NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
1. Organization and Operation
Realty Income Corporation (“Realty Income,” the “Company,” “we,” “our” or “us”) is organized as a Maryland corporation. We invest in commercial real estate and have elected to be taxed as a real estate investment trust, or REIT.
At December 31, 2019, we owned 6,483 properties, located in 49 U.S states, Puerto Rico and the United Kingdom (U.K.), containing over 106.3 million leasable square feet.
Information with respect to number of properties, square feet, average initial lease term and average cash lease yield is unaudited.
2. Summary of Significant Accounting Policies and Procedures and Newly Adopted Accounting Standards
Federal Income Taxes. We have elected to be taxed as a REIT, as defined above, under the Internal Revenue Code of 1986, as amended, or the Code. We believe we have qualified and continue to qualify as a REIT. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income. Assuming our dividends equal or exceed our taxable net income, we generally will not be required to pay federal corporate income taxes on such income. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements, except for federal income taxes of our taxable REIT subsidiaries. The income taxes recorded on our consolidated statements of income and comprehensive income represent amounts paid by Realty Income and its subsidiaries for city and state income and franchise taxes and for U.K. income taxes.
Earnings and profits that determine the taxability of distributions to stockholders differ from net income reported for financial reporting purposes due to differences in the estimated useful lives and methods used to compute depreciation and the carrying value (basis) of the investments in properties for tax purposes, among other things.
We regularly analyze our various federal and state filing positions and only recognize the income tax effect in our financial statements when certain criteria regarding uncertain income tax positions have been met. We believe that our income tax positions would more likely than not be sustained upon examination by all relevant taxing authorities. Therefore, no provisions for uncertain income tax positions have been recorded in our financial statements.
Net Income per Common Share. Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income available to common stockholders, plus income attributable to dilutive shares and convertible common units, for the period by the weighted average number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period.
The following is a reconciliation of the denominator of the basic net income per common share computation to the denominator of the diluted net income per common share computation.
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Weighted average shares used for the basic net income per share computation
|
|
315,837,012
|
|
|
289,427,430
|
|
|
273,465,680
|
|
Incremental shares from share-based compensation
|
|
322,265
|
|
|
179,532
|
|
|
154,050
|
|
Weighted average partnership common units convertible to common shares that were dilutive
|
|
—
|
|
|
317,022
|
|
|
317,022
|
|
Weighted average shares used for diluted net income per share computation
|
|
316,159,277
|
|
|
289,923,984
|
|
|
273,936,752
|
|
Unvested shares from share-based compensation that were anti-dilutive
|
|
8,113
|
|
|
13,148
|
|
|
32,205
|
|
Weighted average partnership common units convertible to common shares that were anti-dilutive
|
|
442,073
|
|
|
297,576
|
|
|
88,182
|
|
Revenue Recognition and Accounts Receivable. The majority of our leases are accounted for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. Any rental revenue contingent upon a tenant’s sales is recognized only after the tenant exceeds their sales breakpoint. Rental increases based upon changes in the consumer price indexes are recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements. Contractually obligated rental revenue from tenants for recoverable real estate taxes and operating expenses are included in tenant reimbursements in the period when such costs are incurred. Taxes and operating expenses paid directly by the tenant are recorded on a net basis.
On January 1, 2019, we adopted ASU 2016-02 (Topic 842, Leases), which amended Topic 840, Leases. As our leases are accounted for as operating leases under both Topic 840 and 842, our lease revenue recognition policy was largely unaffected by this update. For further information, see Newly Adopted Accounting Standards section below.
Other revenue, which includes property-related revenue not included in rental revenue and interest income recognized on financing receivables for certain leases with above-market terms.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Realty Income and other subsidiaries for which we make operating and financial decisions (i.e. control), after elimination of all material intercompany balances and transactions. We consolidate entities that we control and record a noncontrolling interest for the portion that we do not own. Noncontrolling interest that was created or assumed as part of a business combination or asset acquisition was recognized at fair value as of the date of the transaction (see note 11). We have no unconsolidated investments.
Cash Equivalents and Restricted Cash. We consider all short-term, highly liquid investments that are readily convertible to cash and have an original maturity of three months or less at the time of purchase to be cash equivalents. Our cash equivalents are primarily investments in United States government money market funds. Restricted cash includes cash proceeds from the sale of assets held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges under Section 1031 of the Code, impounds related to mortgages payable and cash that is not immediately available to Realty Income (i.e. escrow deposits for future acquisitions).
Cash accounts maintained on behalf of Realty Income in demand deposits at commercial banks and money market funds may exceed federally insured levels or may be held in accounts without any federal insurance or any other insurance or guarantee. However, Realty Income has not experienced any losses in such accounts.
Gain on Sales of Properties. When real estate is sold, the related net book value of the applicable assets is removed and a gain from the sale is recognized in our consolidated statements of income and comprehensive income. We record a gain from the sale of real estate provided that various criteria, relating to the terms of the sale and any subsequent involvement by us with the real estate, have been met.
Allocation of the Purchase Price of Real Estate Acquisitions. A majority of our acquisitions qualify as asset acquisitions and the transaction costs associated with those acquisitions are capitalized. 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 of in-place leases and the value of in-place leases, as applicable. 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 and is often based upon the expected future cash flows of the property and various characteristics of the markets 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.
Our estimated fair value determinations are based on management’s judgment, utilizing various factors, including: market land and building values, market rental rates, discount rates and capitalization rates. Our methodology for measuring and allocating the fair value of real estate acquisitions includes both observable market data (categorized as level 2 on the three-level valuation hierarchy of Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurement), and unobservable inputs that reflect our own internal assumptions (categorized as level 3 under ASC Topic 820). Given the significance of the unobservable inputs we believe the allocations of fair value of real estate acquisitions should be categorized as level 3 under ASC Topic 820. For certain of our purchase price allocations we have used the assistance of an independent third party real estate valuation firm.
The allocation of tangible assets (which includes land and buildings/improvements) of an acquired property with an in-place lease is based upon relative fair value. Land is typically valued utilizing the sales comparison (or market) approach. Buildings and improvements are typically valued under the replacement cost approach. In allocating the fair value to identified intangibles for above-market or below-market leases, an amount is recorded based on the present value of the difference between (i) the contractual amount to be paid pursuant to the in-place lease and (ii) our estimate of fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease. The value of in-place leases is determined by our estimated costs related to acquiring a tenant and the carrying costs that would be incurred over the vacancy period to locate a tenant if the property were vacant, considering market conditions and costs to execute similar leases at the time of acquisition.
The values of the above-market and below-market leases are amortized over the term of the respective leases, including any bargain renewal options, as an adjustment to rental revenue on our consolidated statements of income and comprehensive income. The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to depreciation and amortization expense over the remaining periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are recorded to revenue or expense as appropriate.
Depreciation and Amortization. Land, buildings and improvements are recorded and stated at cost. Major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives, while ordinary repairs and maintenance are expensed as incurred. Buildings and improvements that are under redevelopment, or are being developed, are carried at cost and no depreciation is recorded on these assets. Additionally, amounts essential to the development of the property, such as pre-construction, development, construction, interest and other costs incurred during the period of development are capitalized. We cease capitalization when the property is available for occupancy upon substantial completion of tenant improvements, but in any event no later than one year from the completion of major construction activity.
Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:
|
|
|
Buildings
|
25 years or 35 years
|
Building improvements
|
4 to 20 years
|
Tenant improvements and lease commissions
|
The shorter of the term of the related lease or useful life
|
Acquired in-place leases
|
Remaining terms of the respective leases
|
Provision for Impairment. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A provision is made for impairment 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. Key factors that we utilize in this analysis include projected rental rates, estimated holding periods, capital expenditures and property sales capitalization rates. If a property is classified as held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell, and depreciation of the property ceases.
If a property was previously reclassified as held for sale but the applicable criteria for this classification are no longer met, the property is reclassified to real estate held for investment. A property that is reclassified to held for investment is measured and recorded at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for investment, or (ii) the fair value at the date of the subsequent decision not to sell.
Twenty-three properties were classified as held for sale at December 31, 2019. We do not depreciate properties that are classified as held for sale.
The following table summarizes provisions for impairment during the periods indicated below (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Total provisions for impairment
|
$
|
40.2
|
|
|
$
|
26.3
|
|
|
$
|
14.8
|
|
Number of properties:
|
|
|
|
|
|
Classified as held for sale
|
9
|
|
|
1
|
|
|
—
|
|
Classified as held for investment
|
5
|
|
|
3
|
|
|
2
|
|
Sold
|
37
|
|
|
40
|
|
|
24
|
|
Equity Offering Costs. Underwriting commissions and offering costs have been reflected as a reduction of additional paid-in-capital on our consolidated balance sheets.
Noncontrolling Interests. Noncontrolling interests are reflected on our consolidated balance sheets as a component of equity. In accordance with the applicable accounting guidance, noncontrolling interests acquired prior to October 1, 2017 were recorded initially at fair value based on the price of the applicable units issued or contributions made, and subsequently adjusted each period for distributions, additional contributions and the allocation of net income attributable to the noncontrolling interests. Noncontrolling interests issued or assumed subsequent to October 1, 2017, were recorded based on the proportional share of equity in the entity.
Derivative and Hedging Activities. We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. We may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.
As of December 31, 2019 we had three interest rate swaps in place, including one on each of our $250.0 million unsecured term loans and the third on an assumed mortgage loan. Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. In October 2018, we designated these three interest rate swaps as hedges and adopted hedge accounting treatment in accordance with Topic 815, Derivatives and Hedging. From the adoption date through the end of 2019, the effective portion of gains or losses on our interest rate swaps were recorded in accumulated other comprehensive loss on our consolidated balance sheet as of December 31, 2019, instead of through interest expense on our consolidated statements of income and comprehensive income.
In May 2019, we entered into four cross-currency swaps to exchange £130 million Sterling for $166 million maturing in May 2034, in order to hedge the foreign currency risk associated with our Sterling-denominated intercompany loan receivable from our consolidated foreign subsidiaries. These cross-currency swaps were designated as cash flow hedges on their trade date. Gains and losses, representing hedge components excluded from the assessment of effectiveness, are recognized in earnings over the life of the hedges on a systematic and rational basis, as documented at hedge inception in accordance with our accounting policy election. The earnings recognition of excluded components is presented in foreign currency and derivative gains, net on our consolidated statements of income and comprehensive income, which is the same caption item as the hedged transactions.
Use of Estimates. The consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles, or GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications. During the fourth quarter of 2019, we reclassified Goodwill, which was previously presented in its own caption on the consolidated balance sheets, into Other Assets for all comparative periods.
Newly Adopted Accounting Standards. In February 2016, the FASB issued ASU 2016-02 (Topic 842, Leases), which replaced Topic 840, Leases. Under this amended topic, the accounting applied by a lessor is largely unchanged from that applied under Topic 840, Leases. The large majority of our leases remain classified as
operating leases, and we continue to recognize lease income on a generally straight-line basis over the lease term. Although primarily a lessor, we are also a lessee under several ground lease arrangements. We adopted Topic 842, Leases, effective as of January 1, 2019 using the effective date method, and elected the practical expedients available for implementation under the standard for all classes of underlying assets. As a result, we recognize lease obligations for ground leases designated as operating and financing leases with corresponding right of use assets and liabilities (see note 3). Additionally, above-market rents on certain of our leases under which we are a lessor are accounted for as financing receivables amortizing over the lease term, and below-market rents on certain of our leases under which we are a lessor are accounted for as prepaid rent (see note 3). Also, as a result of the adoption of this standard, tenant reimbursable revenue and property expenses are now presented on a gross basis as both tenant reimbursement revenue included in rental revenue, and as a reimbursable expense included in property expenses, respectively, on our consolidated statements of income and comprehensive income. Property taxes and insurance paid directly by the lessee to a third party will continue to be presented on a net basis. These presentation changes had no impact on our results of operations. As a result, there was no restatement of prior issued financial statements and, similarly, no cumulative effect adjustment to opening equity; however, we have elected to aggregate prior period tenant reimbursement revenue within rental revenue to be consistent with the current period presentation within the statements of income and comprehensive income.
In connection with our acquisition of properties in the U.K. during the second quarter of 2019, we adopted accounting guidance applicable under Topic 830, Foreign Currency Matters. The functional currency of the U.K. subsidiaries holding the acquired properties is the Great British Pound (Sterling). Assets and liabilities from our foreign-owned subsidiaries are translated into U.S. dollars using the exchange rate in effect at the consolidated balance sheet date. Equity accounts are translated at historical rates, except for retained earnings, whereas the impact is calculated via the income statement translation process. Revenue and expense accounts are translated using the weighted average exchange rates during the period. The cumulative translation adjustments from our U.K. subsidiaries are recorded in accumulated other comprehensive income (loss) in the consolidated statements of equity. We have intercompany debt denominated in pound sterling, which is the same currency as the functional currency of our U.K. subsidiaries. When this debt is remeasured against the functional currency of the Company, which is the U.S. dollar, a gain or loss can result. Such transaction gains or losses realized upon settlement of a foreign currency transaction, which may include intercompany transactions, are included in net income under the caption ‘Foreign currency and derivative gains, net'.
3. Supplemental Detail for Certain Components of Consolidated Balance Sheets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
A.
|
Lease intangible assets, net, consist of the following at:
|
|
2019
|
|
|
2018
|
|
|
In-place leases
|
|
$
|
1,612,153
|
|
|
$
|
1,321,979
|
|
|
Accumulated amortization of in-place leases
|
|
(627,676
|
)
|
|
(546,573
|
)
|
|
Above-market leases
|
|
710,275
|
|
|
583,109
|
|
|
Accumulated amortization of above-market leases
|
|
(201,369
|
)
|
|
(158,918
|
)
|
|
|
|
$
|
1,493,383
|
|
|
$
|
1,199,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
B.
|
Other assets, net, consist of the following at:
|
|
2019
|
|
|
2018
|
|
|
Right of use asset - operating leases, net
|
|
$
|
120,533
|
|
|
$
|
—
|
|
|
Financing receivables
|
|
81,892
|
|
|
—
|
|
|
Right of use asset - financing leases
|
|
36,901
|
|
|
—
|
|
|
Non-refundable escrow deposits
|
|
14,803
|
|
|
200
|
|
|
Goodwill
|
|
14,430
|
|
|
14,630
|
|
|
Impounds related to mortgages payable
|
|
12,465
|
|
|
9,555
|
|
|
Prepaid expenses
|
|
11,839
|
|
|
11,595
|
|
|
Credit facility origination costs, net
|
|
11,453
|
|
|
14,248
|
|
|
Value-added tax receivable
|
|
9,682
|
|
|
—
|
|
|
Corporate assets, net
|
|
5,251
|
|
|
5,681
|
|
|
Restricted escrow deposits
|
|
4,529
|
|
|
1,129
|
|
|
Derivative assets and receivables - at fair value
|
|
12
|
|
|
3,100
|
|
|
Other items
|
|
4,871
|
|
|
1,853
|
|
|
|
|
$
|
328,661
|
|
|
$
|
61,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
C.
|
Distributions payable consist of the following declared distributions at:
|
|
2019
|
|
|
2018
|
|
|
Common stock distributions
|
|
$
|
76,622
|
|
|
$
|
67,636
|
|
|
Noncontrolling interests distributions
|
|
106
|
|
|
153
|
|
|
|
|
$
|
76,728
|
|
|
$
|
67,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
D.
|
Accounts payable and accrued expenses consist of the following at:
|
|
2019
|
|
|
2018
|
|
|
Notes payable - interest payable
|
|
$
|
75,114
|
|
|
$
|
73,094
|
|
|
Derivative liabilities and payables - at fair value
|
|
26,359
|
|
|
7,001
|
|
|
Property taxes payable
|
|
18,626
|
|
|
14,511
|
|
|
Value-added tax payable
|
|
13,434
|
|
|
—
|
|
|
Accrued costs on properties under development
|
|
5,870
|
|
|
8,137
|
|
|
Mortgages, term loans, and credit line - interest payable
|
|
1,729
|
|
|
1,596
|
|
|
Other items
|
|
35,907
|
|
|
29,426
|
|
|
|
|
$
|
177,039
|
|
|
$
|
133,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
E.
|
Lease intangible liabilities, net, consist of the following at:
|
|
2019
|
|
|
2018
|
|
|
Below-market leases
|
|
$
|
447,522
|
|
|
$
|
404,938
|
|
|
Accumulated amortization of below-market leases
|
|
(114,419
|
)
|
|
(94,072
|
)
|
|
|
|
$
|
333,103
|
|
|
$
|
310,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
F.
|
Other liabilities consist of the following at:
|
|
2019
|
|
|
2018
|
|
|
Rent received in advance and other deferred revenue
|
|
$
|
127,687
|
|
|
$
|
115,380
|
|
|
Lease liability - operating leases, net
|
|
122,285
|
|
|
—
|
|
|
Security deposits
|
|
6,303
|
|
|
6,093
|
|
|
Lease liability - financing leases
|
|
5,946
|
|
|
—
|
|
|
Capital lease obligations
|
|
—
|
|
|
5,636
|
|
|
|
|
$
|
262,221
|
|
|
$
|
127,109
|
|
4. Investments in Real Estate
We acquire land, buildings and improvements necessary for the successful operations of commercial tenants.
A. Acquisitions during 2019 and 2018
Below is a summary of our acquisitions for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Properties
|
|
|
Square Feet
(in millions)
|
|
|
Investment
($ in millions)
|
|
|
Weighted Average Lease Term (Years)
|
|
Initial Average Cash Lease Yield
|
|
Year Ended December 31, 2019 (1)
|
|
|
|
|
|
|
|
|
|
Acquisitions - U.S. (in 45 states)
|
753
|
|
|
11.6
|
|
|
$
|
2,860.8
|
|
|
13.0
|
|
6.8
|
%
|
Acquisitions - U.K. (2)
|
18
|
|
|
1.6
|
|
|
797.8
|
|
|
15.6
|
|
5.2
|
%
|
Total Acquisitions
|
771
|
|
|
13.2
|
|
|
3,658.6
|
|
|
13.4
|
|
6.4
|
%
|
Properties under Development - U.S.
|
18
|
|
|
0.5
|
|
|
56.6
|
|
|
15.1
|
|
7.3
|
%
|
Total (3)
|
789
|
|
|
13.7
|
|
|
$
|
3,715.2
|
|
|
13.5
|
|
6.4
|
%
|
|
|
(1)
|
None of our investments during 2019 caused any one tenant to be 10% or more of our total assets at December 31, 2019. All of our 2019 investments in acquired properties are 100% leased at the acquisition date.
|
|
|
(2)
|
Represents investments of £625.8 million Sterling during the year ended December 31, 2019 converted at the applicable exchange rate on the date of acquisition.
|
|
|
(3)
|
The tenants occupying the new properties operate in 31 industries, and are 94.6% retail and 5.4% industrial, based on rental revenue. Approximately 36% of the rental revenue generated from acquisitions during 2019 is from investment grade rated tenants, their subsidiaries or affiliated companies.
|
The $3.7 billion invested during 2019 was allocated as follows: $1.1 billion to land, of which $28.9 million was related to right of use assets under long-term ground leases, $2.1 billion to buildings and improvements, $448.3 million to intangible assets related to leases, $82.6 million to financing receivables related to certain leases
with above-market terms, $46.8 million to intangible liabilities related to below-market leases, and $8.4 million to prepaid rent related to certain leases with below-market terms. There was no contingent consideration associated with these acquisitions.
The properties acquired during 2019 generated total revenues of $92.0 million and net income of $36.9 million during the year ended December 31, 2019.
Below is a summary of our acquisitions for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Properties
|
|
|
Square Feet
(in millions)
|
|
|
Investment
($ in millions)
|
|
|
Weighted Average Lease Term (Years)
|
|
Initial Average Cash Lease Yield
|
|
Year Ended December 31, 2018 (1)
|
|
|
|
|
|
|
|
|
|
Acquisitions - U.S. (in 39 states)
|
750
|
|
|
4.1
|
|
|
$
|
1,717.2
|
|
|
14.9
|
|
6.3
|
%
|
Properties under Development - U.S.
|
14
|
|
|
1.1
|
|
|
80.3
|
|
|
12.3
|
|
6.9
|
%
|
Total (2)
|
764
|
|
|
5.2
|
|
|
1,797.5
|
|
|
14.8
|
|
6.4
|
%
|
|
|
(1)
|
None of our investments during 2018 caused any one tenant to be 10% or more of our total assets at December 31, 2018. All of our 2018 investments in acquired properties are 100% leased at the acquisition date.
|
(2) The tenants occupying the new properties operated in 21 industries, and the property types consisted of 96.3% retail and 3.7% industrial, based on rental revenue. Approximately 59% of the rental revenue generated from acquisitions during 2018 was from investment grade rated tenants, their subsidiaries or affiliated companies.
The $1.8 billion invested during 2018 was allocated as follows: $651.5 million to land, $1.0 billion to buildings and improvements, $141.0 million to intangible assets related to leases, and $39.2 million to intangible liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with these acquisitions.
The properties acquired during 2018 generated total revenues of $57.3 million and net income of $30.9 million during the year ended December 31, 2018.
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.
B. Investments in Existing Properties
During 2019, we capitalized costs of $17.9 million on existing properties in our portfolio, consisting of $2.1 million for re-leasing costs, $801,000 for recurring capital expenditures and $15.0 million for non-recurring building improvements. In comparison, during 2018, we capitalized costs of $17.9 million on existing properties in our portfolio, consisting of $3.9 million for re-leasing costs, $1.1 million for recurring capital expenditures and $12.9 million for non-recurring building improvements.
C. Properties with Existing Leases
Of the $3.7 billion we invested during 2019, approximately $2.72 billion was used to acquire 575 properties with existing leases. In comparison, of the $1.8 billion we invested during 2018, approximately $425.5 million was used to acquire 205 properties with existing leases. The value of the in-place and above-market leases is recorded to lease intangible assets, net on our consolidated balance sheets, and the value of the below-market leases is recorded to lease intangible liabilities, net on our consolidated balance sheets.
The values of the in-place leases are amortized as depreciation and amortization expense. The amounts amortized to expense for all of our in-place leases, for 2019, 2018, and 2017 were $112.0 million, $106.6 million, and $104.8 million, respectively.
The values of the above-market and below-market leases are amortized over the term of the respective leases, including any bargain renewal options, as an adjustment to rental revenue on our consolidated statements of income and comprehensive income. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for 2019, 2018, and 2017 were $21.7 million, $16.9 million, and $14.0 million, respectively. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense as appropriate.
The following table presents the estimated impact during the next five years and thereafter related to the amortization of the above-market and below-market lease intangibles and the amortization of the in-place lease intangibles at December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease to
rental revenue
|
|
|
Increase to
amortization
expense
|
|
2020
|
|
$
|
(22,911
|
)
|
|
$
|
122,982
|
|
2021
|
|
(21,756
|
)
|
|
115,235
|
|
2022
|
|
(20,201
|
)
|
|
103,268
|
|
2023
|
|
(18,685
|
)
|
|
90,965
|
|
2024
|
|
(17,145
|
)
|
|
82,394
|
|
Thereafter
|
|
(75,105
|
)
|
|
469,633
|
|
Totals
|
|
$
|
(175,803
|
)
|
|
$
|
984,477
|
|
5. Credit Facility
In August 2019, we amended and restated our unsecured credit facility, or our credit facility, in order to allow borrowings in multiple currencies under our revolving credit facility. The amended and restated credit agreement is otherwise substantively consistent with the prior credit agreement entered into in October 2018. Our credit facility consists of a $3.0 billion unsecured revolving credit facility with an initial term that expires in March 2023 and includes, at our option, two six-month extensions and a $250.0 million unsecured term loan due March 2024. The revolving credit facility allows us to borrow in up to 14 currencies, including U.S. dollars, and has a $1.0 billion expansion option. Under our credit facility, our investment grade credit ratings as of December 31, 2019 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.
At December 31, 2019, credit facility origination costs of $11.5 million are included in other assets, net, as compared to $14.2 million at December 31, 2018, on our consolidated balance sheet. These costs are being amortized over the remaining term of our revolving credit facility.
At December 31, 2019, we had a borrowing capacity of $2.3 billion available on our revolving credit facility (subject to customary conditions to borrowing) and an outstanding balance of $704.3 million, including £169.2 million Sterling, as compared to an outstanding balance of $252.0 million at December 31, 2018.
The weighted average interest rate on outstanding borrowings under our revolving credit facility was 3.1% during 2019 and 2.9% during 2018. At December 31, 2019 and 2018, the weighted average interest rate on borrowings outstanding was 2.2% and 3.2%, respectively. Our credit facility is subject to various leverage and interest coverage ratio limitations, and at December 31, 2019, we were in compliance with the covenants on our credit facility.
6. Term Loans
In October 2018, in conjunction with our revolving credit facility, we entered into a $250.0 million senior unsecured term loan, which matures in March 2024. Borrowing under this term loan bears interest at the current one-month LIBOR, plus 0.85%. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest on this term loan at 3.89%. The terms of this term loan were not impacted by the amendment and restatement of our credit agreement in August 2019.
In June 2015, in conjunction with entering into our previous credit facility, we entered into a $250.0 million senior unsecured term loan maturing in June 2020. Borrowing under this term loan bears 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 fixes our per annum interest rate on this term loan at 2.62%. The terms of this term loan were not impacted by the amendment and restatement of our credit agreement in August 2019.
In January 2013, in conjunction with our acquisition of American Realty Capital Trust, Inc., or ARCT, we entered into a $70.0 million senior unsecured term loan with an initial maturity date of January 2018. Borrowing under this term loan bore interest at the current one-month LIBOR, plus 1.10%. In conjunction with this term loan, we also entered into an interest rate swap, which, until its termination in January 2018, effectively fixed our per annum interest rate on this term loan at 2.05%. In 2018, we entered into two separate six–month extensions of this loan, during which periods the interest was borne at the current one–month LIBOR, plus 0.90%. In January 2019, we paid off the outstanding principal and interest on this term loan.
Deferred financing costs of $1.2 million incurred in conjunction with the $250.0 million term loan maturing June 2020 and $1.1 million incurred in conjunction with the $250.0 million term loan maturing March 2024 are being amortized over the remaining terms of each respective term loan. The net balance of these deferred financing costs, which was $956,000 at December 31, 2019 and $1.4 million at December 31, 2018, is included within term loans, net on our consolidated balance sheets.
7. Mortgages Payable
During 2019, we made $20.7 million in principal payments, including the repayment of one mortgage in full for $15.8 million. During 2018, we made $21.9 million in principal payments, including the repayment of two mortgages in full for $17.0 million. During 2019, we assumed two mortgages totaling $130.8 million on 33 properties. No mortgages were assumed during 2018. Assumed mortgages are secured by the properties on which the debt was placed and are considered non-recourse debt with limited customary exceptions for items such as solvency, bankruptcy, misrepresentation, fraud, misapplication of payments, environmental liabilities, failure to pay taxes, insurance premiums, liens on the property, violations of the single purpose entity requirements, and uninsured losses.
Our mortgages contain customary covenants, such as limiting our ability to further mortgage each applicable property or to discontinue insurance coverage without the prior consent of the lender. At December 31, 2019, we were in compliance with these covenants.
The balance of our deferred financing costs, which are classified as part of mortgages payable, net, on our consolidated balance sheets, was $1.3 million at December 31, 2019 and $183,000 at December 31, 2018. These costs are being amortized over the remaining term of each mortgage.
The following is a summary of all our mortgages payable as of December 31, 2019 and 2018, respectively (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Of
|
|
Number of
Properties(1)
|
|
Weighted Average
Stated
Interest Rate(2)
|
|
Weighted Average
Effective Interest
Rate(3)
|
|
|
Weighted
Average
Remaining
Years Until
Maturity
|
|
Remaining
Principal
Balance
|
|
|
Unamortized
Premium
and Deferred
Finance Costs
Balance, net
|
|
|
Mortgage
Payable
Balance
|
|
12/31/2019
|
|
92
|
|
|
4.9
|
%
|
|
4.6
|
%
|
|
3.1
|
|
$
|
408,419
|
|
|
$
|
1,700
|
|
|
$
|
410,119
|
|
12/31/2018
|
|
60
|
|
|
5.1
|
%
|
|
4.6
|
%
|
|
3.2
|
|
$
|
298,377
|
|
|
$
|
4,192
|
|
|
$
|
302,569
|
|
(1) At December 31, 2019, there were 27 mortgages on 92 properties. At December 31, 2018, there were 26 mortgages on 60 properties. The mortgages require monthly payments with principal payments due at maturity. At December 31, 2019, the mortgages were at fixed interest rates, except for one variable rate mortgage on one property totaling $7.1 million, which has been swapped to a fixed interest rate. At December 31, 2018, the mortgages were at fixed rates, except for two mortgages on two properties totaling $23.3 million. After factoring in arrangements which limit our exposure to interest rate risk and effectively fix our per annum interest rates, our mortgage debt subject to variable rates totaled $16.0 million at December 31, 2018.
(2) Stated interest rates ranged from 3.8% to 6.9% at each of December 31, 2019 and December 31, 2018.
(3) Effective interest rates ranged from 3.8% to 7.6% at December 31, 2019, while effective interest rates ranged from 1.1% to 7.7% at December 31, 2018.
The following table summarizes the maturity of mortgages payable, excluding net premiums of $3.0 million and deferred financing costs of $1.3 million, as of December 31, 2019 (dollars in millions):
|
|
|
|
|
Year of Maturity
|
Principal
|
|
2020
|
$
|
84.2
|
|
2021
|
68.8
|
|
2022
|
111.8
|
|
2023
|
20.6
|
|
2024
|
112.2
|
|
Thereafter
|
10.8
|
|
Totals
|
$
|
408.4
|
|
8. Notes Payable
A. General
Our senior unsecured notes and bonds consist of the following, sorted by maturity date (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
5.750% notes, issued in June 2010 and due in January 2021
|
|
$
|
250
|
|
|
$
|
250
|
|
3.250% notes, $450 issued in October 2012 and $500 issued in December 2017, both due in October 2022
|
|
950
|
|
|
950
|
|
4.650% notes, issued in July 2013 and due in August 2023
|
|
750
|
|
|
750
|
|
3.875% notes, issued in June 2014 and due in July 2024
|
|
350
|
|
|
350
|
|
3.875% notes, issued April 2018 and due in April 2025
|
|
500
|
|
|
500
|
|
4.125% notes, $250 issued in September 2014 and $400 issued in March 2017, both due in October 2026
|
|
650
|
|
|
650
|
|
3.000% notes, issued in October 2016 and due in January 2027
|
|
600
|
|
|
600
|
|
3.650% notes, issued in December 2017 and due in January 2028
|
|
550
|
|
|
550
|
|
3.250% notes, issued in June 2019 and due in June 2029
|
|
500
|
|
|
—
|
|
2.730% notes, issued in May 2019 and due in May 2034 (1)
|
|
418
|
|
|
—
|
|
5.875% bonds, $100 issued in March 2005 and $150 issued in June 2011, both due in March 2035
|
|
250
|
|
|
250
|
|
4.650% notes, $300 issued in March 2017 and $250 issued in December 2017, both due in March 2047
|
|
550
|
|
|
550
|
|
Total principal amount
|
|
6,318
|
|
|
5,400
|
|
Unamortized net original issuance premiums and deferred financing costs
|
|
(30
|
)
|
|
(23
|
)
|
|
|
$
|
6,288
|
|
|
$
|
5,377
|
|
(1) Represents the principal balance (in U.S. dollars) of the Sterling-denominated private placement of £315.0 million Sterling based on the applicable exchange rate on December 31, 2019.
The following table summarizes the maturity of our notes and bonds payable as of December 31, 2019, excluding unamortized net original issuance premiums and deferred financing costs (dollars in millions):
|
|
|
|
|
|
Year of Maturity
|
|
Principal
|
|
2021
|
|
$
|
250
|
|
2022
|
|
950
|
|
2023
|
|
750
|
|
2024
|
|
350
|
|
Thereafter
|
|
4,018
|
|
Totals
|
|
$
|
6,318
|
|
As of December 31, 2019, the weighted average interest rate on our notes and bonds payable was 3.9% and the weighted average remaining years until maturity was 8.3 years.
Interest incurred on all of the notes and bonds was $233.5 million for 2019, $213.8 million for 2018 and $197.1 million for 2017. The interest rate on each of these notes and bonds is fixed.
Our outstanding notes and bonds are unsecured; accordingly, we have not pledged any assets as collateral for these or any other obligations. Interest on all of the senior note and bond obligations is paid semiannually.
All of these notes and bonds contain various covenants, including: (i) a limitation on incurrence of any debt which would cause our debt to total adjusted assets ratio to exceed 60%; (ii) a limitation on incurrence of any secured debt which would cause our secured debt to total adjusted assets ratio to exceed 40%; (iii) a limitation on incurrence of any debt which would cause our debt service coverage ratio to be less than 1.5 times; and (iv) the maintenance at all times of total unencumbered assets not less than 150% of our outstanding unsecured debt. At December 31, 2019, we were in compliance with these covenants.
B. Note Issuances
During the three year period ended December 31, 2019 we issued the following notes and bonds (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Issuances
|
|
Date of
Issuance
|
|
Maturity date
|
|
Principal
amount
issued
|
|
Price of par value
|
|
Effective yield to
maturity
|
2.730% notes
|
|
May 2019
|
|
May 2034
|
|
£315
|
|
100.00
|
%
|
|
2.73%
|
3.250% notes
|
|
June 2019
|
|
June 2029
|
|
$500
|
|
99.36
|
%
|
|
3.33%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Issuances
|
|
|
|
|
|
|
|
|
|
|
3.875% notes
|
|
April 2018
|
|
April 2025
|
|
$500
|
|
99.50
|
%
|
|
3.96%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Issuances
|
|
|
|
|
|
|
|
|
|
|
4.125% notes
|
|
March 2017
|
|
October 2026 (1)
|
|
$400
|
|
102.98
|
%
|
|
3.75%
|
4.650% notes
|
|
March 2017
|
|
March 2047
|
|
$300
|
|
99.97
|
%
|
|
4.65%
|
3.250% notes
|
|
December 2017
|
|
October 2022 (2)
|
|
$500
|
|
101.77
|
%
|
|
2.84%
|
3.650% notes
|
|
December 2017
|
|
January 2028
|
|
$550
|
|
99.78
|
%
|
|
3.68%
|
4.650% notes
|
|
December 2017
|
|
March 2047 (3)
|
|
$250
|
|
105.43
|
%
|
|
4.32%
|
(1) This issuance constituted a further issuance of, and formed a single series with the senior notes due 2026 issued in September 2014.
(2) This issuance constituted a further issuance of, and formed a single series with the senior notes due 2022 issued in October 2012.
(3) This issuance constituted a further issuance of, and formed a single series with the senior notes due 2047 issued in March 2017.
The net proceeds from the May 2019 Sterling-denominated private placement of £315.0 million approximated $398.1 million, as converted at the applicable exchange rate on the closing of the offering, and were used to fund our initial investment in U.K. properties. The net proceeds of $492.2 million from the June 2019 note offering and the net proceeds of approximately $493.1 million from the April 2018 note offering were used to repay borrowings outstanding under our credit facility, to fund investment opportunities, and for other general corporate purposes.
The net proceeds of $1.3 billion from the December 2017 note offerings were used to redeem all $550.0 million aggregate principal amount of our outstanding 2019 notes, including accrued and unpaid interest, and to repay borrowings outstanding under our revolving credit facility and, to the extent not used for those purposes, to fund the development and acquisitions of additional properties and for other general corporate purposes. The net proceeds of $705.2 million from the March 2017 note offerings were used to repay borrowings outstanding under our credit facility, to fund investment opportunities and for other general corporate purposes.
C. Note Repayment
In January 2018, we repaid our $350.0 million of outstanding 2.000% notes, plus accrued and unpaid interest upon maturity.
In December 2017, we completed the early redemption on all $550.0 million of outstanding 6.75% notes due August 2019, plus accrued and unpaid interest. As a result of the early redemption, we recognized a $42.4 million loss on extinguishment of debt, represents a $0.15 dilution of net income per common share for the year ended December 31, 2017.
In September 2017, we repaid our $175.0 million of outstanding 5.375% notes, plus accrued and unpaid interest upon maturity.
9. Issuances of Common Stock
A. Issuance of Common Stock in an Overnight Offering
In May 2019, we issued 12,650,000 shares of common stock in an overnight underwritten public offering. After deducting underwriting discounts and other offering costs of $31.0 million, the net proceeds of $845.1 million were used to repay borrowings under our credit facility, to fund investment opportunities, and for other general corporate purposes. We did not issue any shares in an overnight offering in 2018. In March 2017, we issued 11,850,000 shares of common stock in an overnight offering. After underwriting discounts and other offering costs of $29.8 million, the net proceeds of $704.9 million were used to repay borrowings under our credit facility.
B. 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. At December 31, 2019, we had 11,652,668 shares remaining for future issuance under our DRSPP program.
The following table outlines common stock issuances pursuant to our DRSPP program (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Shares of common stock issued under the DRSPP program
|
117,522
|
|
|
166,268
|
|
|
1,193,653
|
|
Gross proceeds
|
$
|
8.4
|
|
|
$
|
9.1
|
|
|
$
|
69.9
|
|
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 2019 or 2018. During 2017, we issued 927,695 shares and raised $54.7 million under the waiver approval process. These shares are included in the total activity for 2017 noted in the table above.
C. At-the-Market (ATM) Program
Under our ATM equity distribution plan, or our ATM program, pursuant to which up to 33,402,405 additional 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. At December 31, 2019, we had 33,402,405 shares remaining for future issuance under our ATM program. We anticipate maintaining the availability of our ATM program in the future, including through replenishing the authorized shares issuable thereunder.
The following table outlines common stock issuances pursuant to our ATM program (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Shares of common stock issued under the ATM program
|
17,051,456
|
|
|
19,138,610
|
|
|
10,914,088
|
|
Gross proceeds
|
$
|
1,274.5
|
|
|
$
|
1,125.4
|
|
|
$
|
621.7
|
|
10. Redemption of Preferred Stock
We issued an irrevocable notice of redemption with respect to our 6.625% Monthly Income Class F Preferred Stock, or the Class F preferred stock, in March 2017, and, as a result, we incurred a non–cash charge of $13.4 million for 2017, representing the Class F preferred stock original issuance costs that we paid in 2012.
11. Noncontrolling Interests
In January 2013, we completed our acquisition of ARCT. Equity issued as consideration for this transaction included common and preferred partnership units issued by Tau Operating Partnership, L.P., or Tau Operating Partnership, the consolidated subsidiary which owns properties acquired through the ARCT acquisition. In January 2019, we redeemed all 317,022 remaining common units of Tau Operating Partnership, and paid off the outstanding balance and interest on the $70.0 million senior unsecured term loan entered in January 2013 in conjunction with our acquisition of ARCT. Following the redemption, our taxable REIT subsidiary, Crest Net Lease, obtained a 0.11% interest in Tau Operating Partnership, and we continue to consolidate the entity.
In 2019 and 2018, we completed the acquisitions of portfolios of properties, both by paying cash and by issuing additional common partnership units in Realty Income, L.P. as consideration for the acquisitions. At December 31, 2019, the remaining units from this issuance represent a 1.9% ownership in Realty Income, L.P. We hold the remaining 98.1% interests in this entity and consolidate the entity.
Neither of the common partnership units have voting rights. Both common partnership units are entitled to monthly distributions equal to the amount paid to common stockholders of Realty Income, and are redeemable in cash or Realty Income common stock, at our option, and at a conversion ratio of one to one, subject to certain exceptions. These issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the balance sheet was appropriate. We determined that the units meet the requirements to qualify for presentation as permanent equity.
In December 2019, we completed the acquisition of nine properties by acquiring a controlling interest in a joint venture. We are the managing member of this joint venture, and possess the ability to control the business and manage the affairs of this entity. At December 31, 2019, we and our subsidiaries held an 89.9% interest, and consolidated this entity in our consolidated financial statements.
In 2016, we completed the acquisition of two properties by acquiring a controlling interest in two entities. In December 2018, we acquired all of the outstanding minority ownership interests associated with one of these entities. In July 2019, we acquired all of the outstanding minority interest associated with the remaining entity.
The following table represents the change in the carrying value of all noncontrolling interests through December 31, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tau Operating
Partnership units(1)
|
|
|
Realty Income, L.P.
units(2)
|
|
|
Other
Noncontrolling
Interests
|
|
|
Total
|
|
Carrying value at December 31, 2017
|
|
$
|
13,322
|
|
|
$
|
2,160
|
|
|
$
|
3,725
|
|
|
$
|
19,207
|
|
Reallocation of equity
|
|
572
|
|
|
(43
|
)
|
|
245
|
|
|
774
|
|
Redemptions
|
|
—
|
|
|
(2,829
|
)
|
|
(2,752
|
)
|
|
(5,581
|
)
|
Shares issued in conjunction with acquisition
|
|
—
|
|
|
18,848
|
|
|
—
|
|
|
18,848
|
|
Distributions
|
|
(837
|
)
|
|
(842
|
)
|
|
(317
|
)
|
|
(1,996
|
)
|
Allocation of net income
|
|
299
|
|
|
618
|
|
|
67
|
|
|
984
|
|
Carrying value at December 31, 2018
|
|
$
|
13,356
|
|
|
$
|
17,912
|
|
|
$
|
968
|
|
|
$
|
32,236
|
|
Reallocation of equity
|
|
—
|
|
|
653
|
|
|
—
|
|
|
653
|
|
Redemptions
|
|
(13,356
|
)
|
|
—
|
|
|
(901
|
)
|
|
(14,257
|
)
|
Additions to noncontrolling interest
|
|
—
|
|
|
6,286
|
|
|
5,084
|
|
|
11,370
|
|
Distributions
|
|
—
|
|
|
(1,219
|
)
|
|
(77
|
)
|
|
(1,296
|
)
|
Allocation of net income
|
|
—
|
|
|
964
|
|
|
32
|
|
|
996
|
|
Carrying value at December 31, 2019
|
|
$
|
—
|
|
|
$
|
24,596
|
|
|
$
|
5,106
|
|
|
$
|
29,702
|
|
(1) 317,022 Tau Operating Partnership units were issued on January 22, 2013. No units remained outstanding as of December 31, 2019, and 317,022 remained outstanding as of December 31, 2018.
(2) 242,007 Realty Income L.P. units were issued on March 30, 2018, 131,790 units were issued on April 30, 2018 and 89,322 units were issued on March 28, 2019. 463,119 and 373,797 units remained outstanding as of December 31, 2019 and 2018, respectively.
At December 31, 2018, Tau Operating Partnership, Realty Income, L.P. and an entity acquired during 2016 were considered variable interest entities, or VIEs, in which we were deemed the primary beneficiary based on our controlling financial interests. In January 2019, we redeemed all 317,022 remaining Tau Operating Partnership units held by nonaffiliates for $20.2 million and recorded the excess over carrying value of $6.9 million as a reduction to
common stock and paid in capital. Following the redemption, we hold 100% of the ownership interests of Tau Operating Partnership, L.P., and while we continue to consolidate the entity, it is no longer considered a VIE. In July 2019, we purchased the remaining interest in the entity acquired during 2016 for $900,000. Below is a summary of selected financial data of consolidated VIEs, including the joint venture acquired during 2019, for which we are the primary beneficiary, included in the consolidated balance sheets at December 31, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Net real estate
|
|
$
|
654,305
|
|
|
$
|
2,903,093
|
|
Total assets
|
|
744,394
|
|
|
3,259,495
|
|
Total debt
|
|
—
|
|
|
191,565
|
|
Total liabilities
|
|
89,975
|
|
|
320,800
|
|
12. Distributions Paid and Payable
A. Common Stock
We pay monthly distributions to our common stockholders. The following is a summary of monthly distributions paid per common share for 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
January
|
|
$
|
0.2210
|
|
|
$
|
0.2125
|
|
|
$
|
0.2025
|
|
February
|
|
0.2255
|
|
|
0.2190
|
|
|
0.2105
|
|
March
|
|
0.2255
|
|
|
0.2190
|
|
|
0.2105
|
|
April
|
|
0.2260
|
|
|
0.2195
|
|
|
0.2110
|
|
May
|
|
0.2260
|
|
|
0.2195
|
|
|
0.2110
|
|
June
|
|
0.2260
|
|
|
0.2195
|
|
|
0.2110
|
|
July
|
|
0.2265
|
|
|
0.2200
|
|
|
0.2115
|
|
August
|
|
0.2265
|
|
|
0.2200
|
|
|
0.2115
|
|
September
|
|
0.2265
|
|
|
0.2200
|
|
|
0.2115
|
|
October
|
|
0.2270
|
|
|
0.2205
|
|
|
0.2120
|
|
November
|
|
0.2270
|
|
|
0.2205
|
|
|
0.2120
|
|
December
|
|
0.2270
|
|
|
0.2205
|
|
|
0.2120
|
|
Total
|
|
$
|
2.7105
|
|
|
$
|
2.6305
|
|
|
$
|
2.5270
|
|
The following presents the federal income tax characterization of distributions paid or deemed to be paid per common share for the years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Ordinary income
|
|
$
|
2.1206964
|
|
|
$
|
2.0269173
|
|
|
$
|
1.9402085
|
|
Nontaxable distributions
|
|
0.5898036
|
|
|
0.6035827
|
|
|
0.5478464
|
|
Total capital gain distribution
|
|
—
|
|
|
—
|
|
|
0.0389451
|
|
Totals
|
|
$
|
2.7105000
|
|
|
$
|
2.6305000
|
|
|
$
|
2.5270000
|
|
At December 31, 2019, a distribution of $0.2275 per common share was payable and was paid in January 2020. At December 31, 2018, a distribution of $0.2210 per common share was payable and was paid in January 2019.
B. Class F Preferred Stock
In April 2017, we redeemed all 16,350,000 shares of our Class F preferred stock. During the first three months of 2017, we paid three monthly dividends to holders of our Class F preferred stock totaling $0.414063 per share, or $3.9 million. In April 2017, we paid a final monthly dividend of $0.101215 per share, or $1.7 million, which was recorded as interest expense. For 2017, dividends per share of $0.5073368 were characterized as ordinary income and dividends per share of $0.0079412 were characterized as total capital gain distribution for federal income tax purposes.
13. Operating Leases
A. At December 31, 2019, we owned 6,483 properties in 49 U.S. states, Puerto Rico and the U.K. Of the 6,483 properties, 6,452, or 99.5%, are single-tenant properties, and the remaining are multi-tenant properties. At December 31, 2019, 94 properties were available for lease or sale.
Substantially all leases are net leases where the tenant pays or reimburses us for property taxes and assessments, maintains the interior and exterior of the building and leased premises, and carries insurance coverage for public liability, property damage, fire and extended coverage.
Rent based on a percentage of a tenants’ gross sales or percentage rents was $8.0 million for 2019, $5.9 million for 2018 and $6.1 million for 2017.
At December 31, 2019, minimum future annual rents to be received on the operating leases for the next five years and thereafter are as follows (dollars in thousands):
|
|
|
|
|
2020
|
$
|
1,541,732
|
|
2021
|
1,503,125
|
|
2022
|
1,435,784
|
|
2023
|
1,350,877
|
|
2024
|
1,233,083
|
|
Thereafter
|
8,055,610
|
|
Total
|
$
|
15,120,211
|
|
B. Major Tenants - No individual tenant’s rental revenue, including percentage rents, represented more than 10% of our total revenue for each of the years ended December 31, 2019, 2018 or 2017.
14. Gain on Sales of Real Estate
The following table summarizes our properties sold during the periods indicated below (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Number of properties
|
93
|
|
|
128
|
|
|
59
|
|
Net sales proceeds
|
$
|
108.9
|
|
|
$
|
142.3
|
|
|
$
|
167.0
|
|
Gain on sales of real estate
|
$
|
30.0
|
|
|
$
|
24.6
|
|
|
$
|
40.9
|
|
These property sales do not represent a strategic shift that will have a major effect on our operations and financial results, and therefore do not require presentation as discontinued operations.
15. Financial Instruments and Fair Value Measurements
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The disclosure for assets and liabilities measured at fair value requires allocation to a three-level valuation hierarchy. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, accounts receivable, escrow deposits, loans receivable, line of credit payable, term loans and all other liabilities, due to their short-term nature or interest rates and terms that are consistent with market, except for our mortgages payable assumed in connection with acquisitions and our senior notes and bonds payable, which are disclosed as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
At December 31, 2019
|
|
Carrying value
|
|
|
Estimated fair value
|
|
Mortgages payable assumed in connection with acquisitions (1)
|
|
$
|
408.4
|
|
|
$
|
417.7
|
|
Notes and bonds payable (2)
|
|
6,317.6
|
|
|
6,826.1
|
|
|
|
|
|
|
At December 31, 2018
|
|
Carrying value
|
|
|
Estimated fair value
|
|
Mortgages payable assumed in connection with acquisitions (1)
|
|
$
|
298.4
|
|
|
$
|
305.7
|
|
Notes and bonds payable (2)
|
|
5,400.0
|
|
|
5,430.0
|
|
(1) Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums is $3.0 million at December 31, 2019, and $4.4 million at December 31, 2018. Also excludes deferred financing costs of $1.3 million at December 31, 2019, and $183,000 at December 31, 2018.
(2) Excludes non-cash original issuance premiums and discounts recorded on notes payable. The unamortized balance of the net original issuance premiums was $6.3 million at December 31, 2019, and $10.5 million at December 31, 2018. Also excludes deferred financing costs of $35.9 million at December 31, 2019 and $33.7 million at December 31, 2018.
The estimated fair values of our mortgages payable assumed in connection with acquisitions and private senior notes payable have been calculated by discounting the future cash flows using an interest rate based upon the relevant forward interest rate curve, plus an applicable credit-adjusted spread. Because this methodology includes unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated fair values related to our mortgages payable is categorized as level three on the three-level valuation hierarchy.
The estimated fair values of our publicly-traded senior notes and bonds payable are based upon indicative market prices and recent trading activity of our senior notes and bonds payable. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values related to our notes and bonds payable is categorized as level two on the three-level valuation hierarchy.
We record interest rate swaps on the consolidated balance sheet at fair value. Prior to our adoption of hedge accounting during October 2018, the change in fair value of interest rate swaps was recognized through interest expense. Following adoption, changes to fair value are recorded to accumulated other comprehensive income, or AOCI.
In May 2019, we entered into four cross-currency swaps to exchange £130 million Sterling for $166 million maturing in May 2034, in order to hedge the foreign currency risk associated with our Sterling-denominated intercompany loan receivable from our consolidated foreign subsidiaries. These cross-currency swaps were designated as cash flow hedges on their trade date. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in earnings over the life of the hedges on a systematic and rational basis, as documented at hedge inception in accordance with our accounting policy election. The earnings recognition of excluded components is presented in foreign currency and derivative gains, net on our consolidated statements of income and comprehensive income, which is the same caption item as the hedged transactions.
The following table summarizes the terms and fair values of our derivative financial instruments at December 31, 2019 and December 31, 2018 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Type
|
Hedge Designation
|
Notional Amount
|
Strike
|
Effective Date
|
Maturity Date
|
Fair Value - asset (liability)
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
2019
|
|
2018
|
|
Interest rate swap
|
Cash flow
|
$
|
7.0
|
|
$
|
7.2
|
|
6.03%
|
09/25/2012
|
09/03/2021
|
$
|
(0.2
|
)
|
$
|
(0.2
|
)
|
Interest rate swap
|
Cash flow
|
250.0
|
|
250.0
|
|
1.72%
|
06/30/2015
|
06/30/2020
|
(0.1
|
)
|
3.0
|
|
Interest rate swap
|
Cash flow
|
250.0
|
|
250.0
|
|
3.04%
|
10/24/2018
|
03/24/2024
|
(14.7
|
)
|
(6.8
|
)
|
Cross-currency swap (1)
|
Cash flow
|
41.6
|
|
—
|
|
(2)
|
05/20/2019
|
05/22/2034
|
(2.6
|
)
|
—
|
|
Cross-currency swap (1)
|
Cash flow
|
41.6
|
|
—
|
|
(3)
|
05/20/2019
|
05/22/2034
|
(2.6
|
)
|
—
|
|
Cross-currency swap (1)
|
Cash flow
|
41.6
|
|
—
|
|
(4)
|
05/20/2019
|
05/22/2034
|
(2.9
|
)
|
—
|
|
Cross-currency swap (1)
|
Cash flow
|
41.6
|
|
—
|
|
(5)
|
05/20/2019
|
05/22/2034
|
(3.2
|
)
|
—
|
|
|
|
$
|
673.4
|
|
$
|
507.2
|
|
|
|
|
$
|
(26.3
|
)
|
$
|
(4.0
|
)
|
|
|
(1)
|
Represents British Pound Sterling, or GBP, United States Dollar, or USD, cross-currency swap.
|
|
|
(2)
|
GBP fixed rates initially at 4.82% and escalating to 10.96%, and USD fixed rate at 9.800%.
|
|
|
(3)
|
GBP fixed rates initially at 4.82% and escalating to 10.96%, and USD fixed rate at 9.803%.
|
|
|
(4)
|
GBP fixed rates initially at 4.82% and escalating to 10.96%, and USD fixed rate at 9.745%.
|
|
|
(5)
|
GBP fixed rates initially at 4.82% and escalating to 10.96%, and USD fixed rate at 9.755%.
|
We measure our derivatives at fair value and include the balances within other assets and accounts payable and accrued expenses on our consolidated balance sheets.
We have agreements with each of our derivative counterparties containing provisions under which we could be declared in default on our derivative obligations if repayment of our indebtedness is accelerated by the lender due to our default.
We utilize interest rate swap agreements to manage interest rate risk and cross-currency swaps to manage foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, spot and forward rates, as well as option volatility.
To comply with the provisions of ASC 820, Fair Value Measurement, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within level two on the three-level valuation hierarchy, the credit valuation adjustments associated with our derivatives utilize level three inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by ourselves and our counterparties. However, at December 31, 2019 and December 31, 2018, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety are classified as level two on the three-level valuation hierarchy.
Unrealized gains and losses in AOCI are reclassified to interest expense in the case of interest rate swaps and to foreign currency gains and losses, net in the case of cross-currency swaps, when the related hedged items are recognized. During 2019, we reclassified $3.4 million from AOCI as an increase to interest expense for our interest rate swaps and $5.5 million for 2019 in cross-currency swap losses into foreign currency and derivative gains, net. During 2018, there were no outstanding derivatives designated as hedges and accounted for through AOCI. As a result, there were no amounts to reclassify from AOCI during 2018.
We expect to reclassify $5.1 million from AOCI as an increase to interest expense relating to interest rate swaps and $1.3 million from AOCI to foreign currency gain relating to cross-currency swaps within the next twelve months.
16. Supplemental Disclosures of Cash Flow Information
Cash paid for interest was $275.3 million in 2019, $251.5 million in 2018, and $240.4 million in 2017.
Interest capitalized to properties under development was $751,000 in 2019, $369,000 in 2018, and $461,000 in 2017.
Cash paid for income taxes was $4.2 million in 2019, $4.7 million in 2018, and $3.8 million in 2017.
The following non-cash activities are included in the accompanying consolidated financial statements:
A. As a result of the adoption of Accounting Standards Codifications Topic 842, Leases, on January 1, 2019, we recorded $132.0 million of lease liabilities and related right of use assets as lessee under operating leases.
B. During 2019, we issued 89,322 common partnership units of Realty Income, L.P. totaling $6.3 million, as partial consideration for an acquisition of properties.
C. During 2019, we recorded $5.1 million to noncontrolling interests in connection with the acquisition of a controlling interest in a consolidated joint venture.
D. During 2019, we assumed mortgages payable to the third-party lenders of $130.8 million.
E. During 2018, we issued 373,797 common partnership units of Realty Income, L.P. as partial consideration for an acquisition of properties, totaling $18.8 million.
F. During 2018, we completed the acquisition of a property using $7.5 million in funds that were held in a non-refundable escrow account.
G. During 2017, we completed the acquisition of a portfolio of properties by entering into a note payable in the amount of $125.9 million with the seller, maturing in January 2018. This note was paid in full at maturity.
Per the requirements of ASU 2016-18 (Topic 230, Statement of Cash Flows) the following table provides a reconciliation of cash and cash equivalents reported within the consolidated balance sheets to the total of the cash, cash equivalents and restricted cash reported within the consolidated statements of cash flows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Cash and cash equivalents shown in the consolidated balance sheets
|
|
$
|
54,011
|
|
|
$
|
10,387
|
|
Impounds related to mortgages payable (1)
|
|
12,465
|
|
|
9,555
|
|
Restricted escrow deposits (1)
|
|
4,529
|
|
|
1,129
|
|
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows
|
|
$
|
71,005
|
|
|
$
|
21,071
|
|
(1) Included within other assets, net on the consolidated balance sheets (see note 3). These amounts consist of cash that we are legally entitled to, but that is not immediately available to us. As a result, these amounts were considered restricted as of the dates presented.
17. Employee Benefit Plan
We have a 401(k) plan covering substantially all of our employees. Under our 401(k) plan, employees may elect to make contributions to the plan up to a maximum of 60% of their compensation, subject to limits under the Code. We match 50% of each of our employee’s salary deferrals up to the first 6% of the employee’s eligible compensation. Our aggregate matching contributions each year have been immaterial to our results of operations.
18. Common Stock Incentive Plan
In 2012, our Board of Directors adopted and stockholders approved the Realty Income Corporation 2012 Incentive Award Plan, or the 2012 Plan, to enable us to motivate, attract and retain the services of directors and employees considered essential to our long-term success. The 2012 Plan offers our directors and employees an opportunity to own our stock or rights that will reflect our growth, development and financial success. Under the terms of the 2012 plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than 3,985,734 shares. The 2012 Plan has a term of ten years from the date it was adopted by our Board of Directors.
The amount of share-based compensation costs recognized in general and administrative expense on our consolidated statements of income and comprehensive income was $13.7 million during 2019, $27.3 million during 2018 (including $11.8 million of accelerated equity awards for our former CEO upon his departure from the company), and $13.9 million during 2017.
In October 2018, John P. Case departed as our Chief Executive Officer (CEO) and resigned as a member of our Board of Directors. In connection with his departure, we entered into a severance agreement with Mr. Case. Pursuant to the terms of this severance agreement, Mr. Case received a severance payment, which included both cash and stock compensation components. The total value of cash, stock compensation and professional fees incurred as a result of this severance was $28.3 million; however, the net amount, after incorporating accruals for CEO compensation previous to this severance, was $18.7 million, which was recognized in general and administrative expense on our 2018 consolidated statement of income and comprehensive income, and which represents the incremental costs incurred per the reconciliation below (dollars in thousands):
|
|
|
|
|
Cash
|
$
|
9,817
|
|
Stock compensation
|
17,902
|
|
Professional fees
|
574
|
|
Total value of severance
|
28,293
|
|
Amount accrued for CEO compensation prior to separation
|
(9,642
|
)
|
Incremental severance
|
$
|
18,651
|
|
A. Restricted Stock
The following table summarizes our common stock grant activity under our 2012 Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Number of
shares
|
|
Weighted
average
price(1)
|
|
Number of
shares
|
|
Weighted
average
price(1)
|
|
Number of
shares
|
|
Weighted
average
price(1)
|
Outstanding nonvested shares, beginning of year
|
|
307,821
|
|
|
$
|
53.44
|
|
|
475,768
|
|
|
$
|
52.32
|
|
|
513,523
|
|
|
$
|
48.33
|
|
Shares granted
|
|
87,327
|
|
|
$
|
69.83
|
|
|
183,952
|
|
|
$
|
52.21
|
|
|
149,264
|
|
|
$
|
59.21
|
|
Shares vested
|
|
(126,363
|
)
|
|
$
|
54.45
|
|
|
(310,706
|
)
|
|
$
|
51.05
|
|
|
(183,381
|
)
|
|
$
|
46.65
|
|
Shares forfeited
|
|
(9,087
|
)
|
|
$
|
55.71
|
|
|
(41,193
|
)
|
|
$
|
53.06
|
|
|
(3,638
|
)
|
|
$
|
56.57
|
|
Outstanding nonvested shares, end of each period
|
|
259,698
|
|
|
$
|
58.39
|
|
|
307,821
|
|
|
$
|
53.44
|
|
|
475,768
|
|
|
$
|
52.32
|
|
(1) Grant date fair value.
The vesting schedule for shares granted to non-employee directors is as follows:
|
|
•
|
For directors with less than six years of service at the date of grant, shares vest in 33.33% increments on each of the first three anniversaries of the date the shares of stock are granted;
|
|
|
•
|
For directors with six years of service at the date of grant, shares vest in 50% increments on each of the first two anniversaries of the date the shares of stock are granted;
|
|
|
•
|
For directors with seven years of service at the date of grant, shares are 100% vested on the first anniversary of the date the shares of stock are granted; and
|
|
|
•
|
For directors with eight or more years of service at the date of grant, there is immediate vesting as of the date the shares of stock are granted.
|
During May 2019, we granted 32,000 shares of common stock to the independent members of our Board of Directors, of which 20,000 shares vested immediately, 4,000 shares vest over a one-year service period, and 8,000 shares vest in equal parts over a three-year service period. In addition, in November 2019, we granted 4,000 shares of common stock to the new member of our Board of Directors, which vests in equal parts over a three-year service period.
Shares granted to employees typically vest annually in equal parts over a four-year service period. During 2019, 51,327 shares were granted to our employees, and vest over a four-year service period.
As of December 31, 2019, the remaining unamortized share-based compensation expense related to restricted stock totaled $10.1 million, which is being amortized on a straight-line basis over the service period of each applicable award. The amount of share-based compensation is based on the fair value of the stock at the grant date. We define the grant date as the date the recipient and Realty Income have a mutual understanding of the key terms and conditions of the award, and the recipient of the grant begins to benefit from, or be adversely affected by, subsequent changes in the price of the shares.
B. Performance Shares
During 2019, 2018 and 2017, we granted performance share awards, as well as dividend equivalent rights, to our executive officers. The number of performance shares that vest for each of the three years is based on the achievement of the following performance goals:
|
|
|
|
|
Performance Awards Metrics
|
|
Weighting
|
|
Total shareholder return (“TSR”) relative to MSCI US REIT Index
|
|
45
|
%
|
TSR relative to JP Morgan Net Lease Peers
|
|
26
|
%
|
Dividend per share growth rate
|
|
16
|
%
|
Debt-to-EBITDA ratio
|
|
13
|
%
|
The performance shares are earned based on our performance, and vest 50% on the first and second January 1 after the end of the three-year performance period, subject to continued service. The performance period for the 2017 performance awards began on January 1, 2017 and ended on December 31, 2019. The performance period for the 2018 performance awards began on January 1, 2018 and will end on December 31, 2020. The performance period for the 2019 performance awards began on January 1, 2019 and will end on December 31, 2021.
The fair value of the performance shares was estimated on the date of grant using a Monte Carlo Simulation model. The following table summarizes our performance share grant activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Number of
performance
shares
|
|
|
Weighted
average
price(1)
|
|
|
Number of
performance
shares
|
|
|
Weighted
average
price(1)
|
|
|
Number of
performance
shares
|
|
|
Weighted
average
price(1)
|
|
Outstanding nonvested shares, beginning of year
|
|
223,392
|
|
|
$
|
58.78
|
|
|
245,309
|
|
|
$
|
62.49
|
|
|
159,751
|
|
|
$
|
49.95
|
|
Shares granted
|
|
128,581
|
|
|
$
|
65.34
|
|
|
269,868
|
|
|
$
|
51.98
|
|
|
124,681
|
|
|
$
|
71.79
|
|
Shares vested
|
|
(47,310
|
)
|
|
$
|
54.27
|
|
|
(291,785
|
)
|
|
$
|
54.88
|
|
|
(39,123
|
)
|
|
$
|
41.60
|
|
Shares forfeited
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding nonvested shares, end of each period
|
|
304,663
|
|
|
$
|
62.25
|
|
|
223,392
|
|
|
$
|
58.78
|
|
|
245,309
|
|
|
$
|
62.49
|
|
(1) Grant date fair value.
As of December 31, 2019, the remaining share-based compensation expense related to the performance shares totaled $8.7 million and is being recognized on a tranche-by-tranche basis over the service period.
C. Restricted Stock Units
During 2019, 2018 and 2017 we also granted restricted stock units that primarily vest over a four-year service period and have the same economic rights as shares of restricted stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Number of
restricted stock
units
|
|
|
Weighted
average
price(1)
|
|
|
Number of
restricted stock
units
|
|
|
Weighted
average
price(1)
|
|
|
Number of
restricted stock
units
|
|
|
Weighted
average
price(1)
|
|
Outstanding nonvested shares, beginning of year
|
|
14,968
|
|
|
$
|
54.62
|
|
|
24,869
|
|
|
$
|
55.97
|
|
|
18,460
|
|
|
$
|
52.65
|
|
Shares granted
|
|
5,482
|
|
|
$
|
69.58
|
|
|
8,383
|
|
|
$
|
49.96
|
|
|
10,467
|
|
|
$
|
60.56
|
|
Shares vested
|
|
(4,939
|
)
|
|
$
|
54.90
|
|
|
(10,118
|
)
|
|
$
|
55.01
|
|
|
(4,058
|
)
|
|
$
|
52.70
|
|
Shares forfeited
|
|
—
|
|
|
$
|
—
|
|
|
(8,166
|
)
|
|
$
|
53.45
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding nonvested shares, end of each period
|
|
15,511
|
|
|
$
|
59.82
|
|
|
14,968
|
|
|
$
|
54.62
|
|
|
24,869
|
|
|
$
|
55.97
|
|
(1) Grant date fair value.
The amount of share-based compensation for the restricted stock units is based on the fair value of our common stock as the grant date. As of December 31, 2019, the remaining share-based compensation expense related to the restricted stock units totaled $296,000 and is being recognized on a straight-line basis over the service period.
19. Segment Information
We evaluate performance and make resource allocation decisions on an industry by industry basis. For financial reporting purposes, we have grouped our tenants into 50 activity segments. All of the properties are incorporated into one of the applicable segments. Unless otherwise specified, all segments listed below are located within the U.S. Because almost all of our leases require the tenant to pay or reimburse us for operating expenses, rental revenue is the only component of segment profit and loss we measure.
The following tables set forth certain information regarding the properties owned by us, classified according to the business of the respective tenants (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Assets, as of December 31:
|
|
2019
|
|
|
2018
|
|
Segment net real estate:
|
|
|
|
|
|
|
Automotive service
|
|
$
|
288,453
|
|
|
$
|
210,668
|
|
Automotive tire services
|
|
232,709
|
|
|
238,939
|
|
Beverages
|
|
279,373
|
|
|
284,910
|
|
Child care
|
|
208,326
|
|
|
151,640
|
|
Convenience stores
|
|
2,057,157
|
|
|
1,756,732
|
|
Dollar stores
|
|
1,427,950
|
|
|
1,117,250
|
|
Drug stores
|
|
1,618,854
|
|
|
1,490,261
|
|
Financial services
|
|
389,634
|
|
|
414,613
|
|
General merchandise
|
|
475,418
|
|
|
317,424
|
|
Grocery stores - U.S. (1)
|
|
922,349
|
|
|
774,526
|
|
Grocery stores - U.K. (1)
|
|
663,210
|
|
|
—
|
|
Health and fitness
|
|
1,019,796
|
|
|
882,515
|
|
Home improvement
|
|
495,305
|
|
|
424,494
|
|
Restaurants-casual dining
|
|
576,526
|
|
|
559,616
|
|
Restaurants-quick service
|
|
1,059,155
|
|
|
964,980
|
|
Theaters - U.S.
|
|
878,103
|
|
|
555,990
|
|
Transportation services
|
|
769,614
|
|
|
758,133
|
|
Wholesale club
|
|
396,690
|
|
|
412,203
|
|
Other non-reportable segments
|
|
2,738,150
|
|
|
2,528,623
|
|
Total segment net real estate
|
|
16,496,772
|
|
|
13,843,517
|
|
Intangible assets:
|
|
|
|
|
Automotive service
|
|
58,854
|
|
|
61,951
|
|
Automotive tire services
|
|
7,322
|
|
|
8,696
|
|
Beverages
|
|
1,509
|
|
|
1,765
|
|
Child care
|
|
21,997
|
|
|
12,277
|
|
Convenience stores
|
|
131,808
|
|
|
108,714
|
|
Dollar stores
|
|
82,701
|
|
|
48,842
|
|
Drug stores
|
|
183,319
|
|
|
165,558
|
|
Financial services
|
|
17,130
|
|
|
20,426
|
|
General merchandise
|
|
66,135
|
|
|
43,122
|
|
Grocery stores - U.S. (1)
|
|
180,197
|
|
|
144,551
|
|
Grocery stores - U.K. (1)
|
|
153,407
|
|
|
—
|
|
Health and fitness
|
|
74,428
|
|
|
71,609
|
|
Home improvement
|
|
72,979
|
|
|
57,928
|
|
Restaurants-casual dining
|
|
23,289
|
|
|
18,153
|
|
Restaurants-quick service
|
|
52,353
|
|
|
54,448
|
|
Theaters - U.S.
|
|
36,089
|
|
|
25,811
|
|
Transportation services
|
|
66,055
|
|
|
73,577
|
|
Wholesale club
|
|
23,372
|
|
|
26,484
|
|
Other non-reportable segments
|
|
240,439
|
|
|
255,685
|
|
Other corporate assets
|
|
564,641
|
|
|
217,369
|
|
Total assets
|
|
$
|
18,554,796
|
|
|
$
|
15,260,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the years ended December 31,
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Segment rental revenue:
|
|
|
|
|
|
|
|
|
|
Automotive service
|
|
$
|
32,365
|
|
|
$
|
28,303
|
|
|
$
|
25,291
|
|
Automotive tire services
|
|
31,292
|
|
|
30,078
|
|
|
29,560
|
|
Beverages
|
|
31,807
|
|
|
31,488
|
|
|
31,174
|
|
Child care
|
|
31,749
|
|
|
21,865
|
|
|
20,775
|
|
Convenience stores
|
|
166,755
|
|
|
142,194
|
|
|
111,023
|
|
Dollar stores
|
|
102,695
|
|
|
94,782
|
|
|
91,076
|
|
Drug stores
|
|
127,853
|
|
|
129,565
|
|
|
126,555
|
|
Financial services
|
|
30,189
|
|
|
29,429
|
|
|
28,744
|
|
General merchandise
|
|
35,366
|
|
|
29,249
|
|
|
23,752
|
|
Grocery stores - U.S. (1)
|
|
69,691
|
|
|
63,594
|
|
|
50,731
|
|
Grocery stores - U.K. (1)
|
|
17,819
|
|
|
—
|
|
|
—
|
|
Health and fitness
|
|
105,896
|
|
|
94,638
|
|
|
88,146
|
|
Home improvement
|
|
42,351
|
|
|
37,939
|
|
|
30,324
|
|
Restaurants-casual dining
|
|
45,238
|
|
|
46,171
|
|
|
43,876
|
|
Restaurants-quick service
|
|
92,018
|
|
|
72,465
|
|
|
59,638
|
|
Theaters - U.S.
|
|
87,698
|
|
|
70,560
|
|
|
58,443
|
|
Transportation services
|
|
66,500
|
|
|
63,565
|
|
|
62,337
|
|
Wholesale club
|
|
38,117
|
|
|
37,571
|
|
|
37,646
|
|
Other non-reportable segments and tenant reimbursements
|
|
329,419
|
|
|
298,090
|
|
|
293,215
|
|
Rental (including reimbursable)
|
|
1,484,818
|
|
|
1,321,546
|
|
|
1,212,306
|
|
Other
|
|
6,773
|
|
|
6,292
|
|
|
3,462
|
|
Total revenue
|
|
$
|
1,491,591
|
|
|
$
|
1,327,838
|
|
|
$
|
1,215,768
|
|
(1) During 2019, we acquired 17 grocery stores and one theater located in the U.K. Our investments in industries outside of the U.S. are managed as separate operating segments. The U.K. theater is included in other non-reportable segments.
20. Commitments and Contingencies
In the ordinary course of business, we are party to various legal actions which we believe are routine in nature and incidental to the operation of our business. We believe that the outcome of the proceedings will not have a material adverse effect upon our consolidated financial position or results of operations.
At December 31, 2019, we had commitments of $6.5 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements. In addition, as of December 31, 2019, we had committed $16.0 million under construction contracts, which is expected to be paid in the next twelve months.
We have certain properties that are subject to ground leases which are accounted for as operating leases.
At December 31, 2019, minimum future rental payments for the next five years and thereafter are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ground Leases
Paid by
Realty Income (1)
|
|
|
Ground Leases
Paid by
Our Tenants (2)
|
|
|
Total
|
|
2020
|
|
$
|
1.6
|
|
|
$
|
13.5
|
|
|
$
|
15.1
|
|
2021
|
|
1.4
|
|
|
13.3
|
|
|
14.7
|
|
2022
|
|
1.4
|
|
|
13.2
|
|
|
14.6
|
|
2023
|
|
1.3
|
|
|
13.2
|
|
|
14.5
|
|
2024
|
|
1.3
|
|
|
13.3
|
|
|
14.6
|
|
Thereafter
|
|
18.9
|
|
|
68.9
|
|
|
87.8
|
|
Total
|
|
$
|
25.9
|
|
|
$
|
135.4
|
|
|
$
|
161.3
|
|
Present value adjustment for remaining lease payments (3)
|
|
|
|
|
|
(39.0
|
)
|
Lease liability - operating leases, net
|
|
|
|
|
|
$
|
122.3
|
|
|
|
(1)
|
Realty Income currently pays the ground lessors directly for the rent under the ground leases.
|
|
|
(2)
|
Our tenants, who are generally sub-tenants under the 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.
|
(3) The range of discount rates used to calculate the present value of the lease payments is 2.42% to 5.50%. At December 31, 2019, the weighted average discount rate is 4.29% and the weighted average remaining lease term is 12.3 years. The discount rates are derived using a hypothetical corporate credit curve for the ground leases based on our outstanding senior notes and relevant market data. The discount rates are specific for individual leases primarily based on the lease term.
On January 1, 2019, we adopted Topic 842, Leases using the effective date method and elected the practical expedients available for implementation under the standard. As a result, on December 31, 2018 we do not have a lease liability for operating leases.
At December 31, 2018, minimum future rental payments for the next five years and thereafter were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ground Leases
Paid by
Realty Income (1)
|
|
|
Ground Leases
Paid by
Our Tenants (2)
|
|
|
Total
|
|
2019
|
|
$
|
1.5
|
|
|
$
|
13.5
|
|
|
$
|
15.0
|
|
2020
|
|
1.4
|
|
|
13.5
|
|
|
14.9
|
|
2021
|
|
1.2
|
|
|
13.2
|
|
|
14.4
|
|
2022
|
|
1.2
|
|
|
13.1
|
|
|
14.3
|
|
2023
|
|
1.2
|
|
|
13.1
|
|
|
14.3
|
|
Thereafter
|
|
19.8
|
|
|
82.0
|
|
|
101.8
|
|
Total
|
|
$
|
26.3
|
|
|
$
|
148.4
|
|
|
$
|
174.7
|
|
|
|
(1)
|
Realty Income currently pays the ground lessors directly for the rent under the ground leases.
|
|
|
(2)
|
Our tenants, who are generally sub-tenants under the 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.
|
21. Subsequent Events
|
|
•
|
In January and February 2020, we declared a dividend of $0.2325, which will be paid in February 2020 and March 2020, respectively.
|
|
|
•
|
In January 2020, we completed the early redemption on all $250.0 million in principal amount of our outstanding 5.750% notes due January 2021, plus accrued and unpaid interest.
|
|
|
•
|
Also in January 2020, we announced that Paul Meurer, our EVP, Chief Financial Officer and Treasurer, is leaving the company. To ensure a smooth transition, Mr. Meurer will serve as a senior advisor to the company through March 31, 2020. The company has begun a search for a new Chief Financial Officer.
|
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED QUARTERLY FINANCIAL DATA
(dollars in thousands, except per share data) (unaudited)
(not covered by Report of Independent Registered Public Accounting Firm)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Year
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
354,365
|
|
|
$
|
365,450
|
|
|
$
|
374,247
|
|
|
$
|
397,529
|
|
|
$
|
1,491,591
|
|
Depreciation and amortization expense
|
|
137,517
|
|
|
150,426
|
|
|
149,424
|
|
|
156,594
|
|
|
593,961
|
|
Interest expense
|
|
70,020
|
|
|
72,488
|
|
|
73,410
|
|
|
75,073
|
|
|
290,991
|
|
Other expenses
|
|
42,861
|
|
|
54,143
|
|
|
52,139
|
|
|
52,269
|
|
|
201,412
|
|
Net income
|
|
111,230
|
|
|
95,420
|
|
|
101,275
|
|
|
129,553
|
|
|
437,478
|
|
Net income available to common stockholders
|
|
110,942
|
|
|
95,194
|
|
|
101,049
|
|
|
129,297
|
|
|
436,482
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
0.37
|
|
|
0.31
|
|
|
0.32
|
|
|
0.39
|
|
|
1.38
|
|
Dividends paid per common share
|
|
0.6720
|
|
|
0.6780
|
|
|
0.6795
|
|
|
0.6810
|
|
|
2.7105
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
318,295
|
|
|
$
|
328,886
|
|
|
$
|
338,081
|
|
|
$
|
342,576
|
|
|
$
|
1,327,838
|
|
Depreciation and amortization expense
|
|
131,103
|
|
|
133,999
|
|
|
136,967
|
|
|
137,711
|
|
|
539,780
|
|
Interest expense
|
|
59,415
|
|
|
66,628
|
|
|
69,342
|
|
|
70,635
|
|
|
266,020
|
|
Other expenses
|
|
47,680
|
|
|
39,349
|
|
|
40,302
|
|
|
54,752
|
|
|
182,083
|
|
Net income
|
|
83,315
|
|
|
96,697
|
|
|
99,283
|
|
|
85,303
|
|
|
364,598
|
|
Net income available to common stockholders
|
|
83,163
|
|
|
96,380
|
|
|
98,999
|
|
|
85,072
|
|
|
363,614
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
0.29
|
|
|
0.34
|
|
|
0.34
|
|
|
0.29
|
|
|
1.26
|
|
Dividends paid per common share
|
|
0.6505
|
|
|
0.6585
|
|
|
0.6600
|
|
|
0.6615
|
|
|
2.6305
|
|