VEREIT, INC. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. We make statements in this section that are forward-looking statements. Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see "Risk Factors" in Part I, Item 1A. of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . Capitalized terms used herein, but not otherwise defined, shall have the meaning ascribed to those terms in the "Part I - Financial Information," including the notes to the consolidated financial statements contained therein. Forward-Looking Statements This Quarterly Report on Form 10-Q includes "forward-looking statements" which reflect our expectations and projections regarding future events and plans, future financial condition, results of operations, liquidity and business, including leasing and occupancy, acquisitions, dispositions, rent receipts, rent relief requests, rent relief granted, the payment of future dividends, the impact of the coronavirus (COVID-19) on our business, the Merger, and the Spin-Off. Generally, the words "anticipates," "assumes," "believes," "continues," "could," "estimates," "expects," "goals," "intends," "may," "plans," "projects," "seeks," "should," "targets," "will," and variations of such words and similar expressions identify forward-looking statements. These forward-looking statements are based on information currently available to us and involve a number of known and unknown assumptions and risks, uncertainties and other factors, which may be difficult to predict and beyond the Company's control, that could cause actual events and plans or could cause our business, financial condition, liquidity and results of operations to differ materially from those expressed or implied in the forward-looking statements. These factors include, among other things, those discussed below. Information regarding historical rent collections should not serve as an indication of future rent collection. We disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of changes in underlying assumptions or factors, new information, future events or otherwise, except as may be required by law. The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements: •Our ability to consummate the proposed Merger and the timing of the closing of the proposed Merger. •The potential impact of the announcement of the proposed transactions or consummation of the proposed transactions on business relationships, including with tenants, clients, employees, customers and competitors. •Litigation associated with the Merger. •Costs, fees, expenses and charges related to the proposed transactions. •We may be subject to risks as a result of restrictions imposed by operating covenants contained in the Merger Agreement restricting us generally from issuing equity, incurring or pre-paying debt and limitations on the use of our Revolving Credit Facility. •The uncertain duration and extent of the impact of COVID-19 on our business and the businesses of our tenants (including their ability to timely make rental payments) and the economy generally. •Federal, state or local legislation or regulation that could impact the timely payment of rent by tenants in light of COVID-19. •We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all. •We are subject to risks associated with tenant, geographic and industry concentrations with respect to our properties. •We may be subject to risks accompanying the management of our industrial and office partnerships, in each of which we hold a non-controlling ownership interest. •Our properties may be subject to impairment charges. •We could be subject to unexpected costs or liabilities that may arise from potential dispositions, including related to limited partnership, tenant-in-common andDelaware statutory trust real estate programs and our management of such programs. •We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties including that we may be unable to acquire, dispose of, or lease properties on advantageous terms or at all. •We are subject to risks associated with bankruptcies or insolvencies of tenants, from tenant defaults generally or from the unpredictability of the business plans and financial condition of our tenants, which are heightened as a result of the COVID-19 pandemic. •We have substantial indebtedness, which may affect our ability to pay dividends, and expose us to interest rate fluctuation risk and the risk of default under our debt obligations. 41 -------------------------------------------------------------------------------- Table of Contents •We may be subject to increases in our borrowing costs as a result of changes in interest rates and other factors, including the phasing out of theLondon Inter-Bank Offered Rate ("LIBOR") starting in 2021. •Our overall borrowing and operating flexibility may be adversely affected by the terms and restrictions within the indenture governing the senior unsecured notes (the "Senior Notes"), and the Credit Agreement governing the terms of the Credit Facility (as both terms are defined in Liquidity and Capital Resources), and compliance with such covenants and/or our ability to access capital markets (including on attractive terms) may be more difficult as a result of the impact of COVID-19. •Our access to capital and terms of future financings may be affected by adverse changes to our credit rating. •We may not generate cash flows sufficient to pay our dividends to stockholders or meet our debt service obligations. •We may be affected by risks resulting from losses in excess of insured limits. •We may fail to remain qualified as a real estate investment trust ("REIT") forU.S. federal income tax purposes. •Compliance with the REIT annual distribution requirements may limit our operating flexibility. •We may be unable to retain or hire key personnel. •We may be impacted by the continuation or deterioration of current market conditions. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A. Risk Factors within our Annual Report on Form 10-K for the year endedDecember 31, 2020 and Part II, Item 1A. Risk Factors within this Quarterly Report on Form 10-Q. We use certain defined terms throughout this Quarterly Report on Form 10-Q that have the following meanings: When we refer to "annualized rental income," we mean the rental revenue under our leases on operating properties on a straight-line basis, which includes the effect of rent escalations and any tenant concessions, such as free rent, and our pro rata share of such revenues from properties owned by unconsolidated joint ventures. Annualized rental income excludes any adjustments to rental income due to changes in the collectability assessment, contingent rent, such as percentage rent, and operating expense reimbursements. Management uses annualized rental income as a basis for tenant, industry and geographic concentrations and other metrics within the portfolio. Annualized rental income is not indicative of future performance. When we refer to a "creditworthy tenant," we mean a tenant that has entered into a lease that we determine is creditworthy and may include tenants with an investment grade or below investment grade credit rating, as determined by major credit rating agencies, or unrated tenants. To the extent we determine that a tenant is a "creditworthy tenant" even though it does not have an investment grade credit rating, we do so based on our management's determination that a tenant should have the financial wherewithal to honor its obligations under its lease with us. As explained further below, this determination is based on our management's substantial experience performing credit analysis and is made after evaluating a tenant's due diligence materials that are made available to us, including financial statements and operating data. When we refer to a "direct financing lease," we mean a lease that requires specific treatment due to the significance of the lease payments from the inception of the lease compared to the fair value of the property, term of the lease, a transfer of ownership, or a bargain purchase option. These leases are recorded as a net asset on the balance sheet. The amount recorded is calculated as the fair value of the remaining lease payments on the leases and the estimated fair value of any expected residual property value at the end of the lease term. When we refer to properties that are net leased on a "long term basis," we mean properties with remaining primary lease terms of generally seven to 10 years or longer on average, depending on property type. Under a "net lease," the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. There are various forms of net leases, most typically classified as triple net or double net. Triple net leases typically require that the tenant pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs). Double net leases typically require that the tenant pay all operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance), but excludes some or all major repairs (e.g., roof, structure and parking lot). Accordingly, the owner receives the rent "net" of these expenses, rendering the cash flow associated with the lease predictable for the term of the lease. Under a net lease, the tenant generally agrees to lease the property for a significant term and agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. 42 -------------------------------------------------------------------------------- Table of Contents The real estate portfolio and economic metrics of our operating properties includes the Company's pro rata share of square feet and annualized rental income from the Company's unconsolidated joint ventures, based upon the Company's legal ownership percentage, which may, at times, not equal the Company's economic interest because of various provisions in certain joint venture agreements regarding distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns. OverviewVEREIT is a full-service real estate operating company which owns and manages one of the largest portfolios of single-tenant commercial properties in theU.S. As ofSeptember 30, 2021 , our portfolio, including the pro rata share of square feet and annualized rental income from the Company's unconsolidated joint ventures, was comprised of 3,882 retail, restaurant, office and industrial real estate properties with an aggregate 88.7 million square feet, of which 97.6% was leased, with a weighted-average remaining lease term of 8.4 years. Merger with Realty Income Corporation OnApril 29, 2021 , the Company and the OP entered into a Merger Agreement with Realty Income, Merger Sub 1, and Merger Sub 2 whereby Merger Sub 2 will be merged with and into the OP, with the OP continuing as the surviving entity and, immediately thereafter,VEREIT will be merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation. Pursuant to the terms and subject to the conditions of the Merger Agreement, each share of Common Stock and Limited Partner OP Unit will be converted into 0.705 of a newly issued share of Realty Income Common Stock. The Merger Agreement contains customary representations, warranties and covenants by each party. The Merger is subject to certain conditions which are set forth in the Merger Agreement. Stockholders ofVEREIT and Realty Income have both approved the Merger. The boards of directors of the Company and Realty Income have also unanimously approved the Merger Agreement. The Merger is expected to close onNovember 1, 2021 subject to the satisfaction or waiver of other closing conditions specified in the Merger Agreement. 43 -------------------------------------------------------------------------------- Table of Contents Operating Highlights and Key Performance Indicators Activity throughSeptember 30, 2021 Operations •Acquired controlling financial interests in 134 commercial properties for an aggregate purchase price of$419.2 million , which includes$4.0 million of external acquisition-related expenses that were capitalized. •Disposed of 83 properties, for an aggregate sales price of$432.7 million . The Company recorded a gain of$96.5 million related to the sales. Debt •As ofSeptember 30, 2021 ,$88.0 million was outstanding under the Revolving Credit Facility. •Total secured debt decreased by$341.4 million , from$1.3 billion to$1.0 billion , which includes prepayment of$247.1 million of mortgage notes. Equity •Issued an aggregate of 35,710 shares under the Prior ATM Program (as defined in Liquidity and Capital Resources), at a weighted average price per share of$37.90 , for gross proceeds of$1.4 million . The weighted average price per share, net of commissions, was$37.42 , for net proceeds of$1.3 million . •Redeemed all outstanding shares of Series F Preferred Stock. The shares of Series F Preferred Stock were redeemed at a redemption price of$25.00 per share. •Declared a quarterly dividend of$0.462 per share of Common Stock for each of the three quarters of 2021. 44 -------------------------------------------------------------------------------- Table of Contents Real Estate Portfolio Metrics In managing our portfolio, we are committed to diversification by property type, tenant, geography and industry. Below is a summary of our operating property type diversification and our top ten concentrations as ofSeptember 30, 2021 , based on annualized rental income of$1.1 billion . 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Our financial performance is influenced by the timing of acquisitions and
dispositions and the operating performance of our operating properties. The
following table shows the property metrics of our operating properties as of
September 30, 2021 and 2020:
September 30, 2021 September 30, 2020
Portfolio Metrics
Operating properties 3,882 3,820
Rentable square feet (in millions) 88.7 88.9
Economic occupancy rate (1) 97.6% 98.5%
Investment-grade tenants (2) 38.0% 37.7%
Weighted-average lease term (in years) 8.4 8.4
Lease rollover: (3)
Annual average 5.9% 5.9%
Maximum for a single year 10.5% 11.1%
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(1)Economic occupancy rate equals the sum of square feet leased (including space subject to month-to-month agreements) divided by rentable square feet. (2)Based on annualized rental income of our real estate portfolio as ofSeptember 30, 2021 and 2020, respectively. Investment-grade tenants are those with a credit rating of BBB- or higher byStandard & Poor's Financial Services LLC or a credit rating of Baa3 or higher byMoody's Investor Service, Inc. The ratings may reflect those assigned byStandard & Poor's Financial Services LLC orMoody's Investor Service, Inc. to the lease guarantor or the parent company, as applicable. (3)Through the end of the next five years as of the respective reporting date. Operating Performance In addition, management uses the following financial metrics to assess our operating performance (dollar amounts in thousands, except per share amounts). Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Financial Metrics Total revenues$ 290,192 $ 295,278 $ 872,268 $ 873,457 Net income$ 61,613 $ 98,917 $ 260,239 $ 241,885 Basic and diluted net income per share attributable to common stockholders$ 0.25 $ 0.41 $ 1.06 $ 0.95 FFO attributable to common stockholders and limited partners (1)$ 176,047 $ 171,233 $ 530,687 $ 508,998 AFFO attributable to common stockholders and limited partners (1)$ 191,554 $ 166,547 $ 561,197 $ 508,604 AFFO attributable to common stockholders and limited partners per diluted share (1)$ 0.83 $
0.77
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(1)See the Non-GAAP Measures section below for descriptions of our non-GAAP measures and reconciliations to the most comparable measure in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"). 46 -------------------------------------------------------------------------------- Table of Contents Results of Operations Our business was not materially impacted during the three and nine months endedSeptember 30, 2021 and 2020 by the COVID-19 pandemic. During the three months endedSeptember 30, 2021 our rent collection was 99.1% of rental revenue and as ofOctober 20, 2021 , we collected$16.8 million of deferred rent, representing approximately 100% of the amounts due fromJanuary 1, 2021 throughSeptember 30, 2021 . The full extent of the future impact of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations remains uncertain. The table below sets forth, for the periods presented, revenue information and the dollar amount change year over year (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 vs 2020 2021 vs 2020 2021 2020 Increase/(Decrease) 2021 2020
Increase/(Decrease)
Revenues:
Rental$ 289,671 $ 293,692 $ (4,021)$ 870,547 $ 870,854 $ (307) Fees from managed partnerships 521 1,586 (1,065) 1,721 2,603 (882) Total revenues$ 290,192 $ 295,278 $ (5,086)$ 872,268 $ 873,457 $ (1,189) Rental The decrease in rental revenue of$4.0 million and$0.3 million during the three and nine months endedSeptember 30, 2021 , respectively, as compared to the same periods in 2020 was primarily due to real estate dispositions, partially offset by real estate acquisitions. Subsequent toJanuary 1, 2020 , the Company acquired 185 occupied properties for an aggregate purchase price of$761.7 million and disposed of 160 consolidated properties for an aggregate sales price of$871.1 million . Fees from Managed Partnerships Fees from managed partnerships consist of fees earned for providing various services to the Company's unconsolidated joint venture entities. The decrease of$1.1 million and$0.9 million during the three and nine months endedSeptember 30, 2021 , respectively, as compared to the same period in 2020 was primarily due to a$1.1 million acquisition fee recorded in 2020 for the purchase of one property in the industrial partnership. Operating Expenses The table below sets forth, for the periods presented, certain operating expense information and the dollar amount change year over year (in thousands): Three Months Ended September 30, Nine Months
Ended
2021 vs 2020 2021 vs 2020
2021 2020 Increase/(Decrease) 2021 2020 Increase/(Decrease)
Acquisition-related $ 1,373 $ 1,050 $ 323 $ 4,155 $ 3,742 $ 413
Merger, litigation and non-routine
costs, net 9,445 105 9,340 16,118 (8,577) 24,695
Property operating 28,854 31,400 (2,546) 88,633 90,988 (2,355)
General and administrative 12,437 14,774 (2,337) 43,414 45,950 (2,536)
Depreciation and amortization 106,668 108,257 (1,589) 320,582 341,070 (20,488)
Impairments 13,272 16,397 (3,125) 59,250 36,871 22,379
Total operating expenses $ 172,049 $ 171,983 $ 66 $ 532,152 $ 510,044 $ 22,108
Acquisition-Related Expenses
Acquisition-related expenses consist of allocated internal salaries related to
time spent on acquiring commercial properties and costs associated with
unconsummated deals. Acquisition-related expenses remained relatively constant
during the three and nine months ended September 30, 2021 , as compared to the
same periods in 2020.
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Merger, Litigation and Non-Routine Costs, Net
Merger , litigation and non-routine costs, net increased $9.3 million during the
three months ended September 30, 2021 , as compared to the same period in 2020,
primarily due to $9.6 million of costs incurred related to the Merger, offset by
legal fees and settlements of $0.2 million during the three months ended
September 30, 2021 , with no comparable expenses during the same period in 2020.
Merger, litigation and non-routine costs, net increased $24.7 million during the
nine months ended September 30, 2021 , as compared to the same period in 2020
primarily due to $22.3 million of costs incurred related to the Merger during
the nine months ended September 30, 2021 , offset by insurance recoveries of $6.3
million . In addition, during the nine months ended September 30, 2020 , the
Company reversed $6.8 million of prior period estimated costs recorded in 2019
that exceeded actual expenses incurred.
Property Operating Expenses
Property operating expenses such as taxes, insurance, ground rent and
maintenance include both reimbursable and non-reimbursable property expenses.
The decrease of $2.5 million and $2.4 million during the three and nine months
ended September 30, 2021 , respectively, as compared to the same periods in 2020
was primarily due to the impact of property dispositions.
General and Administrative Expenses
The decrease of $2.3 million and $2.5 million during the three and nine months
ended September 30, 2021 , respectively, as compared to the same periods in 2020
was primarily due to decreased compensation expense.
Depreciation and Amortization Expenses
The decrease in depreciation and amortization expenses of $1.6 million and $20.5
million during the three and nine months ended September 30, 2021 , respectively,
as compared to the same periods in 2020 was primarily due to the write off of
intangible lease assets related to certain properties whose tenants filed for
Chapter 11 bankruptcy during 2020 and real estate dispositions.
Impairments
Impairments of $13.3 million and $16.4 million were recorded during the three
months ended September 30, 2021 and 2020, respectively. Impairments of $59.3
million and $36.9 million were recorded during the nine months ended September
30, 2021 and 2020, respectively. During the three and nine months ended
September 30, 2021 , the impairment charges primarily related to certain office,
retail and restaurant properties which were identified by management for
potential sale or were determined would not be re-leased by the tenant.
Other (Expense) Income and Provision for Income Taxes
The table below sets forth, for the periods presented, certain financial
information and the dollar amount change year over year (in thousands):
Three Months Ended September 30, Nine Months
Ended
2021 vs 2020 2021 vs 2020
2021 2020 Increase/(Decrease) 2021 2020 Increase/(Decrease)
Interest expense $ (59,768) $ (66,935) $ (7,167) $ (179,795) $ (197,244) $ (17,449)
(Loss) gain on extinguishment and
forgiveness of debt, net $ (5) $ 61 $ (66) $ (2,102) $ (1,419) $ 683
Other income, net $ 346 $ 73 $ 273 $ 7,101 $ 1,026 $ 6,075
Equity in income of unconsolidated
entities $ 463 $ 663 $ (200) $ 1,374 $ 2,406 $ (1,032)
Gain on disposition of real estate and
real estate assets held for sale, net $ 3,369 $ 42,814 $ (39,445) $ 96,339 $ 76,858 $ 19,481
Provision for income taxes $ (935) $ (1,054) $ (119) $ (2,794) $ (3,155) $ (361)
48-------------------------------------------------------------------------------- Table of Contents Interest Expense The decrease in interest expense of$7.2 million and$17.4 million during the three and nine months endedSeptember 30, 2021 , respectively, as compared to the same periods in 2020 was primarily due to a decrease in average debt outstanding and weighted average interest rates. AtSeptember 30, 2021 , the Company had$5.7 billion of debt outstanding with a weighted average interest rate of 3.86%, as compared to$5.9 billion of debt outstanding with a weighted average interest rate of 4.19% atSeptember 30, 2020 . Loss on Extinguishment and Forgiveness of Debt, Net (Loss) gain on extinguishment and forgiveness of debt, net remained relatively constant during the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020. Other Income, Net Other income, net remained relatively constant during the three months endedSeptember 30, 2021 , as compared to the same period in 2020. The increase of$6.1 million in other income, net during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to gains of$4.0 million recorded during the nine months endedSeptember 30, 2021 , related to real estate investments received associated with site improvements performed by the tenant, with no comparable activity during the same periods in 2020. Equity in Income of Unconsolidated Entities The decrease of$0.2 million and$1.0 million in equity in income during the three and nine months endedSeptember 30, 2021 , respectively, as compared to the same periods in 2020 was primarily due to the Company's purchase of the remaining interest in one unconsolidated joint venture during the fourth quarter of 2020. Gain on Disposition of Real Estate and Real Estate Assets Held for Sale, Net The decrease in gain on disposition of real estate and real estate assets held for sale, net of$39.4 million during the three months endedSeptember 30, 2021 , as compared to the same period in 2020 was due to the Company's disposition of 31 properties for an aggregate sales price of$62.8 million which resulted in a gain of$3.4 million during the three months endedSeptember 30, 2021 , as compared to the disposition of 16 properties for an aggregate sales price of$157.0 million during the same period in 2020, which resulted in a gain of$42.9 million . The increase in gain on disposition of real estate and real estate assets held for sale, net of$19.5 million during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020 was due to the Company's disposition of 83 properties for an aggregate sales price of$432.7 million which resulted in a gain of$96.5 million during the nine months endedSeptember 30, 2021 , as compared to the disposition of 63 properties for an aggregate sales price of$376.2 million during the same period in 2020, which resulted in a gain of$77.2 million . Provision for Income Taxes The provision for income taxes consists of certain state and local income and franchise taxes. The provision for income taxes remained relatively constant during the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020. 49 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Measures Our results are presented in accordance withU.S. GAAP. We also disclose certain non-GAAP measures, as discussed further below. Management uses these non-GAAP financial measures in our internal analysis of results and believes these measures are useful to investors for the reasons explained below. These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance withU.S. GAAP. Funds from Operations and Adjusted Funds from Operations Due to certain unique operating characteristics of real estate companies, as discussed below, theNational Association of Real Estate Investment Trusts, Inc. ("Nareit"), an industry trade group, has promulgated a supplemental performance measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental performance measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income or loss as determined underU.S. GAAP. Nareit defines FFO as net income or loss computed in accordance withU.S. GAAP adjusted for gains or losses from disposition of property, depreciation and amortization of real estate assets, impairment write-downs on real estate, and our pro rata share of FFO adjustments related to unconsolidated partnerships and joint ventures. We calculate FFO in accordance with Nareit's definition described above. In addition to FFO, we use adjusted funds from operations ("AFFO") as a non-GAAP supplemental financial performance measure to evaluate the operating performance of the Company. AFFO, as defined by the Company, excludes from FFO non-routine items such as acquisition-related expenses, merger, litigation and non-routine costs, net and gains or losses on sale of investment securities or mortgage notes receivable. We also exclude certain non-cash items such as impairments of goodwill, intangible and right of use assets, straight-line rent, net direct financing lease adjustments, gains or losses on derivatives, gains or losses on the extinguishment or forgiveness of debt, equity-based compensation and amortization of intangible assets, deferred financing costs, premiums and discounts on debt and investments, above-market lease assets and below-market lease liabilities. Management believes that excluding these items from FFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of our portfolio over time. AFFO allows for a comparison of the performance of our operations with other publicly-traded REITs, as AFFO, or an equivalent measure, is routinely reported by publicly-traded REITs, and we believe often used by analysts and investors for comparison purposes. For all of these reasons, we believe FFO and AFFO, in addition to net income (loss), as defined byU.S. GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of the Company over time. However, not all REITs calculate FFO and AFFO the same way, so comparisons with other REITs may not be meaningful. FFO and AFFO should not be considered as alternatives to net income (loss) and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. Neither theU.S. Securities and Exchange Commission (the "SEC"), Nareit, nor any other regulatory body has evaluated the acceptability of the exclusions used to adjust FFO in order to calculate AFFO and its use as a non-GAAP financial performance measure. 50
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Table of Contents The table below presents FFO and AFFO for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands, except share and per share data): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income $ 61,613
(3,124) (10,771) (15,897) (36,667)
Gain on disposition of real estate assets and
interests in unconsolidated joint ventures,
net (3,369) (42,814) (96,339) (76,858)
Depreciation and amortization of real estate
assets 106,290 107,869 319,430 339,855
Impairment of real estate 13,272 16,397 59,250 36,871
Proportionate share of adjustments for
unconsolidated entities 1,365 1,635 4,004 3,912
FFO attributable to common stockholders and
limited partners 176,047 171,233 530,687 508,998
Acquisition-related expenses 1,373 1,050 4,155 3,742
Merger, litigation and non-routine costs, net 9,445 105 16,118 (8,577)
(Gain) loss on investments (19) (76) (692) 607
Amortization of premiums (discounts) on debt
and investments, net 837 (201) 1,479 (1,252)
Amortization of above-market lease assets and
deferred lease incentives, net of
amortization of below-market lease
liabilities 1,164 393 4,541 1,929
Net direct financing lease adjustments 384 381 1,124 1,118
Amortization and write-off of deferred
financing costs 2,677 3,114 7,881 8,853
Loss (gain) on extinguishment and forgiveness
of debt, net 5 (61) 2,102 1,419
Straight-line rent (3,560) (12,595) (12,392) (18,053)
Equity-based compensation 2,941 2,991 9,513 9,450
Other adjustments, net 415 379 (2,884) 1,048
Proportionate share of adjustments for
unconsolidated entities (155) (166) (435) (678)
AFFO attributable to common stockholders and
limited partners $ 191,554 Weighted-average shares of Common Stock outstanding - basic 229,271,106 216,737,561 229,227,755 216,002,172 Effect of weighted-average Limited Partner OP Units and dilutive securities (1) 908,334 290,114 661,115 285,993 Weighted-average shares of Common Stock outstanding - diluted (2) 230,179,440 217,027,675 229,888,870 216,288,165 AFFO attributable to common stockholders and limited partners per diluted share $ 0.83$ 0.77 $ 2.44$ 2.35
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(1)Dilutive securities include unvested restricted stock units ("Restricted
Stock Units") and stock options ("Stock Options").
(2)Weighted-average shares for all periods presented exclude the effect of the
convertible debt, which was fully repaid in cash as of December 31, 2020 and the
underlying Restricted Stock Units that would not have met the vesting criteria
based on certain performance targets as of the end of the respective reporting
period.
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Liquidity and Capital Resources
General
Our principal liquidity needs for the next twelve months and beyond are to:
•fund normal operating expenses;
•fund potential capital expenditures, tenant improvements and leasing costs;
•meet debt service and principal repayment obligations, including balloon
payments on maturing debt and debt prepayments;
•pay dividends;
•pay merger costs and expenses; and
•fund property acquisitions.
We expect to be able to satisfy these obligations using one or more of the
following sources:
•cash flow from operations;
•proceeds from real estate dispositions;
•utilization of the existing Revolving Credit Facility; and
•cash and cash equivalents balance.
COVID-19
We do not currently expect liquidity constraints. However, COVID-19 and related
impacts on our financial performance and the financial performance of our
tenants could still have a material and adverse effect on our results of
operations, liquidity and cash flows, in particular due to the potential
inability of our tenants to satisfy their rent obligations and inability of the
Company to renew leases, lease vacant space or re-let space as leases expire on
favorable terms, or at all. Impacts related to COVID-19 may also negatively
impact our future compliance with financial covenants in our Credit Facility,
indentures governing our Senior Notes and other debt agreements and result in a
default and acceleration of indebtedness which could negatively impact our
ability to make additional borrowings under our Credit Facility. The financial
impact of COVID-19 could also negatively affect our ability to pay dividends or
fund acquisitions in the future.
Disposition Activity
As part of our effort to optimize our real estate portfolio by focusing on
holding core assets, during the nine months ended September 30, 2021 , the
Company disposed of 83 properties for an aggregate sales price of $432.7
million . We expect to continue to explore opportunities to sell additional
properties to provide further financial flexibility, however, due to current
economic circumstances, we may not be able to dispose of properties on
advantageous terms or at all.
Credit Facility
Summary and Obligations
On May 23, 2018 , the General Partner, as guarantor, and the OP, as borrower,
entered into a credit agreement with Wells Fargo Bank, National Association as
administrative agent and other lenders party thereto (the "Credit Agreement").
The Credit Agreement provided for maximum borrowings of $2.9 billion , originally
consisting of a $2.0 billion unsecured revolving credit facility (the "Revolving
Credit Facility") and a $900.0 million unsecured term loan facility (the "Credit
Facility Term Loan," together with the Revolving Credit Facility, the "Credit
Facility"). Effective December 27, 2019 , the Company reduced the amount
available under its Revolving Credit Facility from $2.0 billion to $1.5 billion .
On May 27, 2020 , the Operating Partnership and the Company, entered into
Amendment No. 1 to the Credit Agreement (the "Amendment") which, among other
things, modified the measurement period for certain financial covenants (and
relevant associated definitions) from either the prior quarterly period
annualized or the prior six month period to the four consecutive fiscal quarter
period most recently ending. During the fourth quarter of 2020, the Company
repaid the outstanding balance of $900.0 million on the Credit Facility Term
Loan in connection with the termination of the related interest rate swap
agreements discussed in Note 7 - Derivatives and Hedging Activities.
As of September 30, 2021 , $88.0 million was outstanding under the Revolving
Credit Facility. The maximum aggregate dollar amount of letters of credit that
may be outstanding at any one time under the Credit Facility is $50.0 million .
As of September 30, 2021 , there were $1.3 million of letters of credit
outstanding.
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The Revolving Credit Facility generally bears interest at an annual rate of
LIBOR plus 0.775% to 1.55% or Base Rate plus 0.00% to 0.55% (based upon the
General Partner's then current credit rating). "Base Rate" is defined as the
highest of the prime rate, the federal funds rate plus 0.50% or a floating rate
based on one month LIBOR plus 1.0%, determined on a daily basis. The Credit
Facility Term Loan generally bore interest at an annual rate of LIBOR plus 0.85%
to 1.75%, or Base Rate plus 0.00% to 0.75% (based upon the General Partner's
then current credit rating). In addition, the Credit Agreement provides the
flexibility for interest rate auctions, pursuant to which, at the Company's
election, the Company may request that lenders make competitive bids to provide
revolving loans, which competitive bids may be at pricing levels that differ
from the foregoing interest rates.
Credit Facility Covenants
The Credit Facility requires restrictions on corporate guarantees, as well as
the maintenance of certain financial covenants. The key financial covenants in
the Credit Facility, as defined and calculated per the terms of the Credit
Agreement include maintaining the following:
Unsecured Credit Facility Key Covenants Required
Ratio of total indebtedness to total asset value ?
60%
Ratio of adjusted EBITDA to fixed charges ?
1.5x
Ratio of secured indebtedness to total asset value ?
45%
Ratio of unsecured indebtedness to unencumbered asset value ?
60%
Ratio of unencumbered adjusted NOI to unsecured interest expense ? 1.75x
The Company believes that it was in compliance with the financial covenants pursuant to the Credit Agreement and is not restricted from accessing any borrowing availability under the Credit Facility as ofSeptember 30, 2021 . Corporate Bonds Summary and Obligations As ofSeptember 30, 2021 , theOperating Partnership had$4.65 billion aggregate principal amount of Senior Notes outstanding. The indenture governing the Senior Notes requires that the Company be in compliance with certain key financial covenants, including maintaining the following: Corporate Bond Key Covenants Required Limitation on incurrence of total debt ? 65%
Limitation on incurrence of secured debt ? 40% Debt service coverage ratio
? 1.5x
Maintenance of total unencumbered assets ? 150%
As ofSeptember 30, 2021 , the Company believes that it was in compliance with these financial covenants based on the covenant limits and calculations in place at that time. OnOctober 8, 2021 , Realty Income announced the commencement of exchange offers and consent solicitations for all of the outstanding series of unsecured notes issued by the OP and guaranteed by the General Partner. The exchange offers and consent solicitations are being conducted in connection with, and are conditioned upon, the completion of the Merger. Mortgage Notes Payable Summary and Obligations As ofSeptember 30, 2021 , the Company had$1.0 billion of mortgage notes payable, which was collateralized by 216 properties, reflecting a decrease fromDecember 31, 2020 of$341.4 million during the nine months endedSeptember 30, 2021 , primarily related to prepayments of mortgage notes payable. Our mortgage indebtedness bore interest at the weighted-average rate of 4.88% per annum and had a weighted-average maturity of 1.9 years. We may in the future incur additional mortgage debt on the properties we currently own or use long-term non-recourse financing to acquire additional properties. The payment terms of our loan obligations vary. In general, only interest amounts are payable monthly with all unpaid principal and interest due at maturity. Some of our loan agreements require that we comply with specific reporting and financial covenants mainly related to debt coverage ratios and loan-to-value ratios. Each loan that has these requirements has specific ratio thresholds that must be met. 53 -------------------------------------------------------------------------------- Table of Contents Restrictions on Loan Covenants Our mortgage loan obligations generally restrict corporate guarantees and require the maintenance of financial covenants, including maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios), as well as the maintenance of a minimum net worth. The mortgage loan agreements contain no dividend restrictions except in the event of default or when a distribution would drive liquidity below the applicable thresholds. The Company believes that it was in compliance with the financial covenants under the mortgage loan agreements and had no restrictions on the payment of dividends as ofSeptember 30, 2021 . Dividends OnAugust 4, 2021 , the Company's Board of Directors declared a quarterly cash dividend for the third quarter of 2021 of$0.462 per share of Common Stock to stockholders of record as ofSeptember 30, 2021 , which was paid onOctober 15, 2021 . An equivalent distribution by theOperating Partnership is applicable per OP Unit. OnOctober 14, 2021 , the Company's Board of Directors declared a monthly cash dividend of$0.154 per share of Common Stock for the month of October, which represents one-third of its prior quarterly dividend. The dividend will be payable onNovember 15, 2021 to shareholders of record onNovember 2, 2021 , only if the Merger has not closed prior to that date. Redemptions of Series F Preferred Stock and Series F Preferred OP Units OnAugust 15, 2021 , the Company redeemed all outstanding shares of Series F Preferred Stock. Concurrently with the redemption of the Series F Preferred Stock, VEREIT OP redeemed all outstanding Series F Preferred Units of VEREIT OP in accordance with the terms of VEREIT OP's agreement of limited partnership. The shares of Series F Preferred Stock were redeemed at a redemption price of$25.00 per share. Common Stock Continuous Offering Program OnFebruary 25, 2021 , the Company established a new continuous equity offering program pursuant to which the Company can sell shares of Common Stock having an aggregate offering price of up to$1.5 billion in "at-the-market" offerings or certain other transactions (the "New ATM Program"). Under the New ATM Program, the Company may also enter into one or more forward transactions under separate master forward sale confirmations and related supplemental confirmations for the sale of shares of its common stock on a forward basis. The New ATM Program replaced the Company's prior continuous equity offering program, which was effectiveApril 15, 2019 (the "Prior ATM Program" and collectively with the New ATM Program, the "ATM Program"). The proceeds from any sale of shares under the ATM Program have been and will be used for general corporate purposes, which may include funding potential acquisitions and repurchasing or repaying outstanding indebtedness. During the nine months endedSeptember 30, 2021 , the Company issued an aggregate of 35,710 shares under the Prior ATM Program, at a weighted average price per share of$37.90 , for gross proceeds of$1.4 million . The weighted average price per share, net of commissions, was$37.42 , for net proceeds of$1.3 million . As ofSeptember 30, 2021 , the Company sold an aggregate of$572.2 million under the Prior ATM Program, which had an initial capacity of$750.0 million . No shares were issued during the three months endedSeptember 30, 2021 . No shares have been issued under the New ATM Program as ofSeptember 30, 2021 . Share Repurchase Program The Company has a share repurchase program (the "Share Repurchase Program") that permits the Company to repurchase up to$200.0 million of its outstanding Common Stock throughMay 6, 2022 . Under the Share Repurchase Program, repurchases can be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated stock repurchase transactions, or other methods of acquiring shares in accordance with applicable securities laws and other legal requirements. The Share Repurchase Program does not obligate the Company to make any repurchases at a specific time or in a specific situation and repurchases are influenced by prevailing market conditions, the trading price of the Common Stock, the Company's financial performance and other conditions. Shares of Common Stock repurchased by the Company under the Share Repurchase Program, if any, will be returned to the status of authorized but unissued shares of Common Stock. As ofSeptember 30, 2021 , there were no share repurchases under the Share Repurchase Program. 54 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following is a summary of our contractual obligations as ofSeptember 30, 2021 (in thousands): Payments due by period Less than 1 More than 5 Total year 1-3 years 4-5 years years Principal payments - mortgage notes$ 991,803 $ 399 $ 984,439 $ 2,216 $ 4,749 Interest payments - mortgage notes 89,600 12,351 76,122 640 487 Principal payments - Credit Facility 88,000 - 88,000 - - Interest payments - Credit Facility (1) 956 372 584 - - Principal payments - corporate bonds 4,650,000 - 500,000 1,150,000 3,000,000 Interest payments - corporate bonds 1,011,993 42,834 493,250 249,936 225,973 Operating and ground lease commitments 292,501 5,649 61,582 37,891 187,379 Other commitments (2) 1,293 1,293 - - - Total$ 7,126,146 $ 62,898 $ 2,203,977 $ 1,440,683 $ 3,418,588
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(1)Interest payments due in future periods on the$88.0 million of variable rate debt were calculated using a forward LIBOR curve. (2)Represents letters of credit outstanding. 55 -------------------------------------------------------------------------------- Table of Contents Cash Flow Analysis for the nine months endedSeptember 30, 2021 Operating Activities - During the nine months endedSeptember 30, 2021 , net cash provided by operating activities increased$50.2 million to$564.2 million from$514.0 million during the same period in 2020. The increase was primarily due to a decrease of$19.4 million in tenant receivables, net of reserves, an increase in accounts payable and accrued expenses of$21.0 million and a decrease in cash interest payments of$11.3 million , offset by an increase in merger costs of$22.3 million . In addition, the Company had$17.7 million of rent abatements during the nine months endedSeptember 30, 2020 , with no comparable activity during the same period in 2021. Investing Activities - Net cash used in investing activities for the nine months endedSeptember 30, 2021 increased$169.7 million to$35.1 million from$134.6 million net cash provided by investing activities during the same period in 2020. The increase was primarily related to an increase in cash used for investments in real estate assets of$272.0 million , offset by an increase in cash proceeds from dispositions of real estate and joint ventures of$73.5 million and a decrease in cash used for investments in unconsolidated entities of$19.2 million and mezzanine position of$10.0 million . Financing Activities - Net cash used in financing activities for the nine months endedSeptember 30, 2021 increased$589.6 million to$1.0 billion from$460.2 million during the same period in 2020. During the nine months endedSeptember 30, 2021 , the Company redeemed$473.1 million of Series F Preferred Stock, repaid$344.5 million of mortgage notes payable, paid$318.9 million of distributions and had net borrowings of$88.0 million on the Credit Facility. During the nine months endedSeptember 30, 2020 , the Company had net proceeds of$594.9 million from corporate bond offerings, paid$418.7 million of distributions, redeemed$300.1 million of Series F Preferred Stock, repaid$197.4 million of mortgage notes payable, had net repayments of$150.0 million on the Credit Facility, received$89.3 million of net proceeds from the issuance of Common Stock, and repurchased$69.4 million of convertible debt. Election as a REIT The General Partner elected to be taxed as a REIT forU.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the taxable year endedDecember 31, 2011 . As a REIT, except as discussed below, the General Partner generally is not subject to federal income tax on taxable income that it distributes to its stockholders so long as it distributes at least 90% of its annual taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if the General Partner maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, federal income taxes on certain income and excise taxes on its undistributed income. We believe we are organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year endingDecember 31, 2021 .The Operating Partnership is classified as a partnership forU.S. federal income tax purposes. As a partnership, theOperating Partnership is not a taxable entity forU.S. federal income tax purposes. Instead, each partner in theOperating Partnership is required to take into account its allocable share of theOperating Partnership's income, gains, losses, deductions and credits for each taxable year. However, theOperating Partnership may be subject to certain state and local taxes on its income and property. Under the limited partnership agreement of the OP, as amended (the "LPA"), theOperating Partnership is required to conduct business in such a manner as to permit the General Partner at all times to qualify as a REIT.The Company conducts all of its business inthe United States andPuerto Rico and, as a result, it files income tax returns in theU.S. federal jurisdiction,Puerto Rico , and various state and local jurisdictions. Certain of the Company's inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation. Inflation We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. However, net leases that require the tenant to pay its allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance, may reduce our exposure to increases in costs and operating expenses resulting from inflation. Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 56 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Significant Accounting Estimates Our accounting policies have been established to conform withU.S. GAAP. The preparation of financial statements in conformity withU.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes 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. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different assumptions or estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 : •Goodwill Impairment; •Real Estate Investment Impairment; and •Allocation of Purchase Price of Real Estate Assets Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market Risk The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our market risk arises primarily from interest rate risk relating to variable-rate borrowings. To meet our short and long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to manage our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, caps, collars, treasury locks, options and forwards in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. Interest Rate Risk As ofSeptember 30, 2021 , our debt included fixed-rate debt, with a fair value and carrying value of$6.1 billion and$5.6 billion , respectively. Changes in market interest rates on our fixed rate debt impact the fair value of the debt, but they have no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points, and the fixed rate debt balance remains constant, we expect the fair value of our debt to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from theirSeptember 30, 2021 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed rate debt of$291.5 million . A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt of$314.9 million . As ofSeptember 30, 2021 , our debt included variable-rate debt with a fair value and carrying value of$88.0 million . The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from theirSeptember 30, 2021 levels, with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate debt would increase or decrease our interest expense by$0.9 million annually. See Note 6 - Debt to our consolidated financial statements. As the information presented above includes only those exposures that existed as ofSeptember 30, 2021 , it does not consider exposures or positions arising after that date. The information presented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations. These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs and assume no other changes in our capital structure. InJuly 2017 , theFinancial Conduct Authority ("FCA") announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. InNovember 2020 , theFederal Reserve Board announced that banks must stop writing newU.S. dollar LIBOR contracts by the end of 2021 and that, no later thanJune 30, 2023 , whenU.S. dollar LIBOR will no longer be published, market participants should amend legacy contracts to use the Secured Overnight Financing Rate ("SOFR"), or another alternative reference rate. The Company is not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. The Company has contracts that are indexed to LIBOR and is monitoring and evaluating the related risks, which include interest amounts on our variable rate debt as discussed in Note 6 - Debt. See Item 1A. Risk Factors included in the Company's Annual Report on Form 10-K for further discussion on risks related to changes in LIBOR reporting practices, the method in which LIBOR is determined, or the use of alternative reference rates. Credit Risk Concentrations of credit risk arise when a number of tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company is subject to tenant, geographic and industry concentrations. Any downturn of the economic conditions in one or more of these tenants, geographies or industries could result in a material reduction of our cash flows or material losses to us. The factors considered in determining the credit risk of our tenants include, but are not limited to: payment history; credit status and change in status (credit ratings for public companies are used as a primary metric); change in tenant space needs (i.e., expansion/downsize); tenant financial performance; economic conditions in a specific geographic region; and industry specific credit considerations. We believe that the credit risk of our portfolio is reduced by the high quality and diversity of our existing tenant base, reviews of prospective tenants' risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants. However, we continue to monitor the credit risk of our portfolio. 57
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