REALTY INCOME CORP 10-K

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations GENERAL Realty Income, The Monthly Dividend Company ® , is an S&P 500 company dedicated to providing stockholders with dependable monthly dividends that increase over time. The company is structured as a real estate investment trust, or REIT, requiring it annually to distribute at least 90% of its taxable income (excluding net capital gains) in the form of dividends to its stockholders. The monthly dividends are supported by the cash flow generated from real estate owned under long-term net lease agreements with our commercial clients. Realty Income was founded in 1969, and listed on the New York Stock Exchange (NYSE: O) in 1994. Over the past 52 years, Realty Income has been acquiring and managing freestanding commercial properties that generate rental revenue under long-term net lease agreements with our commercial clients. We refer to our tenants as clients because we strive to build mutually beneficial relationships and we believe their success is our success. The company is a member of the S&P 500 Dividend Aristocrats ® index for having increased its dividend every year for over 25 consecutive years. At December 31, 2020, we owned a diversified portfolio: • Of 6,592 properties; • With an occupancy rate of 97.9%, or 6,452 properties leased and 140 properties available for lease or sale; • Doing business in 51 separate industries; • Located in 49 U.S. states, Puerto Rico and the United Kingdom (U.K.); • With approximately 110.8 million square feet of leasable space; • With a weighted average remaining lease term (excluding rights to extend a lease at the option of our client) of approximately 9.0 years; and • With an average leasable space per property of approximately 16,810 square feet; approximately 12,340 square feet per retail property and 245,270 square feet per industrial property. Of the 6,592 properties in the portfolio at December 31, 2020, 6,555, or 99.4%, are single-client properties, of which 6,419 were leased, and the remaining are multi-client properties. Unless otherwise specified, references to rental revenue in the Management's Discuss and Analysis of Financial Condition and Results of Operations are exclusive of reimbursements from clients for recoverable real estate taxes and operating expenses totaling $79.4 million, $69.1 million and $47.0 million for 2020, 2019 and 2018, respectively. In addition, references to reserves recorded as a reduction of rental revenue include amounts reserved for in the current period, as well as unrecognized contractual rental revenue and unrecognized straight-line rental revenue for leases accounted for on a cash basis. LIQUIDITY AND CAPITAL RESOURCES Capital Philosophy Historically, we have met our long-term capital needs by issuing common stock, preferred stock and long-term unsecured notes and bonds. Over the long term, we believe that common stock should be the majority of our capital structure; however, we may issue preferred stock or debt securities. We may issue common stock when we believe that our share price is at a level that allows for the proceeds of any offering to be accretively invested into additional properties. In addition, we may issue common stock to permanently finance properties that were initially financed by our credit facility, commercial paper program, or debt securities. However, we cannot assure you that we will have access to the capital markets at all times and at terms that are acceptable to us. Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,” which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common stockholders, primarily through cash provided by operating activities, borrowings on our credit facility and under our commercial paper program and through public securities offerings. -42- Table of Contents Conservative Capital Structure We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At December 31, 2020, our total outstanding borrowings of senior unsecured notes and bonds, term loan and mortgages payable were $8.85 billion, or approximately 28.2% of our total market capitalization of $31.34 billion. We define our total market capitalization at December 31, 2020 as the sum of: • Shares of our common stock outstanding of 361,303,445, plus total common units outstanding of 463,119, multiplied by the last reported sales price of our common stock on the NYSE of $62.17 per share on December 31, 2020, or $22.49 billion; • Outstanding mortgages payable of $299.6 million, excluding net mortgage premiums of $1.7 million and deferred financing costs of $973,000; • Outstanding borrowings of $250.0 million on our term loan, excluding deferred financing costs of $642,000; • Outstanding senior unsecured notes and bonds of $8.30 billion, including Sterling-denominated notes of £715.0 million, and excluding unamortized net original issuance premiums of $14.6 million and deferred financing costs of $49.2 million; and • No borrowings outstanding on our revolving credit facility. Universal Shelf Registration In November 2018, we filed a shelf registration statement with the SEC, which is effective for a term of three years and will expire in November 2021. In accordance with SEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock, or depositary shares, and (6) any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. 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 NYSE at prevailing market prices or at negotiated prices. During 2020, we issued 17,724,374 shares and raised approximately $1.09 billion of gross proceeds under the ATM program. At December 31, 2020, we had 15,678,031 shares remaining for future issuance under our current ATM program. We anticipate maintaining the availability of our ATM program in the future, including the replenishment of authorized shares issuable thereunder. Issuances of Common Stock In March 2020, we issued 9,690,500 shares of common stock in an overnight underwritten public offering, including 690,500 shares purchased by the underwriters upon 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 primarily used to repay borrowings under our revolving credit facility. In January 2021, we issued 12,075,000 shares of common stock in an overnight underwritten public offering, including 1,575,000 shares purchased by the underwriters upon exercise of their option to purchase additional shares . The company used the net proceeds from the offering, along with available cash and additional borrowings, to fund property acquisitions and for general corporate purposes and working capital. 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. 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 2020. During 2020, we issued 149,289 shares and raised approximately $9.1 -43- Table of Contents million under our DRSPP. At December 31, 2020, we had 11,503,379 shares remaining for future issuance under our DRSPP program. Revolving Credit Facility and Commercial Paper Program 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 multicurrency revolving facility allows us to borrow in up to 14 currencies, including U.S. dollars. Our revolving credit facility has a $1.0 billion expansion option, which is subject to obtaining lender commitments. Under our revolving credit facility, our investment grade credit ratings as of December 31, 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 pricing of 0.90% over LIBOR. The borrowing rate is subject to an interest rate floor and may change if our investment grade credit ratings change. We also have other interest rate options available to us under our credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation. At December 31, 2020, we had no outstanding borrowings on our revolving credit facility and available borrowing capacity of $3.0 billion. The weighted average interest rate on borrowings under our revolving credit facility during 2020 was 1.5% per annum. We must comply with various financial and other covenants in our credit facility. At December 31, 2020, we were in compliance with these covenants. We expect to use our credit facility to acquire additional properties and for other general corporate purposes. Any additional borrowings will increase our exposure to interest rate risk. In August 2020, we established a U.S. dollar-denominated unsecured commercial paper program. Under the terms of the program we may, from time to time, issue unsecured commercial paper notes up to a maximum aggregate amount outstanding of $1.0 billion. Borrowings under this program generally mature in one year or less. At December 31, 2020, we had no outstanding commercial paper borrowings. The weighted average interest rate on borrowings under our commercial paper program was 0.3% from inception of the plan through December 31, 2020. We use our $3.0 billion revolving credit facility as a liquidity backstop for the repayment of the notes issued under the commercial paper program. We generally use our credit facility and commercial paper borrowings for the short-term financing of new property acquisitions. Thereafter, we generally seek to refinance those borrowings with the net proceeds of long-term or permanent financing, which may include the issuance of common stock, preferred stock or debt securities. We cannot assure you, however, that we will be able to obtain any such refinancing, or that market conditions prevailing at the time of the refinancing will enable us to issue equity or debt securities at acceptable terms. We regularly review our credit facility and commercial paper program and may seek to extend, renew or replace our credit facility, to the extent we deem appropriate. Term Loans In October 2018, in conjunction with entering into our revolving credit facility, we entered into a $250.0 million senior unsecured term loan, which matures in March 2024, and is governed by the credit agreement that governs our revolving credit facility. 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. Mortgage Debt As of December 31, 2020, we had $299.6 million of mortgages payable, all of which were assumed in connection with our property acquisitions. Additionally, at December 31, 2020, we had net premiums totaling $1.7 million on these mortgages and deferred financing costs of $973,000. We expect to pay off the mortgages payable as soon as prepayment penalties have declined to a level that would make it economically feasible to do so. During 2020, we made $108.8 million of principal payments, including the repayment of nine mortgages in full for $103.4 million. -44- Table of Contents Notes Outstanding Our senior unsecured note and bond obligations consist of the following as of December 31, 2020, sorted by maturity date (dollars in millions): 3.250% notes, $450 issued in October 2012 and $500 issued in December 2017, both due in October 2022 (1) $ 950 4.650% notes, issued in July 2013 and due in August 2023 750 3.875% notes, issued in June 2014 and due in July 2024 350 3.875% notes, issued in April 2018 and due in April 2025 500 0.750% notes, issues December 2020 and due in March 2026 325 4.125% notes, $250 issued in September 2014 and $400 issued in March 2017, both due in October 2026 650 3.000% notes, issued in October 2016 and due in January 2027 600 3.650% notes, issued in December 2017 and due in January 2028 550 3.250% notes, issued in June 2019 and due in June 2029 500 1.625% notes, issued in October 2020 and due December 2030 (2) 547 3.250% notes, $600 issued in May 2020 and $350 issued in July 2020, both due in January 2031 950 1.800% notes, issued in December 2020 and due in March 2033 400 2.730% notes, issued in May 2019 and due in May 2034 (2) 431 5.875% bonds, $100 issued in March 2005 and $150 issued in June 2011, both due in March 2035 250 4.650% notes, $300 issued in March 2017 and $250 issued in December 2017, both due in March 2047 550 Total principal amount 8,303 Unamortized net original issuance premiums and deferred financing costs (35) $ 8,268 (1) In January 2021, we completed the early redemption on all $950.0 million in principal amount of our outstanding 3.250% notes due October 2022, plus accrued and unpaid interest. (2) Represents the principal balance (in U.S. dollars) of the October 2020 Sterling-denominated note offering and May 2019 Sterling-denominated private placement of £400.0 million and £315.0 million, respectively, converted at the applicable exchange rate on December 31, 2020. During the year ended December 31, 2020 we issued the following notes and bonds (in millions): 2020 Issuances Date of Issuance Maturity date Principal amount issued Price of par value Effective yield to maturity 3.250% notes May 2020 January 2031 $600 98.99 % 3.36% 3.250% notes July 2020 January 2031 $350 108.24 % 2.34% 1.625% notes October 2020 December 2030 £400 99.19 % 1.71% 0.750% notes December 2020 March 2026 $325 99.19 % 0.91% 1.800% notes December 2020 March 2033 $400 98.47 % 1.94% The net proceeds of $391.3 million from the December 2020 offering of 1.800% notes due 2033 and the net proceeds of $320.3 million from the December 2020 offering of 0.750% notes due 2026 were used, along with available cash and additional borrowings, as necessary to redeem in January 2021 all $950 million aggregate principal amount of our outstanding 3.25% notes due 2022 at the applicable redemption price, plus accrued interest and, to the extent not used for those purposes, to fund investment opportunities and for other general corporate purposes. The net proceeds from the October 2020 Sterling-denominated offering of £400.0 million approximated $508.2 million, as converted at the applicable exchange rate on the closing of the offering, and 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 investment opportunities and for other general corporate purposes. The net proceeds of $376.6 million from the July 2020 note offering and the net proceeds of $590.0 million from the May 2020 note offering were used to repay borrowings under our credit facility, to fund potential investment opportunities and for other general corporate purposes. -45- Table of Contents All of our outstanding notes and bonds have fixed interest rates and contain various covenants, with which we remained in compliance as of December 31, 2020. Additionally, with the exception of interest on our 1.625% senior unsecured notes due in December 2030, which is paid annually, interest on all of our other senior note and bond obligations is paid semiannually. The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our senior notes and bonds. These calculations, which are not based on U.S. GAAP measurements, are presented to investors to show our ability to incur additional debt under the terms of our senior notes and bonds as well as to disclose our current compliance with such covenants, and are not measures of our liquidity or performance. The actual amounts as of December 31, 2020 are: Note Covenants Required Actual Limitation on incurrence of total debt < 60% of adjusted assets 39.6 % Limitation on incurrence of secured debt < 40% of adjusted assets 1.4 % Debt service coverage (trailing 12 months) (1) > 1.5 x 5.1 Maintenance of total unencumbered assets > 150% of unsecured debt 256.7 % (1) Our debt service coverage ratio is calculated on a pro forma basis for the preceding four-quarter period on the assumptions that: (i) the incurrence of any debt (as defined in the covenants) incurred by us since the first day of such four-quarter period and the application of the proceeds therefrom (including to refinance other Debt since the first day of such four-quarter period), (ii) the repayment or retirement of any of our debt since the first day of such four-quarter period, and (iii) any acquisition or disposition by us of any asset or group since the first day of such four quarters had in each case occurred on January 1, 2020, and subject to certain additional adjustments. Such pro forma ratio has been prepared on the basis required by that debt service covenant, reflects various estimates and assumptions and is subject to other uncertainties, and therefore does not purport to reflect what our actual debt service coverage ratio would have been had transactions referred to in clauses (i), (ii) and (iii) of the preceding sentence occurred as of January 1, 2020, nor does it purport to reflect our debt service coverage ratio for any future period. The following is our calculation of debt service and fixed charge coverage at December 31, 2020 (in thousands, for trailing twelve months): Net income available to common stockholders $ 395,486 Plus: interest expense, excluding the amortization of deferred financing costs 299,015 Plus: loss on extinguishment of debt 9,819 Plus: provision for taxes 14,693 Plus: depreciation and amortization 677,038 Plus: provisions for impairment 147,232 Plus: pro forma adjustments 71,574 Less: gain on sales of real estate (76,232) Income available for debt service, as defined $ 1,538,625 Total pro forma debt service charge $ 304,552 Debt service and fixed charge coverage ratio 5.1 Cash Reserves We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our properties. We intend to retain an appropriate amount of cash as working capital. At December 31, 2020, we had cash and cash equivalents totaling $824.5 million, inclusive of £32.3 million Sterling. We believe that our cash and cash equivalents on hand, cash provided from operating activities, and borrowing capacity is sufficient to meet our liquidity needs for the next twelve months. We intend, however, to use permanent or long-term capital to fund property acquisitions and to repay future borrowings under our credit facility and commercial paper program. Credit Agency Ratings The borrowing interest rates under our revolving credit facility are based upon our ratings assigned by credit rating agencies. As of December 31, 2020, we were assigned the following investment grade corporate credit ratings on our senior unsecured notes and bonds: Moody’s Investors Service has assigned a rating of A3 with a “stable” outlook and Standard & Poor’s Ratings Group has assigned a rating of A- with a “stable” outlook. In addition, we were assigned the following ratings on our commercial paper at December 31, 2020: Moody's Investors Service has assigned a rating of P-2 and Standard & Poor's Ratings Group has assigned a rating of A-2. Based on our ratings as of December 31, 2020, the facility interest rate was LIBOR, plus 0.775% with a facility commitment fee of 0.125%, for all-in pricing of 0.90% over LIBOR. Our credit facility provides that the interest rate can range between: (i) LIBOR, plus 1.45% if our credit rating is lower than BBB-/Baa3 or unrated and (ii) LIBOR, -46- Table of Contents plus 0.75% if our credit rating is A/A2 or higher. In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which range from: (i) 0.30% for a rating lower than BBB-/Baa3 or unrated, and (ii) 0.10% for a credit rating of A/A2 or higher. We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease. The credit ratings assigned to us could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies and we cannot assure you that our ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, a rating is not a recommendation to buy, sell or hold our debt securities, preferred stock or common stock. Table of Obligations The following table summarizes the maturity of each of our obligations as of December 31, 2020 (dollars in millions): Year of Maturity Credit Facility and Commercial Paper Program (1) Notes and Bonds (2) Term Loan (3) Mortgages Payable (4) Interest (5) Ground Leases Paid by Realty Income (6) Ground Leases Paid by Our Clients (7) Other (8) Totals 2021 $ — $ — $ — $ 44.2 $ 302.3 $ 1.6 $ 13.7 $ 106.8 $ 468.6 2022 — 950.0 — 111.8 301.6 1.6 13.6 — 1,378.6 2023 — 750.0 — 20.6 266.6 1.6 13.7 — 1,052.5 2024 — 350.0 250.0 112.2 223.2 1.6 13.8 — 950.8 2025 — 500.0 — 0.7 192.9 1.4 13.5 — 708.5 Thereafter — 5,752.4 — 10.1 1,222.4 18.8 55.9 — 7,059.6 Totals $ — $ 8,302.4 $ 250.0 $ 299.6 $ 2,509.0 $ 26.6 $ 124.2 $ 106.8 $ 11,618.6 (1) The initial term of the credit facility expires in March 2023 and includes, at our option, two six-month extensions. At December 31, 2020, there were no outstanding borrowings under our revolving credit facility or commercial paper program. (2) Excludes both non–cash original issuance discounts and premiums recorded on notes payable of $14.6 million and deferred financing costs of $49.2 million. Excludes the impact of the January 2021 early redemption of all $950.0 million in principal of the 3.250% notes due October 2022. (3) Excludes deferred financing costs of $642,000. (4) Excludes both non–cash net premiums recorded on the mortgages payable of $1.7 million and deferred financing costs of $973,000. (5) Interest on the term loans, notes, bonds, mortgages payable, credit facility and commercial paper program has been calculated based on outstanding balances through their respective maturity dates. Excludes the impact of the January 2021 early redemption of all $950.0 million in principal of the 3.250% notes due October 2022. (6) Realty Income currently pays the ground lessors directly for the rent under the ground leases. (7) Our clients, who are generally sub-tenants under ground leases, are responsible for paying the rent under these ground leases. In the event our client fails to pay the ground lease rent, we are primarily responsible. (8) “Other” consists of $100.0 million of commitments under construction contracts and $6.8 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements. Our credit facility, commercial paper program, term loan, and notes payable obligations are unsecured. Accordingly, we have not pledged any assets as collateral for these obligations. No Unconsolidated Investments We have no unconsolidated investments, nor do we engage in trading activities involving energy or commodity contracts. Impact of Real Estate and Credit Markets In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, including the current market, the global credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and global credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly. -47- Table of Contents Acquisitions During 2020 Below is a listing of our acquisitions in the U.S. and U.K. for the year ended December 31, 2020: Number of Properties Leasable Square Feet Investment ($ in thousands) Weighted Average Lease Term (Years) Initial Average Cash Lease Yield (1) Year ended December 31, 2020 (2) Acquisitions - U.S. (in 30 states) 202 5,476,009 $ 1,302,220 14.9 5.8 % Acquisitions - U.K. (3) 24 2,120,256 920,934 10.8 6.1 % Total Acquisitions 226 7,596,265 $ 2,223,154 13.2 5.9 % Properties under Development - U.S. 18 1,601,095 84,127 15.3 5.6 % Total (4) 244 9,197,360 $ 2,307,281 13.2 5.9 % (1) The initial average cash lease yield for a property is generally computed as estimated contractual first year cash net operating income, which, in the case of a net leased property, is equal to the aggregate cash base rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that our client could default on the payment of contractual rent, we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above. Contractual net operating income for the fourth quarter of 2020 includes approximately $700,000 received as a settlement credit for a property acquired in the U.S. as reimbursement of a free rent period. 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. (2) None of our investments during 2020 caused any one client to be 10% or more of our total assets at December 31, 2020. All of our investments in acquired properties during 2020 are 100% leased at the acquisition date. (3) Represents investments of £707.8 million Sterling during the year ended December 31, 2020 converted at the applicable exchange rate on the date of acquisition. (4) Our clients occupying the new properties operate in 26 industries, and are 86.6% retail and 13.4% industrial, based on rental revenue. Approximately 61% of the rental revenue generated from acquisitions during 2020 is from our investment grade rated clients, their subsidiaries or affiliated companies. Portfolio Discussion Leasing Results At December 31, 2020, we had 140 properties available for lease out of 6,592 properties in our portfolio, which represents a 97.9% occupancy rate based on the number of properties in our portfolio. The following tables summarize our leasing results for the periods indicated below: Three months ended December 31, 2020 Properties available for lease at September 30, 2020 92 Lease expirations (1) 159 Re-leases to same client (2) (72) Re-leases to new client (2)(3) (5) Vacant dispositions (34) Properties available for lease at December 31, 2020 140 (1) Includes scheduled and unscheduled expirations (including leases rejected in bankruptcy), as well as future expirations resolved in the current quarter. (2) The annual new rent on these re-leases was $21.01 million, as compared to the previous annual rent of $20.95 million on the same properties, representing a rent recapture rate of 100.3% on the properties re-leased during the three months ended December 31, 2020. (3) Re-leased all five properties to new clients after a period of vacancy. -48- Table of Contents Year ended December 31, 2020 Properties available for lease at December 31, 2019 94 Lease expirations (1) 446 Re-leases to same client (2) (296) Re-leases to new client (2)(3) (18) Vacant dispositions (86) Properties available for lease at December 31, 2020 140 (1) Includes scheduled and unscheduled expirations (including leases rejected in bankruptcy), as well as future expirations resolved in the current year. (2) The annual new rent on these re-leases was $66.24 million, as compared to the previous annual rent of $66.26 million on the same properties, representing a rent recapture rate of 100.0% on the properties re-leased during the year ended December 31, 2020. (3) Re-leased five properties to new clients without a period of vacancy, and 13 properties to new clients after a period of vacancy. As part of our re-leasing costs, we pay leasing commissions to unrelated, third party real estate brokers consistent with the commercial real estate industry standard, and sometimes provide rent concessions to our clients. We do not consider the collective impact of the leasing commissions or rent concessions to our clients to be material to our financial position or results of operations. At December 31, 2020, our average annualized contractual rent was approximately $15.38 per square foot on the 6,452 leased properties in our portfolio. At December 31, 2020, we classified 21 properties with a carrying amount of $19.0 million, as real estate and lease intangibles held for sale, net on our balance sheet. The expected sale of these properties does not represent a strategic shift that will have a major effect on our operations and financial results and is consistent with our existing disposition strategy to further enhance our real estate portfolio and maximize portfolio returns. Investments in Existing Properties During 2020, we capitalized costs of $7.0 million on existing properties in our portfolio, consisting of $1.8 million for re-leasing costs, $198,000 for recurring capital expenditures, and $5.0 million for non-recurring building improvements. In comparison, during 2019, we capitalized costs of $17.9 million on existing properties in our portfolio, consisting of $2.1 million for re-leasing costs, $801,000 for recurring capital expenditures, and $15.0 million for non-recurring building improvements. The majority of our building improvements relate to roof repairs, HVAC improvements, and parking lot resurfacing and replacements. The amounts of our capital expenditures can vary significantly, depending on the rental market, credit worthiness of our clients, the lease term and the willingness of our clients to pay higher rents over the terms of the leases. We define recurring capital expenditures as mandatory and recurring landlord capital expenditure obligations that have a limited useful life. We define non-recurring capital expenditures as property improvements in which we invest additional capital that extend the useful life of the properties. Increases in Monthly Dividends to Common Stockholders We have continued our 52-year policy of paying monthly dividends. In addition, we increased the dividend five times during 2020 and once in 2021. As of February 2021, we have paid 93 consecutive quarterly dividend increases and increased the dividend 109 times since our listing on the NYSE in 1994. Month Month Dividend Increase 2020 Dividend increases Declared Paid per share per share 1st increase Dec 2019 Jan 2020 $ 0.2275 $ 0.0005 2nd increase Jan 2020 Feb 2020 $ 0.2325 $ 0.0050 3rd increase Mar 2020 Apr 2020 $ 0.2330 $ 0.0005 4th increase Jun 2020 Jul 2020 $ 0.2335 $ 0.0005 5th increase Sep 2020 Oct 2020 $ 0.2340 $ 0.0005 2021 Dividend increases 1st increase Dec 2020 Jan 2021 $ 0.2345 $ 0.0005 -49- Table of Contents The dividends paid per share during 2020 totaled $2.7940, as compared to $2.7105 during 2019, an increase of $0.0835, or 3.1%. The monthly dividend of $0.2345 per share represents a current annualized dividend of $2.81 per share, and an annualized dividend yield of approximately 4.5% based on the last reported sale price of our common stock on the NYSE of $62.17 on December 31, 2020. Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will be in any future period. RESULTS OF OPERATIONS Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with GAAP, and are the basis for our discussion and analysis of financial condition and results of operations. Preparing our consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We believe that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in note 2 to our consolidated financial statements. In order to prepare our consolidated financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments must be made with regard to critical accounting policies. Management must make significant assumptions in determining the fair value of assets acquired and liabilities assumed. When acquiring a property for investment purposes, we typically allocate the cost of real estate acquired, inclusive of transaction costs, to: (1) land, (2) building and improvements, and (3) identified intangible assets and liabilities, based in each case on their relative estimated fair values. Intangible assets and liabilities consist of above-market or below-market lease value and the value of in-place leases, as applicable. Additionally, above–market rents on certain leases under which we are a lessor are accounted for as financing receivables amortizing over the lease term, while below–market rents on certain leases under which we are a lessor are accounted for as prepaid rent. In an acquisition of multiple properties, we must also allocate the purchase price among the properties. The allocation of the purchase price is based on our assessment of estimated fair value of the land, building and improvements, and identified intangible assets and liabilities and is often based upon the various characteristics of the market where the property is located. In addition, any assumed mortgages are recorded at their estimated fair values. The estimated fair values of our mortgages payable have been calculated by discounting the future cash flows using applicable interest rates that have been adjusted for factors, such as industry type, client investment grade, maturity date, and comparable borrowings for similar assets. The use of different assumptions in the allocation of the purchase price of the acquired properties and liabilities assumed could affect the timing of recognition of the related revenue and expenses. Another significant judgment must be made as to if, and when, impairment losses should be taken on our properties when events or a change in circumstances indicate that the carrying amount of the 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 inputs that we utilize in this analysis include projected rental rates, estimated holding periods, capital expenditures, and property sales capitalization rates. If a property is held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell. The carrying value of our real estate is the largest component of our consolidated balance sheets. Our strategy of primarily holding properties, long-term, directly decreases the likelihood of their carrying values not being recoverable, thus requiring the recognition of an impairment. However, if our strategy, or one or more of the above assumptions were to change in the future, an impairment may need to be recognized. If events should occur that require us to reduce the carrying value of our real estate by recording provisions for impairment, they could have a material impact on our results of operations. When assessing the collectability of future lease payments, one of the key factors we have considered during 2020 has been the COVID-19 pandemic. We generally assess collectability based on an analysis of creditworthiness, -50- Table of Contents economic trends, and other facts and circumstances related to our applicable clients. If the collection of substantially all of the future lease payments is less than probable, we will 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. Unless otherwise specified, references to reserves recorded as a reduction of rental revenue include amounts reserved for in the current period, as well as unrecognized contractual rental revenue and unrecognized straight-line rental revenue for leases accounted for on a cash basis. As of December 31, 2020, other than the information related to the reserves we have recorded to such date, we do not have any further client specific information that would change our assessment that collection of substantially all of the future lease payments under our existing leases is probable. However, there may be impacts in future periods that could change this assessment as the situation continues to evolve and as more information becomes available. The COVID-19 pandemic and the measures taken to limit its spread are negatively impacting the economy across many industries, including the industries in which some of our clients operate. These impacts may continue and increase in severity as the duration or extent of the pandemic increases, which may, in turn, adversely impact the fair value estimates of our real estate and require the recording of impairments on our properties. As a result, we evaluated certain key assumptions involving fair value estimates of our real estate, recording of impairments on our properties and collectability 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. The following is a comparison of our results of operations for the years ended December 31, 2020, 2019 and 2018. Total Revenue The following summarizes our total revenue (dollars in thousands): Increase 2020 2019 2018 2020 versus 2019 2019 versus 2018 REVENUE Rental (excluding reimbursable) $ 1,560,171 $ 1,415,733 $ 1,274,596 $ 144,438 $ 141,137 Rental (reimbursable) 79,362 69,085 46,950 10,277 22,135 Other 12,092 6,773 6,292 5,319 481 Total revenue $ 1,651,625 $ 1,491,591 $ 1,327,838 $ 160,034 $ 163,753 Rental Revenue (excluding reimbursable) The table below summarizes the increase in rental revenue (excluding reimbursable) in 2020 compared to 2019 (dollars in thousands): Year Ended December 31, Increase/(Decrease) Number of Properties Square Footage 2020 2019 $ Change % Change Properties acquired during 2020 & 2019 1,014 22,388,061 $ 282,038 $ 85,039 $ 196,999 231.7 % Same store rental revenue 5,403 84,641,826 1,237,358 1,259,303 (21,945) (1.7) % Properties sold during 2020 & 2019 221 4,234,228 6,567 22,389 (15,822) (70.7) % Straight-line rent and other non-cash adjustments N/A N/A 7,384 15,177 (7,793) (51.3) % Vacant rents, development and other (1) 180 3,916,555 26,824 33,825 (7,001) (20.7) % Totals $ 1,560,171 $ 1,415,733 $ 144,438 10.2 % (1) Relates to the aggregate of (i) rental revenue from properties (174 properties comprising 2,973,551 square feet) that were available for lease during part of 2020 or 2019, (ii) rental revenue for properties (6 properties comprising 943,004 square feet) under development, and (iii) lease termination settlements. -51- Table of Contents The table below summarizes the increase in rental revenue (excluding reimbursable) in 2019 compared to 2018 (dollars in thousands): Year Ended December 31, Increase/(Decrease) Number of Properties Square Footage 2019 2018 $ Change % Change Properties acquired during 2019 & 2018 1,532 18,219,735 $ 197,784 $ 54,028 $ 143,756 266.1 % Same store rental revenue 4,811 83,399,809 1,175,576 1,157,577 17,999 1.6 % Properties sold during 2019 & 2018 221 1,933,496 3,615 19,306 (15,691) (81.3) % Straight-line rent and other non-cash adjustments N/A N/A 13,821 16,993 (3,172) (18.7) % Vacant rents, development and other (1) 140 4,653,664 24,937 26,692 (1,755) (6.6) % Totals $ 1,415,733 $ 1,274,596 $ 141,137 11.1 % (1) Relates to the aggregate of (i) rental revenue from properties (130 properties comprising 3,249,304 square feet) that were available for lease during part of 2019 or 2018, (ii) rental revenue for properties (10 properties comprising 1,404,360 square feet) under development, and (iii) lease termination settlements. For purposes of determining the same store rent property pool, we include all properties that were owned for the entire year-to-date period, for both the current and prior year, except for properties during the current or prior year that; (i) were vacant at any time, (ii) were under development or redevelopment, or (iii) were involved in eminent domain and rent was reduced. Each of the exclusions from the same store pool are separately addressed within the applicable sentences above, explaining the changes in rental revenue for the period. Our calculation of same store rental revenue includes rent deferred for future payment as a result of lease concessions we granted in response to the COVID-19 pandemic and recognized under the practical expedient provided by the Financial Accounting Standards Board (FASB). Same store rental revenue in 2020 was negatively impacted by reserves recorded as reductions of rental revenue of $39.9 million, compared to $1.4 million in 2019. There was no same store rental income impact by reserves recorded as a reduction of rental revenue in 2018. Our calculation of same store rental revenue also includes uncollected rent for which we have not granted a lease concession. If these applicable amounts of rent deferrals and uncollected rent were excluded from our calculation of same store rental revenue, the decrease for 2020 relative to 2019 would have been (5.1)%. Rental revenue was negatively impacted by rent reserves during 2020, primarily due to the COVID-19 pandemic, particularly with respect to the ongoing disruption to the theater industry. The following table summarizes reserves recorded as a reduction of rental revenue (dollars in millions): Year ended December 31, 2020 2019 2018 Rental revenue reserves $ 44.1 $ 1.4 $ 1.1 Straight-line rent reserves 8.4 1.5 0.2 Total rental revenue reserves $ 52.5 $ 2.9 $ 1.3 Of the 6,592 properties in the portfolio at December 31, 2020, 6,555, or 99.4%, are single-client properties and the remaining are multi-client properties. Of the 6,555 single-client properties, 6,419, or 97.9%, were net leased at December 31, 2020. Of our 6,419 leased single-client properties, 5,486 or 85.5% were under leases that provide for increases in rents through: • Base rent increases tied to a consumer price index (typically subject to ceilings); • Percentage rent based on a percentage of our client's gross sales; • Fixed increases; or • A combination of two or more of the above rent provisions. Percentage rent, which is included in rental revenue, was $5.1 million in 2020, $8.0 million in 2019, and $5.9 million in 2018. Percentage rent in 2020 was less than 1% of rental revenue and we anticipate percentage rent to be less than 1% of rental revenue in 2021. At December 31, 2020, our portfolio of 6,592 properties was 97.9% leased with 140 properties available for lease, as compared to 98.6% leased, with 94 properties available for lease at December 31, 2019. It has been our -52- Table of Contents experience that approximately 1% to 4% of our property portfolio will be available for lease at any given time; however, it is possible that the number of properties available for lease or sale could increase in the future, given the nature of economic cycles and other unforeseen global events, such as the ongoing COVID-19 pandemic and the measures taken to limit its spread. Rental Revenue (reimbursable) A number of our leases provide for contractually obligated reimbursements from clients for recoverable real estate taxes and operating expenses. The increase in contractually obligated reimbursements by our clients in the years presented is primarily due to the growth of our portfolio due to acquisitions. Other Revenue The increase in other revenue for 2020 was primarily related to interest income recognized on financing receivables for certain leases with above-market terms as compared to 2019. In addition, interest income from our money market accounts was higher for 2020 as compared to 2019, which is primarily due to higher average investment balances. Total Expenses The following summarizes our total expenses (dollars in thousands): Increase (Decrease) 2020 2019 2018 2020 versus 2019 2019 versus 2018 EXPENSES Depreciation and amortization $ 677,038 $ 593,961 $ 539,780 $ 83,077 $ 54,181 Interest 309,336 290,991 266,020 18,345 $ 24,971 Property (excluding reimbursable) 25,241 19,500 19,376 5,741 $ 124 Property (reimbursable) 79,362 69,085 46,950 10,277 $ 22,135 General and administrative (1) 73,215 66,483 84,148 6,732 $ (17,665) Income taxes 14,693 6,158 5,340 8,535 $ 818 Provisions for impairment 147,232 40,186 26,269 107,046 $ 13,917 Total expenses $ 1,326,117 $ 1,086,364 $ 987,883 $ 239,753 $ 98,481 Total revenue (2) $ 1,572,263 $ 1,422,506 $ 1,280,888 General and administrative expenses as a percentage of total revenue (1)(2) 4.4 % 4.7 % 5.1 % Property expenses (excluding reimbursable) as a percentage of total revenue (2) 1.6 % 1.4 % 1.5 % (1) General and administrative expenses for 2020 included an executive severance charge related to the departure of our former CFO in March 2020. The total value of cash, stock compensation and professional fees incurred as a result of this severance was $3,463 and was recorded to general and administrative expense. In order to present a normalized calculation of our general and administrative expenses as a percentage of total revenue for 2020, we have excluded this executive severance charge to arrive at a normalized general and administrative amount of $69,752, which was used for our calculation. General and administrative expenses for 2018 included a one–time severance payment made to our former CEO in October 2018. The total value of cash, stock compensation and professional fees incurred as a result of this severance was $28,293; however, the net amount, after incorporating accruals for CEO compensation previous to this severance, was $18,651 and was recorded to general and administrative expense. In order to present a normalized calculation of our general and administrative expenses as a percentage of total revenue for 2018, we have excluded this one–time executive severance charge to arrive at a normalized general and administrative amount of $65,497, which was used for our calculation. Executive severance charges are excluded from Adjusted Funds from Operations Available to Common Stockholders, or AFFO, which is not a financial measure under generally accepted accounting principles. See our discussion of AFFO, which includes a reconciliation of this amount. (2) Excludes rental revenue (reimbursable). Depreciation and Amortization The increase in depreciation and amortization in 2020 and 2019 was primarily due to the acquisition of properties in 2020 and 2019, which was partially offset by property sales in those same periods. As discussed in the sections entitled “Funds from Operations Available to Common Stockholders (FFO)” and “Adjusted Funds from Operations Available to Common Stockholders (AFFO),” depreciation and amortization is a non-cash item that is added back to net income available to common stockholders for our calculation of FFO and AFFO. -53- Table of Contents Interest Expense The following is a summary of the components of our interest expense (dollars in thousands): 2020 2019 2018 Interest on our credit facility, commercial paper, term loans, notes, mortgages and interest rate swaps $ 293,879 $ 277,802 $ 260,103 Credit facility commitment fees 3,812 3,803 2,774 Amortization of debt origination and deferred financing costs 10,694 9,485 8,711 Loss (gain) on interest rate swaps 4,132 2,752 (2,733) Amortization of net mortgage premiums (1,258) (1,415) (1,520) Amortization of net note premiums (1,754) (995) (1,256) Other items (169) (441) (59) Interest expense $ 309,336 $ 290,991 $ 266,020 Credit facility, commercial paper, term loans, mortgages and notes Average outstanding balances (dollars in thousands) $ 8,240,829 $ 7,100,032 $ 6,662,952 Average interest rates 3.48 % 3.89 % 3.90 % The increase in interest expense from 2019 to 2020 is primarily due to the October 2020 issuance of our 1.625% notes due 2030, May and July 2020 issuances of our 2031 Notes, the May 2019 issuance of our 2.730% notes due 2034, the June 2019 issuance of our 3.250% notes due 2029, and higher interest related to mortgages assumed during December 2019, partially offset by the January 2020 repayment of our 5.750% notes due 2021, the June 2020 repayment of one of our $250.0 million term loans, and lower average interest rates. The increase in interest expense from 2018 to 2019 is primarily due to the October 2018 issuance of our $250.0 million senior unsecured term loan, the May 2019 issuance of our 2.730% notes due 2034, the June 2019 issuance of our 3.250% notes due 2029, and a loss on our interest rate swaps in 2019. At December 31, 2020, the weighted average interest rate on our: • Term loan outstanding of $250.0 million (excluding deferred financing costs of $642,000 and considering that one of our $250.0 million term loans was paid off in June 2020) was swapped to fixed at 3.9%; • Mortgages payable of $299.6 million (excluding net premiums totaling $1.7 million and deferred financing costs of $973,000 on these mortgages) was 4.9%; • Notes and bonds payable of $8.30 billion (excluding unamortized net original issuance premiums of $14.6 million and deferred financing costs of $49.2 million) was 3.4%; and • Combined outstanding notes, bonds, mortgages and term loan of $8.85 billion (excluding all net premiums and deferred financing costs) was 3.5%. Property Expenses (excluding reimbursable) Property expenses (excluding reimbursable) consist of costs associated with properties available for lease, non-net-leased properties and general portfolio expenses. Expenses related to properties available for lease and non-net-leased properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections and legal fees. General portfolio costs include, but are not limited to, insurance, legal, property inspections, and title search fees. At December 31, 2020, 140 properties were available for lease, as compared to 94 at December 31, 2019 and 80 at December 31, 2018. The increase in property expenses (excluding reimbursable) in 2020 is primarily due to reserves for contractually obligated reimbursements by our clients, an increase in repairs and maintenance expense, and an increase in portfolio size and the number of vacant properties at year-end. Property Expenses (reimbursable) The increase in property expenses (reimbursable) in both 2020 and 2019 was primarily attributable to the increased portfolio size, which contributed to higher contractually obligated reimbursements from our clients for recoverable real estate taxes and operating expenses primarily due to our acquisitions in each year. General and Administrative Expenses General and administrative expenses are expenditures related to the operations of our company, including employee–related costs, professional fees, and other general overhead costs associated with running our business. -54- Table of Contents General and administrative expenses increased in 2020 primarily due to a severance charge of $3.5 million for our former CFO, who departed the company in March 2020, higher payroll-related costs, and higher corporate–level professional fees, partially offset by lower costs for terminated acquisitions and travel. The decrease in general and administrative costs in 2019 is primarily due to the severance charge of $18.7 million incurred in 2018 that related to our former CEO, who departed the company in October 2018. Income Taxes Income taxes are for city and state income and franchise taxes, and for U.K. income taxes paid by us and our subsidiaries. The increase in income taxes in 2020 was primarily attributable to our U.K. investments, which contributed to higher U.K. income taxes as compared to 2019. Provisions for Impairment The following table summarizes provisions for impairment during the periods indicated below (dollars in millions): Year Ended December 31, 2020 2019 2018 Total provisions for impairment $ 147.2 $ 40.2 $ 26.3 Number of properties: Classified as held for sale 6 1 — Classified as held for investment 42 5 3 Sold 51 45 41 During 2020, we identified the impact of the COVID-19 pandemic as an impairment triggering event for properties occupied by certain of our clients experiencing difficulties meeting their lease obligations to us. After considering the impacts of the COVID-19 pandemic on the key assumptions, we determined that the carrying values of 38 properties classified as held for investment for the year ended December 31, 2020 were not recoverable. As a result, we recorded provisions for impairment of $105.0 million for the year ended December 31, 2020 on the applicable properties impacted by the COVID-19 pandemic. Of the provisions for impairment recorded during 2020 for properties impacted by the COVID-19 pandemic, a total of 13 assets occupied by certain of our clients in the theater industry were impaired for $83.8 million, which reduced the carrying value of the properties from $123.4 million to their estimated fair value of $39.6 million. Impairments recorded on other properties during the year ended December 31, 2020 totaled $42.2 million. Gain on Sales of Real Estate The following table summarizes our properties sold during the periods indicated below (dollars in millions): Year Ended December 31, 2020 2019 2018 Number of properties sold 126 93 128 Net sales proceeds $ 262.5 $ 108.9 $ 142.3 Gain on sales of real estate $ 76.2 $ 30.0 $ 24.6 Foreign Currency and Derivative Gains, Net We borrow in the functional currencies of the countries in which we invest. Foreign currency gains and losses are primarily a result of intercompany debt and certain remeasurement transactions. Loss on Extinguishment of Debt In January 2020, we completed the early redemption on all $250.0 million in principal amount of outstanding 5.75% 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 during 2020. -55- Table of Contents Net Income Available to Common Stockholders The following summarizes our net income available to common stockholders (dollars in millions, except per share data): Year Ended December 31, % Increase/(decrease) 2020 2019 2018 2020 versus 2019 2019 versus 2018 Net income available to common stockholders $ 395.5 $ 436.5 $ 363.6 (9.4) % 20.0 % Net income per share (1) $ 1.14 $ 1.38 $ 1.26 (17.4) % 9.5 % (1) All per share amounts are presented on a diluted per common share basis. The calculation to determine net income available to common stockholders includes provisions for impairment, gains from the sale of properties, and foreign currency gains and losses, which can vary from period to period based on timing and significantly impact net income attributable to the Company and available to common stockholders. Net income available to common stockholders in 2020 was impacted by the following transactions: (i) $147.2 million of provisions for impairment, (ii) $52.5 million in reserves recorded as a reduction of rental revenue, (iii) a $9.8 million loss on extinguishment of debt due to the January 2020 early redemption of the 5.750% notes due 2021, and (iv) a $3.5 million executive severance charge for our former CFO. For 2019, the only comparable charges were $40.2 million in provisions for impairment and $2.9 million in reserves recorded as a reduction of rental revenue. Net income available to common stockholders in 2018 was impacted by a severance payment made to our former CEO in October 2018. The total value of cash, stock compensation and professional fees incurred as a result of this severance was $28.3 million; however, the net amount, after incorporating accruals for CEO compensation previous to this severance, was $18.7 million. Adjusted Earnings before Interest, Taxes, Depreciation and Amortization for Real Estate (Adjusted EBITDA re ) The National Association of Real Estate Investment Trusts (Nareit) came to the conclusion that a Nareit-defined EBITDA metric for real estate companies (i.e., EBITDA for real estate, or EBITDA re ) would provide investors with a consistent measure to help make investment decisions among REITs. Our definition of “Adjusted EBITDA re ” is generally consistent with the Nareit definition, other than our adjustments to remove foreign currency and derivative gains and losses and executive severance charges (which is consistent with our previous calculations of "Adjusted EBITDA"). We define Adjusted EBITDA re , a non–GAAP financial measure, for the most recent quarter as earnings (net income) before (i) interest expense, including non-cash loss (gain) on swaps, (ii) income and franchise taxes, (iii) real estate depreciation and amortization, (iv) provisions for impairment, (v) gain on sales of real estate, (vi) foreign currency and derivative gains and losses, net, and (vii) executive severance charges (as described in the Adjusted Funds from Operations section). Our Adjusted EBITDA re may not be comparable to Adjusted EBITDA re reported by other companies or as defined by Nareit, and other companies may interpret or define Adjusted EBITDA re differently than we do. Management believes Adjusted EBITDA re to be a meaningful measure of a REIT’s performance because it is widely followed by industry analysts, lenders and investors. Management also believes the use of an annualized quarterly Adjusted EBITDA re metric, which we refer to as Annualized Adjusted EBITDA re , is meaningful because it represents the Company’s current earnings run rate for the period presented. The ratio of our total debt to our annualized quarterly Adjusted EBITDA re is also used to determine vesting of performance share awards granted to our executive officers. Adjusted EBITDA re should be considered along with, but not as an alternative to net income as a measure of our operating performance. We define Annualized Pro Forma Adjusted EBITDA re as Annualized Adjusted EBITDA re , subject to certain adjustments to incorporate operating income from properties we acquired or stabilized during the applicable quarter and to remove operating income from properties we disposed of during the applicable quarter, giving pro forma effect to all transactions as if they occurred at the beginning of the applicable period. We believe Annualized Pro Forma Adjusted EBITDA re is a useful non-GAAP supplemental measure, as it excludes properties that were no longer owned at the balance sheet date and includes the annualized rent from properties acquired during the quarter. Our ratios of net debt-to-Adjusted EBITDA re and net debt-to-Pro Forma Adjusted EBITDA re , which are used by management as a measure of leverage, are calculated as net debt (which we define as total debt per the consolidated balance sheet, less cash and cash equivalents), divided by annualized quarterly Adjusted EBITDA re and annualized Pro Forma Adjusted EBITDA re , respectively. -56- Table of Contents The following table summarizes our Adjusted EBITDA re calculation for the periods indicated below: For the Quarter Ended December 31, Dollars in thousands 2020 2019 2018 Net income (1) $ 118,150 $ 129,553 $ 85,303 Interest 78,764 75,073 70,635 Income taxes 4,500 1,736 1,607 Depreciation and amortization 175,041 156,594 137,711 Executive severance charge (2) — — 18,651 Provisions for impairment 23,790 8,950 1,235 Gain on sales of real estate (22,667) (14,168) (5,825) Foreign currency and derivative gains, net (3,311) (1,792) — Quarterly Adjusted EBITDA re $ 374,267 $ 355,946 $ 309,317 Annualized Adjusted EBITDA re (3) $ 1,497,068 $ 1,423,784 $ 1,237,268 Annualized Pro Forma Adjustments 25,910 77,793 11,306 Annualized Pro Forma Adjusted EBITDA re $ 1,522,978 $ 1,501,577 $ 1,248,574 Net Debt (4) $ 7,992,991 $ 7,847,536 $ 6,489,589 Net Debt/Adjusted EBITDA re 5.3 5.5 5.2 Net Debt/Pro forma Adjusted EBITDA re 5.2 5.2 5.2 (1) Net income for 2020 was negatively impacted by $18.1 million of rent reserves recorded as reductions of rental revenue, of which $3.3 million relates to straight-line rent. (2) The executive severance charge in 2018 reflects an $18.7 million severance charge for our former CEO upon his departure in October 2018. (3) We calculate Annualized Adjusted EBITDAre by multiplying the Quarterly Adjusted EBITDAre by four. (4) Net Debt is total debt per the consolidated balance sheet, less of cash and cash equivalents. The Annualized Pro Forma Adjustments consist of adjustments to incorporate operating income from properties we acquired or stabilized during the applicable quarter and to remove operating income from properties we disposed of during the applicable quarter, giving pro forma effect to all transactions as if they occurred at the beginning of the applicable period. The Annualized Pro Forma Adjustments are consistent with the debt service coverage ratio calculated under financial covenants for our senior unsecured notes and bonds. The following table summarizes our Annualized Pro forma Adjusted EBITDA re calculation for the periods indicated below: Dollars in thousands 2020 2019 2018 Annualized pro forma adjustments from properties acquired or stabilized $ 27,431 $ 77,431 $ 14,633 Annualized pro forma adjustments from properties disposed (1,521) 362 (3,327) Annualized Pro forma Adjustments $ 25,910 $ 77,793 $ 11,306 FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (FFO) The following summarizes our FFO (dollars in millions, except per share data): % Increase 2020 2019 2018 2020 versus 2019 2019 versus 2018 FFO available to common stockholders $ 1,142.1 $ 1,039.6 $ 903.3 9.9 % 15.1 % FFO per share (1) $ 3.31 $ 3.29 3.12 0.6 % 5.4 % (1) All per share amounts are presented on a diluted per common share basis. FFO in 2020 was impacted by reserves recorded as a reduction of rental revenue related to the COVID-19 pandemic, a loss on extinguishment of debt due to the early redemption of the 5.750% notes due 2021 in January 2020 and an executive severance charge for our former CFO in March 2020. -57- Table of Contents FFO in 2018 was impacted by a severance payment made to our former CEO in October 2018. The total value of cash, stock compensation and professional fees incurred as a result of this severance was $28.3 million; however, the net amount, after incorporating accruals for CEO compensation previous to this severance, was $18.7 million. The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts): 2020 2019 2018 Net income available to common stockholders $ 395,486 $ 436,482 $ 363,614 Depreciation and amortization 677,038 593,961 539,780 Depreciation of furniture, fixtures and equipment (588) (565) (650) Provisions for impairment 147,232 40,186 26,269 Gain on sales of real estate (76,232) (29,996) (24,643) FFO adjustments allocable to noncontrolling interests (817) (477) (1,113) FFO available to common stockholders $ 1,142,119 $ 1,039,591 $ 903,257 FFO allocable to dilutive noncontrolling interests 1,418 1,403 867 Diluted FFO $ 1,143,537 $ 1,040,994 $ 904,124 FFO per common share, basic and diluted 3.31 3.29 3.12 Distributions paid to common stockholders $ 964,167 $ 852,134 $ 761,582 FFO available to common stockholders in excess of distributions paid to common stockholders $ 177,952 $ 187,457 $ 141,675 Weighted average number of common shares used for computation per share: Basic 345,280,126 315,837,012 289,427,430 Diluted 345,878,377 316,601,350 289,923,984 We define FFO, a non-GAAP financial measure, consistent with the National Association of Real Estate Investment Trusts' definition, as net income available to common stockholders, plus depreciation and amortization of real estate assets, plus provisions for impairments of depreciable real estate assets, and reduced by gains on property sales. We consider FFO to be an appropriate supplemental measure of a REIT’s operating performance as it is based on a net income analysis of property portfolio performance that adds back items such as depreciation and impairments for FFO. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a supplemental performance measure. ADJUSTED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (AFFO) The following summarizes our AFFO (dollars in millions, except per share data): % Increase 2020 2019 2018 2020 versus 2019 2019 versus 2018 AFFO available to common stockholders $ 1,172.6 $ 1,050.0 $ 924.6 11.7 % 13.6 % AFFO per share (1) $ 3.39 $ 3.32 3.19 2.1 % 4.1 % (1) All per share amounts are presented on a diluted per common share basis. AFFO for 2020 was impacted by reserves recorded as a reduction of rental revenue related to the COVID-19 pandemic. -58- Table of Contents We consider AFFO to be an appropriate supplemental measure of our performance. Other companies in our industry use a similar measurement, but they may use the term “CAD” (for Cash Available for Distribution), “FAD” (for Funds Available for Distribution) or other terms. Our AFFO calculations may not be comparable to AFFO, CAD or FAD reported by other companies, and other companies may interpret or define such terms differently than we do. The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO and AFFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts): 2020 2019 2018 Net income available to common stockholders (1) $ 395,486 $ 436,482 $ 363,614 Cumulative adjustments to calculate FFO (2) 746,633 603,109 539,643 FFO available to common stockholders 1,142,119 1,039,591 903,257 Executive severance charge (3) 3,463 — 18,651 Loss on extinguishment of debt 9,819 — — Amortization of share-based compensation 14,727 13,662 15,470 Amortization of deferred financing costs (4) 4,968 4,754 3,991 Amortization of net mortgage premiums (1,258) (1,415) (1,520) Loss (gain) on interest rate swaps 4,353 2,752 (2,733) Straight-line payments from cross-currency swaps (5) 2,573 4,316 — Leasing costs and commissions (1,859) (2,102) (3,907) Recurring capital expenditures (198) (801) (1,084) Straight-line rent (26,502) (28,674) (24,687) Amortization of above and below-market leases 22,940 19,336 16,852 Other adjustments (6) (2,519) (1,404) 268 Total AFFO available to common stockholders $ 1,172,626 $ 1,050,015 $ 924,558 AFFO allocable to dilutive noncontrolling interests 1,438 1,442 901 Diluted AFFO $ 1,174,064 $ 1,051,457 $ 925,459 AFFO per common share: Basic $ 3.40 $ 3.32 $ 3.19 Diluted $ 3.39 $ 3.32 $ 3.19 Distributions paid to common stockholders $ 964,167 $ 852,134 $ 761,582 AFFO available to common stockholders in excess of distributions paid to common stockholders $ 208,459 $ 197,881 $ 162,976 Weighted average number of common shares used for computation per share: Basic 345,280,126 315,837,012 289,427,430 Diluted 345,878,377 316,601,350 289,923,984 (1) As of December 31, 2020, there was $24.5 million of uncollected rent deferred as a result of lease concessions we granted in response to the COVID-19 pandemic and recognized under the practical expedient provided by the FASB and $51.9 million of uncollected rent for which we have not granted a lease concession. Deferrals accounted for as modifications totaling $236,000 for 2020 have not been added back to AFFO. (2) See reconciling items for FFO presented under “Funds from Operations Available to Common Stockholders (FFO).” (3) The executive severance charge in 2020 represents the incremental costs incurred upon our former CFO's departure in March 2020, consisting of $1.6 million of cash, $1.8 million of share-based compensation expense and $58,000 of professional fees. The executive severance charge in 2018 represents the incremental costs incurred upon our former CEO's departure in October 2018, consisting of $9.8 million of cash, $17.9 million of share-based compensation expense and $574,000 of professional fees, reduced by $9.6 million accrued for CEO compensation prior to separation. (4) Includes the amortization of costs incurred and capitalized upon issuance of our notes payable, assumption of our mortgages payable and upon issuance of our current and previous term loans. The deferred financing costs are being amortized over the lives of the respective mortgages and term loans. No costs associated with our credit facility agreements or annual fees paid to credit rating agencies have been included. (5) Straight-line payments from cross-currency swaps represent quarterly payments in U.S. dollars received by us from counterparties in exchange for associated foreign currency payments. These USD payments are fixed and determinable for the duration of the associated hedging transaction. -59- Table of Contents (6) Includes adjustments allocable to noncontrolling interests, obligations related to financing lease liabilities, and foreign currency gains and losses as a result of intercompany debt and remeasurement transactions. We believe the non-GAAP financial measure AFFO provides useful information to investors because it is a widely accepted industry measure of the operating performance of real estate companies that is used by industry analysts and investors who look at and compare those companies. In particular, AFFO provides an additional measure to compare the operating performance of different REITs without having to account for differing depreciation assumptions and other unique revenue and expense items which are not pertinent to measuring a particular company’s on-going operating performance. Therefore, we believe that AFFO is an appropriate supplemental performance metric, and that the most appropriate GAAP performance metric to which AFFO should be reconciled is net income available to common stockholders. Presentation of the information regarding FFO and AFFO is intended to assist the reader in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and AFFO in the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and AFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as alternatives to net income as an indication of our performance. FFO and AFFO should not be considered as alternatives to reviewing our cash flows from operating, investing, and financing activities. In addition, FFO and AFFO should not be considered as measures of liquidity, our ability to make cash distributions, or our ability to pay interest payments. IMPACT OF INFLATION Leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index (typically subject to ceilings), or increases in the clients’ sales volumes. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation. Moreover, our use of net lease agreements tends to reduce our exposure to rising property expenses due to inflation because the client is responsible for property expenses. Inflation and increased costs may have an adverse impact on our clients if increases in their operating expenses exceed increases in revenue. IMPACT OF NEWLY ADOPTED ACCOUNTING STANDARDS For information on the impact of newly adopted accounting standards on our business, see note 2 of the Notes to the Consolidated Financial Statements.