REALTY INCOME CORPORATION 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") 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 theNew 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.
At
•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;
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•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
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$104.9 million ,$79.4 million and$69.1 million for 2021, 2020 and 2019, respectively. In addition, references to reserves recorded as a reduction of rental revenue include amounts reserved for in the current period, as well as unrecognized contractual revenue and unrecognized straight-line rental revenue for leases accounted for on a cash basis. 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. LIQUIDITY AND CAPITAL RESOURCES Capital Philosophy Historically, we have met our long-term capital needs by issuing common stock, long-term 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 of our capital structure; however, we may also raise funds from debt or other equity securities. We may issue common stock when we believe that our share price is at a level that allows for the proceeds of any offering to be accretively invested into additional properties. In addition, we may issue common stock to permanently finance properties that were initially financed by our revolving credit facility, commercial paper program, or 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 theU.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. 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. AtDecember 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 atDecember 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 onDecember 31, 2021 , or$42.4 billion ; •Outstanding borrowings of$650.0 million on our revolving credit facility; •Outstanding borrowings of$901.4 million on 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 ; -43- -------------------------------------------------------------------------------- Table of Contents •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 . Universal Shelf Registration InJune 2021 , we filed a shelf registration statement with theSEC , which is effective for a term of three years and will expire inJune 2024 . In accordance withSEC 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") 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 NYSE at prevailing market prices or at negotiated prices. During 2021, we issued 46,290,540 shares and raised approximately$3.21 billion of gross proceeds under the ATM program. AtDecember 31, 2021 , we had 29,387,491 shares 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 OnNovember 1, 2021 , we completed our acquisition of VEREIT. Pursuant to the terms 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 ofRealty Income common stock. As a result of the merger, former VEREIT common stockholders, VEREIT OP common unitholders and awardees of vested share awards separated fromRealty Income received approximately 162 million shares ofRealty Income common stock, based on the shares of VEREIT common stock and common units of VEREIT OP outstanding as ofOctober 29, 2021 . Issuances of Common Stock in Underwritten Public Offerings InJuly 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. InJanuary 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. AtDecember 31, 2021 , we had 11,335,379 shares remaining for future issuance under our DRSPP program. -44-
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Revolving Credit Facility and Commercial Paper Program We have a$3.0 billion unsecured revolving credit facility with an initial term that expires inMarch 2023 and includes, at our option, two six-month extensions. The multicurrency revolving facility allows us to borrow in up to 14 currencies, includingU.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 ofDecember 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 inDecember 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. AtDecember 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 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. AtDecember 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 aU.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. AtDecember 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 atDecember 31, 2021 mature betweenJanuary 2022 andApril 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 InOctober 2018 , in conjunction with entering into our revolving credit facility, we entered into a$250.0 million senior unsecured term loan, which matures inMarch 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 ofDecember 31, 2021 , we had$1.11 billion of 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, atDecember 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 ofDecember 31, 2021 , sorted by maturity date (in millions): -45-
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Principal Amount Carrying Value (USD)
(Currency As of December 31,
Denomination) 2021
4.600% notes,
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,
550 550
0.750% notes, issued December 2020 and due in March 2026 $ 325 325
4.875% notes,
600 600
4.125% notes,
$ 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,
600 600
3.650% notes, issued in December 2017 and due in January 2028 $ 550 550
3.400% notes,
600 600
2.200% notes,
500 500
3.250% notes, issued in June 2019 and due in June 2029 $ 500 500
3.100% notes,
599 599
1.625% notes, issued in October 2020 and due December 2030 £ 400 541
3.250% notes,
$ 950 950
2.850% notes,
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,
$ 250 250
4.650% notes,
$ 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 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 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.
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During the year ended
Principal amount Effective yield to
2021 Issuances Date of Issuance Maturity Date used Price of par value 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 %
(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. 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.
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 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.
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. generally accepted
accounting principles ("GAAP") measurements, 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, 2021 are:
Note Covenants Required Actual
Limitation on incurrence of total debt < 60% of adjusted assets 41.1 % Limitation on incurrence of secured debt < 40% of adjusted assets 3.1 % Debt service coverage (trailing 12 months)(1) > 1.5 x
5.6
Maintenance of total unencumbered assets > 150% of unsecured debt
252.9 %
(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 Debt 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 onJanuary 1, 2021 , 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 ofJanuary 1, 2021 , 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 atDecember 31, 2021 (in thousands, for trailing twelve months): -47-
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Net income available to common stockholders
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. AtDecember 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 ofDecember 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'sRatings Group has assigned a rating of A- with a "stable" outlook. In addition, we were assigned the following ratings on our commercial paper atDecember 31, 2021 : Moody's Investors Service has assigned a rating of P-2 and Standard & Poor'sRatings Group has assigned a rating of A-2. Based on our ratings as ofDecember 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 inDecember 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. -48-
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Table of Obligations The following table summarizes the maturity of each of our obligations as ofDecember 31, 2021 (in millions): Credit Facility and Ground Leases Ground Leases Year of Commercial Paper Notes Term Mortgages Paid by Realty Paid by Our Maturity Program(1) and Bonds(2) Loan(3) Payable (4) Interest (5) Income(6) 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 2024 - 850.0 250.0 733.0 401.0 9.0 31.1 - 2,274.1 2025 - 1,050.0 - 42.0 355.4 9.2 30.9 - 1,487.5 2026 - 1,575.0 - 1.2 304.0 9.3 28.7 1,918.2 Thereafter - 8,782.3 - 4.7 1,348.1 270.9 243.0 - 10,649.0 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 inMarch 2023 and includes, at our option, two six-month extensions. AtDecember 31, 2021 , there were$650.0 million in borrowings under our revolving credit facility. The commercial paper borrowings outstanding atDecember 31, 2021 totaled$901.4 million and mature betweenJanuary 2022 andApril 2022 . (2) Excludes both non-cash net premiums recorded on notes payable of$295.5 million and deferred financing costs of$53.1 million . The table of obligations also excludes theJanuary 2022 issuances of £250.0 million of senior unsecured notes dueJanuary 2027 and £250.0 million of senior unsecured notes dueJanuary 2042 . (3) Excludes deferred financing costs of$443,000 . (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 term loan, notes, bonds, mortgages payable, credit facility, and commercial paper program has been calculated based on outstanding balances at period end through their respective maturity dates. Excludes interest from theJanuary 2022 issuances of £250.0 million of 1.875% senior unsecured notes dueJanuary 2027 and £250.0 million of 2.500% senior unsecured notes dueJanuary 2042 . (6)Realty Income currently pays the ground lessors directly for the rent under the ground leases. (7) Our clients, who are generally sub-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) "Other" consists of$285.7 million of commitments under construction contracts and$74.7 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements.
Our credit facility, commercial paper program, term loan, and notes payable obligations are unsecured. Accordingly, we have not pledged any assets as collateral for these obligations.
Unconsolidated Investments As a result of our merger with VEREIT, we assumed an equity method investment in three unconsolidated entities. We are responsible to fund our proportionate share of any operating cash deficits. There are no further material commitments related to these investments at this time. The debt held by the unconsolidated entities is secured by its properties, though is non-recourse to us. Impact of Real Estate and Credit Markets In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, including the current market, the global credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and global credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly. Acquisitions During 2021 Below is a listing of our acquisitions in theU.S. andEurope for the year endedDecember 31, 2021 (excludes properties assumed onNovember 1, 2021 in conjunction with our merger with VEREIT): Weighted Initial Weighted Investment Average Lease Average Cash Lease Number of Properties Leasable Square Feet ($ in thousands) Term (Years) Yield (1) Year endedDecember 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)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 -49- -------------------------------------------------------------------------------- Table of Contents 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 endedDecember 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 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 atDecember 31, 2021 . (3) Includes £7.0 million of investments inU.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 AtDecember 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 endedDecember 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
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 , 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 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.
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
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results and is consistent with our existing disposition strategy to further enhance our real estate portfolio and maximize portfolio returns.
Investments inExisting 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. 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. 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. 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 ofFebruary 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%. InNovember 2021 , we also made a$2.060 tax distribution of Orion shares, that occurred in conjunction with the Orion Divestiture onNovember 12, 2021 , after our merger with VEREIT onNovember 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. 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 onDecember 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 be in any future period. RESULTS OF OPERATIONS Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with 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 2 to our consolidated financial statements. -51-
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In order to prepare our consolidated financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments must be made with regard to critical accounting policies. 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-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 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. 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 ofDecember 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 -52-
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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
Total Revenue
The following summarizes our total revenue (in thousands):
Increase
2021 2020
versus versus
2021 2020 2019 2020 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
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
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 %
-53--------------------------------------------------------------------------------- Table of Contents (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 theFinancial 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 in 2020. Same store rental revenue in 2020 was negatively impacted by net reserves recorded as reductions of rental revenue of$39.9 million compared to$1.4 million in 2019. Our calculation of same store rental revenue also includes uncollected rent for which we have not granted a lease concession. If these applicable amounts of rent deferrals and uncollected rent were excluded from our calculation of same store rental revenue, the increase for 2021 relative to 2020 would have been 7.7%. Rental revenue was negatively impacted by rent reserves during 2021 and 2020, primarily due to the COVID-19 pandemic, particularly with respect to the ongoing disruption to the theater industry. As the COVID-19 pandemic did not affect our rent collections untilApril 2020 , there was no related impact for the three months endedMarch 31, 2020 . The following table summarizes reserves recorded as a reduction of rental revenue (in millions): Year ended December 31, 2021 2020 2019 Rental revenue reserves$ 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
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. AtDecember 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 atDecember 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. -54-
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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
versus versus
2021 2020 2019 2020 2019
EXPENSES (1)
Depreciation and amortization $ 897,835
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 4.9 % 4.4 % 4.7 %
percentage of total revenue (2)(3)
Property expenses (excluding reimbursable) as a 1.5 % 1.6 % 1.4 %
percentage of total revenue (3)
(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.
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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 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 inNovember 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 theOctober 2020 issuance of our 1.625% notes due 2030, May andJuly 2020 issuances of our 2031 Notes, theMay 2019 issuance of our 2.730% notes due 2034, theJune 2019 issuance of our 3.250% notes due 2029, and higher interest related to mortgages assumed duringDecember 2019 , partially offset by theJanuary 2020 repayment of our 5.750% notes dueJanuary 2021 , theJune 2020 repayment of one of our$250.0 million term loans, and lower average interest rates.
For the year ended
•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. AtDecember 31, 2021 , 164 properties were available for lease or sale, as compared to 140 atDecember 31, 2020 and 94 atDecember 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. -56-
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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 inMarch 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
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 $167.4 million of merger and integration-related transaction costs
during 2021. The merger and integration-related costs incurred to date primarily
consist of advisory fees, attorney fees, accountant fees, SEC filing fees and
additional integration costs that include incremental and non-recurring costs
necessary to convert data and systems, retain employees and otherwise enable us
to operate the acquired VEREIT assets efficiently. There were no merger and
integration-related costs during 2020 or 2019.
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Gain on Sales of Real Estate The following summarizes our property dispositions (dollars in millions). These amounts exclude properties disposed from the spin-off of office properties to Orion Office REIT, Inc. inNovember 2021 . Year Ended December 31, 2021 2020 2019 Number of properties sold 154 126 93 Net sales proceeds$ 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 InDecember 2021 , we completed the early redemption on all$750.0 million in principal amount of outstanding 4.650% notes dueAugust 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. InOctober 2021 , we completed the early redemption on$9.6 million in principal of a mortgage dueJune 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
In
In
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 ofU.K. investments, which contributed to higherU.K. income taxes for both years. -58-
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Net Income Available to Common Stockholders The following summarizes our net income available to common stockholders (dollars in millions, except per share data):
Year Ended December 31, % (Decrease)
2021 2020
versus versus
2021 2020 2019 2020 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 theJanuary 2021 early redemption of the 3.250% notes dueOctober 2022 recorded in the three months endedMarch 31, 2021 and$46.4 million related to theDecember 2021 early redemption of the 4.650% notes dueAugust 2023 recorded in the three months endedDecember 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 theJanuary 2020 early redemption of the 5.750% notes dueJanuary 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 EBITDAre)The National Association of Real Estate Investment Trusts ("Nareit") came to the conclusion that a Nareit-defined EBITDA metric for real estate companies (i.e., EBITDA for real estate, or EBITDAre) 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 gains and losses and executive severance charges (which is consistent with our previous calculations of "Adjusted EBITDA"). We define Adjusted EBITDAre, a non-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) loss 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 gains and losses, net (as described in the Adjusted Funds from Operations section), and (ix) our proportionate share of interest expense and real estate depreciation and amortization from unconsolidated entities. Our Adjusted EBITDAre may not be comparable to Adjusted EBITDAre 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 is widely followed by industry analysts, lenders and investors. 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's 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 EBITDAre should 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 income from properties we acquired or stabilized during the applicable quarter and to remove operating income 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. 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. Our ratios of net debt-to-Annualized Adjusted EBITDAre and net debt-to-Annualized Pro Forma Adjusted EBITDAre, which are used by management as a measure of leverage, are calculated as net debt (which we define as total debt per our consolidated balance sheet, -59- -------------------------------------------------------------------------------- Table of Contents excluding deferred financing costs and net premiums and discounts, but including our proportionate share on debt from unconsolidated entities, less cash and cash equivalents), divided by annualized quarterly Adjusted EBITDAre and annualized Pro Forma Adjusted EBITDAre, respectively.
The following table summarizes our Annualized Adjusted EBITDAre 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
Interest 100,739 78,764 75,073
Loss on extinguishment of debt 46,722 - -
Income taxes 10,128 4,500 1,736
Depreciation and amortization 333,229 175,041 156,594
Provisions for impairment 7,990 23,790 8,950
Merger and integration-related costs 137,332 - -
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
Quarterly Adjusted EBITDAre$ 619,906 $ 374,267 $ 355,946 Annualized Adjusted EBITDAre (2)$ 2,479,624 $ 1,497,068 $ 1,423,784 Annualized Pro Forma Adjustments 358,560 25,910 77,793 Annualized Pro Forma Adjusted EBITDAre$ 2,838,184 $ 1,522,978 $ 1,501,577
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
(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) Net Debt is total debt per our consolidated balance sheet, excluding
deferred financing costs and net premiums and discounts, but including our
proportionate share on debt from unconsolidated entities, less cash and cash
equivalents.
(4) Net Debt/Annualized Adjusted EBITDAre was 6.0x for 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 consist of adjustments to incorporate
operating income from properties we acquired or stabilized during the applicable
quarter and to remove operating income 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 are consistent with
the debt service coverage ratio calculated under financial covenants for our
senior unsecured notes and bonds. The following table summarizes our Annualized
Pro forma Adjusted EBITDAre calculation for the periods indicated below:
Dollars in thousands 2021 2020 2019
Annualized pro forma adjustments from properties
acquired or stabilized $ 400,575 $ 27,431 $ 77,431
Annualized pro forma adjustments from properties
disposed (42,015) (1,521) 362
Annualized Pro forma Adjustments $ 358,560
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FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (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):
We define FFO, a non-GAAP measure, consistent with theNational 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 gains 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. % Increase/(Decrease) 2021 2020 versus versus 2021 2020 2019 2020 2019 FFO available to common stockholders $ 1,240.6 $ 1,142.1 $ 1,039.6 8.6 % 9.9 % FFO per share (1) $ 2.99 $ 3.31 $ 3.29 (9.7) % 0.6 % Normalized FFO available to common stockholders $ 1,408.0 $ 1,142.1 $ 1,039.6 23.3 % 9.9 % Normalized FFO per share (1) $ 3.39 $ 3.31 $ 3.29 2.4 %
0.6 %
(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 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 thousands, except per share
amounts):
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2021 2020 2019
Net income available to common stockholders $
359,456
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
- 1,418 1,403
Diluted FFO $
1,240,580
FFO available to common stockholders $
1,240,580
167,413 - -
Normalized FFO available to common stockholders $
1,407,993
1,642 1,418 1,403
Diluted Normalized FFO $
1,409,635
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
$
71,554
$
238,967
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.
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ADJUSTED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (AFFO)
The following summarizes our AFFO (dollars in millions, except per share data):
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.
% Increase
2021 2020
versus versus
2021 2020 2019 2020 2019
AFFO available to common
stockholders $ 1,488.8 $ 1,172.6 $ 1,050.0 27.0 % 11.7 %
AFFO per share (1) $ 3.59 $ 3.39 $ 3.32 5.9 % 2.1 %
(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 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 thousands, except per share amounts):
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2021 2020 2019
Net income available to common stockholders (1) $ 359,456 $ 395,486 $ 436,482
Cumulative adjustments to calculate Normalized FFO (2) 1,048,537 746,633 603,109
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 -
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
Leasing costs and commissions (6,201) (1,859) (2,102)
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
Proportionate share of adjustments for unconsolidated entities
(1,948) - -
Other adjustments (6) 1,128 (2,519) (1,404)
Total AFFO available to common stockholders $ 1,488,753 $ 1,172,626 $ 1,050,015
AFFO allocable to dilutive noncontrolling interests 1,619 1,438 1,442
Diluted AFFO $ 1,490,372 $ 1,174,064 $ 1,051,457
AFFO per common share:
Basic $ 3.59 $ 3.40 $ 3.32
Diluted $ 3.59 $ 3.39 $ 3.32
Distributions paid to common stockholders $ 1,169,026 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: Basic 414,535,283 345,280,126 315,837,012 Diluted 415,270,063 345,878,377 316,601,350 (1)As ofDecember 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) and Normalized Funds from Operations Available to Common Stockholders (Normalized FFO)." (3)The executive severance charge represents the incremental costs incurred upon our former CFO's departure inMarch 2020 , consisting of$1.6 million of cash,$1.8 million of share-based compensation expense and$58,000 of professional fees. (4) Includes the amortization of 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) Straight-line payments from cross-currency swaps represent quarterly payments inU.S. dollars received by us from counterparties in exchange for associated foreign currency payments. These 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, and foreign currency gains and losses as a result of intercompany debt and remeasurement transactions. 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 GAAP performance metric to which AFFO should be reconciled is net income available to common stockholders. -64-
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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 STANDARDSFor information on the impact of new accounting standards on our business, see note 2 of the Notes to the Consolidated Financial Statements.
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