REALTY INCOME CORPORATION FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act
of 1934, as amended. When used in this quarterly report, the words "estimated",
"anticipated", "expect", "believe", "intend" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements
include, without limitation, discussions of our business, portfolio, strategy,
plans and intentions and statements regarding estimated or future operations and
results of operations, financial condition or prospects (including, without
limitation, estimated and future funds from operations ("FFO"), adjusted funds
from operations ("AFFO") and normalized and adjusted FFO and net income,
estimated initial weighted average contractual lease rates, estimated square
footage of properties under development or expansion, the timing, prices and
other terms of potential or planned acquisitions or dispositions, statements
regarding initial cash lease yields on or percentages of investment grade
clients that are lessees of properties that we have acquired or intend or agreed
to acquire or that are under development or expansion, client bankruptcies,
statements regarding the payment, dependability and amount of and potential
increases in future common stock dividends, statements regarding future cash
flow or cash generation, capital raising, settlement of shares of common stock
sold pursuant to forward sale confirmations under our ATM program, statements
regarding our ability to meet our liquidity needs, and statements regarding the
anticipated or projected impact of our merger with VEREIT on our business,
results of operations, financial condition or prospects). Forward-looking
statements are subject to risks, uncertainties, and assumptions about Realty
Income Corporation , including, among other things:
•Our access 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 (including those in the theater industry), 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 in 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 or
dispositions of properties, or the estimated or potential impact of the merger
are based upon numerous assumptions and estimates and are inherently subject to
substantial uncertainties and actual results of operations, financial condition,
property acquisitions or dispositions, and the impacts of the merger may 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. Some of the
factors that could cause actual results to differ materially are:
•Our continued qualification as a real estate investment trust;
•General domestic and foreign business and economic conditions;
•Competition;
•Fluctuating interest and currency rates;
•Access to debt and equity capital markets;
•Continued volatility and uncertainty in the credit markets and broader
financial markets;
•Other risks inherent in the real estate business including our clients'
defaults under leases, potential liability relating to environmental matters,
illiquidity of real estate investments, and potential damages from natural
disasters;
•Impairments in the value of our real estate assets;
•Changes in income tax laws and rates;
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•The continued evolution of the COVID-19 pandemic and the measures taken to
limit its spread, and its impacts on us, our business, our clients (including
those in the theater industry), or the economy generally;
•The timing and pace of reopening efforts at 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 of terrorism and war; and
•Any effects of uncertainties regarding whether the anticipated benefits or
results of our merger with VEREIT will be achieved.
Additional factors that may cause future events and actual results, financial or
otherwise, to differ, potentially materially, from those discussed in or implied
by the forward-looking statements include those discussed in the sections
entitled "Business", "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on
Form 10-K , for the fiscal year ended
Readers are cautioned not to place undue reliance on forward-looking statements. Those forward-looking statements are not guarantees of future performance and speak only as of the date that this quarterly report was filed with theSecurities and Exchange Commission , orSEC . While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, the forward-looking events discussed in this quarterly report might not occur. THE COMPANYRealty 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. The Company is 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 its 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 11,733 properties; •With an occupancy rate of 98.9%(1), or 11,602 properties leased and 131 properties available for lease or sale; •With clients doing business in 79 separate industries; •Located in all 50 U.S. states,Puerto Rico , theUnited Kingdom (U.K. ) andSpain ; •With approximately 225.7 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 8.8 years; and •With an average leasable space per property of approximately 19,230 square feet; approximately 13,100 square feet per retail property and approximately 235,790 square feet per industrial property.
(1) Excludes four properties with ancillary leases only, such as cell towers and billboards.
Of the 11,733 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$44.1 million and$23.9 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$129.0 million and$69.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Rental revenue during the three and nine months endedSeptember 30, 2021 excludes the impact of the mergers, which occurred onNovember 1, 2021 . -33-
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Investment Philosophy We believe that owning an actively managed, 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, as ofSeptember 30, 2022 , consisted of 11,733 properties located in all 50 U.S. states,Puerto Rico , theU.K. andSpain , and doing business in 79 industries. None of the 79 industries represented in our property portfolio accounted for more than 9.0% of our annualized contractual rent as ofSeptember 30, 2022 .
As we look to continue to expand geographically across
Investment Strategy We seek to invest in high-quality real estate that our clients consider important to the successful operation of their businesses. We generally seek to acquire commercial real estate that has some or all of the following characteristics: •Properties in markets or locations important to our clients; •Properties 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 of locations and geographic markets we expect to remain strong or strengthen in the future). We typically seek to invest in 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 lease 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. Our investments are usually with clients who have demonstrated
resiliency to e-commerce or have a strong omni channel 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 their final
destination, real estate as part of a customer experience and supply chain
strategy. Our overall investments
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(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, approximately 93% of our annualized retail contractual rent onSeptember 30, 2022 , 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 to be considered for acquisition, properties must meet stringent underwriting requirements. We have established a four-part analysis that examines each potential investment based on:
•The aforementioned overall real estate characteristics, including demographics, replacement cost, and comparative rental rates; •Industry, client (including credit profile), and market conditions; •Store profitability for retail locations if profitability data is available; and •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 obligations to employees, suppliers, and real estate lease obligations. Because 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. 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 will 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 operate. Prior to entering into any transaction, our research department 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 providing summaries of these findings to management. AtSeptember 30, 2022 , approximately 42.7% of our total portfolio annualized contractual rent comes from properties leased to our investment grade clients, their subsidiaries or affiliated companies. AtSeptember 30, 2022 , our top 20 clients (based on percentage of total portfolio annualized contractual rent) represented approximately 41.3% of our annualized rent and 12 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 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;
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•Maximum asset-level returns on properties that are re-leased or sold;
•Additional value creation from the existing portfolio by enhancing individual
properties, pursuing alternative uses, and deriving ancillary revenue; and
•Investment opportunities in new asset classes for the portfolio.
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.
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.
RECENT DEVELOPMENTS
Increases in Monthly Dividends to Common Stockholders
We have continued our 53-year policy of paying monthly dividends. In addition,
we increased the dividend four times during 2022. As of October 2022 , we have
paid 100 consecutive quarterly dividend increases and increased the dividend 117
times since our listing on the NYSE in 1994.
The following table summarizes our dividend increases in 2022:
Month Month Dividend Increase
2022 Dividend increases Declared Paid per share per share
1st increase Dec 2021 Jan 2022 $0.2465 $0.0005
2nd increase Mar 2022 Apr 2022 $0.2470 $0.0005
3rd increase Jun 2022 Jul 2022 $0.2475 $0.0005
4th increase Sep 2022 Oct 2022 $0.2480 $0.0005
The dividends paid per share during the nine months ended September 30, 2022 ,
totaled approximately $2.2230 , as compared to approximately $2.1150 during the
nine months ended September 30, 2021 , an increase of $0.1080 , or 5.1%.
The monthly dividend of $0.2480 per share represents a current annualized
dividend of $2.9760 per share, and an annualized dividend yield of approximately
5.1% based on the last reported sale price of our common stock on the NYSE of
$58.20 on September 30, 2022 . Although we expect to continue our policy of
paying monthly dividends, we cannot guarantee that we will maintain our current
level of dividends, that we will continue our pattern of increasing dividends
per share, or what our actual dividend yield will be in any future period.
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Acquisitions During the Three and Nine Months EndedSeptember 30, 2022 Below is a listing of our acquisitions in theU.S. andEurope for the periods indicated below: Weighted Initial Weighted Leasable Investment Average Average Number of Square Feet ($ in Lease Term Cash Lease Properties (in thousands) millions) (Years) Yield (1) Three months ended September 30, 2022 (2) Acquisitions - U.S. 272 3,845$ 1,131.6 16.5 6.1 % Acquisitions - Europe 27 3,512 587.4 8.8 6.2 % Total acquisitions 299 7,357$ 1,719.0 13.9 6.2 % Properties under development (3) 76 1,758 148.5 15.1 5.6 % Total (4) 375 9,115$ 1,867.5 14.0 6.1 % Nine months ended September 30, 2022 (2) Acquisitions - U.S. 561 9,396$ 2,623.6 15.1 5.9 % Acquisitions - Europe 78 8,904 2,058.6 8.9 5.8 % Total acquisitions 639 18,300$ 4,682.2 12.5 5.9 % Properties under development (3) 127 3,201 416.4 15.6 5.6 % Total (5) 766 21,501$ 5,098.6 12.7 5.8 % (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 weighted average cash yield includes approximately$1.2 million and$8.0 million , received as settlement credits as reimbursement of free rent periods for the three and nine months endedSeptember 30, 2022 , respectively. 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 the three and nine months endedSeptember 30, 2022 , caused any one client to be 10% or more of our total assets atSeptember 30, 2022 . (3)Includes fiveU.K. development properties that represent investments of £21.7 million and £36.6 million Sterling during the three and nine months endedSeptember 30, 2022 , respectively, converted at the applicable exchange rate on the funding date. (4)Our clients occupying the new properties are 95.7% retail, 4.1% industrial and 0.2% other property types, based on rental revenue. Approximately 27% of the rental revenue generated from acquisitions during the three months endedSeptember 30, 2022 , is from our investment grade rated clients, their subsidiaries or affiliated companies. (5)Our clients occupying the new properties are 90.6% retail, 9.3% industrial and 0.1% other property types, based on rental revenue. Approximately 30% of the rental revenue generated from acquisitions during the nine months endedSeptember 30, 2022 , is from our investment grade rated clients, their subsidiaries or affiliated companies. Announcement of Transaction with Wynn Resorts InFebruary 2022 , we announced that we had signed a definitive agreement with Wynn Resorts, Limited to acquire theEncore Boston Harbor Resort and Casino for$1.7 billion under a long-term net lease agreement. This sale-leaseback transaction, which is expected to close in the fourth quarter of 2022, is expected to be executed at a 5.9% initial weighted average cash lease yield and includes an initial lease term of 30 years with annual rent growth of 1.75% for the first ten years and the greater of 1.75% or CPI (capped at 2.5%) over the remaining lease term. The lease also includes an additional 30-year option to renew upon expiration. This transaction is subject to numerous uncertainties, including various closing conditions, and there can be no assurance that the transaction will be consummated on the terms or timetable currently contemplated, or at all. Theater Industry Update For the third quarter 2022, we collected approximately 85% of the contractual rent(1) across our theater portfolio as Cineworld Group plc ("Cineworld"), the parent entity of the entities that lease certain of our theater properties, including Regal Cinemas, commenced Chapter 11 reorganization proceedings during the month ofSeptember 2022 and, as is customary in this jurisdiction pursuant to the proceedings of the bankruptcy court, was not yet required to pay rent for the month of September. However, for the month ofOctober 2022 , we have collected all of the contractual rent across our theater portfolio. -37-
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As ofSeptember 2022 , we had cumulative reserves of$23.5 million on properties leased to Cineworld and its affiliates. These reserves, representing a reduction of rental revenue, primarily relate to contractual rent and expense recoveries recorded during the COVID-19 pandemic in 2020 and exclude straight-line rent reserves. Total receivables from Cineworld and its affiliates were$31.0 million atSeptember 30, 2022 , net of reserves and excluding straight line rent receivables, and include both deferred contractual rent and deferred expense recoveries. (1)We define contractual rent as the monthly aggregate cash amount charged to clients, inclusive of monthly base rent receivables. Charged amounts have not been adjusted for any COVID-19 related rent relief granted and includes contractual rent from any clients in bankruptcy.
Portfolio Discussion
Leasing Results AtSeptember 30, 2022 , we had 131 properties available for lease out of 11,733 properties in our portfolio, representing a 98.9% occupancy rate based on the number of properties in the portfolio. Our property-level occupancy rate atSeptember 30, 2022 excludes four properties with ancillary leases only, such as cell towers and billboards. Below is a summary of our portfolio activity for the periods indicated below: Three months endedSeptember 30, 2022 Properties available for lease atJune 30, 2022 132 Lease expirations (1) 181 Re-leases to same client (147) Re-leases to new client (8) Vacant dispositions (27) Properties available for lease atSeptember 30, 2022 131 Nine months endedSeptember 30, 2022 Properties available for lease atDecember 31, 2021 164 Lease expirations (1) 534 Re-leases to same client (420) Re-leases to new client (25) Vacant dispositions (122) Properties available for lease atSeptember 30, 2022 131 (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 endedSeptember 30, 2022 , the annual new rent on re-leases was$33.36 million , as compared to the previous annual rent of$30.75 million on the same units, representing a rent recapture rate of 108.5% on the units re-leased. We re-leased five units to new clients without a period of vacancy, and six units to new clients after a period of vacancy. During the nine months endedSeptember 30, 2022 , the annual new rent on re-leases was$100.57 million , as compared to the previous annual rent of$94.22 million on the same units, representing a rent recapture rate of 106.7% on the units re-leased. We re-leased 12 units to new clients without a period of vacancy, and 25 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. AtSeptember 30, 2022 , our average annualized contractual rent was approximately$14.06 per square foot on the 11,602 leased properties in our portfolio. AtSeptember 30, 2022 , we classified 24 properties, with a carrying amount of$18.3 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 -38-
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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 the three months endedSeptember 30, 2022 , we capitalized costs of$32.8 million on existing properties in our portfolio, consisting of$685,000 for re-leasing costs,$273,000 for recurring capital expenditures, and$31.8 million for non-recurring building improvements. During the nine months endedSeptember 30, 2022 , we capitalized costs of$70.6 million on existing properties in our portfolio, consisting of$3.9 million re-leasing costs,$3.0 million for recurring capital expenditures, and$63.7 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 rents 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. Sale ofUnconsolidated Joint Ventures DuringJuly 2022 , all seven of the properties owned by our industrial partnerships acquired in connection with the VEREIT merger were sold. The gross purchase price for the properties was$905.0 million and we collected$113.5 million of net proceeds (after mortgage defeasance and closing costs) during the three months endedSeptember 30, 2022 , representing our proportionate share of partnership distributions. Equity Capital Raising InJune 2022 , we replaced our prior ATM program, which authorized us to offer and sell up to 69,088,433 shares of common stock, with a new equity distribution program, pursuant to which we may offer and sell up to 120,000,000 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. During the three and nine months endedSeptember 30, 2022 , we raised$0.7 billion and$2.4 billion of gross proceeds from the sale of common stock, respectively, at a weighted average price of$73.05 and$68.27 per share, respectively, primarily through proceeds from the sale of common stock through our ATM programs. The ATM program issuances during the three and nine months endedSeptember 30, 2022 included 9,532,853 and 25,432,825 shares issued pursuant to forward sale confirmations, respectively. As ofSeptember 30, 2022 , 19,995,547 shares of common stock subject to forward sale confirmations have been executed but not settled. Note Issuances InOctober 2022 , we issued$750.0 million of 5.625% senior unsecured notes dueOctober 2032 (the "October 2032 Notes"). The public offering price for theOctober 2032 notes was 99.879% of the principal amount for an effective semi-annual yield to maturity of 5.641%. InJune 2022 , we closed on the previously announced private placement of £600.0 million of senior unsecured notes, which included £140.0 million of notes due 2030, £345.0 million of notes due 2032, and £115.0 million of notes due 2037. The combined notes have a weighted average tenor of approximately 10.5 years, and a weighted average fixed interest rate of 3.22%. InJanuary 2022 , we issued £250.0 million of 1.875% senior unsecured notes dueJanuary 2027 (the "January 2027 Notes") and £250.0 million of 2.500% senior unsecured notes dueJanuary 2042 (the "January 2042 Notes"). The public offering price for theJanuary 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 theJanuary 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 theJanuary 2027 Notes and theJanuary 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%. -39-
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New, Expanded Revolving Credit Facility InApril 2022 , we entered a new$4.25 billion unsecured credit facility to amend and restate our previous$3.0 billion unsecured credit facility, which was due to expire inMarch 2023 . The new revolving credit facility matures inJune 2026 and includes two six-month extensions that can be exercised at our option. Similar to our previous revolving credit facility, the new revolving credit facility also has a$1.0 billion expansion feature, which is subject to obtaining lender commitments. As ofSeptember 30, 2022 , the balance of borrowings outstanding under our new revolving credit facility was$1.2 billion , and we had a cash balance of$187.7 million . Expansion of Commercial Paper Programs DuringJuly 2022 , ourU.S. Dollar-denominated unsecured commercial paper program was amended to increase the maximum aggregate amount of outstanding notes from$1.0 billion to$1.5 billion . We also established a new 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), which may be issued inU.S. Dollars or various other 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 note market. The notes offered under our European commercial paper program will rank pari passu with all of our other unsecured senior indebtedness, including borrowings under our revolving credit facility and our term loan, and our outstanding senior notes, including under ourU.S. Dollar-denominated commercial paper programs. We use our unsecured revolving credit facility as a liquidity backstop for the repayment of the notes issued under these programs.
Select Financial Results The following summarizes our select financial results (dollars in millions, except per share data).
% Increase
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021 Three months Nine Months
Total revenue $ 837.3 $ 489.9 $ 2,455.0 $ 1,395.4 70.9 % 75.9 %
Net income available to common
stockholders (1) $ 219.6 $ 135.0 $ 642.1 $ 355.4 62.7 % 80.7 %
Net income per share (2) $ 0.36 $ 0.34 $ 1.06 $ 0.94 5.9 % 12.8 %
Funds from operations available
to common stockholders ("FFO") $ 597.2 $ 332.3 $ 1,807.4 $ 914.4 79.7 % 97.7 %
FFO per share (2) $ 0.97 $ 0.85 $ 2.99 $ 2.41 14.1 % 24.1 %
Normalized funds from operations
available to common stockholders
("Normalized FFO") $ 600.9 $ 349.1 $ 1,820.4 $ 944.5 72.1 % 92.7 %
Normalized FFO per share (2) $ 0.97 $ 0.89 $ 3.01 $ 2.49 9.0 % 20.9 %
Adjusted funds from operations
available to common stockholders
("AFFO") $ 603.6 $ 356.8 $ 1,767.4 $ 1,002.7 69.2 % 76.3 %
AFFO per share (2) $ 0.98 $ 0.91 $ 2.92 $ 2.64 7.7 % 10.6 %
(1) The calculation to determine net income available to common stockholders
includes provisions for impairment, gain from the sale of real estate, and
foreign currency gain and loss. These items can vary from quarter to quarter 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 the three and nine months endedSeptember 30, 2022 were impacted by the following transactions: (i) merger and integration-related costs related to our merger with VEREIT of$3.7 million and$13.0 million , respectively, and (ii)$1.7 million and$16.4 million of provisions for impairment, respectively. Our financial results during the three and nine months endedSeptember 30, 2021 were impacted by the following transactions: (i) a$50.5 million loss on extinguishment of debt primarily due to theJanuary 2021 early redemption of the 3.250% notes dueOctober 2022 recorded in the three months endedMarch 31, 2021 , (ii) merger and integration-related costs related to our merger with VEREIT of$16.8 million and$30.1 million , respectively, and (iii)$11.0 million and$31.0 million of provisions for impairment, respectively. See our discussion of FFO, Normalized FFO, and AFFO (which are not financial measures under generally accepted accounting principles, or GAAP), later in the section entitled "Management's Discussion and Analysis of -40-
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Financial Condition and Results of Operations," in this quarterly report, which
includes a reconciliation of net income available to common stockholders to FFO
and Normalized FFO, and AFFO.
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 programs, 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 programs and through public securities offerings.
As of September 30, 2022 , there are approximately $1.3 billion of obligations
becoming due through the remainder of 2022, which we expect to fund through a
combination of cash flows from operations, issuances of common stock or debt,
and additional borrowings under our revolving credit facility and rolling over
borrowings under our commercial paper programs.
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.
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 September
30, 2022 , our total outstanding borrowings of senior unsecured notes and bonds,
term loan, mortgages payable, revolving credit facility and commercial paper
were $16.14 billion , or approximately 30.6% of our total market capitalization
of $52.75 billion .
We define our total market capitalization at
•Shares of our common stock outstanding of 627,145,827, plus total common units outstanding of 1,795,167, multiplied by the last reported sales price of our common stock on the NYSE of$58.20 per share onSeptember 30, 2022 , or$36.60 billion ; •Outstanding borrowings of$1.2 billion on our revolving credit facility, comprised entirely of Euro borrowings; •Outstanding borrowings of$723.8 million on our commercial paper programs, including €511.0 million of Euro-denominated borrowings; •Outstanding mortgages payable of$840.7 million , excluding net mortgage premiums of$15.6 million and deferred financing costs of$926,000 ; •Outstanding borrowings of$250.0 million on our term loan, excluding deferred financing costs of$295,000 ; and •Outstanding senior unsecured notes and bonds of$13.1 billion , including Sterling-denominated notes of £2.57 billion, and excluding unamortized net premiums of$241.3 million and deferred financing costs of$56.6 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 -41- -------------------------------------------------------------------------------- Table of Contents 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 ATM program, up to 120,000,000 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. Our ATM program replaced our prior ATM program inJune 2022 , which previously authorized us to offer and sell up to 69,088,433 shares of common stock. 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. We currently expect to fully physically cash settle any forward sale agreement with the respective forward purchaser on one or more dates specified by us on or prior to the maturity date of such forward sale agreement, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward sale agreement multiplied by the relevant forward price per share. During the three months endedSeptember 30, 2022 , we issued 9,532,853 shares, which were sold pursuant to forward sale confirmations, and raised approximately$696.6 million of gross proceeds under the ATM program. During the nine months endedSeptember 30, 2022 , we issued 35,506,034 shares and raised approximately$2.42 billion of gross proceeds under the ATM programs. With respect to forward sales pursuant to our ATM program, we do not initially receive any proceeds from any sale of shares of our common stock borrowed by a forward purchaser and sold through a forward seller. As ofSeptember 30, 2022 , there were 19,995,547 shares of common stock underlying the outstanding forward sale agreements under our ATM program with a weighted average initial price of$66.70 per share as ofSeptember 30, 2022 , representing approximately$1.3 billion in gross proceeds assuming full physical settlement of all outstanding shares of common stock subject to such forward sale agreements and certain assumptions made with respect to settlement dates. The weighted average forward price atSeptember 30, 2022 was$66.43 per share, after price deduction and adjustments. After deducting the 20.0 million shares sold pursuant forward sale confirmations that remained outstanding as ofSeptember 30, 2022 , we had 90,471,600 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. 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 the nine months endedSeptember 30, 2022 . During the three months endedSeptember 30, 2022 , we issued 43,430 shares and raised approximately$3.0 million under our DRSPP. During the nine months endedSeptember 30, 2022 , we issued 128,061 shares and raised approximately$8.7 million under our DRSPP. AtSeptember 30, 2022 , we had 11,207,318 shares remaining for future issuance under our DRSPP program. Revolving Credit Facility InApril 2022 , we entered a new$4.25 billion unsecured revolving credit facility to amend and restate our previous$3.0 billion unsecured revolving credit facility, which was due to expire inMarch 2023 . This new multicurrency credit facility matures inJune 2026 , includes two six-month extensions that can be exercised at our option and allows us to borrow in up to 14 currencies, includingU.S. dollars. Similar to our previous credit facility, our new revolving credit facility also has a$1.0 billion expansion feature, which is subject to obtaining lender commitments. Under the new revolving credit facility, our current investment grade credit ratings provide for financing onU.S. Dollar borrowings at the Secured Overnight Financing Rate ("SOFR"), plus 0.725% with a SOFR adjustment charge of 0.10% and a revolving credit facility fee of 0.125%, for all-in pricing of 0.95% over SOFR and British Pound Sterling at the Sterling Overnight Indexed Average ("SONIA"), plus 0.725% with a SONIA adjustment charge of 0.0326% and a revolving credit facility fee of 0.125%, for all-in pricing of 0.8826% over SONIA. 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 in different currencies as well. Our new credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation. -42-
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AtSeptember 30, 2022 , we had a borrowing capacity of$3.05 billion available on our revolving credit facility and an$1.2 billion outstanding balance. The weighted average interest rate on borrowings under our revolving credit facility during the nine months endedSeptember 30, 2022 , was 1.7% per annum. We must comply with various financial and other covenants in our credit facility. AtSeptember 30, 2022 , 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. Commercial Paper Programs DuringJuly 2022 , ourU.S. Dollar-denominated unsecured commercial paper program was amended to increase the maximum aggregate amount of outstanding notes from$1.0 billion to$1.5 billion . We also established a new 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), which may be issued inU.S. Dollars or various other 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 note market. AtSeptember 30, 2022 , we had an outstanding balance of$723.8 million , including €511.0 million of Euro-denominated borrowings. The weighted average interest rate on borrowings under our commercial paper programs was 1.3% for the nine months endedSeptember 30, 2022 . We use our$4.25 billion revolving credit facility as a liquidity backstop for the repayment of the notes issued under the commercial paper programs. The commercial paper borrowings outstanding atSeptember 30, 2022 have matured and will mature betweenOctober 2022 andJanuary 2023 . 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 programs and may seek to extend, renew or replace our credit facility and commercial paper programs, to the extent we deem appropriate. Term Loan InOctober 2018 , in conjunction with entering into our current revolving credit facility, we entered into a$250.0 million senior unsecured term loan, which matures inMarch 2024 . Prior toApril 2022 , borrowing under this term loan bore interest at the current one-month LIBOR, plus 0.85%. In connection with entering into our new unsecured credit facility inApril 2022 , the previous LIBOR benchmark rate was replaced with daily SOFR, based on a five day lookback period, and, due to our current credit ratings, is not subject to a credit spread adjustment. In conjunction with this term loan, we also entered into an interest rate swap, which was based off the daily SOFR throughJune 30, 2022 . As ofSeptember 30, 2022 , the effective interest rate on this term loan, after giving effect to the interest rate swap, was 3.83%. Mortgage Debt As ofSeptember 30, 2022 , we had$840.7 million of mortgages payable, of which £30.7 million related to a Sterling-denominated mortgage. The majority of our mortgages payable were assumed in connection with our merger with VEREIT or with our property acquisitions, including the assumption of eight mortgages on 17 properties totaling$45.1 million during the nine months endedSeptember 30, 2022 . AtSeptember 30, 2022 , we had net premiums totaling$15.6 million on these mortgages and deferred financing costs of$926,000 . 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 the nine months endedSeptember 30, 2022 , we made$311.1 million in principal payments, including the repayment of 12 mortgages in full for$308.0 million . 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. AtSeptember 30, 2022 , we were in compliance with these covenants. -43- -------------------------------------------------------------------------------- Table of Contents Notes Outstanding As ofSeptember 30, 2022 , our senior unsecured note and bond obligations had a total principal amount of$13.13 billion , including Sterling- denominated notes of £2.57 billion, and excluding net unamortized premiums of$241.3 million and deferred financing costs of$56.6 million . The carrying value of these note and bond obligations as ofSeptember 30, 2022 , includes the portion of the VEREIT OP notes that remained outstanding, totaling$39.1 million in the aggregate, that were not exchanged in the exchange offers commenced by us with respect to the outstanding bonds ofVEREIT Operating Partnership, L.P. ("VEREIT OP") in connection with the consummation of the merger with VEREIT (the "Exchange Offers"); consequently, these notes were originally issued by VEREIT OP inDecember 2019 for the principal amount of$600 million , while the amount of debt issued byRealty Income Corporation 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. -44-
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As of
Principal Amount Carrying Value
(Currency Denomination) (USD)
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
1.875% notes, issued in
£ 250 279
3.000% notes, issued in
$ 600 600
1.125% notes, issued in July 2021 and due in July 2027 £ 400 446
3.950% notes,
600 600
3.650% notes, issued in
$ 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
3.160% notes, issued in June 2022 and due in June 2030 £ 140 156
1.625% notes, issued in
£ 400 446
3.250% notes,
$ 950 950
3.180% notes, issued in
£ 345 384
2.850% notes,
$ 700 700
1.800% notes, issued in
$ 400 400
1.750% notes, issued in July 2021 and due in July 2033 £ 350 390
2.730% notes, issued in May 2019 and due in May 2034 £ 315 350
5.875% bonds,
$ 250 250
3.390% notes, issued in June 2022 and due in June 2037 £ 115 128
2.500% notes, issued in
£ 250 279
4.650% notes,
$ 550 550
Total principal amount $ 13,132
Unamortized net premiums and deferred financing costs 184
$ 13,316
(1) Carrying Value (USD) as of September 30, 2022 , includes the portion of the
VEREIT OP notes that remained outstanding, totaling $39.1 million in the
aggregate, that were not exchanged in the exchange offers commenced by us with
respect to the outstanding bonds of VEREIT Operating Partnership, L.P. ("VEREIT
OP") in connection with the consummation of the merger with VEREIT (the
"Exchange Offers").
(2) These notes were originally issued by VEREIT OP in December 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.
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In
All of our outstanding notes and bonds have fixed interest rates and contain various covenants, with which we remained in compliance as ofSeptember 30, 2022 . Interest on our £400 million of 1.625% senior unsecured notes issued inOctober 2020 , our £400 million of 1.125% senior unsecured notes issued inJuly 2021 , our £350 million of 1.750% senior unsecured notes also issued inJuly 2021 , our £250 million of 1.875% senior unsecured notes issued inJanuary 2022 , and £250 million of 2.500% senior unsecured notes also issued inJanuary 2022 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 onU.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 ofSeptember 30, 2022 , are: Note Covenants Required
Actual
Limitation on incurrence of total debt < 60% of adjusted assets 39.8 % Limitation on incurrence of secured debt < 40% of adjusted assets 2.2 % Debt service coverage (trailing 12 months) (1) > 1.5x
5.5
Maintenance of total unencumbered assets > 150% of unsecured debt
259.0 %
(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 onOctober 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 ofOctober 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 atSeptember 30, 2022 (in thousands, for trailing twelve months): Net income available to common stockholders $ 646,184
Plus: interest expense, excluding the amortization of deferred financing costs
421,714
Plus: loss on extinguishment of debt 46,355
Plus: provision for taxes 45,930
Plus: depreciation and amortization 1,565,445
Plus: provisions for impairment 24,370
Plus: pro forma adjustments 269,307
Less: gain on sales of real estate (114,013)
Income available for debt service, as defined $ 2,905,292 Total pro forma debt service charge $ 528,120 Debt service and fixed charge coverage ratio 5.5 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. AtSeptember 30, 2022 , we had cash and cash equivalents totaling$187.7 million , inclusive of £97.8 million Sterling and €9.6 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 programs. -46-
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Credit Agency Ratings The borrowing interest rates under our revolving credit facility are based upon our ratings assigned by credit rating agencies. As ofSeptember 30, 2022 , 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 atSeptember 30, 2022 : 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 credit agency ratings as ofSeptember 30, 2022 , interest rates under our new credit facility forU.S. borrowings would have been at the SOFR, plus 0.725% with a SOFR adjustment charge of 0.10% and a revolving credit facility fee of 0.125%, for all-in pricing of 0.95% over SOFR and, 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 pricing of 0.8826% over SONIA. In addition, our new credit facility provides that the interest rates can range between: (i) SOFR/SONIA, plus 1.40% if our credit rating is lower than BBB-/Baa3 or our senior unsecured debt is unrated and (ii) SOFR/SONIA, plus 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 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. 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 Obligations The following table summarizes the maturity of each of our obligations as ofSeptember 30, 2022 (dollars in millions): Senior Ground Credit Facility and Unsecured Notes Leases Paid by Ground Commercial Paper and Term Mortgages Realty Income Leases Paid by Principal due Programs (1) Bonds (2) Loan (3) Payable (4) Interest (5) (6) Our Clients (7) Other (8) Totals 2022 $ 703.8 $ - $ -$ 1.1 $ 124.0 $ 2.6 $ 7.7$ 544.5 $ 1,259.7 2023 20.0 - - 22.0 509.8 10.5 30.6 241.5 324.6 2024 - 850.0 250.0 740.5 484.0 13.2 29.9 1.2 1,884.8 2025 - 1,050.0 - 39.2 427.6 11.4 29.3 - 1,129.9 2026 1,196.3 1,575.0 - 12.0 354.8 17.2 28.4 - 2,828.9 Thereafter - 9,656.8 - 25.9 1,562.2 295.2 224.3 - 10,202.2 Totals$ 1,920.1 $ 13,131.8 $ 250.0 $ 840.7 $ 3,462.4 $ 350.1 $ 350.2$ 787.2 $ 17,630.1 (1)The initial term of the credit facility expires inJune 2026 and includes, at our option, two six-month extensions. AtSeptember 30, 2022 , there were$1.2 billion borrowings under our revolving credit facility. Commercial paper programs outstanding atSeptember 30, 2022 were$723.8 million , which have matured and will mature betweenOctober 2022 andJanuary 2023 . (2)Excludes non-cash net premiums recorded on notes payable of$241.3 million and deferred financing costs of$56.6 million . The table of obligations also excludes theOctober 2022 issuance of$750.0 million of senior unsecured notes dueOctober 2032 (3)Excludes deferred financing costs of$295,000 . (4)Excludes both non-cash net premiums recorded on the mortgages payable of$15.6 million and deferred financing costs of$926,000 . (5)Interest on the term loan, notes, bonds, mortgages payable, credit facility and commercial paper programs has been calculated based on outstanding balances at period end through their respective maturity dates. (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$764.9 million of commitments under construction contracts, and$22.3 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements.
Our credit facility, commercial paper programs, term loan, and notes payable obligations are unsecured. Accordingly, we have not pledged any assets as collateral for these obligations.
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Unconsolidated Investments As a result of our merger with VEREIT, we assumed an equity method investment in three unconsolidated entities. InJuly 2022 , six of the seven properties owned by our industrial partnerships acquired in connection with the VEREIT merger were sold, and the seventh property was sold inSeptember 2022 . The gross purchase price for the properties was$905.0 million and we collected$113.5 million of net proceeds (after mortgage defeasance and closing costs) during the three months endedSeptember 30, 2022 , representing our proportionate share of partnership distributions. Up until the point of sale of these properties, we were responsible to fund our proportionate share of any operating cash deficits pursuant to the governance documents of the applicable entities. There were no further material commitments related to those investments. The debt held by the unconsolidated entities was secured by its properties, though was non-recourse to use with limited customary exceptions, which varied from loan to loan. 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
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 125.3% of our taxable income of$933.3 million . Our taxable income reflects non-cash deductions for depreciation and amortization. Our 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 the nine months endedSeptember 30, 2022 , totaled$1.34 billion , representing 76.0% of our adjusted funds from operations available to common stockholders of approximately$1.77 billion . In comparison, our cash distributions to common stockholders in 2021 totaled$1.17 billion , representing 78.5% our adjusted funds from operations available to common stockholders of$1.49 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, 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 afterDecember 31, 2017 , and beforeJanuary 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. -48-
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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 in our Annual Report on Form 10-K for the
year ended December 31, 2021 .
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.
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The following is a comparison of our results of operations for the three and
nine months ended
Total Revenue
The following summarizes our total revenue (dollars in thousands):
Three months ended September 30, Nine months ended September 30, $ Increase
2022 2021 2022 2021 Three Months Nine Months
REVENUE
Rental (excluding
reimbursable) $ 781,883 $ 462,416 $ 2,297,272 $ 1,316,838 $ 319,467 $ 980,434
Rental (reimbursable) 44,063 23,921 129,039 69,120 20,142 59,919
Other 11,323 3,554 28,720 9,485 7,769 19,235
Total revenue $ 837,269 $ 489,891 $ 2,455,031 $ 1,395,443 $ 347,378 $ 1,059,588 The increase in total revenue primarily relates to the merger with VEREIT and
acquisitions for the nine months ended
Rental Revenue (excluding reimbursable)
The table below summarizes the increase in rental revenue (excluding
reimbursable) in the three months ended
Three months ended September 30, Increase/(Decrease)
Number of Properties Square Footage (1) 2022 2021 $ Change
Properties acquired during
2022 & 2021 1,781 42,439,083 $ 140,524 41,337 $ 99,187
Same store rental revenue (2) 9,645 168,085,523 612,270 606,426 5,844 Orion Divestiture 92 10,093,123 21 43,928 (43,907) Constant currency adjustment (3) N/A N/A 3,725 7,716
(3,991)
Properties sold during and prior to 2022 393 9,587,827 9,037 9,428
(391)
Straight-line rent and other non-cash adjustments N/A N/A 2,788 4,895
(2,107)
Vacant rents, development and other (4) 307 6,573,977 11,628 12,468
(840)
Other excluded revenue (5) N/A N/A 1,890 3,195
(1,305)
Less: VEREIT rental revenue (6) N/A N/A - (266,977) 266,977 Totals $ 781,883$ 462,416 $ 319,467 (1) Excludes 5,913,131 square feet from properties ground leased to clients and 2,647,226 square feet from properties with no land or building ownership. (2) The same store rental revenue percentage increase for the three months endedSeptember 30, 2022 as compared with the same period in prior year is 1.0%. (3) For purposes of comparability, same store rental revenue is presented on a constant currency basis using the exchange rate as ofSeptember 30, 2022 , of1.11 GBP /USD. None of the properties inSpain met our same store pool definition for the periods presented. (4) Relates to the aggregate of (i) rental revenue from properties (292 properties comprising 5,869,312 square feet) that were available for lease during part of 2022 or 2021, and (ii) rental revenue for properties (15 properties comprising 704,665 square feet) under development. (5) Primarily consists of lease termination revenue and reimbursements for tenant improvements and rental revenue that is not contractual base rent such as lease termination settlements. (6) Amounts for the three months endedSeptember 30, 2021 represent rental revenue from VEREIT properties, which were not included in our financial statements prior to the close of the merger onNovember 1, 2021 . -50-
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The table below summarizes the increase in rental revenue (excluding
reimbursable) in the nine months ended
Nine months ended September 30, Increase/(Decrease)
Number of Properties Square Footage (1) 2022 2021 $ Change
Properties acquired during
2022 & 2021 1,781 42,439,083 $ 351,162 $ 66,111 $ 285,051
Same store rental revenue (2) 9,645 168,085,523 1,844,225 1,801,469 42,756 Orion Divestiture 92 10,093,123 430 132,518 (132,088) Constant currency adjustment (3) N/A N/A 21,605 25,754
(4,149)
Properties sold during and prior to 2022 393 9,587,827 17,442 48,882
(31,440)
Straight-line rent and other non-cash adjustments N/A N/A 15,126 13,925
1,201
Vacant rents, development and other (4) 307 6,573,977 39,586 29,184
10,402
Other excluded revenue (5) N/A N/A 7,696 7,164 532 Less: VEREIT rental revenue (6) N/A N/A - (808,169) 808,169 Totals 2,297,272 1,316,838 980,434 (1) Excludes 5,913,131 square feet from properties ground leased to clients and 2,647,226 square feet from properties with no land or building ownership. (2) The same store rental revenue percentage increase for the nine months endedSeptember 30, 2022 as compared with the same period in prior year is 2.4%. (3) For purposes of comparability, same store rental revenue is presented on a constant currency basis using the exchange rate as ofSeptember 30, 2022 , of1.11 GBP /USD. None of the properties inSpain met our same store pool definition for the periods presented. (4) Relates to the aggregate of (i) rental revenue from properties (292 properties comprising 5,869,312 square feet) that were available for lease during part of 2022 or 2021, and (ii) rental revenue for properties (15 properties comprising 704,665 square feet) under development. (5) Primarily consists of lease termination revenue and reimbursements for tenant improvements and rental revenue that is not contractual base rent such as lease termination settlements. (6) Amounts for the nine months endedSeptember 30, 2021 represent rental revenue from VEREIT properties, which were not included in our financial statements prior to the close of the merger onNovember 1, 2021 . 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. Beginning with the first quarter of 2022, properties acquired through the merger with VEREIT were considered under each element of our same store pool criterion, except for the requirement that the property be owned for the full comparative period. If the property was owned by VEREIT for the full comparative period and each of the other criterion were met, the property was included in our same store property pool. 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). Beginning with the first quarter of 2022, properties acquired through the merger with VEREIT were considered under each element of ourSame Store Pool criterion, except for the requirement that the property be owned for the full comparative period. If the property was owned by VEREIT for the full comparative period and each of the other criterion were met, the property was included in our same store property pool. 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 increases for the three and nine months endedSeptember 30, 2022 relative to the comparable periods for 2021 would have been 0.3% and 2.5%, respectively.
Of the 11,733 properties in the portfolio at
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Of the 12,146 in-place leases in the portfolio, which excludes 167 vacant units, 10,306, or 84.9%, 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 the clients' gross sales; •Fixed increases; or •A combination of two or more of the above rent provisions.
Rent based on a percentage of our client's gross sales, or percentage rent, was$2.3 million in the three months endedSeptember 30, 2022 ,$441,000 in the three months endedSeptember 30, 2021 ,$8.3 million in the nine months endedSeptember 30, 2022 , and$2.0 million in the nine months endedSeptember 30, 2021 . We anticipate percentage rent to be less than 1% of rental revenue for 2022. AtSeptember 30, 2022 , our portfolio of 11,733 properties was 98.9% leased with 131 properties available for lease, as compared to 98.5% leased with 164 properties available for lease atDecember 31, 2021 , and 98.8% leased with 86 properties available for lease atSeptember 30, 2021 . It has been our experience that approximately 1% to 4% of our property portfolio will 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 the future, given the nature of economic cycles and other unforeseen global events, such as the COVID-19 pandemic. 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.
Total Expenses
The following summarizes our total expenses (dollars in thousands):
Three months ended September 30, Nine months ended September 30, $ Increase/(Decrease)
2022 2021 2022 2021 Three Months Nine Months
EXPENSES
Depreciation and amortization $ 419,016 $ 198,832 $ 1,232,215 $ 564,606 $ 220,184 $ 667,609
Interest 117,409 76,156 333,933 222,905 41,253 111,028
Property (excluding
reimbursable) 8,656 5,741 28,202 20,775 2,915 7,427
Property (reimbursable) 44,063 23,921 129,039 69,120 20,142 59,919
General and administrative 34,096 23,813 100,934 66,458 10,283 34,476
Provisions for impairment 1,650 11,011 16,379 30,977 (9,361) (14,598)
Merger and integration-related
costs 3,746 16,783 12,994 30,081 (13,037) (17,087)
Total expenses $ 628,636 $ 356,257 $ 1,853,696 $ 1,004,922 $ 272,379 $ 848,774
Total revenue (1) $ 793,206 $ 465,970 $ 2,325,992 $ 1,326,323
General and administrative
expenses as a percentage of
total revenue (1) 4.3 % 5.1 % 4.3 % 5.0 %
Property expenses (excluding
reimbursable) as a percentage of
total revenue (1) 1.1 % 1.2 % 1.2 % 1.6 %
(1) Excludes rental revenue (reimbursable). During 2021, we began presenting
'Other income, net', which consists of certain miscellaneous non-recurring
revenue previously presented in 'Other' within 'Revenue,' in a separate caption
in the consolidated statements of income and
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comprehensive income. There was no change to the general and administrative
expense as a percentage of total revenue prior to this adjustment for the three
and nine months ended September 30, 2021 .
Depreciation and Amortization
The increase in depreciation and amortization for the three and nine months
ended September 30, 2022 , was primarily due to the acquisition of properties in
2021 and the merger with VEREIT. 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):
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Interest on our credit
facility, commercial paper,
term loan, notes, mortgages and
interest rate swaps $ 131,160 $ 72,299 $ 376,448 $ 212,030
Credit facility commitment fees 1,358 958 3,521 2,844
Amortization of debt
origination and deferred
financing costs 3,653 3,010 10,056 8,346
Loss on interest rate swaps 734 734 2,180 2,180
Amortization of net mortgage
premiums (3,327) (673) (10,418) (1,158)
Amortization of net note
premiums (15,762) 102 (47,185) (37)
Interest capitalized (789) (423) (1,729) (1,604)
Capital lease obligation 382 149 1,060 304
Interest expense $ 117,409 $ 76,156 $ 333,933 $ 222,905
Credit facility, commercial
paper, term loan, mortgages and
notes
Average outstanding balances
(dollars in thousands) $ 16,174,244 $ 9,282,808 $ 15,680,253 $ 8,857,204
Average interest rates 3.21 % 3.02 % 3.16 % 3.10 %
The increase in interest expense for the three and nine months ended September
30, 2022 is primarily due to the June 2022 issuance of £600 million in principal
of Sterling denominated notes, January 2022 issuance of £500 million in
principal of Sterling denominated notes, the issuance of $4.65 billion in
principal of notes associated with the exchange offer and assumption of $839.1
million in principal of mortgage debt, both associated with our merger with
VEREIT in November 2021 , the July 2021 issuance of £750 million in principal of
Sterling denominated notes, and higher average balances and rates on the credit
facility and commercial paper borrowings, partially offset by the December 2021
early redemption on all $750.0 million in principal of the 4.650% notes due
August 2023 , and the January 2021 early redemption on all $950.0 million in
principal of the 3.250% notes due October 2022 .
During the nine months ended
•Revolving credit facility outstanding borrowings of$1.2 billion was 1.7%; •Commercial paper outstanding borrowings of$723.8 million was 1.3%; •Term loan outstanding of$250.0 million (excluding deferred financing costs of$295,000 ) was swapped to fixed at 3.8%; •Mortgages payable of$840.7 million (excluding net premiums totaling$15.6 million and deferred financing costs of$926,000 on these mortgages) was 4.8%; •Notes and bonds payable of$13.13 billion (excluding net unamortized original issue premiums of$241.3 million and deferred financing costs of$56.6 million ) was 3.3%; and •Notes, bonds, mortgages, term loan, and credit facility and commercial paper borrowings of$16.1 billion (excluding all net premiums and deferred financing costs) was 3.2%. -53-
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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. AtSeptember 30, 2022 , 131 properties were available for lease or sale, as compared to 164 atDecember 31, 2021 , and 86 atSeptember 30, 2021 .
The increase in property expenses (excluding reimbursable) for the three and
nine months ended
Property Expenses (reimbursable) The increase in property expenses (reimbursable) for the three and nine months endedSeptember 30, 2022 , was primarily attributable to our increased portfolio size, which contributed to higher operating expenses as a result of our acquisitions in 2021 and the nine months endedSeptember 30, 2022 , and an increase in ground lease rent, insurance, and 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 the three and nine months endedSeptember 30, 2022 , is primarily due to higher payroll-related costs and higher corporate-level professional fees, information technology, and corporate occupancy costs associated with the growth of the company, including the merger with VEREIT. AtSeptember 30, 2022 , the headcount was 388 versus 257 atSeptember 30, 2021 .
Provisions for Impairment The following table summarizes provisions for impairment during the periods indicated below (dollars in millions):
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Carrying value prior to
impairment $ 48.1 $ 35.0 $ 107.0 $ 85.7
Less: total provisions for
impairment (1.7) (11.0) (16.4) (31.0)
Carrying value after impairment 46.4 24 90.6 54.7
Number of properties:
Classified as held for sale 3 - 3 -
Classified as held for
investment - 1 5 7
Sold 20 22 69 57
Merger and Integration-Related Costs
In conjunction with our merger with VEREIT, we incurred approximately
$3.7 million and $13.0 million of merger and integration-related transaction
costs during the three and nine months ended September 30, 2022 , respectively,
compared to approximately $16.8 million and $30.1 million during three and nine
months ended September 30, 2021 . Merger and integration-related costs consist of
advisory fees, attorney fees, accountant fees, SEC filing fees and additional
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.
Gain on Sales of Real Estate
The following summarizes our property dispositions, excluding our proportionate
share of net proceeds from the disposition of properties by our consolidated
industrial partnerships (dollars in millions):
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Number of properties sold 34 27 138 96
Net sales proceeds $ 142.2 $ 31.9 $ 414.4 $ 123.5
Gain on sales of real estate $ 42.6 $ 12.1 $ 93.4 $ 35.4
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Foreign Currency and Derivative Gains (Losses), Net We borrow in the functional currencies of the countries in which we invest. Net foreign currency gain and loss are primarily related to the remeasurement of intercompany debt from foreign subsidiaries. Gain and loss on foreign currency are largely offset by derivative gain and loss. Derivative gain and loss relates to mark-to-market adjustments on derivatives that do not qualify for hedge accounting. Net derivative gain and loss are primarily related to realized and unrealized short term currency exchange swaps. Gain and loss on derivatives are largely offset by foreign currency gain and loss. InJune 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 intercompany 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 accumulated other comprehensive income, or AOCI, to 'Foreign currency and derivative loss, net' during the nine months endedSeptember 30, 2022 . The reclassification from AOCI was offset by$7.9 million in losses from the intercompany loan remeasurement on the final exchange. Gain (loss) on extinguishment of debt InSeptember 2021 , we completed the early redemption on$12.5 million in principal of a mortgage dueJune 2032 , plus accrued and unpaid interest. As a result of the early redemption, we recognized a$4.0 million loss on extinguishment of debt for the nine months endedSeptember 30, 2021 . InJanuary 2021 , we completed the early redemption on all$950.0 million in principal amount of outstanding 3.250% notes dueOctober 2022 , plus accrued and unpaid interest. As a result of the early redemption, we recognized a$46.5 million loss on extinguishment of debt for the nine months endedSeptember 30, 2021 . Equity in Income and Impairment of Investment in Unconsolidated Entities Equity in income of unconsolidated entities for the three and nine months endedSeptember 30, 2022 , relates to three equity method investments that were acquired in our merger with VEREIT. The loss for the three and nine months endedSeptember 30, 2022 is primarily driven by an other than temporary impairments. There were no comparative investments for the three and nine months endedSeptember 30, 2021 . During the third quarter of 2022 all seven of the properties owned by our industrial partnerships acquired in connection with the VEREIT merger were sold. Other Income,Net Certain miscellaneous non-recurring revenue is included in other income, net. The increase in the three and nine months endedSeptember 30, 2022 , is primarily related to insurance proceeds received from property losses and other non-recurring settlements. 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 the three and nine months endedSeptember 30, 2022 , was primarily attributable to our increased volume ofU.K. investments, which contributed to higherU.K. income taxes as compared to the same period in 2021.
Net Income Available to Common Stockholders The following summarizes our net income available to common stockholders (dollars in millions, except per share data):
Three months ended September 30, Nine months ended September 30, % Increase
2022 2021 2022 2021 Three Months Nine Months
Net income available to common
stockholders $ 219.6 $ 135.0 $ 642.1 $ 355.4 62.7 % 80.7 %
Net income per share (1) $ 0.36 $ 0.34 $ 1.06 $ 0.94 5.9 % 12.8 %
(1) All per share amounts are presented on a diluted per common share basis.
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The calculation to determine net income available to common stockholders includes provisions for impairment, gain from the sale of properties, and foreign currency gain and loss, which can vary from period to period based on timing and significantly impact net income available to the Company and available to common stockholders.
The increase in net income available to common stockholders for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 primarily related to the increase in the size of our portfolio due to the merger with VEREIT, which closed onNovember 1, 2021 . In addition, net income available to common stockholders for the nine months endedSeptember 30, 2021 , was impacted by the following transactions: (i) a$50.5 million loss on extinguishment of debt, primarily due to theJanuary 2021 early redemption of the 3.250% notes dueOctober 2022 recorded in the three months endedMarch 31, 2021 , (ii)$30.1 million of merger-related costs related to our merger with VEREIT, of which$16.8 million related to the three months endedSeptember 30, 2021 , and (iii)$31.0 million of provisions for impairment, of which$11.0 million related to the three months endedSeptember 30, 2021 . Adjusted Earnings before Interest, Taxes, Depreciation and Amortization for Real Estate (Adjusted EBITDAre)The National Association of Real Estate Investment Trusts (Nareit) 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 gain and loss, excluding gain and loss 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, 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) gain (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 gain, net (as described in the Adjusted Funds from Operations section), and (ix) equity in income and impairment of investment in 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 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, EBITDAre is widely followed by industry analysts, lenders, investors, rating agencies, and 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 our 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 Adjusted EBITDAre from properties we acquired or stabilized during the applicable quarter and to remove Adjusted EBITDAre from properties we disposed of during the applicable quarter, and includes transaction accounting adjustments in accordance withU.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. Management also uses our ratios of net debt-to-Annualized Adjusted EBITDAre and net debt-to Annualized Pro Forma Adjusted EBITDAre as measures of leverage in assessing our financial performance, which is calculated as net debt (which we define as total debt per the consolidated balance sheets, 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. -56-
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The following is a reconciliation of net income available to common stockholders
(which we believe is the most comparable GAAP measure) to Adjusted EBITDAre and
Annualized Pro Forma EBITDAre calculations for the periods indicated below
(dollars in thousands):
Three months ended
2022 2021
Net income $ 220,287 $ 135,276
Interest 117,409 76,156
(Gain) loss on extinguishment of debt (240) 3,983
Income taxes 10,163 6,079
Depreciation and amortization 419,016 198,832
Provisions for impairment 1,650 11,011
Merger and integration-related costs 3,746 16,783
Gain on sales of real estate (42,883) (12,094)
Foreign currency and derivative losses, net 22,893 2,374
Gain on settlement of foreign currency forwards 2,784 -
Equity in income and impairment of investment in
unconsolidated entities 662 -
Quarterly Adjusted EBITDAre $ 755,487 $ 438,400
Annualized Adjusted EBITDAre (1) $ 3,021,948 $ 1,753,600
Annualized Pro Forma Adjustments $ 31,700 $ 43,910
Annualized Pro Forma Adjusted EBITDAre $ 3,053,648 $ 1,797,510 Total debt per the consolidated balance sheets, excluding
deferred financing costs and net premiums and discounts
$ 9,293,592 Less: Cash and cash equivalents (187,745) (516,983) Net Debt (2)$ 15,954,863 $ 8,776,609 Net Debt/Annualized Adjusted EBITDAre (3) 5.3 x 5.0 x Net Debt/Annualized Pro Forma Adjusted EBITDAre(3) 5.2 x 4.9 x (1) We calculate Annualized Adjusted EBITDAre by multiplying the Quarterly Adjusted EBITDAre by four. (2) Net Debt is total debt per our consolidated balance sheets, excluding deferred financing costs and net premiums and discounts, but including our proportionate share on debt from unconsolidated entities, less cash and cash equivalents. (3) During 2021, Net Debt was adjusted to exclude deferred financing costs and net premiums and discounts. The adjustment of Net Debt did not impact the calculation for the Net Debt/Annualized Adjusted EBITDAre for the three months endedSeptember 30, 2021 . As described above, the Annualized Pro Forma Adjustments, which includes transaction accounting adjustments in accordance withU.S. GAAP, consists of adjustments to incorporate the Adjusted EBITDAre from properties we acquired or stabilized during the applicable quarter and removes Adjusted 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 period, consistent with the requirements of Article 11 of Regulation S-X. The following table summarizes our Annualized Pro Forma Adjusted EBITDAre calculation for the periods indicated below: Three months ended September 30, Dollars in thousands 2022 2021 Annualized pro forma adjustments from properties acquired or stabilized $ 68,589$ 45,901 Annualized pro forma adjustments from properties disposed (36,889) (1,991) Annualized Pro forma Adjustments $ 31,700$ 43,910 -57-
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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 gain 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. Three months ended September 30, Nine months ended September 30, % Increase 2022 2021 2022 2021 Three Months Nine Months FFO available to common stockholders $ 597.2 $ 332.3$ 1,807.4 $ 914.4 79.7 % 97.7 % FFO per share (1) $ 0.97 $ 0.85 $ 2.99 $ 2.41 14.1 % 24.1 % Normalized FFO available to common stockholders $ 600.9 $ 349.1$ 1,820.4 $ 944.5 72.1 % 92.7 % Normalized FFO per share (1) $ 0.97 $ 0.89 $ 3.01 $ 2.49 9.0 % 20.9 %
(1) All per share amounts are presented on a diluted per common share basis.
FFO and Normalized FFO for the three and nine months ended
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 (dollars in thousands, except per share
amounts):
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Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Net income available to common
stockholders $ 219,567 $
134,996
419,016 198,832 1,232,215 564,606
Depreciation of furniture, fixtures and
equipment (511) (230) (1,478) (674)
Provisions for impairment 1,650 11,011 16,379 30,977
Gain on sales of real estate (42,883) (12,094) (93,611) (35,396)
Proportionate share of adjustments for
unconsolidated entities (1) 717 - 12,812 -
FFO adjustments allocable to
noncontrolling interests (402) (180) (1,075) (511)
FFO available to common stockholders $ 597,154 $ 332,335 $ 1,807,385 $ 914,417
FFO allocable to dilutive
noncontrolling interests 985 356 2,569 1,062
Diluted FFO $ 598,139 $ 332,691 $ 1,809,954 $ 915,479 FFO available to common stockholders $ 597,154
3,746 16,783 12,994 30,081
Normalized FFO available to common
stockholders $ 600,900 $ 349,118 $ 1,820,379 $ 944,498
Normalized FFO allocable to dilutive
noncontrolling interests 985 356 2,569 1,062
Diluted Normalized FFO $ 601,885 $ 349,474 $ 1,822,948 $ 945,560
FFO per common share, basic and diluted $ 0.97 $
0.85
Normalized FFO per common share, basic and diluted $ 0.97$ 0.89 $ 3.01 $ 2.49 Distributions paid to common stockholders $ 458,586$ 273,791 $ 1,342,695 $ 797,847 FFO available to common stockholders in excess of distributions paid to common stockholders $ 138,568$ 58,544 $ 464,690 $ 116,570 Normalized FFO available to common stockholders in excess of distributions paid to common stockholders $ 142,314$ 75,327 $ 477,684 $ 146,651 Weighted average number of common shares used for FFO and normalized FFO: Basic 617,511,609 391,913,478 604,463,977 379,291,782 Diluted 619,201,363 392,513,520 605,958,422 379,872,546 (1)Includes an other than temporary impairment of$0.7 million and$8.5 million recognized during the three and nine months endedSeptember 30, 2022 , respectively, on our investment in unconsolidated entities, all of which were sold as ofSeptember 30, 2022 . 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. -59-
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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. We define diluted AFFO as AFFO adjusted for dilutive noncontrolling interests.
Three months ended September 30, Nine months ended September 30, % Increase
2022 2021 2022 2021 Three months Nine months
AFFO available to
common stockholders $ 603.6 $ 356.8 $ 1,767.4 $ 1,002.7 69.2 % 76.3 %
AFFO per share (1) $ 0.98 $ 0.91 $ 2.92 $ 2.64 7.7 % 10.6 %
(1) All per share amounts are presented on a diluted per common share 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 (dollars in thousands, except per share
amounts):
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Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Net income available to common
stockholders $ 219,567 $
134,996 $ 642,143
381,333 214,122 1,178,236 589,083
Normalized FFO available to common
stockholders 600,900 349,118 1,820,379 944,498
(Gain) loss on extinguishment of
debt (240) 3,983 (367) 50,456
Amortization of share-based
compensation 5,099 4,315 16,742 12,484
Amortization of net debt premiums
and deferred financing costs (2) (16,728) 1,394 (50,772) 4,284
Loss on interest rate swaps 735 733 2,181 2,179
Straight-line payments from
cross-currency swaps (3) 0 513 884 1,715
Leasing costs and commissions (686) (1,199) (3,853) (2,026)
Recurring capital expenditures (273) (365) (459) (415)
Straight-line rent and expenses, net (29,628) (14,801) (85,004) (36,268)
Amortization of above and
below-market leases, net 17,422 10,312 47,466 23,546
Proportionate share of adjustments
for unconsolidated entities (85) - (4,239) -
Other adjustments (4) 27,050 2,834 24,434 2,253
AFFO available to common
stockholders $ 603,566 $
356,837
1,006 351 2,613 1,047
Diluted AFFO $ 604,572 $
357,188
AFFO per common share, basic and diluted $ 0.98$ 0.91 $ 2.92$ 2.64 Distributions paid to common stockholders $ 458,586 $
273,791
AFFO available to common stockholders in excess of distributions paid to common stockholders $ 144,980$ 83,046 $ 424,697$ 204,859 Weighted average number of common shares used for computation per share: Basic 617,511,609 391,913,478 604,463,977 379,291,782 Diluted 619,201,363 392,513,520 605,958,422 379,872,546 (1)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)." (2) 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. (3) 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. InJune 2022 , we terminated the four cross-currency swaps subject to this adjustment. The nine months endedSeptember 30, 2022 includes the adjustment through the termination date. (4) 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 gain and loss as a result of intercompany debt and remeasurement transactions. -61-
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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.
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.
PROPERTY PORTFOLIO INFORMATION
At
•Consisting of 11,733 properties; •With an occupancy rate of 98.9%(1), or 11,602 properties leased and 131 properties available for lease or sale; •With clients doing business in 79 separate industries; •Located in all 50 U.S. states,Puerto Rico , theU.K. andSpain ; •With approximately 225.7 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 8.8 years; and •With an average leasable space per property of approximately 19,230 square feet; approximately 13,100 square feet per retail property and approximately 235,790 square feet per industrial property.
(1) Excludes four properties with ancillary leases only, such as cell towers and billboards.
AtSeptember 30, 2022 , 11,602 properties were 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' 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. We believe total portfolio annualized contractual revenue 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 and reserve reversals recorded as adjustments to GAAP rental revenue in the periods presented and excludes unconsolidated entities. -62-
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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 includes property types and clients engaged in various
industries. Even though we now only have a single segment, we believe our
investors continue to view diversification as a key component of our investment
philosophy and so we believe it is still 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 (1)
As of
Sept 30, Dec 31, Dec 31, Dec 31, Dec 31,
2022 2021 2020 2019 2018
Grocery stores 10.3% 10.2% 9.8% 7.9% 5.0%
Convenience stores 9.0 9.1 11.9 12.3 12.6
Dollar stores 7.7 7.5 7.6 7.9 7.3
Restaurants - quick service 6.4 6.6 5.3 5.8 6.3
Drug stores 6.2 6.6 8.2 8.8 9.4
Restaurants - casual dining 5.5 5.9 2.8 3.2 3.3
Home improvement 5.0 5.1 4.3 2.9 2.8
Health and fitness 4.7 4.7 6.7 7.0 7.1
Automotive service 3.9 3.2 2.7 2.6 2.2
General merchandise 3.9 3.7 3.4 2.5 2.1
(1) The presentation of Top 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 , and in Spain , starting in September 2021 .
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Property Type Composition The following table sets forth certain property type information regarding our property portfolio as ofSeptember 30, 2022 (dollars in thousands): Approximate Total Portfolio Percentage of Total Number of Leasable Annualized Portfolio Annualized Property Type Properties Square Feet (1) Contractual Rent Contractual Rent Retail 11,400 149,442,600$ 2,656,115 84.6 % Industrial 314 74,037,100 438,474 13.9 Other (2) 19 2,179,200 48,608 1.5 Totals 11,733 225,658,900$ 3,143,197 100.0 % (1)Includes leasable building square footage. Excludes 1,610 acres of leased land categorized as agriculture atSeptember 30, 2022 . (2)"Other" includes eight properties classified as office, consisting of approximately 2.0 million leasable square feet and$25.6 million in annualized contractual rent, and 11 properties classified as agriculture, consisting of approximately 157,300 leasable square feet and$23.0 million in annualized contractual rent. 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, atSeptember 30, 2022 : Percentage of Total Number of Portfolio Annualized Client Leases Contractual Rent(1) Dollar General 1,438 4.2 % Walgreens 341 3.9 7-Eleven 6323.8 Dollar Tree / Family Dollar 1,057 3.5 FedEx 81 2.8 LA Fitness 76 2.3 BJ's Wholesale Clubs 33 1.9 Sainsbury's 27 1.8 B&Q (Kingfisher) 36 1.7 CVS Pharmacy 183 1.7 Lifetime Fitness 21 1.7 Wal-Mart / Sam's Club 66 1.7 AMC Theaters 35 1.6 Red Lobster 200 1.5 Regal Cinemas (Cineworld) 41 1.5 Tractor Supply 165 1.4 Tesco 16 1.3 Home Depot 29 1.2 Kroger 31 1.1 Fas Mart (GPM Investments) 260 1.0 Total 4,768 41.3 %
(1)Amounts for each client are calculated independently; therefore, the individual percentages may not sum to the total.
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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 ofSeptember 30, 2022 (dollars in thousands): Total Portfolio
(1)
Expiring Approximate Total Portfolio Percentage of Total
Leases Leasable Annualized Portfolio Annualized
Year Retail Non-Retail Square Feet Contractual Rent Contractual Rent
2022 67 4 848,400 $ 10,384 0.3
2023 608 24 8,416,400 112,238 3.6
2024 691 31 13,715,300 157,098 5.0
2025 844 35 13,955,500 197,071 6.3
2026 783 32 15,885,500 182,868 5.8
2027 1,351 34 21,724,400 265,394 8.4
2028 1,158 37 22,170,300 261,870 8.3
2029 883 20 18,775,800 225,784 7.2
2030 540 20 15,116,500 169,843 5.4
2031 475 35 20,745,700 233,083 7.4
2032 704 18 12,899,300 199,703 6.5
2033 557 13 12,596,800 162,275 5.2
2034 542 6 10,146,400 205,349 6.5
2035 409 3 4,713,700 104,514 3.3
2036 405 8 6,977,300 126,818 4.0
2037 - 2059 1,772 37 24,911,900 528,905 16.8
Totals 11,789 357 223,599,200 $ 3,143,197 100.0 %
(1)Leases on our multi-client properties are counted separately in the table above. This table excludes 167 vacant units.
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Geographic Diversification
The following table sets forth certain state-by-state information regarding our
property portfolio as of September 30, 2022 (dollars in thousands):
Approximate Percentage of Total
Number of Leasable Portfolio Annualized
Location Properties Percent Leased Square Feet Contractual Rent
Alabama 385 97 4,207,900 2.0 %
Alaska 6 100 299,700 0.1
Arizona 230 100 3,589,100 1.9
Arkansas 223 100 2,441,800 1.1
California 324 99 11,384,400 6.0
Colorado 163 98 2,634,700 1.5
Connecticut 25 96 1,237,300 0.4
Delaware 25 100 189,900 0.1
Florida 723 99 9,688,100 5.2
Georgia 511 99 8,262,400 3.6
Hawaii 22 100 47,800 0.2
Idaho 27 100 189,100 0.1
Illinois 483 98 12,048,800 5.2
Indiana 393 99 7,227,500 2.8
Iowa 93 99 2,908,500 0.9
Kansas 179 100 4,531,500 1.2
Kentucky 312 99 5,376,300 1.7
Louisiana 328 100 4,988,300 2.1
Maine 54 100 1,004,900 0.5
Maryland 73 96 2,822,700 1.3
Massachusetts 90 100 3,104,500 1.4
Michigan 459 99 5,525,400 2.9
Minnesota 231 99 3,513,100 1.9
Mississippi 281 99 4,236,800 1.3
Missouri 345 99 4,770,500 2.0
Montana 21 100 204,500 0.1
Nebraska 75 99 1,013,000 0.4
Nevada 71 100 2,633,800 1.0
New Hampshire 29 100 561,500 0.3
New Jersey 142 99 2,225,900 1.7
New Mexico 102 98 1,299,200 0.6
New York 239 99 4,315,400 3.1
North Carolina 380 98 7,823,500 3.2
North Dakota 21 90 343,300 0.2
Ohio 675 99 14,541,600 4.5
Oklahoma 285 99 3,919,700 1.7
Oregon 41 100 650,400 0.4
Pennsylvania 335 99 5,904,400 2.7
Rhode Island 6 100 99,800 0.1
South Carolina 286 99 4,101,700 1.9
South Dakota 29 100 428,400 0.2
Tennessee 409 98 6,787,800 2.6
Texas 1,507 99 % 25,200,900 11.1
Utah 36 100 1,529,500 0.5
Vermont 7 100 134,900 0.1
Virginia 350 98 5,942,400 2.5
Washington 77 100 1,769,500 1.0
West Virginia 75 100 729,900 0.4
Wisconsin 266 100 5,221,000 2.1
Wyoming 23 100 157,700 0.1
Puerto Rico 6 100 59,400 0.1
United Kingdom 203 100 17,868,700 9.0
Spain 52 100 % 3,960,100 1.0
Totals/average 11,733 99 % 225,658,900 100.0 %
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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 PRONOUNCEMENTSFor information on the impact of new accounting standards on our business, see note 2 of the Notes to the Consolidated Financial Statements.
OTHER INFORMATION
Our common stock is listed on the NYSE under the ticker symbol "O" with a CUSIP
number of 756109-104. Our 1.625% notes due December 2030 are listed on the NYSE
under the ticker symbol "O30" with a CUSIP number of 756109-AY0. Our 1.875%
notes due January 2027 are listed on the NYSE under the ticker symbol "O27B"
with a CUSIP number of 756109-BM5. Our 1.125% notes due July 2027 are listed on
the NYSE under the ticker symbol "O27A" with a CUSIP number of 756109-BB9. Our
1.750% notes due July 2033 are listed on the NYSE under the ticker symbol "O33A"
with a CUSIP number of 756109-BC7. Our 2.500% notes due January 2042 are listed
on the NYSE under the ticker symbol "O42" with a CUSIP number of 756109-BN3. Our
central index key number is 726728.
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 SEC . None of the information
on our website is deemed to be part of this report.
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