REALTY INCOME CORP 10-Q

Item 1. Financial Statements REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share and share count data) June 30, 2020 December 31, 2019 ASSETS (unaudited) Real estate held for investment, at cost: Land $ 5,772,734 $ 5,684,034 Buildings and improvements 14,096,997 13,833,882 Total real estate held for investment, at cost 19,869,731 19,517,916 Less accumulated depreciation and amortization ( 3,367,420 ) ( 3,117,919 ) Real estate held for investment, net 16,502,311 16,399,997 Real estate and lease intangibles held for sale, net 40,551 96,775 Cash and cash equivalents 35,345 54,011 Short-term investment 300,000 — Accounts receivable 255,609 181,969 Lease intangible assets, net 1,508,177 1,493,383 Other assets, net 460,554 328,661 Total assets $ 19,102,547 $ 18,554,796 LIABILITIES AND EQUITY Distributions payable $ 81,384 $ 76,728 Accounts payable and accrued expenses 201,176 177,039 Lease intangible liabilities, net 322,744 333,103 Other liabilities 248,547 262,221 Line of credit payable 628,551 704,335 Term loans, net 249,258 499,044 Mortgages payable, net 394,816 410,119 Notes payable, net 6,602,152 6,288,049 Total liabilities 8,728,628 8,750,638 Commitments and contingencies Stockholders’ equity: Common stock and paid in capital, par value $ 0.01 per share, 740,200,000 shares authorized, 345,023,421 and 333,619,106 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively 13,704,121 12,873,849 Distributions in excess of net income ( 3,306,588 ) ( 3,082,291 ) Accumulated other comprehensive loss ( 53,084 ) ( 17,102 ) Total stockholders’ equity 10,344,449 9,774,456 Noncontrolling interests 29,470 29,702 Total equity 10,373,919 9,804,158 Total liabilities and equity $ 19,102,547 $ 18,554,796 The accompanying notes to consolidated financial statements are an integral part of these statements. -2- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (dollars in thousands, except per share data) (unaudited) Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 REVENUE Rental (including reimbursable) $ 410,201 $ 364,252 $ 822,358 $ 718,289 Other 4,435 1,198 6,619 1,526 Total revenue 414,636 365,450 828,977 719,815 EXPENSES Depreciation and amortization 168,328 150,426 332,913 287,943 Interest 77,841 72,488 153,766 142,508 Property (including reimbursable) 26,452 21,342 52,058 42,978 General and administrative 19,063 18,585 40,027 33,693 Income taxes 2,838 1,155 5,601 2,600 Provisions for impairment 13,869 13,061 18,347 17,733 Total expenses 308,391 277,057 602,712 527,455 Gain on sales of real estate 1,323 6,891 39,829 14,154 Foreign currency and derivative gains (losses), net 502 136 ( 1,062 ) 136 Loss on extinguishment of debt — — ( 9,819 ) — Net income 108,070 95,420 255,213 206,650 Net income attributable to noncontrolling interests ( 246 ) ( 226 ) ( 562 ) ( 514 ) Net income available to common stockholders $ 107,824 $ 95,194 $ 254,651 $ 206,136 Amounts available to common stockholders per common share: Net Income: Basic and Diluted $ 0.31 $ 0.31 $ 0.75 $ 0.67 Weighted average common shares outstanding: Basic 343,515,406 311,032,972 340,061,487 307,293,949 Diluted 343,685,259 311,322,162 340,281,265 307,580,127 Other comprehensive income: Net income available to common stockholders $ 107,824 $ 95,194 $ 254,651 $ 206,136 Foreign currency translation adjustment 22 ( 6 ) 414 ( 6 ) Unrealized loss on derivatives, net ( 10,534 ) ( 2,794 ) ( 36,396 ) ( 6,493 ) Comprehensive income available to common stockholders $ 97,312 $ 92,394 $ 218,669 $ 199,637 The accompanying notes to consolidated financial statements are an integral part of these statements. -3- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (dollars in thousands) (unaudited) Three Months Ended June 30, 2020 and 2019 Shares of common stock Common stock and paid in capital Distributions in excess of net income Accumulated other comprehensive loss Total stockholders’ equity Noncontrolling interests Total equity Balance, March 31, 2020 343,402,030 $ 13,604,055 $ ( 3,173,468 ) $ ( 42,572 ) $ 10,388,015 $ 29,624 $ 10,417,639 Net Income — — 107,824 — 107,824 246 108,070 Other comprehensive loss — — — ( 10,512 ) ( 10,512 ) — ( 10,512 ) Distributions paid and payable — — ( 240,944 ) — ( 240,944 ) ( 400 ) ( 241,344 ) Share issuances, net of costs 1,555,966 96,996 — — 96,996 — 96,996 Share-based compensation, net 65,425 3,070 — — 3,070 — 3,070 Balance, June 30, 2020 345,023,421 $ 13,704,121 $ ( 3,306,588 ) $ ( 53,084 ) $ 10,344,449 $ 29,470 $ 10,373,919 Balance, March 31, 2019 303,807,421 $ 10,748,467 $ ( 2,752,775 ) $ ( 11,797 ) $ 7,983,895 $ 25,181 $ 8,009,076 Net income — — 95,194 — 95,194 226 95,420 Other comprehensive loss — — — ( 2,800 ) ( 2,800 ) — ( 2,800 ) Distributions paid and payable — — ( 212,356 ) — ( 212,356 ) ( 315 ) ( 212,671 ) Share issuances, net of costs 14,384,215 969,162 — — 969,162 — 969,162 Share-based compensation, net 27,077 4,407 — — 4,407 — 4,407 Balance, June 30, 2019 318,218,713 $ 11,722,036 $ ( 2,869,937 ) $ ( 14,597 ) $ 8,837,502 $ 25,092 $ 8,862,594 Six Months Ended June 30, 2020 and 2019 Shares of common stock Common stock and paid in capital Distributions in excess of net income Accumulated other comprehensive loss Total stockholders’ equity Noncontrolling interests Total equity 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 — — 254,651 — 254,651 562 255,213 Other comprehensive loss — — — ( 35,982 ) ( 35,982 ) — ( 35,982 ) Distributions paid and payable — — ( 478,948 ) — ( 478,948 ) ( 794 ) ( 479,742 ) Share issuances, net of costs 11,280,466 827,772 — — 827,772 — 827,772 Share-based compensation, net 123,849 2,500 — — 2,500 — 2,500 Balance, June 30, 2020 345,023,421 $ 13,704,121 $ ( 3,306,588 ) $ ( 53,084 ) $ 10,344,449 $ 29,470 $ 10,373,919 Balance, December 31, 2018 303,742,090 $ 10,754,495 $ ( 2,657,655 ) $ ( 8,098 ) $ 8,088,742 $ 32,236 $ 8,120,978 Net income — — 206,136 — 206,136 514 206,650 Other comprehensive loss — — — ( 6,499 ) ( 6,499 ) — ( 6,499 ) Distributions paid and payable — — ( 418,418 ) — ( 418,418 ) ( 588 ) ( 419,006 ) Share issuances, net of costs 14,416,113 971,313 — — 971,313 — 971,313 Issuance of common partnership units — — — — — 6,286 6,286 Redemption of common units — ( 6,869 ) — — ( 6,869 ) ( 13,356 ) ( 20,225 ) Share-based compensation, net 60,510 3,097 — — 3,097 — 3,097 Balance, June 30, 2019 318,218,713 $ 11,722,036 $ ( 2,869,937 ) $ ( 14,597 ) $ 8,837,502 $ 25,092 $ 8,862,594 The accompanying notes to consolidated financial statements are an integral part of these statements. -4- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Six months ended June 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 255,213 $ 206,650 Adjustments to net income: Depreciation and amortization 332,913 287,943 Amortization of share-based compensation 10,400 7,291 Non-cash revenue adjustments ( 1,507 ) ( 4,351 ) Loss on extinguishment of debt 9,819 — Amortization of net premiums on mortgages payable ( 710 ) ( 708 ) Amortization of deferred financing costs 4,916 3,960 Loss on interest rate swaps 1,992 1,364 Foreign currency and derivative losses (gains), net 1,062 ( 136 ) Gain on sales of real estate ( 39,829 ) ( 14,154 ) Provisions for impairment on real estate 18,347 17,733 Change in assets and liabilities Accounts receivable and other assets ( 61,091 ) ( 11,250 ) Accounts payable, accrued expenses and other liabilities ( 16,881 ) ( 4,679 ) Net cash provided by operating activities 514,644 489,663 CASH FLOWS FROM INVESTING ACTIVITIES Investment in real estate ( 632,174 ) ( 1,604,575 ) Improvements to real estate, including leasing costs ( 4,710 ) ( 11,767 ) Proceeds from sales of real estate 133,643 51,052 Purchase of short-term investment ( 300,000 ) — Insurance and other proceeds received 108 — Non-refundable escrow deposits — ( 9,619 ) Net cash used in investing activities ( 803,133 ) ( 1,574,909 ) CASH FLOWS FROM FINANCING ACTIVITIES Cash distributions to common stockholders ( 474,294 ) ( 413,410 ) Borrowings on line of credit 2,324,409 1,404,000 Payments on line of credit ( 2,385,859 ) ( 1,648,000 ) Principal payment on term loan ( 250,000 ) ( 70,000 ) Proceeds from notes and bonds payable issued 593,922 895,774 Principal payment on notes payable ( 250,000 ) — Principal payments on mortgages payable ( 14,730 ) ( 2,492 ) Payments upon extinguishment of debt ( 9,445 ) — Proceeds from common stock offerings, net 728,883 845,061 Proceeds from dividend reinvestment and stock purchase plan 4,815 4,098 Proceeds from At-the-Market (ATM) program, net 94,076 122,155 Redemption of common units — ( 20,225 ) Distributions to noncontrolling interests ( 794 ) ( 635 ) Net receipts on derivative settlements 2,421 — Debt issuance costs ( 5,526 ) ( 7,331 ) Other items, including shares withheld upon vesting ( 7,901 ) ( 4,195 ) Net cash provided by financing activities 349,977 1,104,800 Effect of exchange rate changes on cash and cash equivalents ( 2,175 ) ( 733 ) Net increase in cash, cash equivalents and restricted cash 59,313 18,821 Cash, cash equivalents and restricted cash, beginning of period 71,005 21,071 Cash, cash equivalents and restricted cash, end of period $ 130,318 $ 39,892 For supplemental disclosures, see note 17. The accompanying notes to consolidated financial statements are an integral part of these statements. -5- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (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, 2019, which are included in our 2019 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 June 30, 2020 we owned 6,541 properties, located in 49 U.S. states, Puerto Rico and the United Kingdom (U.K.), consisting of approximately 106.4 million leasable square feet. 2. Summary of Significant Accounting Policies and Procedures A. 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 10). We have no unconsolidated investments. B. 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. C. The COVID-19 pandemic and the measures taken to limit its spread are negatively impacting the economy across many industries, including the industries in which some of our tenants operate. These impacts may continue and increase in severity as the duration of the pandemic lengthens, which may, in turn, adversely impact the fair value estimates of our real estate and recording of impairments on our properties. As a result, we have evaluated certain key assumptions involving fair value estimates of our real estate and collectibility of our accounts receivable. We continue to evaluate the potential impacts of the COVID-19 pandemic and the measures taken to limit its spread on our business and industry segments as the situation continues to evolve and more information becomes available. Based on the status of our business operations as of June 30, 2020, as a result of the COVID-19 pandemic, we expect to remain in compliance with the financial covenants for our unsecured notes and credit facility over the next 12 months. On April 8, 2020, the Financial Accounting Standards Board, or FASB, staff and FASB board members responded to questions about the accounting for COVID-19 related rent concessions under Topic 842, Leases . The accounting for these rent concessions under Topic 842 depends on the enforceable rights and obligations of the parties under the original lease contract (including those arising from the laws of the jurisdiction governing the lease contract) and the nature of any changes to the terms and conditions of the contract. If a rent concession under these circumstances is required by the original lease contract (e.g. by a force majeure clause), the concession will generally be accounted for as a variable lease payment. In contrast, if the lessor is under no obligation to grant a rent concession, the lessor’s agreement to grant one should be accounted for as a lease modification. The FASB staff has provided clarifying guidance for leases where the total lease cash flows will remain substantially the same or less than those after the COVID-19 related effects, though companies may choose to forgo the evaluation of the enforceable rights and obligations of the original lease contract as a practical expedient. Instead, -6- Table of Contents the company would account for rent concessions, whatever their form (e.g. rent deferral, abatement or other), either (1) as if they are part of the enforceable rights and obligations of the parties under the existing lease contract; or (2) as a lease modification. If accounting for a concession as a lease modification, the full lease modification requirements under Topic 842 apply. Under either policy election, 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. If we conclude collection of substantially all lease payments is less than probable, rental revenue recognized is limited to cash received and existing operating lease receivables must be written off as an adjustment to rental revenue. The majority of concessions granted to our tenants during the second quarter of 2020 as a result of the COVID-19 pandemic have been rent deferrals with the original lease term unchanged. In these cases, we have currently determined that the collection of substantially all rent payments is probable. We also currently anticipate future concessions to be similar. In accordance with the April 8, 2020 guidance provided by the 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 during the second quarter of 2020 increased significantly from original lease terms, which required us to account for these as lease modifications, and resulted in an insignificant impact to rental revenue for the three months ended June 30, 2020. Similarly, rent abatements granted during the second quarter of 2020, which were also accounted for as lease modifications, impacted our rental revenue by an insignificant amount for the three months ended June 30, 2020. We assess collectability of our future lease payments based on an analysis of creditworthiness, economic trends (including trends arising from the COVID-19 pandemic) and other facts and circumstances related to the applicable tenants. If the collection of substantially all of the future lease payments is less than probable, we write-off the receivable balances associated with the lease and cease to recognize lease income, including straight-line rent, unless cash is received when due. The following table summarizes reserves recorded as a reduction of rental revenue (dollars in millions): Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Rental revenue reserves $ 6.4 $ 0.4 $ 7.4 $ 1.0 Straight-line rent reserves 2.1 — 2.8 1.4 Total rental revenue reserves $ 8.5 $ 0.4 $ 10.2 $ 2.4 As of June 30, 2020, we do not have any further tenant specific information that would change our assessment that collection of substantially all of the future lease payments under our existing leases is probable. However, since the conversations regarding rent collections for tenants 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. D. During the first six months of 2020, we reclassified 'Real estate held for sale, net', which was previously presented in 'Net real estate', into a new caption entitled 'Real estate and lease intangibles held for sale, net'. The reclassification out of 'Net real estate' incorporates intangibles held for sale into a more appropriate presentation of the held for sale caption. Intangibles held for investment are included in the captions entitled 'Lease intangible assets, net' and 'Lease intangible liabilities, net' in the consolidated balance sheets. The December 31, 2019 balance sheet has been reclassified to match the current period classification. 3. Supplemental Detail for Certain Components of Consolidated Balance Sheets (dollars in thousands): A. Accounts Receivable consist of the following at: June 30, 2020 December 31, 2019 Straight-line rent receivables $ 161,033 $ 147,047 Other receivables 94,576 34,922 $ 255,609 $ 181,969 -7- Table of Contents B. Lease intangible assets, net, consist of the following at: June 30, 2020 December 31, 2019 In-place leases $ 1,679,972 $ 1,612,153 Accumulated amortization of in-place leases ( 690,000 ) ( 627,676 ) Above-market leases 743,095 710,275 Accumulated amortization of above-market leases ( 224,890 ) ( 201,369 ) $ 1,508,177 $ 1,493,383 C. Other assets, net, consist of the following at: June 30, 2020 December 31, 2019 Right of use asset - operating leases, net $ 117,444 $ 120,533 Right of use asset - financing leases 100,294 36,901 Restricted escrow deposits 81,683 4,529 Financing receivables 81,388 81,892 Derivative assets and receivables - at fair value 19,011 12 Goodwill 14,383 14,430 Impounds related to mortgages payable 13,290 12,465 Prepaid expenses 12,570 11,839 Credit facility origination costs, net 9,418 11,453 Corporate assets, net 5,598 5,251 Non-refundable escrow deposits 1,000 14,803 Value-added tax receivable — 9,682 Other items 4,475 4,871 $ 460,554 $ 328,661 D. Distributions payable consist of the following declared distributions at: June 30, 2020 December 31, 2019 Common stock distributions $ 81,276 $ 76,622 Noncontrolling interests distributions 108 106 $ 81,384 $ 76,728 E. Accounts payable and accrued expenses consist of the following at: June 30, 2020 December 31, 2019 Derivative liabilities and payables - at fair value $ 73,980 $ 26,359 Notes payable - interest payable 71,274 75,114 Property taxes payable 21,964 18,626 Value-added tax payable 4,921 13,434 Accrued income taxes 4,481 4,450 Accrued costs on properties under development 1,860 5,870 Mortgages, term loans, credit line - interest payable and interest rate swaps 1,496 1,729 Other items 21,200 31,457 $ 201,176 $ 177,039 F. Lease intangible liabilities, net, consist of the following at: June 30, 2020 December 31, 2019 Below-market leases $ 449,013 $ 447,522 Accumulated amortization of below-market leases ( 126,269 ) ( 114,419 ) $ 322,744 $ 333,103 G. Other liabilities consist of the following at: June 30, 2020 December 31, 2019 Lease liability - operating leases, net $ 119,718 $ 122,285 Rent received in advance and other deferred revenue 116,517 127,687 Security deposits 6,212 6,303 Lease liability - financing leases 6,100 5,946 $ 248,547 $ 262,221 H. Short-term investment Short-term investment represents a term deposit with a bank that was not readily convertible to cash as of June 30, 2020. The term deposit matured on July 24. 2020. -8- Table of Contents 4. Investments in Real Estate We acquire land, buildings and improvements necessary for the successful operations of commercial tenants. A. Acquisitions During the First Six Months of 2020 and 2019 Below is a summary of our acquisitions for the six months ended June 30, 2020: Number of Properties Square Feet (in millions) Investment ($ in millions) Weighted Average Lease Term (Years) Initial Average Cash Lease Yield Six months ended June 30, 2020 (1) Acquisitions - U.S. (in 25 states) 80 1.8 $ 412.6 14.4 6.5 % Acquisitions - U.K. (2) 6 0.5 223.7 11.8 5.3 % Total acquisitions 86 2.3 636.3 13.6 6.1 % Properties under development - U.S. 8 0.2 3.9 10.5 8.8 % Total (3) 94 2.5 $ 640.2 13.6 6.1 % (1) None of our investments during the first six months of 2020 caused any one tenant to be 10% or more of our total assets at June 30, 2020. All of our investments in acquired properties during the first six months of 2020 are 100 % leased at the acquisition date. (2) Represents investments of £ 180.1 million Sterling during the six months ended June 30, 2020 converted at the applicable exchange rate on the date of acquisition. (3) The tenants occupying the new properties operate in 17 industries, and are 96.5 % retail and 3.5 % industrial, based on rental revenue. Approximately 37 % of the rental revenue generated from acquisitions during the first six months of 2020 is from investment grade rated tenants, their subsidiaries or affiliated companies. The acquisitions during the first six months of 2020, which had no associated contingent consideration, were allocated as follows (dollars in millions): Acquisitions - U.S. Acquisitions - U.K. Six months ended June 30, 2020 (USD) (£ Sterling) Land (1) $ 82.9 £ 22.8 Buildings and improvements 278.4 60.8 Lease intangible assets 54.5 42.0 Other assets (2) 1.5 54.5 Lease intangible liabilities ( 2.3 ) — Other liabilities (3) ( 0.9 ) — $ 414.1 £ 180.1 (1) U.K. land includes £ 6.4 million of right of use assets under long-term ground leases. (2) U.S. other assets consists of $ 810,000 financing receivables with above-market terms and $ 689,000 of right of use assets under ground leases. U.K. other assets entirely consists of right of use assets under ground leases. (3) U.S. other liabilities entirely consists of lease liabilities under ground leases. The properties acquired during the first six months of 2020 generated total revenues of $ 13.6 million and net income of $ 4.6 million during the six months ended June 30, 2020. -9- Table of Contents Below is a summary of our acquisitions for the six months ended June 30, 2019: Number of Properties Square Feet (in millions) Investment ($ in millions) Weighted Average Lease Term (Years) Initial Average Cash Lease Yield Six months ended June 30, 2019 (1) Acquisitions - U.S. (in 34 states) 175 4.2 $ 1,040.9 15.9 6.8 % Acquisitions - U.K. (2) 12 1.1 549.2 14.8 5.3 % Total acquisitions 187 5.3 1,590.1 15.5 6.3 % Properties under development - U.S. 12 0.4 24.1 16.5 7.2 % Total (3) 199 5.7 $ 1,614.2 15.6 6.3 % (1) None of our investments during 2019 caused any one tenant to be 10% or more of our total assets at June 30, 2019. All of our investments in acquired properties during the first six months of 2019 are 100 % leased at the acquisition date. (2) Represents investments of £ 433.9 million Sterling during the six months ended June 30, 2019 converted at the applicable exchange rate on the date of the acquisition. (3) The tenants occupying the new properties operated in 17 industries, and are 99.1 % retail and 0.9 % industrial, based on rental revenue. Approximately 18 % of the rental revenue generated from acquisitions during the first six months of 2019 was from investment grade rated tenants, their subsidiaries or affiliated companies. The acquisitions during the first six months of 2019, which had no associated contingent consideration, were allocated as follows (dollars in millions): Acquisitions - U.S. Acquisitions - U.K. Six months ended June 30, 2019 (USD) (£ Sterling) Land (1) $ 234.7 £ 164.4 Buildings and improvements 704.5 182.0 Lease intangible assets 80.3 90.8 Other assets (2) 53.8 — Lease intangible liabilities ( 23.0 ) ( 3.3 ) Other liabilities (3) ( 7.4 ) — $ 1,042.9 £ 433.9 (1) U.K. land includes £ 13.6 million of right of use assets under long-term ground leases. (2) U.S. other assets entirely consists of financing receivables with above-market terms. (3) U.S. other liabilities entirely consists of deferred rent on certain below-market leases. The properties acquired during the first six months of 2019 generated total revenues of $ 19.7 million and net income of $ 10.0 million during the six months ended June 30, 2019. 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. -10- Table of Contents B. Investments in Existing Properties During the first six months of 2020, we capitalized costs of $ 4.4 million on existing properties in our portfolio, consisting of $ 1.1 million for re-leasing costs, $ 23,000 for recurring capital expenditures, and $ 3.3 million for non-recurring building improvements. In comparison, during the first six months of 2019, we capitalized costs of $ 6.1 million on existing properties in our portfolio, consisting of $ 1.0 million for re-leasing costs, $ 172,000 for recurring capital expenditures, and $ 4.9 million for non-recurring building improvements. C. Properties with Existing Leases Of the $ 640.2 million we invested during the first six months of 2020, approximately $ 500.3 million was used to acquire 57 properties with existing leases. In comparison, of the $ 1.6 billion we invested during the first six months of 2019, approximately $ 929.7 million was used to acquire 75 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 the first six months of 2020 and 2019 were $ 66.3 million and $ 57.8 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 the first six months of 2020 and 2019 were $ 16.1 million and $ 7.9 million, respectively. If a lease was 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 June 30, 2020 (dollars in thousands): Net decrease to rental revenue Increase to amortization expense 2020 $ ( 12,694 ) $ 64,254 2021 ( 24,568 ) 122,159 2022 ( 23,020 ) 110,185 2023 ( 21,483 ) 97,909 2024 ( 19,872 ) 89,245 Thereafter ( 93,824 ) 506,220 Totals $ ( 195,461 ) $ 989,972 -11- Table of Contents 5. Credit Facility We have 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. 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, which is subject to obtaining lender commitments. Under our credit facility, our investment grade credit ratings as of June 30, 2020 provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 0.775 % with a facility commitment fee of 0.125 %, for all-in drawn pricing of 0.90 % over LIBOR. The borrowing rate is subject to an interest rate floor and may change if our investment grade credit ratings change. We also have other interest rate options available to us under our revolving credit facility. Our revolving credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation. At June 30, 2020, credit facility origination costs of $ 9.4 million are included in other assets, net, as compared to $ 11.5 million at December 31, 2019, on our consolidated balance sheet. These costs are being amortized over the remaining term of our revolving credit facility. At June 30, 2020, we had a borrowing capacity of $ 2.4 billion available on our revolving credit facility (subject to customary conditions to borrowing) and an outstanding balance of $ 628.6 million, including £ 329.5 million Sterling, as compared to an outstanding balance of $ 704.3 million, including £ 169.2 million Sterling, at December 31, 2019. The weighted average interest rate on outstanding borrowings under our revolving credit facility was 1.6 % during the first six months of 2020 and 3.3 % during the first six months of 2019. At June 30, 2020 and December 31, 2019, the weighted average interest rate on borrowings outstanding under our revolving credit facility was 0.9 % and 2.2 %, respectively. Our revolving credit facility is subject to various leverage and interest coverage ratio limitations, and at June 30, 2020, we were in compliance with the covenants on our revolving credit facility. 6. Term Loans In October 2018, in conjunction with entering into our current 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 %. In June 2015, in conjunction with entering into our previous revolving credit facility, we entered into a $ 250.0 million senior unsecured term loan which matured in June 2020. Borrowing under this term loan bore interest at the current one-month LIBOR, plus 0.90 %. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixed our per annum interest rate on this term loan at 2.62 %. In June 2020, we repaid the term loan in full upon maturity. Deferred financing costs of $ 1.2 million incurred in conjunction with the $ 250.0 million term loan which matured 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 deferred financing costs at June 30, 2020 of $ 742,000 relates to the $ 250.0 million term loan maturing March 2024. The net balance of deferred financing costs at December 31, 2019 of $ 956,000 related to the $ 250.0 million term loan that matured in June 2020 and the $ 250.0 million term loan maturing March 2024. 7. Mortgages Payable During the first six months of 2020, we made $ 14.7 million in principal payments, including the repayment of one mortgage in full for $ 11.4 million. During the first six months of 2019, we made $ 2.5 million in principal payments. No mortgages were assumed during the first six months of 2020 or 2019. 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 June 30, 2020, we were in compliance with these covenants. -12- Table of Contents The balance of our deferred financing costs, which are classified as part of mortgages payable, net, on our consolidated balance sheets, was $ 1.1 million at June 30, 2020 and $ 1.3 million at December 31, 2019. These costs are being amortized over the remaining term of each mortgage. The following table summarizes our mortgages payable as of June 30, 2020 and December 31, 2019, 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 Financing Costs Balance, net Mortgage Payable Balance 6/30/2020 91 4.9 % 4.6 % 2.7 $ 393,690 $ 1,126 $ 394,816 12/31/2019 92 4.9 % 4.6 % 3.1 $ 408,419 $ 1,700 $ 410,119 (1) At June 30, 2020, there were 26 mortgages on 91 properties. At December 31, 2019, there were 27 mortgages on 92 properties. The mortgages require monthly payments with principal payments due at maturity. The mortgages were at fixed interest rates, except for one variable rate mortgage on one property, which has been swapped to a fixed interest rate, with a principal balance at June 30, 2020 and December 31, 2019 of $ 7.0 million and $ 7.1 million, respectively. (2) Stated interest rates ranged from 3.8 % to 6.9 % at each of June 30, 2020 and December 31, 2019. (3) Effective interest rates ranged from 3.8 % to 7.6 % at each of June 30, 2020 and December 31, 2019. The following table summarizes the maturity of mortgages payable, excluding net premiums of $ 2.3 million and deferred financing costs of $ 1.1 million, as of June 30, 2020 (dollars in millions): Year of Maturity Principal 2020 $ 69.5 2021 68.8 2022 111.8 2023 20.6 2024 112.2 Thereafter 10.8 Totals $ 393.7 8. Notes Payable A. General Our senior unsecured notes and bonds consist of the following, sorted by maturity date (dollars in millions): June 30, 2020 December 31, 2019 5.750 % notes, issued in June 2010 and due in January 2021 $ — $ 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 in 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 500 500 3.250 % notes, issued in May 2020 and due in January 2031 (1) 600 — 2.730 % notes, issued in May 2019 and due in May 2034 (2) 391 418 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 6,641 6,318 Unamortized net original issuance premiums and deferred financing costs ( 39 ) ( 30 ) $ 6,602 $ 6,288 -13- Table of Contents (1) In July 2020, we issued $ 350 million of 3.250 % senior unsecured notes, which constituted a further issuance of, and formed a single series with, the $ 600 million senior notes issued in May 2020. See note 21, Subsequent Events . (2) Represents the principal balance (in U.S. dollars) of the Sterling-denominated private placement of £ 315.0 million converted at the applicable exchange rates on June 30, 2020, and December 31, 2019, respectively. The following table summarizes the maturity of our notes and bonds payable as of June 30, 2020, excluding net unamortized original issuance premiums and deferred financing costs (dollars in millions): Year of Maturity Principal 2022 $ 950 2023 750 2024 350 Thereafter 4,591 Totals $ 6,641 As of June 30, 2020, the weighted average interest rate on our notes and bonds payable was 3.8 % and the weighted average remaining years until maturity was 8.3 years. All of our outstanding notes and bonds payable have fixed interest rates and contain various covenants, with which we remained in compliance as of June 30, 2020. Additionally, interest on all of our senior unsecured note and bond obligations is paid semiannually. B. Note Repayment 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. As a result of the early redemption, we recognized a $ 9.8 million loss on extinguishment of debt on our consolidated statement of income for the six months ended June 30, 2020. C. Note Issuances In May 2020, we issued $ 600.0 million of 3.250 % senior unsecured notes due January 2031, or the 2031 Notes. The public offering price for the 2031 Notes was 98.987 % of the principal amount, for an effective yield to maturity of 3.364 % and gross proceeds of $ 593.9 million. In June 2019, we issued $ 500.0 million of 3.250 % senior unsecured notes due June 2029, or the 2029 Notes. The public offering price for the 2029 Notes was 99.359 % of principal amount, for an effective yield to maturity of 3.326 % and gross proceeds of $ 496.8 million. In May 2019, we issued £ 315.0 million of 2.730 % unsecured notes due May 2034, through a private placement. The proceeds from each of these offerings were used to repay borrowings outstanding under our credit facility, to fund investment opportunities, and for other general corporate purposes. 9. Issuances of Common Stock A. Issuance of Common Stock in an Underwritten Public Offering In March 2020, we issued 9,690,500 shares of common stock in an underwritten public offering, including 690,500 shares purchased by the underwriters upon the exercise of their option to purchase additional shares. After deducting underwriting discounts and other offering costs of $ 21.2 million, the net proceeds of $ 728.9 million were used to repay borrowings under our credit facility, to fund investment opportunities, and for other general corporate purposes. B. At-the-Market (ATM) Program Under our "at-the-market" equity distribution plan, or our ATM program, up to 33,402,405 shares of common stock may be offered and sold (1) by us to, or through, a consortium of banks acting as our sales agents or (2) by a consortium of banks acting as forward sellers on behalf of any forward purchasers contemplated thereunder, in each case by means of ordinary brokers' transactions on the New York Stock Exchange ("NYSE: O") at prevailing market prices or at negotiated prices. At June 30, 2020, we had 31,891,256 shares remaining for future issuance under our ATM program. We anticipate maintaining the availability of our ATM program in the future, including the replenishment of authorized shares issuable thereunder. -14- Table of Contents The following table outlines common stock issuances pursuant to our ATM program (dollars in millions): Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Shares of common stock issued under the ATM program 1,511,149 1,706,695 1,511,149 1,706,695 Gross proceeds $ 95.7 $ 124.2 $ 95.7 $ 124.2 C. 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 June 30, 2020, we had 11,573,851 shares remaining for future issuance under our DRSPP program. The following table outlines common stock issuances pursuant to our DRSPP program (dollars in millions): Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Shares of common stock issued under the DRSPP program 44,817 27,520 78,817 59,418 Gross proceeds $ 2.4 $ 1.9 $ 4.8 $ 4.1 Our DRSPP includes a waiver approval process, allowing larger investors or institutions, per a formal approval process, to purchase shares at a small discount, if approved by us. We did not issue shares under the waiver approval process during the first six months of 2020 or 2019. 10. Noncontrolling Interests The two noncontrolling interests in entities that we consolidate include an operating partnership, Realty Income, L.P., and a joint venture acquired during 2019. The following table represents the change in the carrying value of all noncontrolling interests through June 30, 2020 (dollars in thousands): Realty Income, L.P. units (1) Other Noncontrolling Interests Total Carrying value at December 31, 2019 $ 24,596 $ 5,106 $ 29,702 Distributions ( 647 ) ( 147 ) ( 794 ) Allocation of net income 479 83 562 Carrying value at June 30, 2020 $ 24,428 $ 5,042 $ 29,470 (1) 242,007 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 remained outstanding at each of June 30, 2020 and December 31, 2019 . At June 30, 2020 and December 31, 2019, Realty Income, L.P. and the joint venture acquired during 2019 were considered variable interest entities, or VIEs, in which we were deemed the primary beneficiary based on our controlling financial interests. Below is a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets at June 30, 2020 and December 31, 2019 (in thousands): June 30, 2020 December 31, 2019 Net real estate $ 640,302 $ 654,305 Total assets 731,943 744,394 Total liabilities 51,688 52,087 11. 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. -15- Table of Contents 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): June 30, 2020 Carrying value Estimated fair value Mortgages payable assumed in connection with acquisitions (1) $ 393.7 $ 403.8 Notes and bonds payable (2) 6,640.6 7,360.0 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 (1) Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums was $ 2.3 million at June 30, 2020, and $ 3.0 million at December 31, 2019. Also excludes deferred financing costs of $ 1.1 million at June 30, 2020 and $ 1.3 million at December 31, 2019. (2) Excludes non-cash original issuance premiums and discounts recorded on notes payable. The unamortized balance of the net original issuance premiums was approximately $ 3,000 at June 30, 2020, and $ 6.3 million at December 31, 2019. Also excludes deferred financing costs of $ 38.5 million at June 30, 2020 and $ 35.9 million at December 31, 2019. 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. In February 2020, we entered into five forward starting treasury rate locks with notional amounts totaling $ 500.0 million. The treasury rate locks were entered into to hedge our exposure to the changes in the 10-year US treasury rates in anticipation of potential future debt offerings during the first half of 2020. The treasury rate locks were designated as cash flow hedges, with any changes in fair value recorded in accumulated other comprehensive income, or AOCI. The AOCI balance associated with the treasury rate locks on the date of initial issuance of the 2031 Notes in May 2020 is being amortized over the term of the 2031 Notes. During June 2020, all five treasury rate locks were terminated and we entered into six forward starting interest rate swaps with notional amounts totaling $ 500.0 million in a cashless settlement of the terminated treasury rate locks. The forward starting swaps were entered into to hedge our exposure to the changes in the 10-year US treasury rates in anticipation of potential future debt offerings through a current estimated range ending in 2023. The forward starting swaps are designated as cash flow hedges, with any changes in fair value recorded in AOCI. Due to the size of the initial net investment resulting from the termination value of the treasury rate locks being rolled into them, two of the six forward starting swaps were determined to be hybrid debt instruments containing embedded at-market swap derivative instruments. As a result, we have bifurcated the derivative instrument and the debt instrument for those two forward starting interest rate swaps for accounting purposes. The remaining four forward starting interest rates swaps are accounted for as derivative instruments. In May 2019, we entered into four cross-currency swaps to exchange £ 130 million 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. -16- Table of Contents We record interest rate swaps on the consolidated balances sheet at fair value. Changes to fair value are recorded to AOCI. The following table summarizes the terms and fair values of our derivative financial instruments at June 30, 2020 and December 31, 2019 (dollars in millions): Derivative Type Accounting Classification Hedge Designation Notional Amount Strike Effective Date Maturity Date Fair Value - asset (liability) June 30, December 31, June 30, December 31, 2020 2019 2020 2019 Interest rate swap Derivative Cash flow $ 6.9 $ 7.0 6.03 % 09/25/2012 09/03/2021 $ ( 0.3 ) $ ( 0.2 ) Interest rate swap Derivative Cash flow — 250.0 1.72 % 06/30/2015 06/30/2020 — ( 0.1 ) Interest rate swap Derivative Cash flow 250.0 250.0 3.04 % 10/24/2018 03/24/2024 ( 25.9 ) ( 14.7 ) Cross-currency swap (1) Derivative Cash flow 41.6 41.6 (2) 05/20/2019 05/22/2034 5.0 ( 2.6 ) Cross-currency swap (1) Derivative Cash flow 41.6 41.6 (3) 05/20/2019 05/22/2034 4.9 ( 2.6 ) Cross-currency swap (1) Derivative Cash flow 41.6 41.6 (4) 05/20/2019 05/22/2034 4.6 ( 2.9 ) Cross-currency swap (1) Derivative Cash flow 41.6 41.6 (5) 05/20/2019 05/22/2034 4.5 ( 3.2 ) Forward-starting swap Derivative Cash flow 75.0 — 2.02 % (6) 06/30/2033 ( 7.9 ) — Forward-starting swap Derivative Cash flow 75.0 — 1.94 % (6) 11/30/2032 ( 7.8 ) — Forward-starting swap Derivative Cash flow 25.0 — 1.67 % (6) 11/30/2032 ( 2.0 ) — Forward-starting swap Derivative Cash flow 125.0 — 1.75 % (6) 06/30/2033 ( 9.9 ) — Forward-starting swap Hybrid debt Cash flow 125.0 — 1.88 % (6) 11/30/2032 ( 12.3 ) — Forward-starting swap Hybrid debt Cash flow 75.0 — 2.00 % (6) 06/30/2033 ( 7.8 ) — $ 923.3 $ 673.4 $ ( 54.9 ) $ ( 26.3 ) (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 %. (6) The five treasury rate locks which were entered into during February 2020 were terminated in June 2020 and converted into six forward starting interest rate swaps through a cashless settlement of the terminated treasury rate locks. 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 June 30, 2020 and December 31, 2019, 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 -17- Table of Contents 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 the three and six months ended June 30, 2020, we reclassified $ 3.7 million and $ 5.3 million, respectively, from AOCI as an increase to interest expense and $ 800,000 and $ 12.2 million for cross-currency swaps into foreign exchange gains. During the three and six months ended June 30, 2019, we reclassified $ 454,000 and $ 1.1 million, respectively, from AOCI as an increase to interest expense for our interest rate swaps and $ 1.4 million for the three and six months ended June 30, 2019 for cross-currency swaps into foreign exchange gains. We expect to reclassify $ 11.7 million from AOCI as an increase to interest expense relating to interest rate swaps and treasury rate locks and $ 2.2 million from AOCI to foreign currency gain relating to cross-currency swaps within the next twelve months. 12. Operating Leases A. At June 30, 2020, we owned 6,541 properties in 49 U.S. states, Puerto Rico, and the U.K. Of the 6,541 properties, 6,505 , or 99.4 %, are single-tenant properties, and the remaining are multi-tenant properties. At June 30, 2020, 101 properties were available for lease or sale. Substantially all of our 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, for the second quarter of 2020 and 2019 was $ 547,000 and $ 495,000 , respectively. Percentage rents for the first six months of 2020 and 2019 were $ 1.8 million and $ 4.1 million, respectively. B. Major Tenants - No individual tenant’s rental revenue, including percentage rents, represented more than 10% of our total revenue for each of the six months ended June 30, 2020 and 2019. 13. Gain on Sales of Real Estate The following table summarizes our properties sold during the periods indicated below (dollars in millions): Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Number of properties 12 18 29 37 Net sales proceeds $ 7.4 $ 28.6 $ 133.6 $ 51.1 Gain on sales of real estate $ 1.3 $ 6.9 $ 39.8 $ 14.2 -18- Table of Contents 14. Impairments 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. During the second quarter of 2020, we assessed the key assumptions used in our impairment analysis for the impact of the COVID-19 pandemic on our portfolio, focusing on tenants experiencing difficulties meeting their lease obligations to us. As a result of this analysis, we determined that the carrying values of eight properties classified as held for investment were not recoverable. As a result, we recorded provisions for impairments of $ 8.2 million on these properties, which are included as part of our total impairments recorded during the second quarter of 2020. The following table summarizes our provisions for impairment during the periods indicated below (dollars in millions): Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Total provisions for impairment $ 13.9 $ 13.1 $ 18.3 $ 17.7 Number of properties: Classified as held for sale 7 — 8 — Classified as held for investment 11 2 14 2 Sold 7 12 14 22 15. Distributions Paid and Payable We pay monthly distributions to our common stockholders. The following is a summary of monthly distributions paid per common share for the first six months of 2020 and 2019: Month 2020 2019 January $ 0.2275 $ 0.2210 February 0.2325 0.2255 March 0.2325 0.2255 April 0.2330 0.2260 May 0.2330 0.2260 June 0.2330 0.2260 Total $ 1.3915 $ 1.3500 At June 30, 2020, a distribution of $ 0.2335 per common share was payable and was paid in July 2020. -19- Table of Contents 16. 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: Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Weighted average shares used for the basic net income per share computation 343,515,406 311,032,972 340,061,487 307,293,949 Incremental shares from share-based compensation 169,853 289,190 219,778 286,178 Weighted average shares used for diluted net income per share computation 343,685,259 311,322,162 340,281,265 307,580,127 Unvested shares from share based compensation that were anti-dilutive 122,222 25,171 65,623 29,069 Weighted average partnership common units convertible to common shares that were anti-dilutive 463,119 463,119 463,119 420,679 17. Supplemental Disclosures of Cash Flow Information Cash paid for interest was $ 149.4 million in the first six months of 2020 and $ 134.9 million in the first six months of 2019. Cash paid for income taxes was $ 5.3 million in the first six months of 2020 and $ 3.1 million in the first six months of 2019. The following non-cash activities are included in the accompanying consolidated financial statements: A. During the first six months of 2020, the fair value of net derivative liabilities decreased by $ 28.6 million. B. Non-refundable deposits from 2019 of $ 13.8 million were applied to acquisitions during the first six months of 2020. C. As a result of the adoption of Accounting Standards Update, or ASU, 2016-02 in 2019, we recorded $ 132.0 million of lease liabilities and related right of use assets as lessee under operating leases on January 1, 2019. D. During the first six months of 2019, we issued 89,322 common partnership units of Realty Income, L.P. as partial consideration for an acquisition of properties, totaling $ 6.3 million. 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): June 30, 2020 June 30, 2019 Cash and cash equivalents shown in the consolidated balance sheets $ 35,345 $ 27,136 Restricted escrow deposits (1) 81,683 1,323 Impounds related to mortgages payable (1) 13,290 11,433 Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows $ 130,318 $ 39,892 (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. -20- Table of Contents 18. 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 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: June 30, 2020 December 31, 2019 Segment net real estate: Automotive service $ 284,069 $ 288,453 Automotive tire services 229,406 232,709 Beverages 277,264 279,373 Child care 216,687 208,326 Convenience stores 2,025,986 2,057,157 Dollar stores 1,426,580 1,427,950 Drug stores 1,589,216 1,618,854 Financial services 381,332 389,634 General merchandise 535,432 475,418 Grocery stores - U.S. (1) 903,343 922,349 Grocery stores - U.K. (1) 682,378 663,210 Health and fitness 1,082,135 1,019,796 Home improvement 499,420 495,305 Restaurants-casual dining 552,711 576,526 Restaurants-quick service 1,070,095 1,059,155 Theaters - U.S. (1) 861,151 878,103 Transportation services 711,739 769,614 Wholesale club 390,312 396,690 Other non-reportable segments 2,818,888 2,738,150 Total net real estate 16,538,144 16,496,772 Intangible assets: Automotive service 56,812 58,854 Automotive tire services 6,545 7,322 Beverages 1,380 1,509 Child care 20,844 21,997 Convenience stores 126,567 131,808 Dollar stores 80,232 82,701 Drug stores 175,374 183,319 Financial services 15,968 17,130 General merchandise 74,759 66,135 Grocery stores - U.S. (1) 171,874 180,197 Grocery stores - U.K. (1) 196,666 153,407 Health and fitness 71,881 74,428 Home improvement 71,497 72,979 Restaurants-casual dining 21,964 23,289 Restaurants-quick service 49,954 52,353 Theaters - U.S. (1) 33,983 36,089 Transportation services 56,087 66,055 Wholesale club 21,816 23,372 Other non-reportable segments 258,672 240,439 Other corporate assets 1,051,528 564,641 Total assets $ 19,102,547 $ 18,554,796 -21- Table of Contents Three months ended June 30, Six months ended June 30, Revenue 2020 2019 2020 2019 Segment rental revenue: Automotive service $ 8,661 $ 8,039 $ 17,332 $ 15,230 Automotive tire services 8,115 7,952 15,948 15,751 Beverages 7,996 7,915 15,991 15,831 Child care 8,714 7,760 18,195 15,587 Convenience stores 46,819 41,432 93,552 82,646 Dollar stores 31,595 25,112 62,986 50,098 Drug stores 35,617 32,343 70,916 65,513 Financial services 7,573 7,694 15,116 15,412 General merchandise 11,887 8,610 23,404 15,520 Grocery stores - U.S. (1) 19,485 17,211 38,994 33,336 Grocery stores - U.K. (1) 11,739 2,915 22,143 2,915 Health and fitness 27,961 26,254 56,239 52,479 Home improvement 11,382 10,664 22,692 20,479 Restaurants-casual dining 11,431 11,385 23,969 22,674 Restaurants-quick service 18,820 21,515 42,128 43,244 Theaters - U.S. (1) 24,448 20,909 49,014 38,565 Transportation services 15,975 16,192 31,960 32,218 Wholesale club 9,588 9,464 19,176 19,057 Other non-reportable segments and tenant reimbursements 92,395 80,886 182,603 161,734 Rental (including reimbursable) 410,201 364,252 822,358 718,289 Other 4,435 1,198 6,619 1,526 Total revenue $ 414,636 $ 365,450 $ 828,977 $ 719,815 (1) Our investments in industries outside of the U.S. are managed as separate operating segments. 19. 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, performance shares 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 $ 4.9 million during the second quarter of 2020, $ 4.5 million during the second quarter of 2019, $ 10.4 million during the first six months of 2020 (including $ 1.8 million of accelerated share-based compensation costs for our former Chief Financial Officer ("CFO") upon his departure from the company) and $ 7.3 million during the first six months of 2019. Upon the departure of our former CFO in the first quarter of 2020, we incurred a severance charge of $ 3.5 million, consisting of $ 1.6 million of cash, $ 1.8 million related to share-based compensation expense and $ 58,000 of professional fees. A. Restricted Stock During the first six months of 2020, we granted 100,473 shares of common stock under the 2012 Plan. This included 36,000 total shares of restricted stock granted to the independent members of our Board of Directors in connection with our annual awards in May 2020, 24,000 shares of which vested immediately and 12,000 shares of which vest in equal parts over a three -year service period. Our restricted stock awards vest over a four -year service period, with the exception of shares granted to our independent directors, and 4,541 shares granted to our former CFO, which vested upon his departure from the Company. -22- Table of Contents As of June 30, 2020, the remaining unamortized share-based compensation expense related to restricted stock totaled $ 11.5 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 and Restricted Stock Units During the first six months of 2020, we granted 98,844 performance shares, as well as dividend equivalent rights, to our executive officers. The performance shares are earned based on our Total Shareholder Return (TSR) performance relative to select industry indices and peer groups as well as achievement of certain operating metrics, and vest 50 % on the first and second January 1 after the end of the three -year performance period, subject to continued service. During the first six months of 2020, we also granted 9,966 restricted stock units, all of which vest over a four -year service period. These restricted stock units have the same economic rights as shares of restricted stock. As of June 30, 2020, the remaining share-based compensation expense related to the performance shares and restricted stock units totaled $ 13.8 million. The fair value of the performance shares were estimated on the date of grant using a Monte Carlo Simulation model. The performance shares are being recognized on a tranche-by-tranche basis over the service period. The amount of share-based compensation for the restricted stock units is based on the fair value of our common stock at the grant date. The restricted stock units are being recognized on a straight-line basis over the service period. 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 June 30, 2020, we had commitments of $ 12.2 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements. In addition, as of June 30, 2020, we had committed $ 3.6 million under construction contracts related to development projects, which is expected to be paid in the next twelve months. 21. Subsequent Events • In July 2020, we declared a dividend of $ 0.2335 per share to our common stockholders, which will be paid in August 2020. • In July 2020, we issued $ 350 million of additional aggregate amount of our existing 3.250 % senior unsecured notes due in January 2031, or the 2031 Notes. The public offering price for the 2031 Notes was 108.241 % of the principal amount, for an effective yield to maturity of 2.341 %. The gross proceeds of approximately $ 378.8 million from this offering will be used to repay borrowings under our credit facility, to fund potential investment opportunities and for other general corporate purposes.