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) September 30, 2020 December 31, 2019 ASSETS (unaudited) Real estate held for investment, at cost: Land $ 5,982,495 $ 5,684,034 Buildings and improvements 14,203,277 13,833,882 Total real estate held for investment, at cost 20,185,772 19,517,916 Less accumulated depreciation and amortization ( 3,444,099 ) ( 3,117,919 ) Real estate held for investment, net 16,741,673 16,399,997 Real estate and lease intangibles held for sale, net 41,093 96,775 Cash and cash equivalents 724,750 54,011 Accounts receivable 261,752 181,969 Lease intangible assets, net 1,610,457 1,493,383 Other assets, net 405,645 328,661 Total assets $ 19,785,370 $ 18,554,796 LIABILITIES AND EQUITY Distributions payable $ 82,980 $ 76,728 Accounts payable and accrued expenses 206,626 177,039 Lease intangible liabilities, net 318,690 333,103 Other liabilities 241,425 262,221 Line of credit payable and commercial paper 856,142 704,335 Term loans, net 249,308 499,044 Mortgages payable, net 335,594 410,119 Notes payable, net 6,994,817 6,288,049 Total liabilities 9,285,582 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, 350,595,869 and 333,619,106 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 14,050,494 12,873,849 Distributions in excess of net income ( 3,527,521 ) ( 3,082,291 ) Accumulated other comprehensive loss ( 52,446 ) ( 17,102 ) Total stockholders’ equity 10,470,527 9,774,456 Noncontrolling interests 29,261 29,702 Total equity 10,499,788 9,804,158 Total liabilities and equity $ 19,785,370 $ 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 September 30, Nine months ended September 30, 2020 2019 2020 2019 REVENUE Rental (including reimbursable) $ 401,869 $ 372,312 $ 1,224,227 $ 1,090,601 Other 2,703 1,935 9,322 3,461 Total revenue 404,572 374,247 1,233,549 1,094,062 EXPENSES Depreciation and amortization 169,084 149,424 501,997 437,367 Interest 76,806 73,410 230,572 215,918 Property (including reimbursable) 25,410 20,354 77,468 63,332 General and administrative 16,514 16,460 56,541 50,153 Income taxes 4,592 1,822 10,193 4,422 Provisions for impairment 105,095 13,503 123,442 31,236 Total expenses 397,501 274,973 1,000,213 802,428 Gain on sales of real estate 13,736 1,674 53,565 15,828 Foreign currency and derivative gains, net 2,336 327 1,274 463 Loss on extinguishment of debt — — ( 9,819 ) — Net income 23,143 101,275 278,356 307,925 Net income attributable to noncontrolling interests ( 239 ) ( 226 ) ( 801 ) ( 740 ) Net income available to common stockholders $ 22,904 $ 101,049 $ 277,555 $ 307,185 Amounts available to common stockholders per common share: Net Income: Basic $ 0.07 $ 0.32 $ 0.81 $ 0.99 Diluted $ 0.07 $ 0.32 $ 0.81 $ 0.98 Weighted average common shares outstanding: Basic 346,476,217 319,945,932 342,214,164 311,556,279 Diluted 346,749,474 320,263,017 342,483,218 311,865,410 Other comprehensive income: Net income available to common stockholders $ 22,904 $ 101,049 $ 277,555 $ 307,185 Foreign currency translation adjustment ( 964 ) ( 359 ) ( 550 ) ( 365 ) Unrealized gain (loss) on derivatives, net 1,602 1,357 ( 34,794 ) ( 5,136 ) Comprehensive income available to common stockholders $ 23,542 $ 102,047 $ 242,211 $ 301,684 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 September 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, 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 Balance, June 30, 2019 318,218,713 $ 11,722,036 $ ( 2,869,937 ) $ ( 14,597 ) $ 8,837,502 $ 25,092 $ 8,862,594 Net income — — 101,049 — 101,049 226 101,275 Other comprehensive income — — — 998 998 — 998 Distributions paid and payable — — ( 218,232 ) — ( 218,232 ) ( 392 ) ( 218,624 ) Share issuances, net of costs 7,693,184 569,617 — — 569,617 — 569,617 Redemption of common units — 3 — — 3 ( 901 ) ( 898 ) Reallocation of equity — ( 653 ) — — ( 653 ) 653 — Share-based compensation, net ( 1,616 ) 3,135 — — 3,135 — 3,135 Balance, September 30, 2019 325,910,281 $ 12,294,138 $ ( 2,987,120 ) $ ( 13,599 ) $ 9,293,419 $ 24,678 $ 9,318,097 Nine Months Ended September 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 — — 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 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 — — 307,185 — 307,185 740 307,925 Other comprehensive loss — — — ( 5,501 ) ( 5,501 ) — ( 5,501 ) Distributions paid and payable — — ( 636,650 ) — ( 636,650 ) ( 980 ) ( 637,630 ) Share issuances, net of costs 22,109,297 1,540,930 — — 1,540,930 — 1,540,930 Issuance of common partnership units — — — — — 6,286 6,286 Redemption of common units — ( 6,866 ) — — ( 6,866 ) ( 14,257 ) ( 21,123 ) Reallocation of equity — ( 653 ) — — ( 653 ) 653 — Share-based compensation, net 58,894 6,232 — — 6,232 — 6,232 Balance, September 30, 2019 325,910,281 $ 12,294,138 $ ( 2,987,120 ) $ ( 13,599 ) $ 9,293,419 $ 24,678 $ 9,318,097 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) Nine months ended September 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 278,356 $ 307,925 Adjustments to net income: Depreciation and amortization 501,997 437,367 Amortization of share-based compensation 13,420 10,478 Non-cash revenue adjustments ( 5,544 ) ( 6,508 ) Loss on extinguishment of debt 9,819 — Amortization of net premiums on mortgages payable ( 1,020 ) ( 1,061 ) Amortization of deferred financing costs 6,888 6,378 Loss on interest rate swaps 3,115 2,058 Foreign currency and derivative gains, net ( 1,274 ) ( 463 ) Gain on sales of real estate ( 53,565 ) ( 15,828 ) Provisions for impairment on real estate 123,442 31,236 Change in assets and liabilities Accounts receivable and other assets ( 59,747 ) ( 7,886 ) Accounts payable, accrued expenses and other liabilities ( 6,082 ) 14,010 Net cash provided by operating activities 809,805 777,706 CASH FLOWS FROM INVESTING ACTIVITIES Investment in real estate ( 1,286,289 ) ( 2,019,666 ) Improvements to real estate, including leasing costs ( 10,336 ) ( 15,834 ) Proceeds from sales of real estate 181,925 72,601 Insurance and other proceeds received 2,874 — Non-refundable escrow deposits — ( 7,173 ) Net cash used in investing activities ( 1,111,826 ) ( 1,970,072 ) CASH FLOWS FROM FINANCING ACTIVITIES Cash distributions to common stockholders ( 716,535 ) ( 629,658 ) Borrowings on line of credit and commercial paper program 3,141,828 1,619,282 Payments on line of credit and commercial paper program ( 3,002,717 ) ( 1,871,282 ) Principal payment on term loan ( 250,000 ) ( 70,000 ) Proceeds from notes and bonds payable issued 972,766 895,774 Principal payment on notes payable ( 250,000 ) — Principal payments on mortgages payable ( 73,711 ) ( 19,495 ) 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 6,922 6,259 Proceeds from At-the-Market (ATM) program, net 442,157 689,641 Redemption of common units — ( 21,123 ) Distributions to noncontrolling interests ( 1,195 ) ( 1,027 ) Net receipts on derivative settlements 3,462 — Debt issuance costs ( 8,870 ) ( 7,996 ) Other items, including shares withheld upon vesting ( 14,783 ) ( 4,245 ) Net cash provided by financing activities 968,762 1,431,191 Effect of exchange rate changes on cash and cash equivalents 1,265 ( 607 ) Net increase in cash, cash equivalents and restricted cash 668,006 238,218 Cash, cash equivalents and restricted cash, beginning of period 71,005 21,071 Cash, cash equivalents and restricted cash, end of period $ 739,011 $ 259,289 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 September 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 September 30, 2020 we owned 6,588 properties, located in 49 U.S. states, Puerto Rico and the United Kingdom (U.K.), consisting of approximately 108.5 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 collectability of our accounts receivable (see note 14 for our discussion of impairments). 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 September 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 for which 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. -6- Table of Contents Instead, 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 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 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 first nine months of 2020 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 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 first nine months 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 and nine months ended September 30, 2020. Similarly, rent abatements granted during the first nine months of 2020, which were also accounted for as lease modifications, impacted our rental revenue by an insignificant amount for the three and nine months ended September 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 recorded a reserve of 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 September 30, Nine months ended September 30, 2020 2019 2020 2019 Rental revenue reserves $ 21.8 $ 0.3 $ 29.3 $ 1.2 Straight-line rent reserves 2.3 0.1 5.1 1.5 Total rental revenue reserves $ 24.1 $ 0.4 $ 34.4 $ 2.7 As of September 30, 2020, other than the information related to the reserves recorded to date, we do not have any further tenant specific information that would change our assessment that collection of substantially all of the future lease payments under our existing leases is probable. However, 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. We also evaluated certain properties impacted by the COVID-19 pandemic for impairment (see note 14). D. During the first nine 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: September 30, 2020 December 31, 2019 Straight-line rent receivables $ 167,470 $ 147,047 Other receivables 94,282 34,922 $ 261,752 $ 181,969 -7- Table of Contents B. Lease intangible assets, net, consist of the following at: September 30, 2020 December 31, 2019 In-place leases $ 1,730,957 $ 1,612,153 Accumulated amortization of in-place leases ( 717,443 ) ( 627,676 ) Above-market leases 835,039 710,275 Accumulated amortization of above-market leases ( 238,096 ) ( 201,369 ) $ 1,610,457 $ 1,493,383 C. Other assets, net, consist of the following at: September 30, 2020 December 31, 2019 Right of use asset - financing leases $ 115,283 $ 36,901 Right of use asset - operating leases, net 114,748 120,533 Financing receivables 98,896 81,892 Derivative assets and receivables - at fair value 14,637 12 Goodwill 14,282 14,430 Prepaid expenses 14,232 11,839 Restricted escrow deposits 8,832 4,529 Credit facility origination costs, net 8,562 11,453 Corporate assets, net 7,485 5,251 Impounds related to mortgages payable 5,429 12,465 Non-refundable escrow deposits 1,000 14,803 Value-added tax receivable 460 9,682 Other items 1,799 4,871 $ 405,645 $ 328,661 D. Distributions payable consist of the following declared distributions at: September 30, 2020 December 31, 2019 Common stock distributions $ 82,872 $ 76,622 Noncontrolling interests distributions 108 106 $ 82,980 $ 76,728 E. Accounts payable and accrued expenses consist of the following at: September 30, 2020 December 31, 2019 Notes payable - interest payable $ 69,383 $ 75,114 Derivative liabilities and payables - at fair value 66,992 26,359 Property taxes payable 28,669 18,626 Value-added tax payable 5,739 13,434 Accrued income taxes 5,550 4,450 Accrued costs on properties under development 1,366 5,870 Mortgages, term loans, credit line - interest payable and interest rate swaps 1,350 1,729 Other items 27,577 31,457 $ 206,626 $ 177,039 F. Lease intangible liabilities, net, consist of the following at: September 30, 2020 December 31, 2019 Below-market leases $ 452,025 $ 447,522 Accumulated amortization of below-market leases ( 133,335 ) ( 114,419 ) $ 318,690 $ 333,103 G. Other liabilities consist of the following at: September 30, 2020 December 31, 2019 Lease liability - operating leases, net $ 117,148 $ 122,285 Rent received in advance and other deferred revenue 112,003 127,687 Lease liability - financing leases 6,178 5,946 Security deposits 6,096 6,303 $ 241,425 $ 262,221 -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 Nine Months of 2020 and 2019 Below is a summary of our acquisitions for the nine months ended September 30, 2020: Number of Properties Leasable Square Feet (in millions) Investment ($ in millions) Weighted Average Lease Term (Years) Initial Average Cash Lease Yield Nine months ended September 30, 2020 (1) Acquisitions - U.S. (in 28 states) 154 3.0 $ 821.9 14.8 6.2 % Acquisitions - U.K. (2) 13 1.2 453.7 10.0 6.4 % Total acquisitions 167 4.2 1,275.6 13.1 6.3 % Properties under development - U.S. 13 0.9 23.3 16.3 6.4 % Total (3) 180 5.1 $ 1,298.9 13.1 6.3 % (1) None of our investments during the first nine months of 2020 caused any one tenant to be 10% or more of our total assets at September 30, 2020. All of our investments in acquired properties during the first nine months of 2020 are 100 % leased at the acquisition date. (2) Represents investments of £ 356.7 million Sterling during the nine months ended September 30, 2020, converted at the applicable exchange rate on the date of acquisition. (3) The tenants occupying the new properties operate in 23 industries, and are 96.9 % retail and 3.1 % industrial, based on rental revenue. Approximately 56 % of the rental revenue generated from acquisitions during the first nine months of 2020 is from investment grade rated tenants, their subsidiaries or affiliated companies. The acquisitions during the first nine months of 2020, which had no associated contingent consideration, were allocated as follows (dollars in millions): Acquisitions - U.S. Acquisitions - U.K. Nine months ended September 30, 2020 (USD) (£ Sterling) Land (1) $ 226.6 £ 81.0 Buildings and improvements 452.8 125.4 Lease intangible assets (2) 141.8 86.3 Other assets (3) 19.5 64.0 Lease intangible liabilities (4) ( 5.1 ) — Other liabilities (5) ( 0.9 ) — $ 834.7 £ 356.7 (1) U.K. land includes £ 6.4 million of right of use assets under long-term ground leases. (2) The weighted average amortization period for acquired lease intangible assets is 17.5 years. (3) U.S. other assets consists of $ 18.8 million financing receivables with above-market terms and $ 689,000 of right of use assets under ground leases. U.K. other assets consists entirely of right of use assets under ground leases. (4) The weighted average amortization period for acquired lease intangible liabilities is 13.9 years. (5) U.S. other liabilities consists entirely of lease liabilities under ground leases. The properties acquired during the first nine months of 2020 generated total revenues of $ 27.5 million and net income of $ 9.4 million during the nine months ended September 30, 2020. -9- Table of Contents Below is a summary of our acquisitions for the nine months ended September 30, 2019: Number of Properties Square Feet (in millions) Investment ($ in millions) Weighted Average Lease Term (Years) Initial Average Cash Lease Yield Nine months ended September 30, 2019 (1) Acquisitions - U.S. (in 38 states) 214 6.2 $ 1,412.9 15.7 6.5 % Acquisitions - U.K. (2) 13 1.2 576.8 15.0 5.2 % Total acquisitions 227 7.4 1,989.7 15.5 6.1 % Properties under development - U.S. 14 0.4 36.0 16.0 7.4 % Total (3) 241 7.8 $ 2,025.7 15.5 6.2 % (1) None of our investments during 2019 caused any one tenant to be 10% or more of our total assets at September 30, 2019. All of our investments in acquired properties during the first nine months of 2019 are 100 % leased at the acquisition date. (2) Represents investments of £ 456.1 million Sterling during the nine months ended September 30, 2019, converted at the applicable exchange rate on the date of the acquisition. (3) The tenants occupying the new properties operated in 19 industries, and are 89.6 % retail and 10.4 % industrial, based on rental revenue. Approximately 25 % of the rental revenue generated from acquisitions during the first nine months of 2019 was from investment grade rated tenants, their subsidiaries or affiliated companies. The acquisitions during the first nine months of 2019, which had no associated contingent consideration, were allocated as follows (dollars in millions): Acquisitions - U.S. Acquisitions - U.K. Nine months ended September 30, 2019 (USD) (£ Sterling) Land (1) $ 280.1 £ 171.3 Buildings and improvements 993.0 189.3 Lease intangible assets (2) 124.6 98.9 Other assets (3) 54.7 — Lease intangible liabilities (4) ( 28.6 ) ( 3.4 ) Other liabilities (5) ( 8.4 ) — $ 1,415.4 £ 456.1 (1) U.K. land includes £ 13.6 million of right of use assets under long-term ground leases. (2) The weighted average amortization period for acquired lease intangible assets is 15.1 years. (3) U.S. other assets consists entirely of financing receivables with above-market terms. (4) The weighted average amortization period for acquired lease intangible liabilities is 19.5 years. (5) U.S. other liabilities consists entirely of deferred rent on certain below-market leases. The properties acquired during the first nine months of 2019 generated total revenues of $ 47.1 million and net income of $ 21.9 million during the nine months ended September 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 nine months of 2020, we capitalized costs of $ 5.1 million on existing properties in our portfolio, consisting of $ 1.0 million for re-leasing costs, $ 126,000 for recurring capital expenditures, and $ 4.0 million for non-recurring building improvements. In comparison, during the first nine months of 2019, we capitalized costs of $ 11.0 million on existing properties in our portfolio, consisting of $ 1.9 million for re-leasing costs, $ 577,000 for recurring capital expenditures, and $ 8.5 million for non-recurring building improvements. C. Properties with Existing Leases Of the $ 1.3 billion we invested during the first nine months of 2020, approximately $ 1.0 billion was used to acquire 96 properties with existing leases. In comparison, of the $ 2.0 billion we invested during the first nine months of 2019, approximately $ 1.23 billion was used to acquire 100 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 nine months of 2020 and 2019 were $ 99.7 million and $ 84.5 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 nine months of 2020 and 2019 were $ 20.4 million and $ 14.3 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 September 30, 2020 (dollars in thousands): Net decrease to rental revenue Increase to amortization expense 2020 $ ( 7,751 ) $ 33,353 2021 ( 30,260 ) 127,724 2022 ( 28,720 ) 116,109 2023 ( 27,183 ) 103,910 2024 ( 25,600 ) 95,101 Thereafter ( 158,739 ) 537,317 Totals $ ( 278,253 ) $ 1,013,514 -11- Table of Contents 5. Credit Facility and Commercial Paper Program A. 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 September 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 September 30, 2020, credit facility origination costs of $ 8.6 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 September 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 $ 556.1 million, consisting entirely of £ 430.5 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 1.5 % during the first nine months of 2020 and 3.2 % during the first nine months of 2019. At September 30, 2020 and December 31, 2019, the weighted average interest rate on borrowings outstanding under our revolving credit facility was 0.8 % and 2.2 %, respectively. Our revolving credit facility is subject to various leverage and interest coverage ratio limitations, and at September 30, 2020, we were in compliance with the covenants on our revolving credit facility. B. Commercial Paper Program In August 2020, we established a U.S. dollar-denominated unsecured commercial paper program. Under the terms of the program, we may issue from time to time unsecured commercial paper notes up to a maximum aggregate amount outstanding of $ 1.0 billion. The commercial paper will rank on a parity in right of payment with all of our other unsecured senior indebtedness outstanding from time to time, including borrowings under our revolving credit facility and our term loan facility and our outstanding senior unsecured notes. Proceeds from commercial paper borrowings will be used for general corporate purposes. As of September 30, 2020, the balance of borrowings outstanding under our commercial paper program was $ 300.0 million. The weighted average interest rate on outstanding borrowings under our commercial paper program was 0.3 % from inception of the program through September 30, 2020. At September 30, 2020, the weighted average interest rate on borrowings outstanding under our commercial paper program was 0.2 %. We expect to use our $ 3.0 billion revolving credit facility as a liquidity backstop for the repayment of the notes issued under the commercial paper program. 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 September 30, 2020 of $ 692,000 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. -12- Table of Contents 7. Mortgages Payable During the first nine months of 2020, we made $ 73.7 million in principal payments, including the repayment of five mortgages in full for $ 69.2 million. During the first nine months of 2019, we made $ 19.5 million in principal payments, including the repayment of one mortgage in full for $ 15.8 million. No mortgages were assumed during the first nine 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 September 30, 2020, we were in compliance with these covenants. The balance of our deferred financing costs, which are classified as part of mortgages payable, net, on our consolidated balance sheets, was $ 1.1 million at September 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 September 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 9/30/2020 72 4.9 % 4.6 % 2.9 $ 334,709 $ 885 $ 335,594 12/31/2019 92 4.9 % 4.6 % 3.1 $ 408,419 $ 1,700 $ 410,119 (1) At September 30, 2020, there were 22 mortgages on 72 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 September 30, 2020 and December 31, 2019 of $ 6.9 million and $ 7.1 million, respectively. (2) Stated interest rates ranged from 3.8 % to 6.9 % at each of September 30, 2020 and December 31, 2019. (3) Effective interest rates ranged from 3.8 % to 7.6 % at each of September 30, 2020 and December 31, 2019. The following table summarizes the maturity of mortgages payable, excluding net premiums of $ 1.9 million and deferred financing costs of $ 1.1 million, as of September 30, 2020 (dollars in millions): Year of Maturity Principal 2020 $ 10.5 2021 68.8 2022 111.8 2023 20.6 2024 112.2 Thereafter 10.8 Totals $ 334.7 -13- Table of Contents 8. Notes Payable A. General Our senior unsecured notes and bonds consist of the following, sorted by maturity date (dollars in millions): September 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, $ 600 issued in May 2020 and $ 350 issued in July 2020, both due in January 2031 950 — 2.730 % notes, issued in May 2019 and due in May 2034 (1) 407 418 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 7,007 6,318 Unamortized net original issuance premiums and deferred financing costs ( 12 ) ( 30 ) $ 6,995 $ 6,288 (1) 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 September 30, 2020, and December 31, 2019, respectively. In October 2020, we issued £ 400 million of 1.625 % senior unsecured notes. See note 21, Subsequent Events. The following table summarizes the maturity of our notes and bonds payable as of September 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 4,957 Totals $ 7,007 As of September 30, 2020, the weighted average interest rate on our notes and bonds payable was 3.7 % and the weighted average remaining years until maturity was 8.2 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 September 30, 2020. Additionally, with the exception of our £ 400 million of 1.625 % senior unsecured notes issued in October 2020 where interest is paid annually, interest on our remaining 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 nine months ended September 30, 2020. -14- Table of Contents C. Note Issuances In July 2020, we issued $ 350.0 million of 3.250 % senior unsecured notes due January 2031 (the "2031 Notes"), which constituted a further issuance of, and formed a single series with, the $ 600.0 million of 2031 Notes issued in May 2020. The public offering price was 108.241 % of the principal amount, for an effective yield to maturity of 2.341 % and gross proceeds of $ 378.8 million. In May 2020, we issued $ 600.0 million of 2031 Notes. The public offering price for the notes was 98.987 % of the principal amount, for an effective yield to maturity of 3.364 % and gross proceeds of $ 593.9 million. In June 2019, we issued $ 500.0 million of 3.250 % senior unsecured notes due June 2029. The public offering price for the 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. In May 2019, we issued 12,650,000 shares of common stock in an overnight underwritten public offering. After deducting underwriting discounts and other offering costs of $ 31.0 million, the net proceeds of $ 845.1 million were used to repay borrowings under our credit facility, to fund investment opportunities, and for other general corporate purposes. 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 September 30, 2020, we had 26,354,637 shares remaining for future issuance under our ATM program. We anticipate maintaining the availability of our ATM program in the future, including the replenishment of authorized shares issuable thereunder. The following table outlines common stock issuances pursuant to our ATM program (dollars in millions): Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Shares of common stock issued under the ATM program 5,536,619 7,663,383 7,047,768 9,370,078 Gross proceeds $ 346.5 $ 570.3 $ 442.2 $ 694.4 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 September 30, 2020, we had 11,539,247 shares remaining for future issuance under our DRSPP program. -15- Table of Contents The following table outlines common stock issuances pursuant to our DRSPP program (dollars in millions): Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Shares of common stock issued under the DRSPP program 34,604 29,801 113,421 89,219 Gross proceeds $ 2.1 $ 2.1 $ 6.9 $ 6.3 Our DRSPP includes a waiver approval process, allowing larger investors or institutions, per a formal approval process, to purchase shares at a small discount, if approved by us. We did not issue shares under the waiver approval process during the first nine months of 2020 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 September 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 Reallocation of equity ( 47 ) — ( 47 ) Distributions ( 972 ) ( 223 ) ( 1,195 ) Allocation of net income 672 129 801 Carrying value at September 30, 2020 $ 24,249 $ 5,012 $ 29,261 (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 September 30, 2020 and December 31, 2019 . At September 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 September 30, 2020 and December 31, 2019 (in thousands): September 30, 2020 December 31, 2019 Net real estate $ 635,619 $ 654,305 Total assets 721,859 744,394 Total liabilities 52,909 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. 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): -16- Table of Contents September 30, 2020 Carrying value Estimated fair value Mortgages payable assumed in connection with acquisitions (1) $ 334.7 $ 343.5 Notes and bonds payable (2) 7,007.0 7,901.3 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 $ 1.9 million at September 30, 2020, and $ 3.0 million at December 31, 2019. Also excludes deferred financing costs of $ 1.1 million at September 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 $ 28.2 million at September 30, 2020, and $ 6.3 million at December 31, 2019. Also excludes deferred financing costs of $ 40.3 million at September 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. During September 2020, we entered into a currency exchange swap to exchange £ 224.9 million for $ 300.1 million, which matured in October 2020. The currency exchange swap was entered into to hedge our exposure to foreign currency risk associated with Sterling-denominated liabilities, with the proceeds used to pay a portion of the credit facility. As the currency exchange swap is not accounted for as a hedging instrument, the change in fair value is recorded in earnings through the caption entitled 'Foreign currency and derivative gains, net' in the consolidated statements of income and comprehensive income. 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 upon the 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 3-month USD-LIBOR swap rate 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. Upon issuance of the 2031 Notes during July 2020, the AOCI balance associated with four of the forward starting swaps with a notional amount of $ 350.0 million is being amortized over the term of the notes. However, we elected not to terminate the four forward starting interest rate swaps, and redesignated the swaps in a new hedging relationship for a future debt issuance to hedge our exposure to the changes in the 10-year US treasury rates in anticipation of potential future debt offerings between May 2020 and December 2023 . 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 -17- Table of Contents 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. 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 September 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) September 30, December 31, September 30, December 31, 2020 2019 2020 2019 Interest rate swap Derivative Cash flow $ 6.8 $ 7.0 6.03 % 09/25/2012 09/03/2021 $ ( 0.2 ) $ ( 0.2 ) Interest rate swap Derivative Cash flow — 250.0 1.72 % 06/20/2015 06/30/2020 — ( 0.1 ) Interest rate swap Derivative Cash flow 250.0 250.0 3.04 % 10/24/2018 03/24/2024 ( 24.4 ) ( 14.7 ) Cross-currency swap (1) Derivative Cash flow 41.6 41.6 (2) 05/20/2019 05/22/2034 1.5 ( 2.6 ) Cross-currency swap (1) Derivative Cash flow 41.6 41.6 (3) 05/20/2019 05/22/2034 1.5 ( 2.6 ) Cross-currency swap (1) Derivative Cash flow 41.6 41.6 (4) 05/20/2019 05/22/2034 1.2 ( 2.9 ) Cross-currency swap (1) Derivative Cash flow 41.6 41.6 (5) 05/20/2019 05/22/2034 0.9 ( 3.2 ) Currency exchange swap (1) Derivative N/A 300.1 — (6) 09/01/2020 10/01/2020 9.5 — Forward-starting swap Derivative Cash flow 75.0 — 2.02 % (7) 06/30/2033 ( 7.1 ) — Forward-starting swap Derivative Cash flow 75.0 — 1.94 % (7) 11/30/2032 ( 7.1 ) — Forward-starting swap Derivative Cash flow 25.0 — 1.67 % (7) 11/30/2032 ( 1.7 ) — Forward-starting swap Derivative Cash flow 125.0 — 1.75 % (7) 06/30/2033 ( 8.5 ) — Forward-starting swap Hybrid debt Cash flow 125.0 — 1.88 % (7) 11/30/2032 ( 11.0 ) — Forward-starting swap Hybrid debt Cash flow 75.0 — 2.00 % (7) 06/30/2033 ( 6.9 ) — $ 1,223.3 $ 673.4 $ ( 52.3 ) $ ( 26.3 ) (1) Represents British Pound Sterling, or GBP, United States Dollar, or USD, currency instrument. (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 forward GBP-USD exchange rate is 1.33 . Upon maturity on October 1, 2020, we paid £ 224.9 million and received $ 300.1 million. (7) 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 -18- Table of Contents 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 September 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 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 nine months ended September 30, 2020, we reclassified $ 3.0 million and $ 8.3 million , respectively, from AOCI as an increase to interest expense and a $ 6.3 million loss and a $ 5.9 million gain, respectively, for cross-currency swaps into foreign exchange gains. During the three and nine months ended September 30, 2019, we reclassified $ 890,000 and $ 2.0 million, respectively, from AOCI as an increase to interest expense for our interest rate swaps and $ 5.7 million and $ 7.1 million, respectively, for the three and nine months ended September 30, 2019 for cross-currency swaps into foreign exchange gains. We expect to reclassify $ 12.1 million from AOCI as an increase to interest expense relating to interest rate swaps and treasury rate locks and $ 1.7 million from AOCI to foreign currency gain relating to cross-currency swaps within the next twelve months. 12. Operating Leases A. At September 30, 2020, we owned 6,588 properties in 49 U.S. states, Puerto Rico, and the U.K. Of the 6,588 properties, 6,554 , or 99.5 %, are single-tenant properties, and the remaining are multi-tenant properties. At September 30, 2020, 92 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 third quarter of 2020 and 2019 was $ 532,000 and $ 407,000 , respectively. Percentage rents for the first nine months of 2020 and 2019 were $ 2.3 million and $ 4.5 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 three and nine months ended September 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 September 30, Nine months ended September 30, 2020 2019 2020 2019 Number of properties 37 27 66 64 Net sales proceeds $ 51.3 $ 21.5 $ 184.9 $ 72.6 Gain on sales of real estate $ 13.7 $ 1.7 $ 53.6 $ 15.8 -19- 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. If estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property, a fair value analysis is performed and, to the extent the estimated fair value is less than the current book value, a provision for impairment is recorded to reduce the book value to estimated fair value. Key assumptions 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 2020, we identified the impact of the COVID-19 pandemic as an impairment triggering event for properties occupied by certain tenants experiencing difficulties meeting their lease obligations to us. After considering the impacts of the COVID-19 pandemic on the key assumptions noted above, we determined that the carrying values of 17 properties classified as held for investment for the three months ended September 30, 2020, and 25 properties classified as held for investment for the nine months ended September 30, 2020 were not recoverable. As a result, we recorded provisions for impairment of $ 81.6 million for the three months ended September 30, 2020, and $ 89.8 million for the nine months ended September 30, 2020, on the applicable properties impacted by the COVID-19 pandemic. Of the provisions for impairment recorded during the third quarter of 2020 for properties impacted by the COVID-19 pandemic, a total of 12 assets occupied by certain of our tenants in the theater industry were impaired for $ 79.0 million. Impairments recorded on other properties during the three and nine months ended September 30, 2020 totaled $ 23.5 million and $ 33.6 million respectively. The following table summarizes our provisions for impairment during the periods indicated below (dollars in millions): Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Total provisions for impairment $ 105.1 $ 13.5 $ 123.4 $ 31.2 Number of properties: Classified as held for sale 8 1 9 1 Classified as held for investment 18 2 28 4 Sold 17 24 31 36 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 nine 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 July 0.2335 0.2265 August 0.2335 0.2265 September 0.2335 0.2265 Total $ 2.0920 $ 2.0295 At September 30, 2020, a distribution of $ 0.2340 per common share was payable and was paid in October 2020. -20- 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 September 30, Nine months ended September 30, 2020 2019 2020 2019 Weighted average shares used for the basic net income per share computation 346,476,217 319,945,932 342,214,164 311,556,279 Incremental shares from share-based compensation 273,257 317,085 269,054 309,131 Weighted average shares used for diluted net income per share computation 346,749,474 320,263,017 342,483,218 311,865,410 Unvested shares from share based compensation that were anti-dilutive 59,042 7,892 57,192 6,529 Weighted average partnership common units convertible to common shares that were anti-dilutive 463,119 463,119 463,119 434,981 17. Supplemental Disclosures of Cash Flow Information Cash paid for interest was $ 224.7 million in the first nine months of 2020 and $ 214.2 million in the first nine months of 2019. Cash paid for income taxes was $ 8.1 million in the first nine months of 2020 and $ 3.6 million in the first nine months of 2019. The following non-cash activities are included in the accompanying consolidated financial statements: A. During the first nine months of 2020, the fair value of net derivative liabilities increased by $ 26.0 million. B. Non-refundable deposits from 2019 of $ 13.8 million were applied to acquisitions during the first nine 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 nine 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): September 30, 2020 September 30, 2019 Cash and cash equivalents shown in the consolidated balance sheets $ 724,750 $ 236,064 Restricted escrow deposits (1) 8,832 11,474 Impounds related to mortgages payable (1) 5,429 11,751 Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows $ 739,011 $ 259,289 (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. -21- 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 51 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. Our investments in industries outside of the U.S. are managed as separate operating segments. 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: September 30, 2020 December 31, 2019 Segment net real estate: Automotive service $ 289,640 $ 288,453 Automotive tire services 226,717 232,709 Beverages 281,881 279,373 Child care 214,718 208,326 Convenience stores 2,088,385 2,057,157 Dollar stores 1,429,292 1,427,950 Drug stores 1,573,196 1,618,854 Financial services 377,968 389,634 General merchandise 570,622 475,418 Grocery stores - U.S. 900,996 922,349 Grocery stores - U.K. 725,243 663,210 Health and fitness 1,067,643 1,019,796 Home improvement - U.S. 547,396 495,305 Restaurants-casual dining 541,710 576,526 Restaurants-quick service 1,067,096 1,059,155 Theaters - U.S. 777,532 878,103 Transportation services 706,159 769,614 Wholesale club 410,791 396,690 Other non-reportable segments 2,985,389 2,738,150 Total net real estate 16,782,374 16,496,772 Intangible assets: Automotive service 55,792 58,854 Automotive tire services 6,154 7,322 Beverages 2,641 1,509 Child care 20,346 21,997 Convenience stores 123,841 131,808 Dollar stores 79,338 82,701 Drug stores 171,674 183,319 Financial services 15,311 17,130 General merchandise 80,153 66,135 Grocery stores - U.S. 184,017 180,197 Grocery stores - U.K. 205,800 153,407 Health and fitness 69,704 74,428 Home improvement - U.S. 97,207 72,979 Restaurants-casual dining 21,241 23,289 Restaurants-quick service 48,759 52,353 Theaters - U.S. 29,142 36,089 Transportation services 53,288 66,055 Wholesale club 37,331 23,372 Other non-reportable segments 308,947 240,439 Other corporate assets 1,392,310 564,641 Total assets $ 19,785,370 $ 18,554,796 -22- Table of Contents Three months ended September 30, Nine months ended September 30, Revenue 2020 2019 2020 2019 Segment rental revenue: Automotive service $ 8,763 $ 8,505 $ 26,094 $ 23,735 Automotive tire services 7,847 7,766 23,795 23,517 Beverages 8,071 7,988 24,062 23,819 Child care 8,710 7,837 26,959 23,425 Convenience stores 47,807 41,286 141,310 123,932 Dollar stores 31,710 25,213 94,696 75,311 Drug stores 35,043 31,902 105,959 97,414 Financial services 7,583 7,585 22,700 22,997 General merchandise 12,937 9,594 36,341 25,115 Grocery stores - U.S. 19,451 17,673 58,444 51,009 Grocery stores - U.K. 12,858 6,618 35,001 9,533 Health and fitness 25,905 26,437 82,145 78,915 Home improvement - U.S. 11,373 10,950 34,065 31,430 Restaurants-casual dining 11,731 10,939 35,699 33,614 Restaurants-quick service 23,047 21,880 65,224 65,124 Theaters - U.S. 12,781 24,002 61,795 62,567 Transportation services 15,981 16,109 47,941 48,327 Wholesale club 9,611 9,468 28,788 28,525 Other non-reportable segments and tenant reimbursements 90,660 80,560 273,209 242,292 Rental (including reimbursable) 401,869 372,312 1,224,227 1,090,601 Other 2,703 1,935 9,322 3,461 Total revenue $ 404,572 $ 374,247 $ 1,233,549 $ 1,094,062 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 $ 3.0 million during the third quarter of 2020, $ 3.2 million during the third quarter of 2019, $ 13.4 million during the first nine 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 $ 10.5 million during the first nine 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 nine months of 2020, we granted 102,473 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. As of September 30, 2020, the remaining unamortized share-based compensation expense related to restricted stock totaled $ 10.0 million, which is being amortized on a straight-line basis over the service period of each -23- Table of Contents 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 nine months of 2020, we granted 83,379 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 nine 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 September 30, 2020, the remaining share-based compensation expense related to the performance shares and restricted stock units totaled $ 10.9 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 September 30, 2020, we had commitments of $ 10.3 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements. In addition, as of September 30, 2020, we had committed $ 96.1 million under construction contracts related to development projects, which is expected to be paid in the next twelve months. 21. Subsequent Events • In October 2020, our Board of Directors appointed Christie Kelly as Executive Vice President, Chief Financial Officer and Treasurer, effective January 19, 2021. Ms. Kelly joined our Board of Directors in November 2019 and currently serves as a member of the Audit Committee. Effective upon the appointment of Ms. Kelly to Chief Financial Officer on January 19, 2021, she will resign from our Board of Directors. • In October 2020, we declared a dividend of $ 0.234 per share to our common stockholders, which will be paid in November 2020. • In October 2020, we issued £ 400 million of 1.625 % senior unsecured notes due December 2030. The public offering price for these notes was 99.191 % of the principal amount, for an effective annual yield to maturity of 1.712 %. The proceeds of approximately £ 396.8 million from this offering were used to repay GBP-denominated borrowings outstanding under our $ 3.0 billion revolving credit facility, to settle an outstanding GBP/USD currency exchange swap arrangement and, to the extent not used for those purposes, to fund potential investment opportunities and for other general corporate purposes. -24- Table of Contents