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 discussions of strategy, plans, or intentions of management. Forward-looking statements are subject to risks, uncertainties, and assumptions aboutRealty 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-tenant properties; •Future expenditures for development projects; and •The impact of the COVID-19 pandemic, or future pandemics, on us, our business, our tenants, or the economy generally. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. In particular, forward-looking statements regarding estimated or future results of operations are based upon numerous assumptions and estimates and are inherently subject to substantial uncertainties and actual results of operations 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 tenant defaults, 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; •The continued evolution of the COVID-19 pandemic and the measures taken to limit its spread, and its impacts on us, our business, our tenants, 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; •The outcome of any legal proceedings to which we are a party or which may occur in the future; and •Acts of terrorism and war. Additional factors that may cause risks and uncertainties 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 endedDecember 31, 2019 , those discussed in this section and in "Item 1.A.- Risk Factors" in Part II of this report. Readers are cautioned not to place undue reliance on forward-looking statements, which 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. -25-
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THE COMPANYRealty Income , The Monthly Dividend Company®, is an S&P 500 company dedicated to providing stockholders with dependable monthly dividends that increase over time. The Company is structured as a real estate investment trust, or REIT, requiring it annually to distribute at least 90% of its 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 lease agreements with commercial tenants.Realty Income was founded in 1969, and listed on theNew York Stock Exchange (NYSE: O) in 1994. Over the past 51 years,Realty Income has been acquiring and managing freestanding commercial properties that generate rental revenue under long-term lease agreements with commercial tenants. The Company is a member of the S&P 500 Dividend Aristocrats® index for having increased its dividend every year for the last 25 consecutive years or more. AtSeptember 30, 2020 , we owned a diversified portfolio: •Of 6,588 properties; •With an occupancy rate of 98.6%, or 6,496 properties leased and 92 properties available for lease or sale; •Doing business in 51 separate industries; •Located in 49 U.S. states,Puerto Rico and theUnited Kingdom (U.K. ); •With approximately 108.5 million square feet of leasable space; •With a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 9.0 years; and •With an average leasable space per property of approximately 16,470 square feet; approximately 12,220 square feet per retail property and 223,320 square feet per industrial property. Of the 6,588 properties in the portfolio atSeptember 30, 2020 , 6,554, or 99.5%, are single-tenant properties, of which 6,465 were leased, and the remaining are multi-tenant properties. 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 tenants for recoverable real estate taxes and operating expenses totaling$18.0 million and$15.5 million for the third quarters of 2020 and 2019, respectively, and$59.4 million and$49.3 million for the first nine months of 2020 and 2019, respectively. 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 over time. A net lease typically requires the tenant to be responsible for monthly rent and certain property operating expenses including property taxes, insurance, and maintenance. In addition, tenants of our properties typically pay rent increases based on: (1) fixed increases, (2) increases in the consumer price index (typically subject to ceilings), or (3) additional rent calculated as a percentage of the tenants' gross sales above a specified level. We believe that a portfolio of properties under long-term lease agreements with commercial tenants 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 tenant, 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, 2020 , consisted of 6,588 properties located in 49 U.S. states,Puerto Rico and theU.K. , and doing business in 51 industries. None of the 51 industries represented in our property portfolio accounted for more than 12.1% of our annualized contractual rental revenue as ofSeptember 30, 2020 . Investment Strategy When identifying new properties for investment, we generally focus on acquiring high-quality real estate that tenants consider important to the successful operation of their business. We generally seek to acquire real estate that has the following characteristics: •Properties that are freestanding, commercially-zoned with a single tenant; •Properties that are in significant markets or strategic locations critical to generating revenue for our tenants (i.e. they need the property in which they operate in order to conduct their business); -26- -------------------------------------------------------------------------------- Table of Contents •Properties that we deem to be profitable for the tenants and/or can generally be characterized as important to the successful operations of the Company's business; •Properties that are located within attractive demographic areas relative to the business of our tenants; •Properties with real estate valuations that approximate replacement costs; •Properties with rental or lease payments that approximate market rents for similar properties; and •Properties that can be purchased with the simultaneous execution or assumption of long-term lease agreements with commercial tenants, offering both current income and the potential for future rent increases. We seek to invest in properties owned by tenants 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, and advertising. In addition, we frequently acquire large portfolios of single-tenant properties net leased to different tenants operating in a variety of industries. We have an internal team dedicated to sourcing such opportunities, often using our relationships with various tenants, 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, tenants, 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 look for tenants with the following attributes: •Tenants with reliable and sustainable cash flow; •Tenants with revenue and cash flow from multiple sources; •Tenants that are willing to sign a long-term lease (10 or more years); and •Tenants that are large owners and users of real estate. From a retail perspective, our investment strategy is to target tenants that have a service, non-discretionary, and/or low-price-point component to their business. We believe these characteristics better position tenants to operate in a variety of economic conditions and to compete more effectively with internet retailers. As a result of the execution of this strategy, approximately 95% of our annualized retail contractual rental revenue atSeptember 30, 2020 is derived from tenants 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 that are primarily 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, tenant (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 tenants' business. We believe the principal financial obligations for most of our tenants typically include their bank and other debt, payment obligations to suppliers, and real estate lease obligations. Because we typically own the land and building in which a tenant conducts its business or which are critical to the tenant's ability to generate revenue, we believe the risk of default on a tenant's lease obligation is less than the tenant's unsecured general obligations. It has been our experience that tenants 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 tenant in the event of reorganization. If a property is rejected by the tenant during reorganization, we own the property and can either lease it to a new tenant or sell the property. In addition, we believe that the risk of default on real estate -27- -------------------------------------------------------------------------------- Table of Contents leases can be further mitigated by monitoring the performance of the tenants' individual locations and considering whether to proactively sell locations that meet our criteria for disposition. Prior to entering into any transaction, our research department conducts a review of a tenant'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 tenant and a more comprehensive review of the business segment and industry in which the tenant operates. We continue to monitor our tenants' credit quality on an ongoing basis by reviewing the available information previously discussed, and providing summaries of these findings to management. AtSeptember 30, 2020 , approximately 49% of our total annualized contractual rental revenue comes from properties leased to investment grade rated companies, their subsidiaries or affiliated companies. AtSeptember 30, 2020 , our top 20 tenants (based on percentage of total portfolio annualized contractual rental revenue) represented approximately 53% of our annualized revenue and 12 of these tenants 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 distributions to stockholders 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 tenants, industries, and markets through re-leasing vacant properties and selectively selling properties; •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 tenants, our tenants' 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 tenant, 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 Theater Industry Update As ofSeptember 30, 2020 , the theater industry represented 5.7% of annualized contractual rental revenue. Given the ongoing disruption to the industry due to the COVID-19 pandemic, we performed a property-level analysis on the collectability of rent for our 78 theater properties, including the gross receivables outstanding as ofSeptember 30, 2020 , totaling$44.9 million . Our analysis involved the assignment of quartile rankings for each asset's pre-pandemic EBITDAR relative to each operator's overall footprint. Other criteria utilized included an analysis of the property's pre-pandemic annual EBITDA generation before corporate overhead, and real estate fundamentals. -28-
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As a result of this analysis, we determined that for 31 of the 78 theater properties it was no longer probable that we would collect substantially all of contractual rents due. As a conservative measure, we fully reserved for six additional theater properties for which we do not possess unit level financial information. Consequently, we reserved for 100% of the outstanding receivables for 37 theater properties and will account prospectively for these leases on a cash accounting basis. The aggregate reserve associated with outstanding receivables for these properties totaled$17.2 million , approximately$1.6 million of which was a reserve for straight-line rent receivables. The dilution for the third quarter of 2020 as a result of establishing these reserves for our theater portfolio is$0.05 per share to our net income and FFO and$0.04 per share to our AFFO. The monthly contractual rent associated with these properties totals approximately$2.8 million . Additionally, during the third quarter, we recorded provisions for impairment on 12 of the 37 theater properties for$79.0 million . Impairment charges are not included in Nareit-defined FFO or in our calculation of AFFO. See "Item 1A--Risk Factors" in Part II of this Quarterly Report on Form 10-Q for more information regarding the actual and potential future impacts of the COVID-19 pandemic and the measures taken to limit its spread on our tenants and our business, results of operations, financial condition and liquidity. Increases in Monthly Dividends to Common Stockholders We have continued our 51-year policy of paying monthly dividends. In addition, we increased the dividend five times during 2020. As ofOctober 2020 , we have paid 92 consecutive quarterly dividend increases and increased the dividend 108 times since our listing on the NYSE in 1994.
The following table summarizes our dividend increases in 2020:
Month Month Dividend Increase 2020 Dividend increases Declared Paid per share per share 1st increase Dec 2019 Jan 2020$ 0.2275 $ 0.0005 2nd increase Jan 2020 Feb 2020$ 0.2325 $ 0.0050 3rd increase Mar 2020 Apr 2020$ 0.2330 $ 0.0005 4th increase Jun 2020 Jul 2020$ 0.2335 $ 0.0005 5th increase Sep 2020 Oct 2020$ 0.2340 $ 0.0005 The dividends paid per share during the first nine months of 2020 totaled approximately$2.092 , as compared to approximately$2.030 during the first nine months of 2019, an increase of$0.062 , or 3.1%. The monthly dividend of$0.234 per share represents a current annualized dividend of$2.808 per share, and an annualized dividend yield of approximately 4.6% based on the last reported sale price of our common stock on the NYSE of$60.75 onSeptember 30, 2020 . Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will be in any future period. -29-
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Table of Contents Acquisitions During the Third Quarter and First Nine Months of 2020 Below is a listing of our acquisitions in theU.S. andU.K. for the periods indicated below: Weighted Initial Leasable Investment Average Average Number of Square Feet ($ in Lease Term Cash Lease Properties (in millions) millions) (Years) Yield Three months ended September 30, 2020 (1) Acquisitions - U.S. (in 21 states) 74 1.2$ 409.2 15.2 5.9 % Acquisitions - U.K. (2) 7 0.7 230.0 8.9 7.5 % Total acquisitions 81 1.9 639.2 12.6 6.4 % Properties under development - U.S. 8 0.7 19.4 18.0 5.9 % Total (3) 89 2.6$ 658.6 12.7 6.4 % Nine months endedSeptember 30, 2020 (1) Acquisitions - U.S. (in 28 states) 154 3.0$ 821.9 14.8 6.2 % Acquisitions - U.K. (2) 13 1.2 453.7 10.0 6.4 % Total acquisitions 167 4.2 1,275.6 13.1 6.3 % Properties under development - U.S. 13 0.9 23.3 16.3 6.4 % Total (4) 180 5.1$ 1,298.9 13.1 6.3 % (1)None of our investments during the three and nine months endedSeptember 30, 2020 caused any one tenant to be 10% or more of our total assets atSeptember 30, 2020 . All of our investments in acquired properties during the three and nine months endedSeptember 30, 2020 are 100% leased at the acquisition date. (2)Represents investments of £176.6 million Sterling during the three months endedSeptember 30, 2020 and £356.7 million Sterling during the nine months endedSeptember 30, 2020 converted at the applicable exchange rate on the date of acquisition. (3)The tenants occupying the new properties operate in 15 industries, and are 97.2% retail and 2.8% industrial, based on rental revenue. Approximately 73% of the rental revenue generated from acquisitions during the third quarter of 2020 is from investment grade rated tenants, their subsidiaries or affiliated companies. (4)The tenants occupying the new properties operate in 23 industries, and are 96.9% retail and 3.1% industrial, based on rental revenue. Approximately 56% of the rental revenue generated from acquisitions during the first nine months of 2020 is from investment grade rated tenants, their subsidiaries or affiliated companies. The initial 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 tenant 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. 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. We may continue to pursue development or expansion opportunities under similar arrangements in the future. Portfolio Discussion Leasing Results AtSeptember 30, 2020 , we had 92 properties available for lease or sale out of 6,588 properties in our portfolio, which represents a 98.6% occupancy rate based on the number of properties in our portfolio. -30-
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The following tables summarizes our leasing results for the periods indicated below: Properties available for lease atJune 30, 2020 101 Lease expirations 98 Re-leases to same tenant (1) (75) Re-leases to new tenant (1)(2) (5) Vacant dispositions (27) Properties available for lease atSeptember 30, 2020 92 (1)The annual new rent on these re-leases was$12.3 million , as compared to the previous annual rent of$12.4 million on the same properties, representing a rent recapture rate of 99.2% on the properties re-leased during the quarter endedSeptember 30, 2020 . (2)Re-leased two properties to new tenants without a period of vacancy, and three properties to new tenants after a period of vacancy. Properties available for lease atDecember 31, 2019 94 Lease expirations 288 Re-leases to same tenant (1) (225) Re-leases to new tenant (1)(2) (13) Vacant dispositions (52) Properties available for lease atSeptember 30, 2020 92 (1)The annual new rent on these re-leases was$45.5 million , as compared to the previous annual rent of$45.6 million on the same properties, representing a rent recapture rate of 99.8% on the properties re-leased during the first nine months of 2020. (2)Re-leased five properties to new tenants without a period of vacancy, and eight properties to new tenants 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 tenant rent concessions. We do not consider the collective impact of the leasing commissions or tenant rent concessions to be material to our financial position or results of operations. AtSeptember 30, 2020 , our average annualized rental revenue was approximately$15.26 per square foot on the 6,496 leased properties in our portfolio. AtSeptember 30, 2020 , we classified 32 properties, with a carrying amount of$41.1 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 results and is consistent with our existing disposition strategy to further enhance our real estate portfolio and maximize portfolio returns. Investments inExisting Properties In the third quarter of 2020, we capitalized costs of$727,000 on existing properties in our portfolio, which primarily relates to non-recurring building improvements. In the first nine months of 2020, we capitalized costs of$5.1 million on existing properties in our portfolio, consisting of$1.0 million for re-leasing costs,$126,000 for recurring capital expenditures, and$4.0 million for non-recurring building improvements. The majority of our building improvements relate to roof repairs, HVAC improvements, and parking lot resurfacing and replacements. The amounts of our capital expenditures can vary significantly, depending on the rental market, tenant credit worthiness, the lease term and the willingness of tenants 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. Equity Capital Raising During the third quarter of 2020, we raised$348.6 million from the sale of common stock at a weighted average price of$62.57 , primarily through our At-The-Market ("ATM") Program. During the first nine months of 2020, we raised$1.2 billion from the sale of common stock at a weighted average price of$71.16 , primarily from 9,690,500 shares issued in an overnight underwritten public offering during the first quarter of 2020, including 690,500 shares purchased by the underwriters upon the exercise of their option to purchase additional shares, and 7,047,768 shares from the sale of common stock under our ATM Program. -31- -------------------------------------------------------------------------------- Table of Contents Chief Financial Officer (CFO) and Treasurer Transition InMarch 2020 and as previously announced,Paul Meurer , our former EVP, Chief Financial Officer, departed from the Company. As a result ofMr. Meurer's departure, we recognized an executive severance charge of$3.5 million during the first quarter of 2020, consisting of$1.6 million of cash,$1.8 million related to share-based compensation expense and$58,000 of professional fees. InOctober 2020 , our Board of Directors appointedChristie Kelly as Executive Vice President, Chief Financial Officer and Treasurer, effectiveJanuary 19, 2021 .Ms. Kelly joined our Board of Directors inNovember 2019 and currently serves as a member of the Audit Committee. Effective upon the appointment ofMs. Kelly to Chief Financial Officer onJanuary 19, 2021 , she will resign from our Board of Directors. Commercial Paper Program InAugust 2020 , we established aU.S. dollar-denominated unsecured commercial paper program. Under the terms of the program, we may issue from time to time unsecured commercial paper notes up to a maximum aggregate amount outstanding of$1.0 billion . Proceeds from commercial paper borrowings will be used for general corporate purposes. As ofSeptember 30, 2020 , the balance of borrowings outstanding under our commercial paper program was$300.0 million . We expect to use our$3.0 billion revolving credit facility as a liquidity backstop for the repayment of the notes issued under the commercial paper program. Note Issuances InOctober 2020 , we issued £400 million of 1.625% senior unsecured notes dueDecember 2030 . The public offering price for these notes was 99.191% of the principal amount, for an effective annual yield to maturity of 1.712% and gross proceeds of £396.8 million. The proceeds from this offering were used to repay GBP-denominated borrowings outstanding under our$3.0 billion revolving credit facility, to settle an outstanding GBP/USD currency exchange swap arrangement and, to the extent not used for those purposes, to fund potential investment opportunities and for other general corporate purposes. InJuly 2020 , we issued$350 million of 3.250% senior unsecured notes dueJanuary 2031 (the "2031" Notes), which constituted a further issuance of, and formed a single series with, the$600.0 million of 2031 Notes issued inMay 2020 . The public offering price was 108.241% of the principal amount, for an effective yield to maturity of 2.341% and gross proceeds of$378.8 million . InMay 2020 , we issued$600.0 million of 2031 Notes. The public offering price for the notes was 98.987% of the principal amount, for an effective yield to maturity of 3.364% and gross proceeds of approximately$593.9 million . The proceeds from each of the offerings of 2031 Notes were used to repay borrowings outstanding under our credit facility, and, to the extent not used for these purposes, to fund potential investment opportunities, and for other general corporate purposes. Term Loan Redemption InJune 2020 , we repaid the$250.0 million term loan in full upon maturity. Early Redemption of 5.75% Notes DueJanuary 2021 InJanuary 2020 , we completed the early redemption on all$250.0 million in principal amount of our outstanding 5.750% notes dueJanuary 2021 , plus accrued and unpaid interest. As a result of the early redemption, we recognized a$9.8 million loss on extinguishment of debt during the first quarter of 2020. Impact of COVID-19 The COVID-19 pandemic and the measures taken to limit its spread are negatively impacting global, national and regional economies across many industries, including the industries in which some of our tenants operate, and have disrupted the businesses and operations of some of our tenants, each of which has had and may continue to have an adverse impact on our business, results of operations, financial condition, and liquidity. These impacts may increase in severity as the duration of the pandemic lengthens. See "Item 1A--Risk Factors" in Part II of this report for more information regarding the actual and potential future impacts of the COVID-19 pandemic and the measures taken to limit its spread on our tenants and our business, results of operations, financial condition and liquidity.
As a result of this challenging environment, we continue to work diligently with our tenants most affected by the pandemic to understand their business operations and financial liquidity and their ability to satisfy their contractual
-32- -------------------------------------------------------------------------------- Table of Contents obligations to us. As we carefully navigate this difficult economic period with our tenants, our focus is on finding resolutions that preserve the long-term relationships we have built with many of our tenants. The majority of lease concessions granted to our tenants during the first nine months of 2020 as a result of the COVID-19 pandemic have been rent deferrals with the original lease term unchanged. In these cases, we have determined that the collection of deferred rent is probable (within the meaning applicable under GAAP), although we cannot assure you that this determination will not change in the future. In addition, as we believe to be the case with many retail landlords, we have received many short-term rent relief requests, most often in the form of rent deferral requests, or requests for further discussion from tenants. We believe that not all tenant requests will ultimately result in lease modification agreements, nor have we relinquished our contractual rights under our lease agreements where rent concessions have not yet been granted. Our rent collections for the periods below and rent relief requests to-date may not be indicative of collections, concessions or requests in any future period.
Percentages of Contractual Rent Collected as of
Month Ended Month Ended Month Ended Quarter Ended
Month Ended
July 31, 2020 August 31, 2020 September 30, 2020 September 30, 2020
Contractual rent collected(1)
across total portfolio 91.8% 93.3% 94.1% 93.1%
92.9%
Contractual rent collected(1)
from top 20 tenants(2) 90.0% 91.6% 91.8% 91.1%
89.9%
Contractual rent collected(1)
from investment grade tenants(3) 100.0% 100.0% 100.0% 100.0% 100.0% (1) Collection rates are calculated as the aggregate cash rent collected for the applicable period from the beginning of that applicable period throughOctober 31, 2020 , divided by the contractual cash rent charged for the applicable period. Cash rent collected is defined as amounts received including amounts in transit, where the tenant has confirmed payment is in process. Rent collection percentages are calculated based on contractual base rents (excluding percentage rents and tenant reimbursements). Charged amounts have not been adjusted for any COVID-19 related rent relief granted and include contractual base rents from any tenants in bankruptcy. Due to differences in applicable foreign currency conversion rates and rent conventions, the percentages above may differ from percentages calculated utilizing total portfolio annualized contractual revenue. (2) We define top 20 tenants as our 20 largest tenants based on percentage of total portfolio annualized contractual rental revenue as of the most recent reported period. (3) We define investment grade tenants as tenants with a credit rating, and tenants that are subsidiaries or affiliates of companies with a credit rating, of Baa3/BBB- or higher from one of the three major rating agencies (Moody's/S&P/Fitch). -33-
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Table of Contents The following table provides information relating to percentage of total contractual rent due and collected for the indicated periods:
Percentage of Total Contractual Rent Due By Month(1)
Percentage of Total Contractual Rent Collected By Month(1)
October September August July October September AugustJuly 2020 2020 2020 2020 2020 2020 2020 2020 U.S. Aerospace 0.6% 0.7% 0.7% 0.7% 0.6% 0.7% 0.7% 0.7% Apparel stores 1.3 1.3 1.3 1.4 1.3 1.3 1.3 1.4 Automotive collision services 1.1 1.2 1.2 1.1 1.1 1.2 1.2 1.1 Automotive parts 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 Automotive service 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 Automotive tire services 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Beverages 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Child care 2.1 2.1 2.1 2.2 2.1 2.1 2.1 1.9 Consumer electronics 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Consumer goods 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Convenience stores 12.1 12.3 12.4 12.2 12.0 12.2 12.3 12.2 Crafts and novelties 0.9 0.9 0.8 0.8 0.9 0.9 0.8 0.8 Diversified industrial 0.7 0.7 0.7 0.7 0.7 0.7 0.70.7 Dollar stores 7.8 7.8 7.9 7.9 7.8 7.8 7.8 7.9 Drug stores 8.4 8.5 8.6 8.6 8.4 8.5 8.6 8.6 Education 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 Electric utilities 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Entertainment 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.1 Equipment services 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Financial services 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 Food processing 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 General merchandise 3.0 2.9 2.9 2.8 3.0 2.9 2.9 2.8 Government services 0.6 0.7 0.7 0.7 0.6 0.6 0.7 0.7 Grocery stores 5.0 5.1 5.0 5.1 5.0 5.1 5.0 5.1 Health and beauty 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Health and fitness 7.0 7.2 7.2 7.2 5.8 5.4 6.0 6.1 Health care 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 Home furnishings 0.7 0.8 0.8 0.8 0.6 0.7 0.7 0.7 Home improvement 3.0 2.9 2.9 2.9 3.0 2.9 2.9 2.9 Machinery 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Motor vehicle dealerships 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 Office supplies 0.2 0.2 0.2 0.2 0.1 0.2 0.1 0.1 Other manufacturing 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Packaging 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 Paper 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Pet supplies and services 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 Restaurants - casual dining 3.0 3.0 3.0 3.1 2.7 2.8 2.8 2.8 Restaurants - quick service 5.6 5.7 5.7 5.8 5.6 5.6 5.0 5.0 Shoe stores 0.2 0.2 0.2 0.2 0.2 0.2 0.2 * Sporting goods 0.7 0.8 0.8 0.8 0.7 0.8 0.8 0.8 Telecommunications 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 Theaters 5.6 5.8 5.8 5.8 0.4 2.3 1.6 0.9 Transportation services 4.1 4.2 4.2 4.2 4.1 4.2 4.2 4.2 Wholesale clubs 2.5 2.4 2.4 2.4 2.5 2.4 2.4 2.4 Other 0.2 0.1 0.1 0.2 0.1 0.1 0.1 0.1 TotalU.S. 95.3% 96.4% 96.5% 96.7% 88.2% 90.5% 89.8% 88.5%U.K. Grocery stores 3.7 3.2 3.3 3.2 3.7 3.2 3.3 3.2 Health care 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Home improvement 0.9 0.3 0.1 - 0.9 0.3 0.1 - Theaters * * * * - - - - TotalU.K. 4.7% 3.6% 3.5% 3.3% 4.7% 3.6% 3.5% 3.3% Totals 100.0% 100.0% 100.0% 100.0% 92.9% 94.1% 93.3% 91.8% * Less than 0.1% (1) Collection rates are calculated as the aggregate cash rent collected for the applicable period from the beginning of that applicable period throughOctober 31, 2020 , divided by the contractual cash rent charged for the applicable period. Cash rent collected is defined as amounts received including amounts in transit, where the tenant has confirmed payment is in process. Rent collection percentages are calculated based on contractual base rents (excluding percentage rents and tenant reimbursements). Charged amounts have not been adjusted for any COVID-19 related rent relief granted and include contractual base rents from any tenants in bankruptcy. Due to differences in applicable foreign currency conversion rates and rent conventions, the industry percentages above may differ from industry percentages calculated utilizing total portfolio annualized contractual revenue. -34- -------------------------------------------------------------------------------- Table of Contents As the adverse impacts of the COVID-19 pandemic and the measures taken to limit its spread continue to evolve, the ability of our tenants to continue to pay rent to us may further diminish, and therefore we cannot assure you that our historical rental collections are indicative of our rental collections in November or in the future. As a result of the impacts of the COVID-19 pandemic and the measures taken to limit its spread, our revenues in the foreseeable future may decline relative to the first nine months of 2020, and that decline may continue or increase in subsequent periods as long as such impacts continue to exist. Summarized Financial Results The following summarizes our select financial results (dollars in millions, except per share data): % Increase (Decrease) Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Three months Nine months Total revenue $ 404.6 $ 374.2$ 1,233.5 $ 1,094.1 8.1 % 12.7 % Net income available to common stockholders (1) $ 22.9 $ 101.0 $ 277.6 $ 307.2 (77.3) % (9.6) % Net income per share (2) $ 0.07 $ 0.32 $ 0.81 $ 0.98 (78.1) % (17.3) % Funds from operations (FFO) available to common stockholders $ 283.0 $ 262.0 $ 848.4 $ 759.2 8.0 % 11.7 % FFO per share (2) $ 0.82 $ 0.82 $ 2.48 $ 2.43 - % 2.1 % Adjusted funds from operations (AFFO) available to common stockholders $ 282.5 $ 265.4 $ 875.0 $ 768.0 6.4 % 13.9 % AFFO per share (2) $ 0.81 $ 0.83 $ 2.55 $ 2.46 (2.4) % 3.7 % (1) The calculation to determine net income available to common stockholders includes provisions for impairment, gains from the sale of real estate, and foreign currency gains and losses. These items can vary from 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 in the first nine months of 2020 were impacted by the following transactions:(i)$123.4 million of provisions for impairment in first nine months of 2020, of which$105.1 million related to the third quarter, (ii)$34.4 million in reserves recorded as a reduction of rental revenue in the first nine months of 2020, of which$24.1 million related to the third quarter, (iii) a$9.8 million loss on extinguishment of debt due to theJanuary 2020 early redemption of the 5.750% notes due 2021 recorded in the first quarter of 2020, and (iv) a$3.5 million executive severance charge for our former CFO also recorded in the first quarter of 2020. See our discussion of 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 Financial Condition and Results of Operations," in this quarterly report, which includes a reconciliation of net income available to common stockholders to FFO and AFFO. LIQUIDITY AND CAPITAL RESOURCES Capital Philosophy Historically, we have met our long-term capital needs by issuing common stock, preferred stock and long-term unsecured notes and bonds. Over the long term, we believe that common stock should be the majority of our capital structure; however, we may issue preferred stock or debt 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 or debt securities. However, we cannot assure you that we will have access to the capital markets at all times and at terms that are acceptable to us. Our primary cash obligations, for the current year and subsequent years, are included in the "Table of Obligations," which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common stockholders, primarily through cash provided by operating activities, borrowings on our credit facility and under our commercial paper program and through public securities offerings. -35- -------------------------------------------------------------------------------- Table of Contents 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. AtSeptember 30, 2020 , our total outstanding borrowings of senior unsecured notes and bonds, term loans, mortgages payable, credit facility borrowings and commercial paper were$8.45 billion , or approximately 28.4% of our total market capitalization of$29.77 billion . We define our total market capitalization atSeptember 30, 2020 as the sum of: •Shares of our common stock outstanding of 350,595,869, plus total common units outstanding of 463,119, multiplied by the last reported sales price of our common stock on the NYSE of$60.75 per share onSeptember 30, 2020 , or$21.33 billion ; •Outstanding borrowings of$556.1 million on our revolving credit facility, consisting entirely of Sterling-denominated borrowings of £430.5 million, and$300.0 million on our commercial paper program; •Outstanding mortgages payable of$334.7 million , excluding net mortgage premiums of$1.9 million and deferred financing costs of$1.1 million ; •Outstanding borrowings of$250.0 million on our term loan, excluding deferred financing costs of$692,000 ; and •Outstanding senior unsecured notes and bonds of$7.01 billion , including a Sterling-denominated private placement of £315.0 million, and excluding unamortized net original issuance premiums of$28.2 million and deferred financing costs of$40.3 million . Universal Shelf Registration InNovember 2018 , we filed a shelf registration statement with theSEC , which is effective for a term of three years and will expire inNovember 2021 . In accordance withSEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock, or depositary shares, and (6) any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. At-the-Market (ATM) Program Under our "at-the-market" equity distribution plan, or our ATM program, up to 33,402,405 shares of common stock may be offered and sold (1) by us to, or through, a consortium of banks acting as our sales agents or (2) by a consortium of banks acting as forward sellers on behalf of any forward purchasers contemplated thereunder, in each case by means of ordinary brokers' transactions on the NYSE at prevailing market prices or at negotiated prices. During the third quarter of 2020, we issued 5,536,619 shares and raised approximately$346.5 million of gross proceeds under the ATM program. During the first nine months of 2020, we issued 7,047,768 shares and raised approximately$442.2 million of gross proceeds under the ATM program. AtSeptember 30, 2020 , we had 26,354,637 shares remaining for future issuance under our ATM program. We anticipate maintaining the availability of our ATM program in the future, including the replenishment of authorized shares issuable thereunder. Issuance of Common Stock InMarch 2020 , we issued 9,690,500 shares of common stock in an overnight underwritten public offering, including 690,500 shares purchased by the underwriters upon the exercise of their option to purchase additional shares. After deducting underwriting discounts and other offering costs of$21.2 million , the net proceeds of$728.9 million were primarily used to repay borrowings under our revolving credit facility. 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 first nine months of 2020. AtSeptember 30, 2020 , we had 11,539,247 shares remaining for future issuance under our DRSPP program. During the third quarter of 2020, we issued 34,604 shares -36- -------------------------------------------------------------------------------- Table of Contents and raised approximately$2.1 million under our DRSPP. During the first nine months of 2020, we issued 113,421 shares and raised approximately$6.9 million under our DRSPP. Revolving Credit Facility and Commercial Paper Program We have a$3.0 billion unsecured revolving credit facility with an initial term that expires inMarch 2023 and includes, at our option, two six-month extensions. The multicurrency revolving facility allows us to borrow in up to 14 currencies, includingU.S. dollars. Our revolving credit facility has a$1.0 billion expansion option, which is subject to obtaining lender commitments. Under our revolving credit facility, our investment grade credit ratings as ofSeptember 30, 2020 provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 0.775% with a facility commitment fee of 0.125%, for all-in drawn pricing of 0.90% over LIBOR. The borrowing rate is subject to an interest rate floor and may change if our investment grade credit ratings change. We also have other interest rate options available to us under our credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation. AtSeptember 30, 2020 , we had a borrowing capacity of$2.4 billion available on our revolving credit facility and an outstanding balance of$556.1 million , consisting entirely of £430.5 million Sterling. The weighted average interest rate on borrowings under our revolving credit facility during the first nine months of 2020 was 1.5% per annum. We must comply with various financial and other covenants in our credit facility. AtSeptember 30, 2020 , 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. InAugust 2020 , we established aU.S. dollar-denominated unsecured commercial paper program. Under the terms of the program, we may issue from time to time unsecured commercial paper notes up to a maximum aggregate amount outstanding of$1.0 billion . Borrowings under this program generally mature in one year or less. AtSeptember 30, 2020 , we had an outstanding balance of$300.0 million . The weighted average interest rate on borrowings under our commercial paper program was 0.3% from inception of the plan throughSeptember 30, 2020 . We expect to use our$3.0 billion revolving credit facility as a liquidity backstop for the repayment of the notes issued under the commercial paper program. We generally use our credit facility and commercial paper borrowings for the short-term financing of new property acquisitions. Thereafter, we generally seek to refinance those borrowings with the net proceeds of long-term or permanent financing, which may include the issuance of common stock, preferred stock or debt securities. We cannot assure you, however, that we will be able to obtain any such refinancing, or that market conditions prevailing at the time of the refinancing will enable us to issue equity or debt securities at acceptable terms. We regularly review our credit facility and commercial paper program and may seek to extend, renew or replace our credit facility, to the extent we deem appropriate. Term Loans InOctober 2018 , in conjunction with entering into our revolving credit facility, we entered into a$250.0 million senior unsecured term loan, which matures inMarch 2024 , and is governed by the credit agreement that governs our revolving credit facility. Borrowing under this term loan bears interest at the current one-month LIBOR, plus 0.85%. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest on this term loan at 3.89%. InJune 2015 , in conjunction with entering into our previous revolving credit facility, we entered into a$250.0 million senior unsecured term loan which matured inJune 2020 . Borrowing under this term loan bore interest at the current one-month LIBOR, plus 0.90%. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixed our per annum interest rate on this term loan at 2.62%. InJune 2020 , we repaid the term loan in full upon maturity. Mortgage Debt As ofSeptember 30, 2020 , we had$334.7 million of mortgages payable, all of which were assumed in connection with our property acquisitions. Additionally, atSeptember 30, 2020 , we had net premiums totaling$1.9 million on these mortgages and deferred financing costs of$1.1 million . 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 first nine months of 2020, we made$73.7 million in principal payments, including the repayment of five mortgages in full for$69.2 million . -37- -------------------------------------------------------------------------------- Table of Contents Notes Outstanding Our senior unsecured note and bond obligations consist of the following as ofSeptember 30, 2020 , sorted by maturity date (dollars in millions): 3.250% notes,$450 issued inOctober 2012 and$500 issued inDecember 2017 , both due in October 2022$ 950 4.650% notes, issued in July 2013 and due in August 2023 750 3.875% notes, issued in June 2014 and due in July 2024 350 3.875% notes, issued in April 2018 and due in April 2025 500
4.125% notes,
650 3.000% notes, issued inOctober 2016 and due inJanuary 2027 600 3.650% notes, issued inDecember 2017 and due inJanuary 2028 550 3.250% notes, issued inJune 2019 and due inJune 2029 500
3.250% notes,
950 2.730% notes, issued inMay 2019 and due inMay 2034 (1) 407
5.875% bonds,
250 4.650% notes,$300 issued inMarch 2017 and$250 issued inDecember 2017 , both due in March 2047 550 Total principal amount$ 7,007 Unamortized net original issuance premiums and deferred financing costs (12)$ 6,995 (1) Represents the principal balance (inU.S. dollars) of the Sterling-denominated private placement of £315.0 million converted at the applicable exchange rate onSeptember 30, 2020 . InOctober 2020 , we issued £400 million of 1.625% senior unsecured notes due inDecember 2030 . The public offering price for these notes was 99.191% of the principal amount, for an effective yield to maturity of 1.712%. The gross proceeds of approximately £396.8 million from this offering were used to repay GBP-denominated borrowings outstanding under our$3.0 billion revolving credit facility, to settle an outstanding GBP/USD currency exchange swap arrangement and, to the extent not used for those purposes, to fund potential investment opportunities and for other general corporate purposes. All of our outstanding notes and bonds have fixed interest rates and contain various covenants, with which we remained in compliance as ofSeptember 30, 2020 . Additionally, with the exception of interest on our 1.625% senior unsecured notes due inDecember 2030 , which is paid annually, interest on all of our senior note and bond obligations outstanding 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. 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, 2020 are: Note Covenants Required
Actual
Limitation on incurrence of total debt < 60% of adjusted assets 39.6 % Limitation on incurrence of secured debt < 40% of adjusted assets 1.6 % Debt service coverage (trailing 12 months) (1) > 1.5x
5.2x
Maintenance of total unencumbered assets > 150% of unsecured debt
257.0 %
(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, 2019 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, 2019 , 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, 2020 (in thousands, for trailing twelve months): -38- -------------------------------------------------------------------------------- Table of Contents Net income available to common stockholders
$ 406,852 Plus: interest expense, excluding the amortization of deferred financing costs
295,625 Plus: loss on extinguishment of debt 9,819 Plus: provision for taxes 11,929 Plus: depreciation and amortization 658,591 Plus: provisions for impairment 132,392 Plus: pro forma adjustments 64,837 Less: gain on sales of real estate
(67,733)
Income available for debt service, as defined
Total pro forma debt service charge
$ 288,566
Debt service and fixed charge coverage ratio 5.2 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, 2020 , we had cash and cash equivalents totaling$724.8 million , inclusive of £172.9 million Sterling. We believe that our cash and cash equivalents on hand, cash provided from operating activities, and borrowing capacity is sufficient to meet our liquidity needs for the next twelve months. We intend, however, to use permanent or long-term capital to fund property acquisitions and to repay future borrowings under our credit facility and commercial paper program. Credit Agency Ratings The borrowing interest rates under our revolving credit facility are based upon our ratings assigned by credit rating agencies. As ofSeptember 30, 2020 , 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, 2020 : Moody's Investors Service has assigned a rating of P-2 and Standard & Poor'sRatings Group has assigned a rating of A-2. Based on our ratings as ofSeptember 30, 2020 , the facility interest rate was LIBOR, plus 0.775% with a facility commitment fee of 0.125%, for all-in drawn pricing of 0.90% over LIBOR. Our credit facility provides that the interest rate can range between: (i) LIBOR, plus 1.45% if our credit rating is lower than BBB-/Baa3 or unrated and (ii) LIBOR, plus 0.75% if our credit rating is A/A2 or higher. In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which range from: (i) 0.30% for a rating lower than BBB-/Baa3 or unrated, and (ii) 0.10% for a credit rating of A/A2 or higher. 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. -39- -------------------------------------------------------------------------------- Table of Contents Table of Obligations The following table summarizes the maturity of each of our obligations as ofSeptember 30, 2020 (dollars in millions): Ground Credit Facility and Leases Paid by Ground Year of Commercial Paper Notes and Term Mortgages Realty Income Leases Paid by Maturity Program (1) Bonds (2) Loan (3) Payable (4) Interest (5) (6) Our Tenants (7) Other (8) Totals 2020 $ 300.0 $ - $ -$ 10.5 $ 60.1 $ 0.4 $ 3.4$ 46.5 $ 420.9 2021 - - - 68.8 290.4 1.5 13.6 59.9 434.2 2022 - 950.0 - 111.8 286.6 1.6 13.4 - 1,363.4 2023 556.1 750.0 - 20.6 248.4 1.6 13.5 - 1,590.2 2024 - 350.0 250.0 112.2 204.1 1.6 13.6 - 931.5 Thereafter - 4,957.0 - 10.8 1,290.9 20.2 69.1 - 6,348.0 Totals $ 856.1$ 7,007.0 $ 250.0 $ 334.7 $ 2,380.5 $ 26.9 $ 126.6$ 106.4 $ 11,088.2 (1)The initial term of the credit facility, representing$556.1 million of the outstanding borrowings atSeptember 30, 2020 , expires inMarch 2023 and includes, at our option, two six-month extensions. The commercial paper borrowings outstanding atSeptember 30, 2020 totaled$300.0 million and matured onOctober 1, 2020 . Upon settlement of a GBP/ USD currency exchange swap arrangement onOctober 1, 2020 , we received$300.1 million upon our payment of £224.9 million, which was used to repay the outstanding borrowings under our commercial paper program. (2)Excludes non-cash original issuance discounts and premiums recorded on notes payable of$28.2 million and deferred financing costs of$40.3 million . The table of obligations also excludes theOctober 2020 issuance of £400 million of senior unsecured notes dueDecember 2030 . (3)Excludes deferred financing costs of$692,000 . (4)Excludes both non-cash net premiums recorded on the mortgages payable of$1.9 million and deferred financing costs of$1.1 million . (5)Interest on the term loans, notes, bonds, mortgages payable, and credit facility 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 tenants, who are generally sub-tenants under ground leases, are responsible for paying the rent under these ground leases. In the event a tenant fails to pay the ground lease rent, we are primarily responsible. (8)"Other" consists of$96.1 million of commitments under construction contracts and$10.3 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements. Our revolving credit facility, commercial paper program, term loans, and notes payable obligations are unsecured. Accordingly, we have not pledged any assets as collateral for these obligations. No Unconsolidated Investments We have no unconsolidated investments, nor do we engage in trading activities involving energy or commodity contracts. 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 ofRealty Income, L.P. on a per unit basis that is generally equal to the amount paid per share to our common stockholders. In order to maintain our status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our taxable income (excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our taxable income (including net capital gains). In 2019, our cash distributions to common stockholders totaled$852.1 million , or approximately 128.9% of our taxable income of$661.0 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 funds from operations and cash on hand are sufficient to support our current level of cash distributions to our stockholders. Our cash distributions to common stockholders in the first nine months of 2020 totaled$716.5 million , representing 81.9% of our adjusted funds from operations available to common stockholders of$875.0 million . In comparison, our 2019 cash distributions to common stockholders totaled$852.1 million , representing 81.2% of our adjusted funds from operations available to common stockholders of$1.05 billion . -40- -------------------------------------------------------------------------------- Table of Contents Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, FFO, AFFO, cash flow from operations, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, or the Code, our debt service requirements, and any other factors the Board of Directors may deem relevant. In addition, our credit facility contains financial covenants that could limit the amount of distributions payable by us in the event of a default, and which prohibit the payment of distributions on the common or preferred 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. 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, 2019. 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, tenant 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. -41- -------------------------------------------------------------------------------- Table of Contents Another significant judgment must be made as to if, and when, impairment losses should be taken on our properties when events or a change in circumstances indicate that the carrying amount of the asset may not be recoverable. If estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property, a fair value analysis is performed and, to the extent the estimated fair value is less than the current book value, a provision for impairment is recorded to reduce the book value to estimated fair value. Key inputs that we utilize in this analysis include projected rental rates, estimated holding periods, capital expenditures, and property sales capitalization rates. If a property is held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell. The carrying value of our real estate is the largest component of our consolidated balance sheets. Our strategy of primarily holding properties, long-term, directly decreases the likelihood of their carrying values not being recoverable, thus requiring the recognition of an impairment. However, if our strategy, or one or more of the above assumptions were to change in the future, an impairment may need to be recognized. If events should occur that require us to reduce the carrying value of our real estate by recording provisions for impairment, they could have a material impact on our results of operations. When assessing the collectability of future lease payments, one of the key factors we have considered during 2020 has been the COVID-19 pandemic. We generally assess collectability based on an analysis of creditworthiness, economic trends, and other facts and circumstances related to the applicable tenants. If the collection of substantially all of the future lease payments is less than probable, we will write-off the receivable balances associated with the lease and cease to recognize lease income, including straight-line rent, unless cash is received when due. As ofSeptember 30, 2020 , other than the information related to the reserves we have recorded to date, we do not have any further tenant specific information that would change our assessment that collection of substantially all of the future lease payments under our existing leases is probable. However, there may be impacts in future periods that could change this assessment as the situation continues to evolve and as more information becomes available. The COVID-19 pandemic and the measures taken to limit its spread are negatively impacting the economy across many industries, including the industries in which some of our tenants operate. These impacts may continue and increase in severity as the duration of the pandemic lengthens, which may, in turn, adversely impact the fair value estimates of our real estate and require the recording of impairments on our properties. As a result, we evaluated certain key assumptions involving fair value estimates of our real estate, recording of impairments on our properties and collectability of our accounts receivable. We continue to evaluate the potential impacts of the COVID-19 pandemic and the measures taken to limit its spread on our business and industry segments, as the situation continues to evolve and more information becomes available. The following is a comparison of our results of operations for the three and nine months endedSeptember 30, 2020 , to the three and nine months endedSeptember 30, 2019 . Total Revenue The following summarizes our total revenue (dollars in thousands): Three months ended September 30, Nine months ended September 30, Increase 2020 2019 2020 2019 Three months Nine months REVENUE Rental (excluding reimbursable) $ 383,845$ 356,789 $ 1,164,873 $ 1,041,327 $ 27,056 $ 123,546 Rental (reimbursable) 18,024 15,523 59,354 49,274 2,501 10,080 Other 2,703 1,935 9,322 3,461 768 5,861 Total revenue $ 404,572$ 374,247 $ 1,233,549 $ 1,094,062 $ 30,325 $ 139,487 Rental Revenue (excluding reimbursable) The increase in rental revenue (excluding reimbursable) in the third quarter of 2020 compared to the third quarter of 2019 is primarily attributable to:
•The 171 properties (5.0 million square feet) we acquired in 2020, which
generated
-42- -------------------------------------------------------------------------------- Table of Contents •A net increase in straight-line rent and other non-cash adjustments to rent of$1.9 million in the third quarter of 2020 as compared to the third quarter of 2019; partially offset by •Same store rents generated on 5,511 properties (86.2 million square feet) during the third quarter of 2020 and 2019, decreased by$13.9 million , or (4.4)%, to$303.0 million from$316.9 million ; •A net decrease of$2.8 million relating to properties sold in the third quarter of 2020 and throughout 2019 that were reported in continuing operations; and •A net decrease of$1.7 million relating to the aggregate of (i) rental revenue from properties (124 properties comprising 2.9 million square feet) that were available for lease during part of 2020 or 2019, (ii) rental revenue for eight properties under development, and (iii) lease termination settlements. In aggregate, the revenues for these items totaled$5.9 million in the third quarter of 2020, compared to$7.6 million in the third quarter of 2019.
The increase in rental revenue (excluding reimbursable) in the first nine months of 2020 compared to the first nine months of 2019 is primarily attributable to:
•The 171 properties (5.0 million square feet) we acquired in the first nine months of 2020, which generated$24.5 million of rent in the first nine months of 2020; •The 779 properties (13.4 million square feet) we acquired in 2019, which generated$174.5 million of rent in the first nine months of 2020, compared to$44.9 million in the first nine months of 2019, an increase of$129.6 million ; partially offset by •Same store rents generated on 5,511 properties (86.2 million square feet) during the first nine months of 2020 and 2019, decreased by$14.6 million or (1.5)%, to$937.2 million from$951.8 million ; •A net decrease in straight-line rent and other non-cash adjustments to rent of$3.0 million in the first nine months of 2020 as compared to the first nine months of 2019; •A net decrease of$9.6 million relating to properties sold in the first nine months of 2020 and during 2019 that were reported in continuing operations; and •A net decrease of$3.4 million relating to the aggregate of (i) rental revenue from properties (124 properties comprising 2.9 million square feet) that were available for lease during part of 2020 or 2019, (ii) rental revenue for eight properties under development, and (iii) lease termination settlements. In aggregate, the revenues for these items totaled$18.4 million in the first nine months of 2020 compared to$21.8 million in the first nine months of 2019. For purposes of determining the same store rent property pool, we include all properties that were owned for the entire year-to-date period, for both the current and prior year, except for properties during the current or prior year that; (i) were vacant at any time, (ii) were under development or redevelopment, or (iii) were involved in eminent domain and rent was reduced. Each of the exclusions from the same store pool are separately addressed within the applicable sentences above, explaining the changes in rental revenue for the period. Our calculation of same store rental revenue includes rent deferred for future payment as a result of lease concessions we granted in response to the COVID-19 pandemic and recognized under the practical expedient provided by theFinancial Accounting Standards Board (FASB). Same store rental income was negatively impacted by reserves recorded as reductions of rental revenue of$19.9 million for the three months endedSeptember 30, 2020 compared to$241,000 for the three months endedSeptember 30, 2019 , and$26.5 million for the nine months endedSeptember 30, 2020 compared to$1.2 million for the nine months endedSeptember 30, 2019 . Our calculation of same store rental revenue also includes uncollected rent for which we have not granted a lease concession. If these applicable amounts of rent deferrals and uncollected rent were excluded from our calculation of same store rental revenue, the decreases for the three and nine months endedSeptember 30, 2020 relative to the comparable periods for 2019 would have been (4.6)% and (5.9)%, respectively. -43- -------------------------------------------------------------------------------- Table of Contents Rental revenue was negatively impacted by rent reserves throughout 2020, primarily due to the COVID-19 pandemic, particularly with respect to the ongoing disruption to the theater industry. The following table summarizes reserves recorded as a reduction of rental revenue (dollars in millions): Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Rental revenue reserves $ 21.8$ 0.3 $ 29.3 $ 1.2 Straight-line rent reserves 2.3 0.1 5.1 1.5 Total rental revenue reserves $ 24.1 $
0.4
Of the 6,588 properties in the portfolio atSeptember 30, 2020 , 6,554, or 99.5%, are single-tenant properties and the remaining are multi-tenant properties. Of the 6,554 single-tenant properties, 6,465, or 98.6%, were net leased atSeptember 30, 2020 . Of our 6,465 leased single-tenant properties, 5,527 or 85.5% were under leases that provide for increases in rents through: •Base rent increases tied to a consumer price index (typically subject to ceilings); •Percentage rent based on a percentage of the tenants' gross sales; •Fixed increases; or •A combination of two or more of the above rent provisions. Percentage rent, which is included in rental revenue, was$532,000 in the third quarter of 2020,$407,000 in the third quarter of 2019,$2.3 million in the first nine months of 2020, and$4.5 million in the first nine months of 2019. We anticipate percentage rent to be less than 1% of rental revenue for 2020. AtSeptember 30, 2020 , our portfolio of 6,588 properties was 98.6% leased with 92 properties available for lease, as compared to 98.6% leased, with 94 properties available for lease atDecember 31, 2019 , and 98.3% leased with 102 properties available for lease atSeptember 30, 2019 . It has been our experience that approximately 1% to 4% of our property portfolio will be unleased at any given time; however, it is possible that the number of properties available for lease or sale could increase in the future, given the nature of economic cycles and other unforeseen global events, such as the ongoing COVID-19 pandemic and the measures taken to limit its spread. Rental Revenue (reimbursable) A number of our leases provide for contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses. The increase in tenant reimbursements for the periods presented is primarily due to the growth of our portfolio due to acquisitions. Other Revenue The increase in other revenue in the third quarter of 2020 and first nine months of 2020 compared to the same periods of 2019 was primarily related to interest income recognized on financing receivables for certain leases with above-market terms as compared to the first nine months of 2019. In addition, interest income from our money market accounts was higher during the first nine months of 2020 than the comparative period in 2019, which is primarily due to higher average investment balances. -44- -------------------------------------------------------------------------------- Table of Contents Total Expenses The following summarizes our total expenses (dollars in thousands): Three months ended September 30, Nine months ended September 30, $ Increase 2020 2019 2020 2019 Three months Nine months EXPENSES Depreciation and amortization$ 169,084 $ 149,424 $ 501,997 $ 437,367 $ 19,660 $ 64,630 Interest 76,806 73,410 230,572 215,918 3,396 14,654 Property (excluding reimbursable) 7,386 4,831 18,114 14,058 2,555 4,056 Property (reimbursable) 18,024 15,523 59,354 49,274 2,501 10,080 General and administrative (1) 16,514 16,460 56,541 50,153 54 6,388 Income taxes 4,592 1,822 10,193 4,422 2,770 5,771 Provisions for impairment 105,095 13,503 123,442 31,236 91,592 92,206 Total expenses$ 397,501 $ 274,973 $ 1,000,213 $ 802,428 $ 122,528 $ 197,785 Total revenue (2)$ 386,548 $ 358,724 $ 1,174,195 $ 1,044,788 General and administrative expenses as a percentage of total revenue (1)(2) 4.3 % 4.6 % 4.5 % 4.8 % Property expenses (excluding reimbursable) as a percentage of total revenue (2) 1.9 % 1.3 % 1.5 % 1.3 % (1) General and administrative expenses for the first nine months of 2020 included an executive severance charge related to the departure of our former CFO inMarch 2020 . The total value of cash, stock compensation and professional fees incurred as a result of this severance was$3,463 and was recorded to general and administrative expense (see our discussion of Adjusted Funds from Operations Available to Common Stockholders, or AFFO, which is not a financial measure under generally accepted accounting principles). In order to present a normalized calculation of our general and administrative expenses as a percentage of total revenue for the first nine months of 2020, we have excluded this executive severance charge to arrive at a normalized general and administrative amount of$53,078 , which was used for our calculation. (2) Excludes rental revenue (reimbursable). Depreciation and Amortization The increase in depreciation and amortization in the third quarter and first nine months of 2020 was primarily due to the acquisition of properties during the fourth quarter of 2019 and the first nine months of 2020, which was partially offset by property sales in those same periods. As discussed in the sections entitled "Funds from Operations Available to Common Stockholders (FFO)" and "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 and AFFO. -45- -------------------------------------------------------------------------------- Table of Contents 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, 2020 2019 2020 2019 Interest on our credit facility, commercial paper, term loans, notes, mortgages and interest rate swaps $ 73,174$ 69,889 $ 218,991 $ 206,247 Credit facility commitment fees 958 958 2,854 2,844 Amortization of debt origination and deferred financing costs 2,584 2,552 7,752 6,930 Loss on interest rate swaps 1,123 694 3,116 2,058 Amortization of net mortgage premiums (311) (354) (1,021) (1,061) Amortization of net note premiums (690) (211) (1,096) (784) Other items (32) (118) (24) (316) Interest expense $ 76,806$ 73,410 $ 230,572 $ 215,918 Credit facility, term loans, mortgages and notes Average outstanding balances (dollars in thousands)$ 8,098,923 $ 7,171,012 $ 8,179,307 $ 6,991,532 Average interest rates 3.51 % 3.88 % 3.48 % 3.93 % The increase in interest expense from 2019 to 2020 for the third quarter and first nine months is primarily due to the May andJuly 2020 issuances of our 2031 Notes, theMay 2019 issuance of our 2.730% notes due 2034, theJune 2019 issuance of our 3.250% notes due 2029, higher interest related to mortgages assumed duringDecember 2019 and interest rate swaps, partially offset by theJanuary 2020 repayment of our 5.750% notes due 2021, theJune 2020 repayment of one of our$250.0 million term loans, and lower average interest rates. During the first nine months of 2020, the weighted average interest rate on our: •Revolving credit facility outstanding borrowings of$556.1 million was 1.5%; •Commercial paper outstanding borrowings of$300.0 million was 0.3%; •Term loan outstanding of$250.0 million (excluding deferred financing costs of$692,000 and considering that one of our$250.0 million term loans was paid off inJune 2020 ) was 1.8%; •Mortgages payable of$334.7 million (excluding net premiums totaling$1.9 million and deferred financing costs of$1.1 million on these mortgages) was 4.9%; •Notes and bonds payable of$7.01 billion (excluding net unamortized original issue premiums of$28.2 million and deferred financing costs of$40.3 million ) was 3.8%; and •Combined outstanding notes, bonds, mortgages, term loan and$3.0 billion revolving credit facility and commercial paper borrowings of$8.45 billion (excluding all net premiums and deferred financing costs) was 3.5%. Property Expenses (excluding reimbursable) Property expenses (excluding reimbursable) consist of costs associated with unleased properties, non-net-leased properties and general portfolio expenses. Expenses related to unleased properties 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, 2020 , 92 properties were available for lease or sale, as compared to 94 atDecember 31, 2019 , and 102 atSeptember 30, 2019 . The increase in property expenses (excluding reimbursable) for the third quarter and first nine months of 2020 is primarily due to reserves for tenant reimbursements and an increase in repairs and maintenance expense. Property Expenses (reimbursable) The increase in property expenses (reimbursable) in the third quarter and first nine months of 2020 was primarily attributable to the increased portfolio size, which contributed to higher contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses primarily due to our acquisitions in each period. -46- -------------------------------------------------------------------------------- Table of Contents 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. General and administrative expenses increased during the first nine months of 2020 primarily due to a severance charge of$3.5 million for our former CFO, who departed the Company inMarch 2020 , higher payroll-related costs, and higher corporate-level professional fees, partially offset by lower costs for terminated acquisitions and travel. Income Taxes Income taxes are for city and state income and franchise taxes, and forU.K. income taxes accrued or paid by us and our subsidiaries. The increase in income taxes in the third quarter and first nine months of 2020 was primarily attributable to ourU.K. investments, which contributed to higherU.K. income taxes as compared to the third quarter and first nine months of 2019. 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, 2020 2019 2020 2019 Total provisions for impairment $ 105.1$ 13.5 $ 123.4$ 31.2 Number of properties: Classified as held for sale 8 1 9 1 Classified as held for investment 18 2 28 4 Sold 17 24 31 36 During 2020, we identified the impact of the COVID-19 pandemic as an impairment triggering event for properties occupied by certain tenants experiencing difficulties meeting their lease obligations to us. After considering the impacts of the COVID-19 pandemic on the key assumptions noted above, we determined that the carrying values of 17 properties classified as held for investment for the three months endedSeptember 30, 2020 , and 25 properties classified as held for investment for the nine months endedSeptember 30, 2020 were not recoverable. As a result, we recorded provisions for impairment of$81.6 million for the three months endedSeptember 30, 2020 , and$89.8 million for the nine months endedSeptember 30, 2020 , on the applicable properties impacted by the COVID-19 pandemic. Of the provisions for impairment recorded during the third quarter of 2020 for properties impacted by the COVID-19 pandemic, a total of 12 assets occupied by certain of our tenants in the theater industry were impaired for$79.0 million . Impairments recorded on other properties during the three and nine months endedSeptember 30, 2020 totaled$23.5 million and$33.6 million respectively. Gain on Sales of Real Estate The following table summarizes our properties sold during the periods indicated below (dollars in millions): Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Number of properties sold 37 27 66 64 Net sales proceeds $ 51.3$ 21.5 $ 184.9$ 72.6 Gain on sales of real estate $ 13.7$ 1.7 $ 53.6$ 15.8 Foreign Currency and Derivative Losses/Gains, Net We borrow in the functional currencies of the countries in which we invest. Foreign currency gains and losses are primarily a result of intercompany debt and certain remeasurement transactions. Loss on Extinguishment of Debt InJanuary 2020 , we completed the early redemption on all$250.0 million in principal amount of outstanding 5.75% notes dueJanuary 2021 , plus accrued and unpaid interest. As a result of the early redemption, we recognized a$9.8 million loss on extinguishment of debt during the first nine months of 2020. -47- -------------------------------------------------------------------------------- Table of Contents Net Income Available to Common Stockholders The following summarizes our net income available to common stockholders (dollars in millions, except per share data): % Decrease Three months ended September 30, Nine months ended September 30,
Nine
2020 2019 2020 2019 Three months
months
Net income available to common stockholders $ 22.9 $ 101.0 $ 277.6 $ 307.2 (77.3) % (9.6) % Net income per share (1) $ 0.07 $ 0.32 $ 0.81 $ 0.98 (78.1) %
(17.3) %
(1) All per share amounts are presented on a diluted per common share basis. The calculation to determine net income available to common stockholders includes provisions for impairment, gains from the sale of properties, and foreign currency gains and losses, which can vary from period to period based on timing and significantly impact net income available to the Company and available to common stockholders. Net income available to common stockholders was impacted by the following transactions: (i)$123.4 million of provisions for impairment in first nine months of 2020, of which$105.1 million related to the third quarter, (ii)$34.4 million in reserves recorded as a reduction of rental revenue in the first nine months of 2020, of which$24.1 million related to the third quarter, (iii) a$9.8 million loss on extinguishment of debt due to theJanuary 2020 early redemption of the 5.750% notes due 2021 recorded in the first quarter of 2020, and (iv) a$3.5 million executive severance charge for our former CFO also recorded in the first quarter of 2020. Adjusted Earnings before Interest, Taxes, Depreciation and Amortization for Real Estate (Adjusted EBITDAre)The National Association of Real Estate Investment Trusts (Nareit) came to the conclusion that a Nareit-defined EBITDA metric for real estate companies (i.e., EBITDA for real estate, or EBITDAre) would provide investors with a consistent measure to help make investment decisions among REITs. Our definition of "Adjusted EBITDAre" is generally consistent with the Nareit definition, other than our adjustments to remove foreign currency and derivative gains and losses (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) real estate depreciation and amortization, (iv) provisions for impairment, (v) gain on sales of real estate, and (vi) foreign currency and derivative gains and losses, net (as described in the Adjusted Funds from Operations section). Our Adjusted EBITDAre may not be comparable to Adjusted EBITDAre reported by other companies or as defined by Nareit, and other companies may interpret or define Adjusted EBITDAre differently than we do. Management believes Adjusted EBITDAre to be a meaningful measure of a REIT's performance because it is widely followed by industry analysts, lenders and investors. Management also believes the use of an annualized quarterly Adjusted EBITDAre metric is meaningful because it represents the Company's current earnings run rate for the period presented. The ratio of our total debt to our annualized quarterly Adjusted EBITDAre is also used to determine vesting of performance share awards granted to our executive officers. Adjusted EBITDAre should be considered along with, but not as an alternative to net income as a measure of our operating performance. Our ratios of net debt-to-Adjusted EBITDAre and net debt-to-Pro Forma Adjusted EBITDAre, which are used by management as a measure of leverage, are calculated as net debt (which we define as total debt per the consolidated balance sheet, less cash and cash equivalents), divided by annualized quarterly Adjusted EBITDAre and annualized Pro Forma Adjusted EBITDAre, respectively. -48-
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Table of Contents The following table summarizes our Adjusted EBITDAre and Pro Forma Adjusted EBITDAre calculation for the periods indicated below (dollars in thousands):
Three months ended
2020 2019 Net income (1) $ 23,143$ 101,275 Interest 76,806 73,410 Income taxes 4,592 1,822 Depreciation and amortization 169,084 149,424 Provisions for impairment 105,095 13,503 Gain on sales of real estate (13,736) (1,674) Foreign currency and derivative gains, net (2,336) (327) Quarterly Adjusted EBITDAre $ 362,648$ 337,433 Annualized Adjusted EBITDAre (2)$ 1,450,592 $ 1,349,732 Annualized Pro forma Adjustments 24,586 16,223 Annualized Pro forma Adjusted EBITDAre
1,475,178 1,365,955
Net Debt$ 7,711,111 $ 6,801,325 Net Debt/Adjusted EBITDAre 5.3 5.0 Net Debt/Pro forma Adjusted EBITDAre 5.2 5.0 (1) Net income for the three months endedSeptember 30, 2020 was negatively impacted by$24.1 million of rent reserves recorded as reductions of rental revenue, of which$2.3 million relates to straight-line rent receivables. (2) We calculate Annualized Adjusted EBITDAre by multiplying the Quarterly Adjusted EBITDAre by four. The Annualized Pro forma Adjustments for the three months endedSeptember 30, 2020 consists of$25.2 million from properties we acquired or stabilized during the quarter and removes$614,000 of operating income from properties we disposed of during the quarter, assuming all transactions occurred at the beginning of the quarter. The Annualized Pro forma Adjustments for the three months endedSeptember 30, 2019 consists of$15.6 million from properties we acquired or stabilized during the quarter and removes$552,000 of operating losses from properties we disposed of during the quarter, assuming all transactions occurred at the beginning of the quarter. The pro forma adjustments are consistent with the debt service coverage ratio calculated under financial covenants for our senior unsecured notes and bonds. We believe 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.
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (FFO) The following summarizes our funds from operations available to common stockholders (dollars in millions, except per share data):
% Increase Three months ended September 30, Nine months ended September 30, Nine 2020 2019 2020 2019 Three months months FFO available to common stockholders $ 283.0 $ 262.0 $ 848.4 $ 759.2 8.0 % 11.7 % FFO per share (1) $ 0.82 $ 0.82 $ 2.48 $ 2.43 - % 2.1 % (1) All per share amounts are presented on a diluted per common share basis. FFO in the first nine months of 2020 was impacted by reserves recorded as a reduction of rental revenue related to the COVID-19 pandemic, a loss on extinguishment of debt due to the early redemption of the 5.750% Notes due 2021 inJanuary 2020 and an executive severance charge for our former CFO inMarch 2020 . -49- -------------------------------------------------------------------------------- Table of Contents The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to 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): Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019
Net income available to common stockholders $ 22,904 $
101,049
169,084 149,424 501,997 437,367 Depreciation of furniture, fixtures and equipment (157) (136) (435) (438) Provisions for impairment 105,095 13,503 123,442 31,236 Gain on sales of real estate (13,736) (1,674) (53,565) (15,828) FFO adjustments allocable to noncontrolling interests (212) (135) (575) (327)
FFO available to common stockholders $ 282,978 $
262,031$ 848,419 $ 759,195 FFO allocable to dilutive noncontrolling interests 345 362 1,063 1,032 Diluted FFO $ 283,323$ 262,393 $ 849,482 $ 760,227 FFO per common share: Basic $ 0.82$ 0.82 $ 2.48$ 2.44 Diluted $ 0.82$ 0.82 $ 2.48$ 2.43
Distributions paid to common stockholders $ 242,241 $
216,248$ 716,535 $ 629,658 FFO available to common stockholders in excess of distributions paid to common stockholders $ 40,737$ 45,783 $ 131,884 $ 129,537 Weighted average number of common shares used for computation per share: Basic 346,476,217 319,945,932 342,214,164 311,556,279 Diluted 347,212,593 320,726,136 342,946,337 312,300,391 We define FFO, a non-GAAP measure, consistent with theNational Association of Real Estate Investment Trusts' definition, as net income available to common stockholders, plus depreciation and amortization of real estate assets, plus provisions for impairments of depreciable real estate assets, and reduced by gains on property sales. We consider FFO to be an appropriate supplemental measure of a REIT's operating performance as it is based on a net income analysis of property portfolio performance that adds back items such as depreciation and impairments for 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. The use of FFO is recommended by the REIT industry as a supplemental performance measure. In addition, FFO is used as a measure of our compliance with the financial covenants of our credit facility.
ADJUSTED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (AFFO) The following summarizes our adjusted funds from operations available to common stockholders (dollars in millions, except per share data):
% Increase (Decrease) Three months ended September 30, Nine months ended September 30, Nine 2020 2019 2020 2019 Three months months AFFO available to common stockholders $ 282.5 $ 265.4 $ 875.0 $ 768.0 6.4 % 13.9 % AFFO per share (1) $ 0.81 $ 0.83 $ 2.55 $ 2.46 (2.4) % 3.7 %
(1) All per share amounts are presented on a diluted per common share basis.
-50- -------------------------------------------------------------------------------- Table of Contents AFFO in the first nine months of 2020 was impacted by reserves recorded as a reduction of rental revenue related to the COVID-19 pandemic. 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. The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to 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): Three months ended
2020 2019 2020 2019
Net income available to common stockholders(1) $ 22,904 $
101,049$ 277,555 $ 307,185 Cumulative adjustments to calculate FFO (2) 260,074 160,982 570,864 452,010 FFO available to common stockholders 282,978 262,031 848,419 759,195 Executive severance charge (3) - - 3,463 - Loss on extinguishment of debt - - 9,819 - Amortization of share-based compensation 3,020 3,187 11,644 10,478 Amortization of deferred financing costs (4) 956 1,299 3,792 3,471 Amortization of net mortgage premiums (310) (354) (1,020) (1,061) Loss on interest rate swaps 1,123 694 3,115 2,058 Straight-line payments from cross-currency swaps (5) 614 1,754 1,960 2,553 Leasing costs and commissions 98 (851) (1,013) (1,880) Recurring capital expenditures (105) (406) (126) (577) Straight-line rent (6,445) (7,642) (20,469) (19,735) Amortization of above and below-market leases, net 2,408 5,486 14,925 13,227 Other adjustments (6) (1,828) 157 463 297 AFFO available to common stockholders $ 282,509$ 265,355 $ 874,972 $ 768,026 AFFO allocable to dilutive noncontrolling interests 347 368 1,079 1,064 Diluted AFFO $ 282,856$ 265,723 $ 876,051 $ 769,090 AFFO per common share: Basic $ 0.82$ 0.83 $ 2.56$ 2.47 Diluted $ 0.81$ 0.83 $ 2.55$ 2.46
Distributions paid to common stockholders $ 242,241 $
216,248
AFFO available to common stockholders in excess of distributions paid to common stockholders $ 40,268$ 49,107 $ 158,437 $ 138,368 Weighted average number of common shares used for computation per share: Basic 346,476,217 319,945,932 342,214,164 311,556,279 Diluted 347,212,593 320,726,136 342,946,337 312,300,391 (1)As ofSeptember 30, 2020 , there was$26.5 million of uncollected rent deferred as a result of lease concessions we granted in response to the COVID-19 pandemic and recognized under the practical expedient provided by the FASB and$36.4 million of uncollected rent for which we have not granted a lease concession. The collection of the$62.9 million of unpaid rent is probable. Deferrals accounted for as modifications totaling$63,000 and$224,000 for the three and nine months endedSeptember 30, 2020 , respectively, have not been added back to AFFO. (2)See reconciling items for FFO presented under "Funds from Operations Available to Common Stockholders (FFO). (3)The executive severance charge represents the incremental costs incurred upon our former CFO's departure inMarch 2020 , consisting of$1.6 million of cash,$1.8 million of share-based compensation expense and$58,000 of professional fees. (4) Includes the amortization of costs incurred and capitalized upon issuance of our notes payable, assumption of our mortgages payable and upon issuance of our term loans. The deferred financing costs are being amortized over the lives of the respective notes payable, mortgages and term loans. No costs associated with our credit facility agreements or annual fees paid to credit rating agencies have been included. -51- -------------------------------------------------------------------------------- Table of Contents (5) Straight-line payments from cross-currency swaps represent quarterly payments inU.S. dollars received by us from counterparties in exchange for associated foreign currency payments. These USD payments are fixed and determinable for the duration of the associated hedging transaction. (6) Includes adjustments allocable to noncontrolling interests, obligations related to financing lease liabilities, and foreign currency gains and losses as a result of intercompany debt and remeasurement transactions. We believe the non-GAAP financial measure AFFO provides useful information to investors because it is a widely accepted industry measure of the operating performance of real estate companies that is used by industry analysts and investors who look at and compare those companies. In particular, AFFO provides an additional measure to compare the operating performance of different REITs without having to account for differing depreciation assumptions and other unique revenue and expense items which are not pertinent to measuring a particular company's on-going operating performance. Therefore, we believe that AFFO is an appropriate supplemental performance metric, and that the most appropriate GAAP performance metric to which AFFO should be reconciled is net income available to common stockholders. Presentation of the information regarding 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 and AFFO in the same way, so comparisons with other REITs may not be meaningful. Furthermore, 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 and AFFO should not be considered as alternatives to reviewing our cash flows from operating, investing, and financing activities. In addition, FFO and AFFO should not be considered as measures of liquidity, our ability to make cash distributions, or our ability to pay interest payments. -52-
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PROPERTY PORTFOLIO INFORMATION AtSeptember 30, 2020 , we owned a diversified portfolio: •Of 6,588 properties; •With an occupancy rate of 98.6%, or 6,496 properties leased and 92 properties available for lease or sale; •Doing business in 51 separate industries; •Located in 49 U.S. states,Puerto Rico and theU.K. ; •With approximately 108.5 million square feet of leasable space; •With a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 9.0 years; and •With an average leasable space per property of approximately 16,470 square feet; approximately 12,220 square feet per retail property and 223,320 square feet per industrial property. AtSeptember 30, 2020 , 6,496 properties were leased under net lease agreements. A net lease typically requires the tenant to be responsible for monthly rent and certain property operating expenses including property taxes, insurance, and maintenance. In addition, our tenants are typically subject to future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants' gross sales above a specified level, or fixed increases. We define total portfolio annualized contractual rental revenue as the monthly aggregate cash amount charged to tenants, inclusive of monthly base rent receivables, 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 rental revenue has not been reduced to reflect reserves recorded as reductions to GAAP rental revenue in the periods presented. Industry Diversification The following table sets forth certain information regarding our property portfolio classified according to the business of the respective tenants, expressed as a percentage of our total portfolio annualized contractual rental revenue: -53-
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Percentage of Total Portfolio Annualized Contractual Rental Revenue by Industry As of As ofDec 31 ,Dec 31 ,Dec 31 ,Dec 31 ,Dec 31 ,September 30, 2020 2019 2018 2017 2016 2015 U.S. Aerospace 0.6% 0.8% 0.9% 1.0% 1.1% 1.2% Apparel stores 1.3 1.1 1.2 1.4 1.7 1.9 Automotive collision services 1.1 1.0 0.9 1.0 1.0 1.1 Automotive parts 1.6 1.6 1.7 1.5 1.3 1.3 Automotive service 2.5 2.6 2.3 2.5 2.0 2.0 Automotive tire services 2.0 2.1 2.3 2.5 2.6 2.9 Beverages 2.0 2.0 2.4 2.6 2.8 2.6 Child care 2.1 2.1 2.2 1.7 1.7 1.9 Consumer electronics 0.3 0.3 0.3 0.3 0.3 0.3 Consumer goods 0.6 0.6 0.7 0.7 0.9 1.0 Convenience stores 12.1 12.3 12.6 9.3 10.0 8.9 Crafts and novelties 0.9 0.6 0.6 0.6 0.5 0.5 Diversified industrial 0.7 0.7 0.8 0.8 0.90.9 Dollar stores 7.8 7.9 7.3 7.5 8.0 8.8 Drug stores 8.4 8.8 9.4 10.2 10.8 10.8 Education 0.2 0.2 0.3 0.3 0.3 0.3 Electric utilities 0.1 0.1 0.1 0.1 0.1 0.1 Entertainment 0.3 0.3 0.3 0.4 0.4 0.5 Equipment services 0.4 0.4 0.4 0.4 0.5 0.5 Financial services 1.9 2.0 2.4 2.3 2.6 1.8 Food processing 0.7 0.7 0.5 0.6 1.0 1.2 General merchandise 3.0 2.5 2.1 2.3 1.9 1.6 Government services 0.6 0.7 0.9 0.9 1 1.1 Grocery stores 5.0 5.2 5.0 5.3 3.5 2.9 Health and beauty 0.2 0.2 0.2 * * * Health and fitness 7.1 7.0 7.1 7.7 7.6 8.3 Health care 1.6 1.6 1.6 1.4 1.5 1.6 Home furnishings 0.8 0.8 0.8 0.9 0.9 0.8 Home improvement 3.0 2.9 2.8 2.9 2.5 2.4 Machinery 0.1 0.1 0.1 0.1 0.1 0.1 Motor vehicle dealerships 1.6 1.6 1.8 2.0 2.0 1.6 Office supplies 0.2 0.2 0.2 0.2 0.3 0.3 Other manufacturing 0.6 0.6 0.7 0.8 0.8 0.8 Packaging 0.9 0.8 1.0 1.1 0.9 0.7 Paper 0.1 0.1 0.1 0.1 0.1 0.1 Pet supplies and services 0.7 0.7 0.5 0.6 0.6 0.7 Restaurants - casual dining 3.0 3.2 3.3 3.6 3.7 3.8 Restaurants - quick service 5.6 5.8 6.3 5.2 4.8 4.5 Shoe stores 0.2 0.2 0.5 0.6 0.6 0.7 Sporting goods 0.7 0.8 0.9 1.0 1.5 1.8 Telecommunications 0.5 0.5 0.6 0.6 0.7 0.7 Theaters 5.7 6.1 5.3 5.7 4.6 5.0 Transportation services 4.1 4.3 5.0 5.4 5.7 5.4 Wholesale clubs 2.5 2.5 2.9 3.1 3.4 3.7 Other 0.2 0.7 0.7 0.8 0.8 0.9 TotalU.S. 95.6% 97.3% 100.0% 100.0% 100.0% 100.0%U.K. Grocery stores 3.4 2.7 - - - - Health care 0.1 - - - - - Home improvement 0.9 - - - - - Theaters * * - - - - TotalU.K. 4.4% 2.7% - - - - Totals 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% *Less than 0.1% -54-
-------------------------------------------------------------------------------- Table of Contents Property Type Composition The following table sets forth certain property type information regarding our property portfolio as ofSeptember 30, 2020 (dollars in thousands): Total Portfolio Percentage of Total Approximate Annualized Contractual Portfolio Annualized Number of Leasable Rental Revenue as of Contractual
Property Type Properties Square Feet (1) September 30, 2020 Rental Revenue Retail 6,410 78,349,200 $ 1,374,093 84.6 % Industrial 120 26,798,900 169,418 10.4 Office 43 3,175,700 53,877 3.3 Agriculture 15 184,500 27,113 1.7 Totals 6,588 108,508,300 $ 1,624,501 100.0 %
(1)Includes leasable building square footage. Excludes 3,300 acres of leased
land categorized as agriculture at
Tenant Diversification The following table sets forth the 20 largest tenants in our property portfolio, expressed as a percentage of total portfolio annualized contractual rental revenue, which does not give effect to deferred rent, atSeptember 30, 2020 : Percentage of Total Portfolio Annualized Number of Contractual Tenant Leases Rental Revenue(1) Walgreens 248 5.8 % 7-Eleven 432 4.9 % Dollar General 784 4.4 % FedEx 41 3.8 % Dollar Tree / Family Dollar 550 3.3 % LA Fitness 57 3.3 % Regal Cinemas (Cineworld) 42 2.8 % AMC Theaters 32 2.7 % Sainsbury's 17 2.6 % Walmart / Sam's Club 56 2.6 % Lifetime Fitness 16 2.5 % Circle K (Couche-Tard) 278 1.8 % BJ's Wholesale Clubs 15 1.7 % Treasury Wine Estates 17 1.6 % CVS Pharmacy 88 1.6 % Super America (Marathon) 161 1.6 % Kroger 22 1.5 % Home Depot 22 1.4 % GPM Investments / Fas Mart 203 1.4 % TBC Corp 159 1.2 % Total 3,240 52.6 %
(1) Amounts for each tenant are calculated independently; therefore, the individual percentages may not sum to the total.
-55- -------------------------------------------------------------------------------- Table of Contents 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 tenant) and their contribution to total portfolio annualized contractual rental revenue as ofSeptember 30, 2020 (dollars in thousands): Total Portfolio (1) Total Portfolio Percentage of Total Expiring
Approximate Annualized Contractual Portfolio Annualized
Leases Leasable Rental Revenue as of Contractual Year Retail Non-Retail Square Feet September 30, 2020 Rental Revenue 2020 15 3 440,900 $ 6,200 0.4 % 2021 285 14 2,737,300 47,996 3.0 2022 385 20 8,538,500 82,274 5.1 2023 552 24 9,806,500 122,373 7.5 2024 424 17 7,788,800 98,617 6.1 2025 507 21 7,918,300 121,433 7.5 2026 331 6 5,812,700 75,290 4.6 2027 425 4 6,318,700 84,571 5.2 2028 594 14 11,538,600 125,652 7.7 2029 540 6 9,269,000 130,432 8.0 2030 225 9 5,606,800 73,336 4.5 2031 237 27 6,979,300 112,474 6.9 2032 299 11 4,648,200 96,679 6.0 2033 286 4 3,769,200 66,748 4.1 2034 304 1 4,729,100 117,588 7.2 2035 - 2045 980 5 10,541,400 262,838 16.2 Totals 6,389 186 106,443,300 $ 1,624,501 100.0 % (1)The table sets forth the timing of remaining lease terms expirations in our portfolio and their contributions to contractual rental revenue as ofSeptember 30, 2020 . Leases on our multi-tenant properties are counted separately in the table above. This table excludes 114 vacant units. -56- -------------------------------------------------------------------------------- Table of Contents Geographic Diversification The following table sets forth certain state-by-state information regarding our property portfolio as ofSeptember 30, 2020 (dollars in thousands): Total Portfolio Percentage of Total Approximate Annualized Contractual Portfolio Annualized Number of Leasable Rental as of Contractual Location Properties Percent Leased Square Feet September 30, 2020 Rental Revenue Alabama 228 98 % 2,203,400 $ 31,777 2.0 % Alaska 3 100 274,600 2,100 0.1 Arizona 152 99 2,082,200 34,023 2.1 Arkansas 102 99 1,183,200 14,714 0.9 California 236 100 7,026,700 142,799 8.8 Colorado 99 97 1,578,100 23,698 1.5 Connecticut 21 90 1,378,200 13,688 0.8 Delaware 19 100 101,400 3,091 0.2 Florida 430 99 4,692,500 84,811 5.2 Georgia 297 99 4,601,800 59,124 3.6 Idaho 14 93 103,200 1,746 0.1 Illinois 299 98 6,507,400 92,463 5.7 Indiana 199 99 2,571,000 39,546 2.4 Iowa 46 100 2,527,800 18,304 1.1 Kansas 119 98 2,208,700 24,817 1.5 Kentucky 94 100 1,845,200 22,112 1.4 Louisiana 136 98 1,953,200 25,548 1.6 Maine 27 100 277,800 5,721 0.4 Maryland 38 100 1,494,000 25,570 1.6 Massachusetts 58 95 881,400 17,062 1.1 Michigan 234 100 2,706,200 39,411 2.4 Minnesota 172 99 2,326,800 44,106 2.7 Mississippi 188 98 2,031,000 23,131 1.4 Missouri 182 97 2,944,700 38,205 2.4 Montana 12 100 89,100 2,237 0.1 Nebraska 61 98 862,300 8,842 0.5 Nevada 25 96 1,220,100 8,748 0.5 New Hampshire 14 100 321,500 6,031 0.4 New Jersey 79 99 1,252,000 29,601 1.8 New Mexico 60 98 504,200 8,695 0.5 New York 140 97 3,167,300 69,084 4.3 North Carolina 204 99 3,644,100 49,258 3.0 North Dakota 8 100 126,900 1,403 0.1 Ohio 342 98 6,845,100 69,740 4.3 Oklahoma 190 99 2,368,500 32,196 2.0 Oregon 31 100 665,100 12,187 0.8 Pennsylvania 223 99 2,265,900 45,653 2.8 Rhode Island 3 100 158,000 2,582 0.2 South Carolina 181 97 1,820,700 35,452 2.2 South Dakota 23 96 258,500 2,772 0.2 Tennessee 262 99 3,851,200 50,035 3.1 Texas 834 99 11,772,800 177,533 11.0 Utah 23 100 949,700 9,974 0.6 Vermont 1 100 65,500 1,212 0.1 Virginia 219 99 3,357,000 44,126 2.7 Washington 50 98 913,400 15,204 0.9 West Virginia 37 100 537,500 7,242 0.4 Wisconsin 129 96 3,115,900 32,523 2.0 Wyoming 9 100 63,900 1,515 0.1 Puerto Rico 4 100 28,300 859 * U.K. 31 100 2,783,300 72,230 4.4 TotalsAverage 6,588 99 % 108,508,300 $ 1,624,501 100.0 % *Less than 0.1% -57-
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IMPACT OF INFLATION Tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index (typically subject to ceilings), or increases in the tenants' 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 tenant is responsible for property expenses. Inflation and increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
For the period ended
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 dueDecember 2030 are listed on the NYSE under the ticker symbol "O30" with a CUSIP number of 756109-AY0. 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 theSecurities and Exchange Commission , orSEC . None of the information on our website is deemed to be part of this report. Item 3: Quantitative and Qualitative Disclosures about Market Risk We are exposed to interest rate changes primarily as a result of our credit facility and commercial paper program, term loans, mortgages payable, and long-term notes and bonds used to maintain liquidity and expand our real estate investment portfolio and operations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flow and to lower our overall borrowing costs. To achieve these objectives we issue long-term notes and bonds, primarily at fixed rates. In order to mitigate and manage the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, interest rate locks and caps. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks, including counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. To limit counterparty credit risk we will seek to enter into such agreements with major financial institutions with favorable credit ratings. There can be no assurance that we will be able to adequately protect against the foregoing risks or realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging activities. We do not enter into any derivative transactions for speculative or trading purposes. The following table presents by year of expected maturity, the principal amounts, average interest rates and estimated fair values of our fixed and variable rate debt as ofSeptember 30, 2020 . This information is presented to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in millions): -58- -------------------------------------------------------------------------------- Table of Contents Expected Maturity Data Fixed rate Weighted average rate Variable rate Weighted average rate Year of Maturity debt on fixed rate debt debt on variable rate debt 2020 $ 10.5 5.07 %$ 300.0 0.23 % 2021 68.8 5.61 - - 2022 1,061.8 3.43 - - 2023 770.6 4.64 556.1 0.84 2024 712.2 3.97 - - Thereafter 4,967.8 3.69 - - Totals (1) $ 7,591.7 3.80 %$ 856.1 0.62 % Fair Value (2) $ 8,494.8$ 856.1 (1)Excludes net premiums recorded on mortgages payable, net original issuance premiums recorded on notes payable and deferred financing costs on mortgages payable, notes payable, and term loans. AtSeptember 30, 2020 , the unamortized balance of net premiums on mortgages payable is$1.9 million , the unamortized balance of net original issuance premiums on notes payable is$28.2 million , and the balance of deferred financing costs on mortgages payable is$1.1 million , on notes payable is$40.3 million , and on term loans is$692,000 . (2)We base the estimated fair value of the publicly-traded fixed rate senior notes and bonds atSeptember 30, 2020 on the indicative market prices and recent trading activity of our senior notes and bonds payable. We base the estimated fair value of our fixed rate and variable rate mortgages and private senior notes payable atSeptember 30, 2020 on the relevant forward interest rate curve, plus an applicable credit-adjusted spread. We believe that the carrying value of the credit facility balance, commercial paper borrowings and term loans balance reasonably approximate their estimated fair values atSeptember 30, 2020 . The table above incorporates only those exposures that exist as ofSeptember 30, 2020 . It does not consider those exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations, would depend on the exposures that arise during the period, our hedging strategies at the time, and interest rates. All of our outstanding notes and bonds have fixed interest rates. AtSeptember 30, 2020 , all of our mortgages payable had fixed interest rates, except one variable rate mortgage on one property totaling$6.9 million , which has been swapped to a fixed interest rate. Interest on our revolving credit facility and term loan balance is variable. However, the variable interest rate feature on our term loans has been mitigated by interest rate swap agreements. Based on our revolving credit facility balance of$556.1 million atSeptember 30, 2020 , a 1% change in interest rates would change our interest rate costs by$5.6 million per year. During 2019, we commenced foreign operations and acquired real property in theU.K. and have continued to acquireU.K. properties in 2020. As a result, we are subject to currency fluctuations that may, from time to time, affect our financial condition and results of operations. Increases or decreases in the value of Sterling relative to theU.S. dollar impact the amount of net income we earn from our investments in theU.K. We mitigate these foreign currency exposures with non-U.S. denominated borrowings and cross-currency swaps. If we increase our international presence through investments in properties outside theU.S. , we may also decide to transact additional business or borrow funds in currencies other thanU.S. dollars. Item 4: Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of and for the quarter endedSeptember 30, 2020 , we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Interim Principal Financial Officer. -59-
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Table of Contents Based on the foregoing, our Chief Executive Officer and Interim Principal Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level. Changes in Internal Controls There have been no changes in our internal control over financial reporting that occurred during the quarter endedSeptember 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Limitations on the Effectiveness of Controls Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
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