 | | 1,110 | | 1970 | - | 1970 | 1/6/2022 | - | 12/22/2022 | |
| Warehousing and Storage | 1 | — | | 52,725 | | 48,919 | | — | | — | | | 52,725 | | 48,919 | | 101,644 | | 3,902 | | 2002 | - | 2002 | 3/11/2021 | - | 3/11/2021 | |
| Wholesale Club | 7 | — | | 54,550 | | 96,993 | | — | | — | | | 54,550 | | 96,993 | | 151,543 | | 4,559 | | 1973 | - | 2002 | 10/28/2022 | - | 10/28/2022 | |
| Other | 3 | — | | 75,775 | | — | | 7,125 | | — | | | 75,775 | | 7,125 | | 82,900 | | — | | 2023 | - | 2023 | 4/27/2023 | - | 9/29/2023 | |
| 13,458 | $822,436 | $14,954,956 | $34,240,455 | $439,360 | $7,715 | | $14,954,956 | $34,687,530 | $49,642,486 | $6,096,736 | | | | | | | |
REALTY INCOME CORPORATION AND SUBSIDIARIES
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (continued)
| | | | | | | | | | | | | | | | | |
| Note 1. | Realty Income Corporation owns 10,885 single-client properties in the United States and Puerto Rico, our corporate headquarters property in San Diego, California, 109 single-client properties in the United Kingdom and 42 single-client properties in Spain. Crest Net Lease, Inc. owns 8 single-client properties in the United States. |
| Realty Income Corporation also owns 70 multi-client properties located in the United States, owns 21 multi-client properties located in the United Kingdom and owns 1 multi-client property located in Spain. |
| | | | | |
| Note 2. | Includes mortgages payable secured by 361 properties, but excludes unamortized net debt premiums of $28.6 million. |
| | | | | |
| Note 3. | The aggregate cost for federal income tax purposes for Realty Income Corporation is $59.1 billion and for Crest Net Lease, Inc. is $30.1 million. |
| | | | | |
| Note 4. | The following is a reconciliation of total real estate carrying value for the years ended December 31 (in thousands): | 2021 | 2020 | 2019 |
| | | | | |
| Balance at Beginning of Period | | $ | 21,048,334 | | $ | 19,637,627 | | $ | 16,566,602 | |
| | | | | |
| Additions During Period: | | | | |
| Acquisitions and development | | 5,851,945 | | 2,163,707 | | 3,644,884 | |
| Merger Additions | | 11,722,801 | | — | | — | |
| Less amounts allocated to acquired lease intangible assets and liabilities on our Consolidated Balance Sheets | | (826,064) | | (382,850) | | (401,319) | |
| Improvements, Etc. | | 56,567 | | 6,194 | | 17,447 | |
| Other (Leasing Costs and Building Adjustments) (1) | | 64,807 | | 22,491 | | 2,741 | |
| | | | | |
| Total Additions | | 16,870,056 | | 1,809,542 | | 3,263,753 | |
| | | | | |
| Deductions During Period: | | | | |
| Cost of Real Estate sold | | 1,206,837 | | 253,506 | | 129,737 | |
| Cost of Equipment sold | | 8 | | 25 | | 11 | |
| Orion Divestiture (2) | | 634,254 | | — | | — | |
| Releasing costs | | 40 | | 259 | | 674 | |
| Other (3) | | 91,176 | | 195,003 | | 87,951 | |
| | | | | |
| Total Deductions | | 1,932,315 | | 448,793 | | 218,373 | |
| | | | | |
| Foreign Currency Translation | | (33,416) | | 49,958 | | 25,645 | |
| | | | | |
| Balance at Close of Period | | $ | 35,952,659 | | $ | 21,048,334 | | $ | 19,637,627 | |
| | | | | |
| (1) Includes reclassification of $20.1 million and $22.5 million right of use assets under finance leases in 2021 and 2020, respectively, and $43.7 million mortgage assumption in 2021. |
| | | | | |
| | | | | |
(dollars in thousands)
| | | | | | | | | | | | | | | | | |
| Note 1. | Realty Income Corporation owns or holds interests in 12,851 single-client properties in the United States and Puerto Rico, our corporate headquarters property in San Diego, California, 191 single-client properties in the United Kingdom, and 148 single-client properties elsewhere in Europe. Crest Net Lease, Inc. owns seven single-client properties in the United States.
Realty Income Corporation also owns or holds interests in 149 multi-client properties in the United States, 100 multi-client properties in the United Kingdom, and 12 multi-client properties elsewhere in Europe. |
| | | | | |
| Note 2. | Includes mortgages payable secured by 131 properties and excludes unamortized discount and deferred financing costs of $0.8 million. |
| | | | | |
| Note 3. | The aggregate cost for federal income tax purposes for Realty Income Corporation is $55.2 billion and for Crest Net Lease, Inc. is $26.1 million. |
| | | | | |
| Note 4. | The following is a reconciliation of total real estate carrying value for the years ended December 31 (in thousands): | 2023 | 2022 | 2021 |
| | | | | |
| Balance at Beginning of Period | $ | 42,689,699 | | $ | 35,952,659 | | $ | 21,048,334 | |
| | | | | |
| Additions During Period: | | | | |
| Acquisitions and development | 7,239,885 | | 8,021,159 | | 5,851,945 | |
| Merger Additions (1) | — | | — | | 11,722,801 | |
| Less amounts allocated to acquired lease intangible assets and liabilities on our Consolidated Balance Sheets | (484,096) | | (625,730) | | (826,064) | |
| Improvements, Etc. | 54,904 | | 99,484 | | 56,567 | |
| Other (Leasing Costs and Building Adjustments) (2) | 49,504 | | 97,482 | | 64,807 | |
| Total Additions | | 6,860,197 | | 7,592,395 | | 16,870,056 | |
| | | | | |
| Deductions During Period: | | | | |
| Cost of Real Estate sold | | 125,166 | | 402,386 | | 1,206,837 | |
| Cost of Equipment sold | | 11 | | — | | 8 | |
| Orion Divestiture (1) | | — | | — | | 634,254 | |
| Releasing costs | | — | | 53 | | 40 | |
| Other (3) | | 111,851 | | 39,463 | | 91,176 | |
| Total Deductions | | 237,028 | | 441,902 | | 1,932,315 | |
| | | | | |
| Foreign Currency Translation | 329,618 | | (413,453) | | (33,416) | |
| Balance at Close of Period | | $ | 49,642,486 | | $ | 42,689,699 | | $ | 35,952,659 | |
| | | | | |
REALTY INCOME CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | |
| (2) Represents derecognition of assets from the Orion Divestiture. For further information, see Note 3 to the Consolidated Financial Statements, Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture. |
| (3) The year ended 2021 includes $43.0 million for building razed and $39.0 million of impairment. The year ended 2020 includes $147.2 million of impairment. The year ended 2019 includes a reclassification of $36.9 million of right of use assets under finance leases in accordance with the adoption of ASC 842, Leases, on January 1, 2019. |
| |
| | | | | |
| Note 5. | The following is a reconciliation of accumulated depreciation for the years ended (in thousands): | 2021 | 2020 | 2019 |
| | | | | |
| Balance at Beginning of Period | | $ | 3,563,178 | | $ | 3,140,855 | | $ | 2,723,086 | |
| | | | | |
| Additions During Period - Provision for Depreciation | | 628,246 | | 531,909 | | 481,499 | |
| | | | | |
| Deductions During Period: | | | | |
| Accumulated depreciation of real estate and equipment sold or disposed of | | 226,897 | | 110,915 | | 64,054 | |
| | | | | |
| Foreign Currency Translation | | (774) | | 1,329 | | 324 | |
| | | | | |
| Balance at Close of Period | | $ | 3,963,753 | | $ | 3,563,178 | | $ | 3,140,855 | |
| | | | | |
| Please see note 2 to our consolidated financial statements for information regarding lives used for depreciation and amortization. |
| | | | | |
| Note 6. | In 2021, provisions for impairment were recorded on 103 Realty Income properties. |
| In 2020, provisions for impairment were recorded on 99 Realty Income properties. |
| In 2019, provisions for impairment were recorded on 51 Realty Income properties. |
| | | | | |
| See report of independent registered public accounting firm. |
As of December 31, 2023
(dollars in thousands)
| | | | | | | | | | | | | | | | | |
| (1) Represents derecognition of assets from the Orion Divestiture. For further information, see note 2, Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture, to our consolidated financial statements. |
| (2) The year ended December 31, 2023 includes contributions to joint ventures of $38.4 million and reclassification of $11.3 million right of use assets under finance leases. 2022 includes reclassification of $3.3 million right of use assets under finance leases, $43.0 million mortgage assumption, and $51.2 million RI Ops LP Units. 2021 includes $20.1 million right of use assets under finance leases and $43.7 million mortgage assumption. |
| (3) The year ended December 31, 2023 includes $14.0 million for building razed and $97.5 million of impairment, excluding impairment of depreciation, in-place and above- market leases. The year ended 2022 includes $13.6 million for building razed and $25.9 million of impairment. The year ended 2021 includes $43.0 million for building razed and $39.0 million of impairment. |
| |
| | | | | |
| Note 5. | The following is a reconciliation of accumulated depreciation for the years ended (in thousands): | 2023 | 2022 | 2021 |
| | | | | |
| Balance at Beginning of Period | $ | 4,908,658 | | $ | 3,963,753 | | $ | 3,563,178 | |
| | | | | |
| Additions During Period - Provision for Depreciation | 1,233,709 | | 1,028,182 | | 628,246 | |
| | | | | |
| Deductions During Period: | | | |
| Accumulated depreciation of real estate and equipment sold or disposed of | 57,609 | | 73,913 | | 226,897 | |
| | | | | |
| Foreign Currency Translation | 11,978 | | (9,364) | | (774) | |
| | | | | |
| Balance at Close of Period | | $ | 6,096,736 | | $ | 4,908,658 | | $ | 3,963,753 | |
| | | | | |
| Please see note 1, Summary of Significant Accounting Policies, to our consolidated financial statements for information regarding lives used for depreciation and amortization. |
| | | | | |
| Note 6. | In 2023, provisions for impairment were recorded on 112 Realty Income properties. |
| In 2022, provisions for impairment were recorded on 94 Realty Income properties. |
| In 2021, provisions for impairment were recorded on 103 Realty Income properties. |
| | | | | |
| See report of independent registered public accounting firm. |
