REALTY INCOME CORP 10-Q

Item 3: Quantitative and Qualitative Disclosures about Market Risk We are exposed to interest rate changes primarily as a result of our credit facility and commercial paper program, term loan, mortgages payable, and long-term notes and bonds used to maintain liquidity and expand our real estate investment portfolio and operations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flow and to lower our overall borrowing costs. To achieve these objectives, we issue long-term notes and bonds, primarily at fixed rates. In order to mitigate and manage the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, interest rate locks and caps. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks, including counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. To limit counterparty credit risk we will seek to enter into such agreements with major financial institutions with favorable credit ratings. There can be no assurance that we will be able to adequately protect against the foregoing risks or realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging activities. We do not enter into any derivative transactions for speculative or trading purposes. The following table presents, by year of expected maturity, the principal amounts, average interest rates and estimated fair values of our fixed and variable rate debt as of September 30, 2021. This information is presented to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in millions): -61- Table of Contents Expected Maturity Data Year of Maturity Fixed rate debt Weighted average rate on fixed rate debt Variable rate debt Weighted average rate on variable rate debt 2021 $ 0.9 4.77 % $ 405.0 0.22 % 2022 111.6 4.96 — — 2023 770.4 4.64 — — 2024 711.9 3.97 — — 2025 540.8 3.81 — — Thereafter 6,753.0 2.91 — — Totals (1) $ 8,888.6 3.23 % $ 405.0 0.22 % Fair Value (2) $ 9,548.5 $ 405.0 (1) Excludes net premiums recorded on mortgages payable, net original issuance premiums recorded on notes payable and deferred financing costs on mortgages payable, notes payable, and our term loan. At September 30, 2021, the unamortized balance of net premiums on mortgages payable is $933,000, the unamortized balance of net original issuance premiums on notes payable is $7.2 million, and the balance of deferred financing costs on mortgages payable is $865,000, on notes payable is $51.0 million, and on the term loan is $493,000. (2) We base the estimated fair value of the publicly-traded fixed rate senior notes and bonds at September 30, 2021 on the indicative market prices and recent trading activity of our senior notes and bonds payable. We base the estimated fair value of our fixed rate mortgages and private senior notes payable at September 30, 2021 on the relevant forward interest rate curve, plus an applicable credit-adjusted spread. We believe that the carrying values of the commercial paper borrowings and term loan balance reasonably approximate their estimated fair values at September 30, 2021. The table above incorporates only those exposures that exist as of September 30, 2021. It does not consider those exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations, would depend on the exposures that arise during the period, our hedging strategies at the time, and interest rates. At September 30, 2021, our outstanding notes, bonds and mortgages payable had fixed interest rates. Interest on our commercial paper borrowings and term loan balance is variable. However, the variable interest rate feature on our term loan has been mitigated by an interest rate swap agreement. At September 30, 2021, our credit facility balance was zero; however, we intend to borrow funds on our credit facility in the future. Based on a hypothetical credit facility borrowing of $50 million, a 1% change in interest rate would change our interest costs by $500,000 annually. During 2019, we commenced foreign operations and acquired real property in the U.K., and in the three months ended September 30, 2021, we expanded our foreign operations to Spain. We have continued to acquire properties in the U.K. and Spain through September 30, 2021. As a result, we are subject to currency fluctuations that may, from time to time, affect our financial condition and results of operations. Increases or decreases in the value of Sterling and Euro relative to the U.S. dollar impact the amount of net income we earn from our investments in the U.K. and Spain. We mitigate these foreign currency exposures with non-U.S. denominated borrowings, cross-currency swaps, currency exchange swaps, foreign currency forwards and foreign currency collars. As we increase our international presence through investments in properties outside the U.S., we have issued Sterling denominated notes and we may also decide to transact additional business or borrow funds in currencies other than U.S. dollars.