REALTY INCOME CORP [O] Filings

10-Q 1 o-20210930.htm 10-Q o-20210930

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2021, or

☐ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-13374

REALTY INCOME CORPORATION

(Exact name of registrant as specified in its charter)

Maryland

33-0580106

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer Identification

Number)

11995 El Camino Real, San Diego, California 92130

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (858) 284-5000

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange On Which Registered
Common Stock, $0.01 Par Value	O	New York Stock Exchange
1.125% Notes due 2027	O27A	New York Stock Exchange
1.625% Notes due 2030	O30	New York Stock Exchange
1.750% Notes due 2033	O33A	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," “accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were 404,212,884 shares of common stock outstanding as of October 29, 2021.

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REALTY INCOME CORPORATION

Index to Form 10-Q

September 30, 2021


PART I.	FINANCIAL INFORMATION	Page
Item 1:	Financial Statements

	Consolidated Balance Sheets	2
	Consolidated Statements of Income and Comprehensive Income	3
	Consolidated Statements of Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Forward-Looking Statements	27
	The Company	28
	Recent Developments	31
	Liquidity and Capital Resources	37
	Results of Operations	43
	Funds from Operations Available to Common Stockholders (FFO) and Normalized Funds from Operations Available to Common Stockholders (Normalized FFO)	52
	Adjusted Funds from Operations Available to Common Stockholders (AFFO)	54
	Property Portfolio Information	56
	Impact of Inflation	61
	Impact of Recent Accounting Pronouncements	61
	Other Information	61

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4:	Controls and Procedures	62

PART II.	OTHER INFORMATION

Item 1A:	Risk Factors	63

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 6:	Exhibits	64

SIGNATURE		67

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share and share count data)


	September 30, 2021		December 31, 2020
ASSETS	(unaudited)
Real estate held for investment, at cost:
Land	$	7,308,046	$	6,318,926
Buildings and improvements	16,374,061		14,696,712
Total real estate held for investment, at cost	23,682,107		21,015,638
Less accumulated depreciation and amortization	(3,904,327)		(3,549,486)
Real estate held for investment, net	19,777,780		17,466,152
Real estate and lease intangibles held for sale, net	44,939		19,004
Cash and cash equivalents	516,983		824,476
Accounts receivable, net	341,729		285,701
Lease intangible assets, net	2,156,008		1,710,655
Other assets, net	873,655		434,297
Total assets	$	23,711,094	$	20,740,285

LIABILITIES AND EQUITY
Distributions payable	$	96,280	$	85,691
Accounts payable and accrued expenses	269,587		241,336
Lease intangible liabilities, net	341,675		321,198
Other liabilities	385,077		256,863
Line of credit payable and commercial paper	405,000		—
Term loan, net	249,507		249,358
Mortgages payable, net	285,617		300,360
Notes payable, net	8,309,238		8,267,749
Total liabilities	10,341,981		9,722,555
Commitments and contingencies
Stockholders’ equity:
Common stock and paid in capital, par value $0.01 per share, 740,200,000 shares authorized, 404,206,076 and 361,303,445 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	17,449,122		14,700,050
Distributions in excess of net income	(4,112,953)		(3,659,933)
Accumulated other comprehensive loss	(1,076)		(54,634)
Total stockholders’ equity	13,335,093		10,985,483
Noncontrolling interests	34,020		32,247
Total equity	13,369,113		11,017,730
Total liabilities and equity	$	23,711,094	$	20,740,285

The accompanying notes to consolidated financial statements are an integral part of these statements.

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(dollars in thousands, except per share data) (unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
REVENUE
Rental (including reimbursable)	$	486,337	$	401,869	$	1,385,958	$	1,224,227
Other	5,538		2,703		13,003		9,322
Total revenue	491,875		404,572		1,398,961		1,233,549

EXPENSES
Depreciation and amortization	198,832		169,084		564,606		501,997
Interest	76,156		76,806		222,905		230,572
Property (including reimbursable)	29,662		25,410		89,895		77,468
General and administrative	23,813		16,514		66,458		56,541
Provisions for impairment	11,011		105,095		30,977		123,442
Merger-related costs	16,783		—		30,081		—
Total expenses	356,257		392,909		1,004,922		990,020
Gain on sales of real estate	12,094		13,736		35,396		53,565
Foreign currency and derivative gains (losses), net	(2,374)		2,336		(1,170)		1,274
Loss on extinguishment of debt	(3,983)		—		(50,456)		(9,819)
Income before income taxes	141,355		27,735		377,809		288,549
Income taxes	(6,079)		(4,592)		(21,529)		(10,193)
Net income	135,276		23,143		356,280		278,356
Net income attributable to noncontrolling interests	(280)		(239)		(865)		(801)
Net income available to common stockholders	$	134,996	$	22,904	$	355,415	$	277,555

Amounts available to common stockholders per common share:
Net Income, basic and diluted	$	0.34	$	0.07	$	0.94	$	0.81

Weighted average common shares outstanding:
Basic	391,913,478		346,476,217		379,291,782		342,214,164
Diluted	392,050,401		346,749,474		379,409,427		342,483,218

Other comprehensive income:
Net income available to common stockholders	$	134,996	$	22,904	$	355,415	$	277,555
Foreign currency translation adjustment	1,438		(964)		1,130		(550)
Unrealized gain (loss) on derivatives, net	16,852		1,602		52,428		(34,794)
Comprehensive income available to common stockholders	$	153,286	$	23,542	$	408,973	$	242,211

The accompanying notes to consolidated financial statements are an integral part of these statements.

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(dollars in thousands) (unaudited)

Three Months Ended September 30, 2021 and 2020


	Shares of common stock	Common stock and paid in capital		Distributions in excess of net income		Accumulated other comprehensive income (loss)		Total stockholders’ equity		Noncontrolling interests		Total equity
Balance, June 30, 2021	380,174,042	$	15,827,231	$	(3,968,333)	$	(19,366)	$	11,839,532	$	34,147	$	11,873,679
Net income	—	—		134,996		—		134,996		280		135,276
Other comprehensive income	—	—		—		18,290		18,290		—		18,290
Distributions paid and payable	—	—		(279,616)		—		(279,616)		(407)		(280,023)
Share issuances, net of costs	24,030,435	1,618,463		—		—		1,618,463		—		1,618,463

Share-based compensation, net	1,599	3,428		—		—		3,428		—		3,428
Balance, September 30, 2021	404,206,076	$	17,449,122	$	(4,112,953)	$	(1,076)	$	13,335,093	$	34,020	$	13,369,113

Balance, June 30, 2020	345,023,421	$	13,704,121	$	(3,306,588)	$	(53,084)	$	10,344,449	$	29,470	$	10,373,919
Net income	—	—		22,904		—		22,904		239		23,143
Other comprehensive income	—	—		—		638		638		—		638
Distributions paid and payable	—	—		(243,837)		—		(243,837)		(401)		(244,238)
Share issuances, net of costs	5,571,223	343,335		—		—		343,335		—		343,335
Reallocation of equity	—	47		—		—		47		(47)		—
Share-based compensation, net	1,225	2,991		—		—		2,991		—		2,991
Balance, September 30, 2020	350,595,869	$	14,050,494	$	(3,527,521)	$	(52,446)	$	10,470,527	$	29,261	$	10,499,788

Nine Months Ended September 30, 2021 and 2020


	Shares of common stock	Common stock and paid in capital		Distributions in excess of net income		Accumulated other comprehensive income (loss)		Total stockholders’ equity		Noncontrolling interests		Total equity
Balance, December 31, 2020	361,303,445	$	14,700,050	$	(3,659,933)	$	(54,634)	$	10,985,483	$	32,247	$	11,017,730
Net income	—	—		355,415		—		355,415		865		356,280
Other comprehensive income	—	—		—		53,558		53,558		—		53,558
Distributions paid and payable	—	—		(808,435)		—		(808,435)		(1,198)		(809,633)
Share issuances, net of costs	42,777,850	2,743,039		—		—		2,743,039		—		2,743,039
Contributions by noncontrolling interests	—	—		—		—		—		2,106		2,106
Share-based compensation, net	124,781	6,033		—		—		6,033		—		6,033
Balance, September 30, 2021	404,206,076	$	17,449,122	$	(4,112,953)	$	(1,076)	$	13,335,093	$	34,020	$	13,369,113

Balance, December 31, 2019	333,619,106	$	12,873,849	$	(3,082,291)	$	(17,102)	$	9,774,456	$	29,702	$	9,804,158
Net income	—	—		277,555		—		277,555		801		278,356
Other comprehensive loss	—	—		—		(35,344)		(35,344)		—		(35,344)
Distributions paid and payable	—	—		(722,785)		—		(722,785)		(1,195)		(723,980)
Share issuances, net of costs	16,851,689	1,171,107		—		—		1,171,107		—		1,171,107
Reallocation of equity	—	47		—		—		47		(47)		—
Share-based compensation, net	125,074	5,491		—		—		5,491		—		5,491
Balance, September 30, 2020	350,595,869	$	14,050,494	$	(3,527,521)	$	(52,446)	$	10,470,527	$	29,261	$	10,499,788

The accompanying notes to consolidated financial statements are an integral part of these statements.

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands) (unaudited)


	Nine months ended September 30,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	356,280	$	278,356
Adjustments to net income:
Depreciation and amortization	564,606		501,997
Amortization of share-based compensation	12,484		13,420
Non-cash revenue adjustments	(12,722)		(5,544)
Loss on extinguishment of debt	50,456		9,819
Amortization of net premiums on mortgages payable	(1,158)		(1,020)
Amortization of deferred financing costs	8,612		6,888
Loss on interest rate swaps	2,179		3,115
Foreign currency and derivative (gains) losses, net	1,170		(1,274)
Gain on sales of real estate	(35,396)		(53,565)
Provisions for impairment on real estate	30,977		123,442
Change in assets and liabilities
Accounts receivable and other assets	(46,670)		(59,747)
Accounts payable, accrued expenses and other liabilities	39,248		(6,082)
Net cash provided by operating activities	970,066		809,805
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in real estate	(3,709,894)		(1,286,289)
Improvements to real estate, including leasing costs	(11,159)		(10,336)
Proceeds from sales of real estate	123,533		181,925
Insurance and other proceeds received	—		2,874
Non-refundable escrow deposits	(5,432)		—
Net cash used in investing activities	(3,602,952)		(1,111,826)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions to common stockholders	(797,847)		(716,535)
Borrowings on line of credit and commercial paper program	6,277,918		3,141,828
Payments on line of credit and commercial paper program	(5,853,423)		(3,002,717)
Principal payment on term loan	—		(250,000)
Proceeds from notes and bonds payable issued	1,033,387		972,766
Principal payment on notes payable	(950,000)		(250,000)
Principal payments on mortgages payable	(55,983)		(73,711)
Payments upon extinguishment of debt	(51,218)		(9,445)
Proceeds from common stock offerings, net	1,263,235		728,883
Proceeds from dividend reinvestment and stock purchase plan	8,208		6,922
Proceeds from At-the-Market (ATM) program, net	1,471,595		442,157

Distributions to noncontrolling interests	(1,198)		(1,195)
Net receipts on derivative settlements	2,463		3,462
Debt issuance costs	(8,670)		(8,870)
Other items, including shares withheld upon vesting	(6,451)		(14,783)
Net cash provided by financing activities	2,332,016		968,762
Effect of exchange rate changes on cash and cash equivalents	(3,711)		1,265
Net (decrease) increase in cash, cash equivalents and restricted cash	(304,581)		668,006
Cash, cash equivalents and restricted cash, beginning of period	850,679		71,005
Cash, cash equivalents and restricted cash, end of period	$	546,098	$	739,011

For supplemental disclosures, see note 18.

The accompanying notes to consolidated financial statements are an integral part of these statements.

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REALTY INCOME CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(unaudited)

1.Basis of Presentation

The consolidated financial statements of Realty Income Corporation (“Realty Income”, the “Company”, “we”, “our” or “us”) were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. Readers of this quarterly report should refer to our audited consolidated financial statements for the year ended December 31, 2020, which are included in our 2020 Annual Report on Form 10-K, as certain disclosures that would substantially duplicate those contained in the audited financial statements have not been included in this report. Unless otherwise indicated, all dollar amounts are expressed in United States (U.S.) dollars.

At September 30, 2021 we owned 7,018 properties, located in all 50 U.S. states, Puerto Rico, the United Kingdom (U.K.) and Spain, consisting of approximately 125.0 million leasable square feet.

2.Summary of Significant Accounting Policies and Procedures

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.

Federal Income Taxes. We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended. 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 accrued or paid by Realty Income and its subsidiaries for city and state income and franchise taxes and for U.K. income taxes.

Lease Revenue Recognition and Accounts Receivable. The COVID-19 pandemic and the measures taken to limit its spread are negatively impacting the economy across many industries, including the industries in which some of our clients operate. These impacts may continue as the duration and severity of the pandemic increases. As a result, we have closely monitored the collectability of our accounts receivable and continue to evaluate the potential impacts of the COVID-19 pandemic and the measures taken to limit its spread on our business and industry segments as the situation continues to evolve and more information becomes available.

We must continue to assess the probability of collecting substantially all of the lease payments to which we are entitled under the original lease contract as required under Topic 842, Leases. If a company concludes collection of substantially all lease payments under a lease is less than probable, rental revenue recognized for that lease is limited to cash received going forward, existing operating lease receivables must be written off as an adjustment to rental revenue, and no further operating lease receivables are recorded for that lease until such future determination is made that substantially all lease payments under that lease are now considered probable. If a company subsequently concludes collection of substantially all lease payments under a lease is probable, a reversal of lease receivables previously written off is recognized.

The majority of concessions granted to our clients during 2020 and the nine months ended September 30, 2021 as a result of the COVID-19 pandemic have been rent deferrals with the original lease term unchanged. We currently anticipate future concessions to be similar. In accordance with the guidance provided by the Financial Accounting Standards Board (FASB) staff, we have elected to account for these leases as if the right of deferral existed in the lease contract and therefore continue to recognize lease revenue in accordance with the lease contract in effect. In limited circumstances, the undiscounted cash flows resulting from deferrals granted increased significantly from original lease terms, which required us to account for these as lease modifications, and resulted in an insignificant

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impact to rental revenue for nine months ended September 30, 2021. Similarly, rent abatements granted, which are also accounted for as lease modifications, impacted our rental revenue by an insignificant amount for the nine months ended September 30, 2021.

Unless otherwise specified, references to reserves recorded as a reduction of rental revenue include amounts reserved for in the current period, as well as unrecognized contractual rental revenue and unrecognized straight-line rental revenue for leases accounted for on a cash basis. References to reserve reversals recorded as increases to rental revenue include amounts where the accounting for recognition of rental revenue and straight-line rental revenue has been moved from the cash to the accrual basis. The following table summarizes reserves and reserve reversals to rental revenue (dollars in millions):


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Rental revenue reserves (reserve reversals)	$	(0.8)	$	21.8	$	15.0	$	29.3
Straight-line rent reserves (reserve reversals)	(2.3)		2.3		(1.1)		5.1
Total rental revenue reserves (reserve reversals)	$	(3.1)	$	24.1	$	13.9	$	34.4

As of September 30, 2021, other than the information related to the reserves recorded to date, we do not have any further client specific information that would change our assessment that collection of substantially all of the future lease payments under our existing leases is probable. However, since the conversations regarding rent collections for our clients affected by the COVID-19 pandemic are ongoing and we do not currently know the types of future concessions, if any, that will ultimately be granted, there may be impacts in future periods that could change this assessment as the situation continues to evolve and as more information becomes available.

Newly Issued Accounting Standards. In July 2021, the FASB issued ASU 2021-05 establishing Topic 842, Lessors - Certain Leases with Variable Lease Payments. ASU 2021-05 improves ASC 842 classification guidance as it relates to a lessor's accounting for certain leases with variable lease payments. This guidance requires a lessor to classify a lease with variable payments that do not depend on an index or rate as an operating lease if either a sales-type lease or direct financing lease classification would trigger a day-one loss. This guidance is effective for reporting periods beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2021-05 on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04 establishing Topic 848, Reference Rate Reform. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and is effective between March 12, 2020 and December 31, 2022. The guidance may be elected over time as reference rate reform activities occur. We are currently evaluating the impact that the expected market transition from LIBOR to alternative references rates will have on our financial statements as well as the applicability of the aforementioned expedients and exceptions provided in ASU 2020-04.

Reclassification. Starting with the three and six months ended June 30, 2021, we began presenting 'Income taxes,' which was previously presented in 'Expenses,' below a newly captioned subtotal for 'Income before income taxes' within our consolidated statements of income and comprehensive income. Prior year amounts have been reclassified to conform to the current year presentation.

3.Agreement and Plan of Merger

On April 29, 2021, we entered into an Agreement and Plan of Merger, as amended, or the Merger Agreement, with VEREIT, Inc., or VEREIT, its operating partnership, VEREIT Operating Partnership, L.P., or VEREIT OP, and two newly formed wholly-owned subsidiaries of us. Pursuant to the terms of the Merger Agreement, (i) one of the newly formed subsidiaries of us agreed to merge with and into VEREIT OP, with VEREIT OP as the surviving entity, which we refer to as the Partnership Merger, and (ii) immediately thereafter, VEREIT agreed to merge with and into the other newly formed subsidiary of us, with our subsidiary as the surviving corporation, which we refer to as the Merger and, together with the Partnership Merger, the Mergers.

On November 1, 2021, we completed our acquisition of VEREIT, and the Mergers were consummated. Pursuant to the terms of the Merger Agreement and subject to the terms thereof, upon the consummation of the Mergers, (i) each outstanding share of VEREIT common stock, and each outstanding common partnership unit of VEREIT OP owned by any of its partners other than VEREIT, Realty Income or their respective affiliates, was automatically

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converted into 0.705 of newly issued shares of our common stock, and (ii) each VEREIT OP outstanding common unit owned by VEREIT, Realty Income or their respective affiliates remained outstanding as partnership interests in the surviving entity. For more information, see Note 22, Subsequent Events.

Following the Mergers, we intend to contribute certain of our office real estate properties to a newly formed, wholly owned subsidiary, Orion Office REIT, Inc., or Orion, and distribute all of the outstanding shares of Orion common stock to our stockholders (including legacy VEREIT stockholders who received shares of our common stock in the Mergers) on a pro rata basis at a rate of one share of Orion common stock for every ten shares of Realty Income common stock held on the applicable record date, which we refer to as the Orion Divestiture. We have currently set a record date for the distribution of shares in the Orion Divestiture for November 2, 2021 and expect the distribution to occur on November 12, 2021. Following the consummation of the Orion Divestiture, Orion will operate as a separate, independent public company.

A. Merger-related Costs
In conjunction with our acquisition of VEREIT, we incurred approximately $16.8 million and $30.1 million of merger-related transaction costs during the three and nine months ended September 30, 2021, respectively. The merger-related costs incurred to date primarily consist of advisory fees, attorney fees, accountant fees and SEC filing fees.

In addition, we have engaged service providers, including investment banks and advisors, to help us negotiate the terms of the Merger and to advise us on other merger-related matters. In connection with these services, we expect to be required to pay success-based fees to the extent that certain conditions, including the closing of the Merger and consummation of the Orion Divestiture, are met. As of September 30, 2021, we expect to incur approximately $19.0 million of such success fees.

B. Litigation Relating to the Mergers
To date, purported stockholders of VEREIT filed 12 lawsuits challenging disclosures related to the Merger (Stein v. VEREIT, Inc., et. al., Case No. 1:21-cv-01409 (D. Ct. Md., June 7, 2021) (the “Stein Complaint”); Bowles v. VEREIT, Inc., et. al., Case No. 1:21-cv-00845 (D. Ct. Del., June 10, 2021) (the “Bowles Complaint”); Leach v. VEREIT, Inc., et. al., Case No. 1:21-cv-05270 (D. Ct. S.D.N.Y., June 14, 2021) (the “Leach Complaint”); Jenkins v. VEREIT, Inc., et. al., Case No. 1:21-cv-05286 (D. Ct. S.D.N.Y., June 15, 2021) (the “Jenkins Complaint”); Tacka v. VEREIT, Inc., et. al., Case No. 1:21-cv-05357 (D. Ct. S.D.N.Y., June 17, 2021) (the “Tacka Complaint”); Congregation Zichron Moishe v. VEREIT, Inc., et. al., Case No. 1:21-cv-01729 (D. Ct. Colo., June 24, 2021) (the “Congregation Zichron Moishe Complaint”); Mishra v. VEREIT, Inc., et al., Case No. 1:21-cv-01758 (D. Colo. June 28, 2021) (the “Mishra Complaint”); Walker v. VEREIT, Inc., et. al., Case No. 1:21-cv-01791 (D. Ct. Colo. July 1, 2021) (the “Walker Complaint”); Ciccotelli v. VEREIT, Inc., et. al., Case No. 2:21-cv-02983 (D. Ct. E.D. Pa. July 2, 2021) (the “Ciccotelli Complaint”); Upton v. VEREIT, Inc., et. al., Case No. 1:21-cv-06129 (D. Ct. S.D.N.Y July 16, 2021) (the “Upton Complaint”); Matten v. VEREIT, Inc., et al., Case No. 1:21-cv-06212 (S.D.N.Y. July 21, 2021) (the “Matten Complaint”); and Halberstam v. VEREIT, Inc., et al., Case No. 1:21-cv-02000 (D. Colo. July 23, 2021 (the “Halberstam Complaint”)). Purported stockholders of Realty Income filed one lawsuit challenging the disclosures related to the Merger (Boyko v. Realty Income Corp., et. al., Case No. 1:21-cv-01653 (D. Ct. Colo., June 16, 2021) (the “Boyko Complaint,” and collectively, the “Complaints”)). A stockholder of Realty Income also sent the Company a demand disclosure letter on June 30, 2021 (the “Demand Letter”).

The Stein, Leach, Tacka, Matten and Halberstam Complaints name VEREIT and the members of the VEREIT board of directors as defendants. The Congregation Zichron Moishe, Mishra, Walker and Upton Complaints name VEREIT, VEREIT OP, and the members of the VEREIT board of directors as defendants. The Bowles and Ciccotelli Complaints name VEREIT, the members of the VEREIT board of directors, VEREIT OP, Realty Income, Merger Sub 1 and Merger Sub 2 as defendants. The Jenkins Complaint names VEREIT, the members of the VEREIT board of directors, Realty Income, Merger Sub 1 and Merger Sub 2 as defendants. The Boyko Complaint names Realty Income and the members of the Realty Income board of directors as defendants. The Demand Letter is addressed to Realty Income and the members of the Realty Income board of directors.

The Complaints each allege generally that the entities and individual defendants named in such Complaint violated Section 14(a) and Rule 14a-9 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act by preparing and disseminating a registration statement that misstates or omits certain allegedly material information. The Demand Letter includes similar allegations. Furthermore, the Jenkins Complaint also alleges that: (1) members of the VEREIT board of directors breached their fiduciary duties by entering into the transactions contemplated by the Merger Agreement through a flawed and unfair process and by failing to disclose

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all material information to VEREIT’s stockholders; and (2) VEREIT, Realty Income, Merger Sub 1 and Merger Sub 2 each aided and abetted such breach of fiduciary duty by the VEREIT board of directors.

Each Complaint seeks, among other things, injunctive relief enjoining the consummation of the Merger, if the Merger is consummated, rescission or rescissory damages and an award of the plaintiff’s costs, including attorneys’ and experts’ fees. The defendants believe that all of the claims asserted in the Complaints are without merit and intend to defend against them vigorously. On July 30, 2021, VEREIT filed a Form 8-K containing supplemental disclosures regarding the Mergers and related transactions in response to allegations set forth in the Complaints and the Demand letter. We have determined that there is a reasonable possibility that we and/or VEREIT will incur losses associated with the Complaints and Demand letter, though the amount of the reasonably possible loss or range of losses is not expected to be material. Accordingly, no accrual for merger-related litigation matters has been recorded as of September 30, 2021. However, litigation is inherently uncertain and there can be no assurance regarding the likelihood that the defendants’ defense of the actions will be successful. The outcome of these lawsuits can’t be predicted and additional lawsuits arising out of the Mergers may also be filed in the future.

4.Supplemental Detail for Certain Components of Consolidated Balance Sheets (dollars in thousands):


A.	Accounts Receivable, net, consist of the following at:	September 30, 2021		December 31, 2020
	Straight-line rent receivables, net	$	211,522	$	174,074
	Client receivables, net	130,207		111,627
		$	341,729	$	285,701


B.	Lease intangible assets, net, consist of the following at:	September 30, 2021		December 31, 2020
	In-place leases	$	2,183,199	$	1,840,704
	Accumulated amortization of in-place leases	(739,276)		(744,375)
	Above-market leases	993,608		866,567
	Accumulated amortization of above-market leases	(281,523)		(252,241)
		$	2,156,008	$	1,710,655


C.	Other assets, net, consist of the following at:	September 30, 2021		December 31, 2020
	Right of use asset - operating leases, net	$	375,685	$	112,049
	Financing receivables	200,041		131,291
	Right of use asset - financing leases	162,919		118,585
	Derivative assets and receivables - at fair value	43,941		10
	Restricted escrow deposits	28,141		21,220
	Prepaid expenses	16,112		11,795
	Goodwill	13,947		14,180
	Corporate assets, net	8,203		8,598
	Non-refundable escrow deposits	5,432		1,000
	Credit facility origination costs, net	5,137		7,705
	Impounds related to mortgages payable	974		4,983
	Other items	13,123		2,881
		$	873,655	$	434,297

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D.	Accounts payable and accrued expenses consist of the following at:	September 30, 2021		December 31, 2020
	Notes payable - interest payable	$	65,873	$	83,219
	Derivative liabilities and payables - at fair value	50,216		73,356
	Property taxes payable	32,013		23,413
	Accrued costs on properties under development	27,110		12,685
	Accrued income taxes	16,939		5,182
	Merger-related costs	14,591		—
	Value-added tax payable	7,796		8,077
	Mortgages, term loans, credit line - interest payable and interest rate swaps	1,064		1,044
	Other items	53,985		34,360
		$	269,587	$	241,336


E.	Lease intangible liabilities, net, consist of the following at:	September 30, 2021		December 31, 2020
	Below-market leases	$	492,331	$	460,895
	Accumulated amortization of below-market leases	(150,656)		(139,697)
		$	341,675	$	321,198


F.	Other liabilities consist of the following at:	September 30, 2021		December 31, 2020
	Lease liability - operating leases, net	$	185,659	$	114,559
	Rent received in advance and other deferred revenue	156,471		130,231
	Lease liability - financing leases	35,677		6,256
	Security deposits	7,270		5,817
		$	385,077	$	256,863

5. Investments in Real Estate

We acquire land, buildings and improvements necessary for the successful operations of commercial clients.

A. Acquisitions During the Nine Months Ended September 30, 2021 and 2020

Below is a summary of our acquisitions for the nine months ended September 30, 2021:


	Number of Properties	Leasable Square Feet	Investment ($ in thousands)		Weighted Average Lease Term (Years)	Initial Average Cash Lease Yield (1)
Nine months ended September 30, 2021 (2)
Acquisitions - U.S. (in 38 states)	415	9,226,363	$	2,073,101	13.8	5.5	%
Acquisitions - Europe (U.K. and Spain)	71	5,217,192	1,520,816		10.5	5.5	%
Total acquisitions	486	14,443,555	$	3,593,917	12.4	5.5	%
Properties under development (3)	50	2,126,955	181,957		15.8	5.9	%
Total (4)	536	16,570,510	$	3,775,874	12.6	5.5	%

(1)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 client could default on the payment of contractual rent, we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above. Contractual net operating income used in the calculation of initial average cash yield includes approximately $3.2 million received as settlement credits for 35 properties as reimbursement of free rent periods for the nine months ended September 30, 2021.

In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does not provide for a fixed rate of return on a property under development or expansion, the initial 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.

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(2)None of our investments during the nine months ended September 30, 2021 caused any one client to be 10% or more of our total assets at September 30, 2021.

(3)Includes one U.K. development property that represents an investment of £4.7 million Sterling during the nine months ended September 30, 2021, converted at the applicable exchange rate on the funding date.

(4)Our clients occupying the new properties are 80.2% retail and 19.8% industrial, based on rental revenue. Approximately 43% of the rental revenue generated from acquisitions during the nine months ended September 30, 2021 is from investment grade rated clients, their subsidiaries or affiliated companies.

The acquisitions during the nine months ended September 30, 2021, which had no associated contingent consideration, were allocated as follows (amounts in millions):


	Acquisitions - U.S.		Acquisitions - U.K.		Acquisitions - Spain
Nine months ended September 30, 2021	(USD)		(£ Sterling)		(€ Euro)
Land (1)	$	621.0	£	283.9	€	36.6
Buildings and improvements	955.0		549.9		36.3
Lease intangible assets (2)	350.4		173.5		23.3
Other assets (3)	379.3		20.2		—
Lease intangible liabilities (4)	(42.3)		(6.4)