REALTY INCOME CORP 10-K

Item 8: Financial Statements and Supplementary Data Table of Contents A. Reports of Independent Registered Public Accounting Firm B. Consolidated Balance Sheets, December 31, 202 1 and 2020 C. Consolidated Statements of Income and Comprehensive Income, Years ended December 31, 2021, 2020, and 2019 D. Consolidated Statements of Equity, Years ended December 31, 2021, 2020, and 2019 E. Consolidated Statements of Cash Flows, Years ended December 31, 2021, 2020, and 2019 F. Notes to Consolidated Financial Statements G. Schedule III Real Estate and Accumulated Depreciation Schedules not filed: All schedules, other than that indicated in the Table of Contents, have been omitted as the required information is either not material, inapplicable or the information is presented in the financial statements or related notes. -67- Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Realty Income Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Realty Income Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of the Fair Value of Land in Real Estate Acquisitions As discussed in Note 5 to the consolidated financial statements, during 2021, the Company acquired $6.4 billion of real estate properties. As discussed in Note 2, the purchase price of a real estate acquisition is typically allocated among the individual components of both tangible and intangible assets and liabilities acquired based on their estimated relative fair values. We identified the evaluation of the fair value of land in real estate acquisitions as a critical audit matter. Specifically, the measurement of the fair values of land is dependent upon significant assumptions of market land values for which relevant external market data is not always readily available. There was a high degree of subjective and complex auditor judgment required in evaluating the fair value measurements given the sensitivity of the fair value measurements to changes in these assumptions. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to allocate the purchase price of real estate acquisitions. This included controls over the measurement of the fair value of land. For a selection of real estate acquisitions, we involved valuation professionals with specialized skills and knowledge who assisted in evaluating a selection of the Company’s acquired land values by comparing them to independently developed ranges using market data from industry transaction databases and published industry reports. Business Combination As discussed in Notes 2 and 3 to the consolidated financial statements, on November 1, 2021, the Company acquired VEREIT, Inc. for $12.1 billion. The transaction was accounted for as a business combination, and the acquired assets and assumed liabilities were recorded at their respective fair values. The Company estimates the fair value of each property acquired, which is then allocated to land, buildings and improvements, and identified intangible assets and liabilities based on their estimated fair values. We identified the evaluation of the fair values of certain acquired properties and the allocation of purchase price to land as a critical audit matter. Specifically, the measurement of the fair values of certain acquired properties and allocation of purchase price to land is dependent upon significant assumptions for which relevant external market data is not always readily available. Such assumptions include market land values, market rental rates, and capitalization rates. There was a high degree of subjective and complex auditor judgment required to evaluate the fair value measurements given the sensitivity of the fair value measurements to changes in these assumptions. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to allocate the purchase price of the VEREIT transaction. This included controls over the selection and review of the significant assumptions used to estimate the fair value of certain properties acquired and the allocation of purchase price to land. For a selection of properties, we involved valuation professionals with specialized skills and knowledge who assisted in evaluating the significant assumptions used to estimate the fair value measurements of certain acquired properties and allocation of purchase price to land. The evaluation included comparison of the Company’s assumptions noted above to independently developed ranges using market data from industry transaction databases, and published industry reports. (signed) KPMG LLP We have served as the Company’s auditor since 1993. San Diego, California February 23, 2022 -68- Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Realty Income Corporation: Opinion on Internal Control Over Financial Reporting We have audited Realty Income Corporation and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedule III (collectively, the consolidated financial statements), and our report dated February 23, 2022 expressed an unqualified opinion on those consolidated financial statements. The Company acquired VEREIT, Inc. during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, VEREIT, Inc.’s internal control over financial reporting associated with total assets of $17.7 billion and total revenues of $176.3 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of VEREIT, Inc. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. (signed) KPMG LLP San Diego, California February 23, 2022 -69- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2021 and 2020 (in thousands, except per share and share count data) 2021 2020 ASSETS Real estate held for investment, at cost: Land $ 10,753,750 $ 6,318,926 Buildings and improvements 25,155,178 14,696,712 Total real estate held for investment, at cost 35,908,928 21,015,638 Less accumulated depreciation and amortization ( 3,949,798 ) ( 3,549,486 ) Real estate held for investment, net 31,959,130 17,466,152 Real estate and lease intangibles held for sale, net 30,470 19,004 Cash and cash equivalents 258,579 824,476 Accounts receivable, net 426,768 285,701 Lease intangible assets, net 5,275,304 1,710,655 Goodwill 3,676,705 14,180 Investment in unconsolidated entities 140,967 — Other assets, net 1,369,579 420,117 Total assets $ 43,137,502 $ 20,740,285 LIABILITIES AND EQUITY Distributions payable $ 146,919 $ 85,691 Accounts payable and accrued expenses 351,128 241,336 Lease intangible liabilities, net 1,308,221 321,198 Other liabilities 759,197 256,863 Line of credit payable and commercial paper 1,551,376 — Term loans, net 249,557 249,358 Mortgages payable, net 1,141,995 300,360 Notes payable, net 12,499,709 8,267,749 Total liabilities 18,008,102 9,722,555 Commitments and contingencies Stockholders’ equity: Common stock and paid in capital, par value $ 0.01 per share, 740,200,000 shares authorized, 591,261,991 and 361,303,445 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 29,578,212 14,700,050 Distributions in excess of net income ( 4,530,571 ) ( 3,659,933 ) Accumulated other comprehensive income (loss) 4,933 ( 54,634 ) Total stockholders’ equity 25,052,574 10,985,483 Noncontrolling interests 76,826 32,247 Total equity 25,129,400 11,017,730 Total liabilities and equity $ 43,137,502 $ 20,740,285 The accompanying notes to consolidated financial statements are an integral part of these statements. -70- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31, 2021, 2020 and 2019 (in thousands, except per share data) 2021 2020 2019 REVENUE Rental (including reimbursable) $ 2,064,958 $ 1,639,533 $ 1,484,818 Other 15,505 7,554 3,345 Total revenue 2,080,463 1,647,087 1,488,163 EXPENSES Depreciation and amortization 897,835 677,038 593,961 Interest 323,644 309,336 290,991 Property (including reimbursable) 133,605 104,603 88,585 General and administrative 96,980 73,215 66,483 Provisions for impairment 38,967 147,232 40,186 Merger and integration-related costs 167,413 — — Total expenses 1,658,444 1,311,424 1,080,206 Gain on sales of real estate 55,798 76,232 29,996 Foreign currency and derivative gains, net 710 4,585 2,255 Loss on extinguishment of debt ( 97,178 ) ( 9,819 ) — Equity in income of unconsolidated entities 1,106 — — Other income, net 9,949 4,538 3,428 Income before income taxes 392,404 411,199 443,636 Income taxes ( 31,657 ) ( 14,693 ) ( 6,158 ) Net income 360,747 396,506 437,478 Net income attributable to noncontrolling interests ( 1,291 ) ( 1,020 ) ( 996 ) Net income available to common stockholders $ 359,456 $ 395,486 $ 436,482 Amounts available to common stockholders per common share: Net income Basic $ 0.87 $ 1.15 $ 1.38 Diluted $ 0.87 $ 1.14 $ 1.38 Weighted average common shares outstanding: Basic 414,535,283 345,280,126 315,837,012 Diluted 414,769,846 345,415,258 316,159,277 Other comprehensive income: Net income available to common stockholders $ 359,456 $ 395,486 $ 436,482 Foreign currency translation adjustment 9,119 ( 2,606 ) 186 Unrealized gain (loss) on derivatives, net 50,448 ( 34,926 ) ( 9,190 ) Comprehensive income available to common stockholders $ 419,023 $ 357,954 $ 427,478 The accompanying notes to consolidated financial statements are an integral part of these statements. -71- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Years Ended December 31, 2021, 2020 and 2019 (in thousands, except share count data) Shares of common stock Common stock and paid in capital Distributions in excess of net income Accumulated other comprehensive income (loss) Total stockholders’ equity Noncontrolling interests Total equity Balance, December 31, 2018 303,742,090 $ 10,754,495 $ ( 2,657,655 ) $ ( 8,098 ) $ 8,088,742 $ 32,236 $ 8,120,978 Net income — — 436,482 — 436,482 996 437,478 Other comprehensive loss — — — ( 9,004 ) ( 9,004 ) — ( 9,004 ) Distributions paid and payable — — ( 861,118 ) — ( 861,118 ) ( 1,296 ) ( 862,414 ) Share issuances, net of costs 29,818,978 2,117,983 — — 2,117,983 — 2,117,983 Contributions by noncontrolling interests — — — — — 11,370 11,370 Redemption of common units — ( 6,866 ) — — ( 6,866 ) ( 14,257 ) ( 21,123 ) Reallocation of equity — ( 653 ) — — ( 653 ) 653 — Share-based compensation, net 58,038 8,890 — — 8,890 — 8,890 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 — — 395,486 — 395,486 1,020 396,506 Other comprehensive loss — — — ( 37,532 ) ( 37,532 ) — ( 37,532 ) Distributions paid and payable — — ( 973,128 ) — ( 973,128 ) ( 1,596 ) ( 974,724 ) Share issuances, net of costs 27,564,163 1,817,978 — — 1,817,978 — 1,817,978 Contributions by noncontrolling interests — — — — — 3,168 3,168 Reallocation of equity — 47 — — 47 ( 47 ) — Share-based compensation, net 120,176 8,176 — — 8,176 — 8,176 Balance, December 31, 2020 361,303,445 $ 14,700,050 $ ( 3,659,933 ) $ ( 54,634 ) $ 10,985,483 $ 32,247 $ 11,017,730 Net income — — 359,456 — 359,456 1,291 360,747 Other comprehensive income — — — 59,567 59,567 — 59,567 Shares issued in merger 162,043,548 11,556,715 — — 11,556,715 3,160 11,559,875 Orion Divestiture — ( 1,140,769 ) — — ( 1,140,769 ) ( 1,352 ) ( 1,142,121 ) Distributions paid and payable — — ( 1,230,094 ) — ( 1,230,094 ) ( 1,868 ) ( 1,231,962 ) Share issuances, net of costs 67,777,279 4,453,953 — — 4,453,953 — 4,453,953 Contributions by noncontrolling interests — — — — — 43,390 43,390 Reallocation of equity — 42 — — 42 ( 42 ) — Share-based compensation, net 137,719 8,221 — — 8,221 — 8,221 Balance, December 31, 2021 591,261,991 $ 29,578,212 $ ( 4,530,571 ) $ 4,933 $ 25,052,574 $ 76,826 $ 25,129,400 The accompanying notes to consolidated financial statements are an integral part of these statements. -72- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2021, 2020 and 2019 (in thousands) 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 360,747 $ 396,506 $ 437,478 Adjustments to net income: Depreciation and amortization 897,835 677,038 593,961 Loss on extinguishment of debt 97,178 9,819 — Amortization of share-based compensation 41,773 16,503 13,662 Non-cash revenue and expense adjustments ( 23,380 ) ( 3,562 ) ( 9,338 ) Amortization of net premiums on mortgages payable ( 3,498 ) ( 1,258 ) ( 1,415 ) Amortization of net premiums on notes payable ( 10,349 ) ( 1,754 ) ( 995 ) Amortization of deferred financing costs 12,333 11,003 9,795 Loss on interest rate swaps 2,905 4,353 2,752 Foreign currency and derivative gains, net ( 710 ) ( 4,585 ) ( 2,255 ) Gain on sales of real estate ( 55,798 ) ( 76,232 ) ( 29,996 ) Equity income of unconsolidated entities ( 1,106 ) — — Distributions from unconsolidated entities 365 — — Provisions for impairment on real estate 38,967 147,232 40,186 Change in assets and liabilities Accounts receivable and other assets ( 38,292 ) ( 79,240 ) ( 8,954 ) Accounts payable, accrued expenses and other liabilities 3,219 19,720 24,056 Net cash provided by operating activities 1,322,189 1,115,543 1,068,937 CASH FLOWS FROM INVESTING ACTIVITIES Investment in real estate ( 6,313,076 ) ( 2,283,130 ) ( 3,572,581 ) Improvements to real estate, including leasing costs ( 19,080 ) ( 8,708 ) ( 23,536 ) Proceeds from sales of real estate 250,536 259,459 108,911 Non-refundable escrow deposits ( 28,390 ) — ( 14,603 ) Return of investment from unconsolidated entities 38,345 — — Net cash paid in merger ( 366,030 ) — — Net cash used in investing activities ( 6,437,695 ) ( 2,032,379 ) ( 3,501,809 ) CASH FLOWS FROM FINANCING ACTIVITIES Cash distributions to common stockholders ( 1,169,026 ) ( 964,167 ) ( 852,134 ) Borrowings on line of credit and commercial paper program 9,082,206 3,528,042 2,816,632 Payments on line of credit and commercial paper program ( 7,508,332 ) ( 4,246,755 ) ( 2,365,368 ) Principal payment on term loan — ( 250,000 ) ( 70,000 ) Proceeds from notes and bonds payable issued 1,033,387 2,200,488 897,664 Principal payment on notes payable ( 1,700,000 ) ( 250,000 ) — Payments upon extinguishment of debt ( 96,583 ) ( 9,445 ) — Principal payments on mortgages payable ( 66,575 ) ( 108,789 ) ( 20,723 ) Proceeds from common stock offerings, net 1,263,235 728,883 845,061 Proceeds from dividend reinvestment and stock purchase plan 11,232 9,109 8,437 Proceeds from At-the-Market (ATM) program 3,179,490 1,094,938 1,264,518 Net cash received from Orion Divestiture 593,484 — — Redemption of common units — — ( 21,123 ) Distributions to noncontrolling interests ( 1,707 ) ( 1,596 ) ( 1,342 ) Net receipts on derivative settlements 3,266 4,106 4,881 Debt issuance costs ( 13,405 ) ( 19,456 ) ( 9,129 ) Other items, including shares withheld upon vesting ( 33,552 ) ( 23,279 ) ( 4,772 ) Net cash provided by financing activities 4,577,120 1,692,079 2,492,602 Effect of exchange rate changes on cash and cash equivalents 20,076 4,431 ( 9,796 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 518,310 ) 779,674 49,934 Cash, cash equivalents and restricted cash, beginning of year 850,679 71,005 21,071 Cash, cash equivalents and restricted cash, end of year $ 332,369 $ 850,679 $ 71,005 For supplemental disclosures, see note 15. The accompanying notes to consolidated financial statements are an integral part of these statements. -73- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS December 31, 2021, 2020, and 2019 1. Organization and Operation Realty Income Corporation (“Realty Income,” the “Company,” “we,” “our” or “us”) was founded in 1969 and is organized as a Maryland corporation. We invest in commercial real estate and have elected to be taxed as a real estate investment trust ("REIT"). We are listed on the New York Stock Exchange under the symbol “O”. Over the past 53 years, we have been acquiring and managing freestanding commercial properties that generate rental revenue under long-term net lease agreements with our commercial clients. At December 31, 2021, we owned 11,136 properties, located in all 50 United States (U.S.) states, Puerto Rico, the United Kingdom (U.K.) and Spain, containing approximately 210.1 million leasable square feet. Information with respect to number of properties, leasable square feet, average initial lease term and initial weighted average cash lease yield is unaudited. Unless otherwise indicated, all dollar amounts are expressed in U.S. dollars. In November 2021, we completed our merger with VEREIT, Inc. (VEREIT). For more details, please see note 3, Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture. 2. Summary of Significant Accounting Policies and Procedures and New Accounting Standards Basis of Presentation . These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany accounts and transactions are eliminated in consolidation. The U.S. Dollar (“USD”) is our functional currency. Principles of Consolidation . These consolidated financial statements include the accounts of Realty Income and all other entities in which we have a controlling financial interest. We evaluate whether we have a controlling financial interest in an entity in accordance with Accounting Standards Codification (“ASC”) 810 , Consolidation. Voting interest entities are entities considered to have sufficient equity at risk and which the equity holders have the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. We consolidate voting interest entities in which we have a controlling financial interest, typically through holding of a majority of the entity’s voting equity interests. Variable interest entities (“VIEs”) are entities that lack sufficient equity at risk or where the equity holders either do not have the obligation to absorb losses, do not have the right to receive residual returns, do not have the right to make decisions about the entity’s activities, or some combination of the above. A controlling financial interest in a VIE is present when an entity has a variable interest, or a combination of variable interests, that provides the entity with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. An entity that meets both conditions above is deemed the primary beneficiary and consolidates the VIE. We reassess our initial evaluation of whether an entity is a VIE when certain reconsideration events occur. We reassess our determination of whether we are the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances. The portion of a consolidated entity not owned by us is recorded as a noncontrolling interest. Noncontrolling interests are reflected on our consolidated balance sheets as a component of equity. Noncontrolling interest that was created or assumed as part of a business combination or asset acquisition was recognized at fair value as of the date of the transaction (see note 11, Noncontrolling Interests ). Use of Estimates . The consolidated financial statements were prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications . Certain reclassifications have been made to the prior years' consolidated financial statements to conform to current year presentation. We began presenting 'Goodwill,' which was previously presented in 'Other assets, net,' in a separate caption within our consolidated balance sheets. In addition, we began presenting 'Income taxes,' which was previously presented in 'Expenses,' below a newly captioned subtotal for 'Income before income taxes' within our consolidated statements of income and comprehensive income. Furthermore, we began presenting -74- Table of Contents 'Other income, net' which consists of certain miscellaneous non-recurring revenue previously presented in 'Other' within 'Revenue,' in a separate caption within our consolidated statements of income and comprehensive income. These reclassifications have no effect on net income, total assets, accumulated earnings or cash flow statements as previously reported. 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: 2021 2020 2019 Weighted average shares used for the basic net income per share computation 414,535,283 345,280,126 315,837,012 Incremental shares from share-based compensation 234,563 135,132 322,265 Weighted average shares used for diluted net income per share computation 414,769,846 345,415,258 316,159,277 Unvested shares from share-based compensation that were anti-dilutive 45,404 70,581 8,113 Weighted average partnership common units convertible to common shares that were anti-dilutive 500,217 463,119 442,073 Cash Equivalents and Restricted Cash . We consider all short-term, highly liquid investments that are readily convertible to cash and have an original maturity of three months or less at the time of purchase to be cash equivalents. Restricted cash includes cash proceeds from the sale of assets held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges under Section 1031 of the U.S. Internal Revenue Code, impounds related to mortgages payable and cash that is not immediately available to Realty Income (i.e. escrow deposits for future acquisitions). Cash accounts maintained on behalf of Realty Income in demand deposits at commercial banks and money market funds may exceed federally insured levels or may be held in accounts without any federal insurance or any other insurance or guarantee. However, Realty Income has not experienced any losses in such accounts. Lease Revenue Recognition and Accounts Receivable . The majority of our leases are accounted for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. Any rental revenue contingent upon our client’s sales is recognized only after our client exceeds their sales breakpoint. Rental increases based upon changes in the consumer price indexes are recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements. Contractually obligated rental revenue from our clients for recoverable real estate taxes and operating expenses are included in contractually obligated reimbursements by our clients, a component of rental revenue, in the period when such costs are incurred. Taxes and operating expenses paid directly by our clients are recorded on a net basis. Other revenue includes certain property-related revenue not included in rental revenue and interest income recognized on financing receivables for certain leases with above-market terms. The COVID-19 pandemic and the measures taken to limit its spread are negatively impacting the economy across many industries, including the industries in which some of our clients operate. These impacts may continue as the duration and severity of the pandemic increases. As a result, we have closely monitored the collectability of our accounts receivable and continue to evaluate the potential impacts of the COVID-19 pandemic and the measures taken to limit its spread on our business and industry segments as the situation continues to evolve and more information becomes available. We continue to assess the probability of collecting substantially all of the lease payments to which we are entitled under the original lease contract as required under Topic 842, Leases . We assess the 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 clients. If we conclude the -75- Table of Contents collection of substantially all lease payments under a lease is less than probable, rental revenue recognized for that lease is limited to cash received going forward, existing operating lease receivables, including those related to straight-line rental revenue, must be written off as an adjustment to rental revenue, and no further operating lease receivables are recorded for that lease until such future determination is made that substantially all lease payments under that lease are now considered probable. If we subsequently conclude that the collection of substantially all lease payments under a lease is probable, a reversal of lease receivables previously written off is recognized. The majority of concessions granted to our clients during 2020 and 2021 as a result of the COVID-19 pandemic have been rent deferrals with the original lease term unchanged. We currently anticipate future concessions will be similar. In accordance with the guidance provided by the Financial Accounting Standards Board (FASB) staff, we have elected to account for these leases as if the right of deferral existed in the lease contract and therefore continue to recognize lease revenue in accordance with the lease contract in effect. In limited circumstances, the undiscounted cash flows resulting from deferrals granted increased significantly from original lease terms, which required us to account for these as lease modifications, and resulted in an insignificant impact to consolidated rental revenue during 2020 and 2021. Similarly, rent abatements granted, which are also accounted for as lease modifications, impacted our rental revenue by an insignificant amount during 2020 and 2021. Unless otherwise specified, references to reserves recorded as a reduction of rental revenue include amounts reserved for in the current period, as well as unrecognized contractual rental revenue and unrecognized straight-line rental revenue for leases accounted for on a cash basis. The following table summarizes reserves to rental revenue (in millions): Year ended December 31, 2021 2020 2019 Rental revenue reserves $ 10.2 $ 44.1 $ 1.4 Straight-line rent reserves 4.5 8.4 1.5 Total rental revenue reserves $ 14.7 $ 52.5 $ 2.9 As of December 31, 2021, other than the information related to the reserves recorded to date, we do not have any further client specific information that would change our assessment that collection of substantially all of the future lease payments under our existing leases is probable. However, since the conversations regarding rent collections for our clients affected by the COVID-19 pandemic are ongoing and we do not currently know the types of future concessions, if any, that will ultimately be granted, there may be impacts in future periods that could change this assessment as the situation continues to evolve and as more information becomes available. We also evaluated certain properties impacted by the COVID-19 pandemic for impairment (see note 14, Financial Instruments and Fair Value Measurements ). Gain on Sales of Real Estate . When real estate is sold, the carrying amount of the applicable assets is derecognized with a corresponding gain from the sale recognized in our consolidated statements of income and comprehensive income. We record a gain from the sale of real estate provided that various criteria, relating to the terms of the sale and any subsequent involvement by us with the real estate, have been met. Allocation of the Purchase Price of Real Estate Acquisitions . A majority of our acquisitions qualify as asset acquisitions and the transaction costs associated with those acquisitions are capitalized. However, our merger with VEREIT comprises both an input and substantive process that together significantly contributes to the ability to create outputs and therefore would be considered a business. As a result, the merger with VEREIT qualified as a business combination and, accordingly, the transaction costs have been expensed and categorized as merger and integration-related costs on our consolidated statements of income and comprehensive income. In accordance with ASC Topic 805, Business Combinations , adjustments to the allocated purchase price are able to be made within one year of the closing date of our merger with VEREIT as acquisition date uncertainties are resolved (for more details on our merger with VEREIT, please see note 3, Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture ). 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 of in-place leases 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 -76- Table of Contents 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 values of the land, building and improvements, and identified intangible assets and liabilities, and is often based upon various characteristics of the market where the property is located. In addition, any assumed notes payable or 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. Our estimated fair value determinations are based on management’s judgment, utilizing various factors, including: market land and building values, market rental rates, discount rates and capitalization rates. Our methodology for measuring and allocating the fair value of real estate acquisitions includes both observable market data (categorized as level 2 on the three-level valuation hierarchy of ASC Topic 820, Fair Value Measurement), and unobservable inputs that reflect our own internal assumptions (categorized as level 3 under ASC Topic 820). Given the significance of the unobservable inputs we believe the allocations of fair value of real estate acquisitions should be categorized as level 3 under ASC Topic 820. From time to time, we have used, and may continue to use, the assistance of independent third parties specializing in real estate valuations to prepare our purchase price allocations. The allocation of tangible assets (which includes land and buildings/improvements) of an acquired property with an in-place lease is based upon relative fair value. Land is typically valued utilizing the sales comparison (or market) approach. Buildings and improvements are typically valued under the replacement cost approach. In allocating the fair value to identified intangibles for above-market or below-market leases, an amount is recorded based on the present value of the difference between (i) the contractual amount to be paid pursuant to the in-place lease and (ii) our estimate of fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease. The value of in-place leases is determined by our estimated costs related to acquiring a client and the carrying costs that would be incurred over the vacancy period to locate a client if the property were vacant, considering market conditions and costs to execute similar leases at the time of acquisition. 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 value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to depreciation and amortization expense over the remaining periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are recorded to revenue or expense as appropriate. Real Estate and Lease Intangibles Held for Sale. We generally reclassify assets to held for sale when the disposition has been approved, there are no known contingencies relating to the sale and the consummation of the disposition is considered probable within one year. Upon classifying a real estate investment as held for sale, we will no longer recognize depreciation expense related to the depreciable assets of the property. Assets held for sale are recorded at the lower of carrying value or estimated fair value, less the estimated cost to dispose of the assets. If circumstances arise that we previously considered unlikely and, as a result, we decide not to sell a property previously classified as held for sale, we will reclassify the property as held for investment. We measure and record a property that is reclassified as held for investment at the lower of (i) its carrying value before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for investment or (ii) the estimated fair value at the date of the subsequent decision not to sell. Thirty-three properties were classified as held for sale at December 31, 2021. Investment in Unconsolidated Entities. We account for our investment in unconsolidated entity arrangements using the equity method of accounting as we have the ability to exercise significant influence, but not control, over operating and financing policies of these investments. We have determined that none of the unconsolidated entities would be considered variable interest entities ("VIE") under the applicable accounting guidance. Our equity method investments were acquired in our merger with VEREIT. As a result, the investments were recorded at fair value and subsequently will be adjusted for our share of equity in the entities' earnings and distributions received. The step-up in fair value was allocated to the individual investment assets and liabilities and is being amortized over the estimated useful life of the respective underlying tangible real estate assets, the lease term of the intangible real -77- Table of Contents estate assets, and the remaining term of the assumed debt. Investment in unconsolidated entities is included in the accompanying consolidated balance sheets. We record our proportionate share of net income from the unconsolidated entities in other income, net in the consolidated statements of income and comprehensive income. Goodwill. Upon the closing of a business combination, after identifying all tangible and intangible assets and liabilities, the excess consideration paid over the fair value of the assets and liabilities acquired and assumed, respectively, represents goodwill. In connection with our merger with VEREIT, we recorded goodwill as a result of consideration exceeding the net assets acquired. Goodwill has not yet been allocated to our individual operating segments; the allocation is pending the finalization of our purchase accounting. Deferred Financing Costs. Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining or originating financing. Deferred financing costs, other than those associated with the line of credit, are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. Deferred financing costs related to the line of credit are included in other assets, net in the accompanying consolidated balance sheets. These costs are amortized to interest expense over the terms of the respective financing agreements that approximates with the effective interest method. Depreciation and Amortization . Land, buildings and improvements are recorded and stated at cost. Major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives, while ordinary repairs and maintenance are expensed as incurred. Buildings and improvements that are under redevelopment, or are being developed, are carried at cost and no depreciation is recorded on these assets. Additionally, amounts essential to the development of the property, such as pre-construction, development, construction, interest and other costs incurred during the period of development are capitalized. We cease capitalization when the property is available for occupancy upon substantial completion of property improvements to accommodate the client's use, but in any event no later than one year from the completion of major construction activity. Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows: Buildings 25 years or 35 years Building improvements 4 to 35 years Equipment 5 to 25 years Lease commissions and property improvements to accommodate the client's use The shorter of the term of the related lease or useful life Acquired in-place leases Remaining terms of the respective leases Provisions for Impairment - Real Estate Assets. 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. Provisions for Impairment - Goodwill. Goodwill is not amortized, but is subject to impairment reviews annually, or more frequently if necessary. Goodwill is qualitatively assessed to determine whether a quantitative impairment assessment is necessary. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized, and the asset is written down to its estimated fair value. We perform our annual goodwill impairment assessment as of June 30. During the years ended December 31, 2021, 2020 and 2019 there were no impairments of goodwill. Provisions for Impairment - Investment in Unconsolidated Entities. When circumstances indicate that a decrease in value of an equity method investment has occurred that is other than temporary, an impairment loss should be recognized. To determine whether an impairment is other-than-temporary, we consider whether it has the ability and intent to hold the investment until the carrying value is fully recovered. We evaluate the recoverability of our investment in unconsolidated entities in accordance with accounting standards for equity investments by first reviewing each investment for indicators of impairment. If indicators are present, we estimate the fair value of the -78- Table of Contents investment. If the carrying value of the investment is greater than the estimated fair value, we make an assessment of whether the impairment is temporary or other-than-temporary. In making this assessment, we consider the length of time and the extent to which fair value has been less than cost, the financial condition and near-term prospects of the entity, and our intent and ability to retain its interest long enough for a recovery in market value. If we conclude that the impairment is other than temporary, the investment is reduced to its estimated fair value. The evaluation of an investment in an unconsolidated entity for potential impairment requires significant judgment. Since our merger with VEREIT in November 2021, when we assumed our first unconsolidated entities, through December 31, 2021, there have been no impairments of equity method investments. Equity Offering Costs. Underwriting commissions and offering costs have been reflected as a reduction of additional paid-in-capital on our consolidated balance sheets. Derivative and Hedging Activities . Derivatives are financial arrangements among two or more parties with returns linked to or “derived” from an underlying equity, debt, commodity, other asset, liability, interest rate, foreign exchange rate or another index, or the occurrence or nonoccurrence of a specified event. The settlement of a derivative is determined by its underlying notional amount specified in the contract. Derivative contracts may be entered into outright or embedded within a non-derivative host contract, and may be listed, traded on exchanges or privately negotiated directly between two parties. We actively manage our risk exposures which arise from our liquidity and funding activities using derivative instruments which hedge for interest rate risk, foreign exchange risk, or both. We record all derivatives on the balance sheet at fair value. The recognition of changes in the fair value of derivatives is recorded in net income unless the derivative is designated in a cash flow or net investment hedge accounting relationship in which case the change in fair value is recorded in other comprehensive income until such time as the designated hedged item impacts net income. Income Taxes . We have elected to be taxed as a 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 (“TRS”). A TRS is a subsidiary of a REIT that is subject to federal, state and local income taxes, as applicable. Our use of a TRS enables us to engage in certain business activities while complying with the REIT qualification requirements and to retain any income generated by these businesses for reinvestment without the requirement to distribute those earnings. 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 income taxes for the U.K. and Spain. Earnings and profits that determine the taxability of distributions to stockholders differ from net income reported for financial reporting purposes due to differences in the estimated useful lives and methods used to compute depreciation and the carrying value (basis) of the investments in properties for tax purposes, among other things. We regularly analyze our various federal and state filing positions and only recognize the income tax effect in our financial statements when certain criteria regarding uncertain income tax positions have been met. We believe that our income tax positions would more likely than not be sustained upon examination by all relevant taxing authorities. Therefore, no provisions for uncertain income tax positions have been recorded in our financial statements. Recently Issued Accounting Standards. In July 2021, the FASB issued ASU 2021-05 establishing Topic 842, Lessors - Certain Leases with Variable Lease Payments . ASU 2021-05 improves ASC 842 classification guidance as it relates to a lessor's accounting for certain leases with variable lease payments. This guidance requires a lessor to classify a lease with variable payments that do not depend on an index or rate as an operating lease if either a sales-type lease or direct financing lease classification would trigger a day-one loss. This guidance is effective for reporting periods beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2021-05 on our consolidated financial statements. In March 2020, the FASB issued ASU 2020-04 establishing Topic 848, Reference Rate Reform . ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and is effective between March 12, 2020 and December 31, 2022. The guidance may be elected over time as reference rate reform activities occur. We are currently evaluating the impact -79- Table of Contents that the expected market transition from the London Interbank Offered Rate, commonly referred to as LIBOR, to alternative references rates will have on our financial statements as well as the applicability of the aforementioned expedients and exceptions provided in ASU 2020-04. 3. Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture Merger with VEREIT On April 29, 2021, we entered into an Agreement and Plan of Merger, as amended, or the Merger Agreement, with VEREIT, its operating partnership, VEREIT Operating Partnership, L.P., or VEREIT OP, and two newly formed subsidiaries. Pursuant to the terms of the Merger Agreement, (i) one of the newly formed subsidiaries of us agreed to merge with and into VEREIT OP, with VEREIT OP as the surviving entity, which we refer to as the Partnership Merger, and (ii) immediately thereafter, VEREIT agreed to merge with and into the other newly formed subsidiary of us, with our subsidiary as the surviving corporation, which we refer to collectively as the merger. The primary reason for the Merger is to expand our size, scale and diversification, in order to further enhance our competitive advantages and accelerate our investment activities. On November 1, 2021, we completed our acquisition of VEREIT, and the merger was consummated. Pursuant to the terms of the Merger Agreement and subject to the terms thereof, upon the consummation of the merger, (i) each outstanding share of VEREIT common stock, and each outstanding common partnership unit of VEREIT OP owned by any of its partners other than VEREIT, Realty Income or their respective affiliates, was automatically converted into 0.705 of newly issued shares of our common stock, or in certain instances, Realty Income L.P. units, and (ii) each VEREIT OP outstanding common unit owned by VEREIT, Realty Income or their respective affiliates remained outstanding as partnership interests in the surviving entity. Each outstanding VEREIT stock option and restricted stock unit that were unvested as of November 1, 2021 were converted into equivalent options and restricted stock units, in each case with respect to the share of the Company's common stock, using the equity award exchange ratio in accordance with the Merger Agreement. For more details, see note 16, Common Stock Incentive Plan. Our merger with VEREIT has been accounted for using the acquisition method of accounting in accordance with ASC, 805, Business Combinations , with Realty Income as the accounting acquirer, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair value. The fair value of the consideration transferred on the date of the acquisition is as follows (in thousands, except share and per share data): Shares of VEREIT common stock and VEREIT OP common units exchanged (1) 229,304,035 Exchange Ratio 0.705 161,659,345 Less: Fractional shares settled in cash ( 1,545 ) Shares of Realty Income common stock and Realty Income L.P. units issued 161,657,800 Adjusted opening price of Realty common stock on November 1, 2021 (2) $ 71.236 Fair value of Realty common stock issued to former holders of VEREIT common stock and VEREIT OP common units $ 11,515,855 Fair value of VEREIT's equity-based compensation awards attributable to pre-combination services (3) 44,020 Total non-cash consideration 11,559,875 Cash paid for fractional shares 110 VEREIT indebtedness paid off in connection with the merger (4) 500,414 Consideration transferred $ 12,060,399 (1) Includes 229,152,001 shares of VEREIT common stock and 152,034 VEREIT OP common units outstanding as of November 1, 2021. Under the Merger Agreement, these shares and units were converted to Realty Income common stock, or in certain instances, Realty Income L.P. units, at an Exchange Ratio of 0.705 per share of VEREIT common stock or VEREIT OP common unit, as applicable. (2) The fair value of Realty Income common stock issued to former holders of VEREIT common stock and VEREIT OP common units is based on the per share opening price of Realty Income common stock of $ 71.00 on November 1, 2021 (which traded on an ex-dividend basis), adjusted for the monthly dividend of $ 0.236 per share that former holders of VEREIT common stock and VEREIT OP common units were eligible to receive when such dividend was paid on November 15, 2021. (3) Represents the fair value of fully vested deferred stock unit awards of VEREIT common stock (“VEREIT DSU Awards”) which were converted into Realty Income common stock upon our merger with VEREIT, as well as the estimated fair value of the Realty Income replacement employee and executive stock options and restricted stock units that were granted at the closing date of our merger with VEREIT and which were attributable to pre-combination services. -80- Table of Contents (4) Represents the outstanding balance of the VEREIT revolving credit facility paid off by Realty Income in connection with the merger. The amount shown in the table above was based upon the balance outstanding immediately prior to November 1, 2021. A. Preliminary Purchase Price Allocation The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands): ASSETS Land $ 3,037,751 Buildings 8,685,049 Total real estate held for investment 11,722,800 Cash and cash equivalents 128,411 Accounts receivable 53,355 Lease intangible assets (1) 3,227,381 Goodwill 3,662,848 Investment in unconsolidated entities 194,876 Other assets 318,776 Total assets acquired $ 19,308,447 LIABILITIES Accounts payable and accrued expenses $ 139,836 Lease intangible liabilities (2) 953,730 Other liabilities 337,052 Mortgages payable 869,113 Notes payable 4,946,965 Total liabilities assumed $ 7,246,696 Net assets acquired, at fair value $ 12,061,751 Noncontrolling interests $ 1,352 Total purchase price $ 12,060,399 (1) The weighted average amortization period for acquired lease intangible assets is 9.3 years. (2) The weighted average amortization period for acquired lease intangible liabilities is 26.1 years. The assessment of fair value is preliminary and is based on information that was available to management at the time the consolidated financial statements were prepared. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. The finalization of our purchase accounting assessment could result in changes in the valuation of assets acquired and liabilities assumed up to a year after the date of our merger with VEREIT, which could be material. Due to the timing and complexity of the merger, we recorded the assets acquired and liabilities assumed at their preliminary estimated fair values. As of December 31, 2021, we had not finalized the determination of fair values allocated to certain assets and liabilities, including land, buildings, lease intangible assets, lease intangible liabilities, and the allocation of goodwill. The preliminary purchase price allocation is subject to change as we complete our analysis of the fair value at the date of the transactions, which could have an impact on the consolidated financial statements. A preliminary estimate of approximately $ 3.66 billion has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. The recognized goodwill is attributable to expected synergies and benefits arising from the merger transaction, including anticipated financing and overhead cost savings, potential economies of scale benefits in both customer and vendor relationships and the employee workforce onboarded from VEREIT following the closing of the transaction. Goodwill has not yet been allocated to our individual operating segments; the allocation is pending the -81- Table of Contents finalization of our purchase accounting. None of the goodwill recognized is expected to be deductible for tax purposes. B. Merger and Integration-related Costs In conjunction with our merger with VEREIT, we incurred approximately $ 161.4 million of transaction costs during the year ended December 31, 2021, which were included in the $ 167.4 million of merger and integration-related costs within our consolidated statements of income and comprehensive income. The merger and integration-related costs primarily consist of advisory fees, including success-based fees, attorney fees, accountant fees, SEC filing fees and additional integration costs that include incremental and non-recurring costs necessary to convert data and systems, retain employees and otherwise enable us to operate acquired businesses or assets efficiently. C. Unaudited Pro Forma Financial Information Our consolidated results of operations for the year ended December 31, 2021 include $ 176.3 million of revenues and $ 36.7 million of net loss associated with the results of operations of VEREIT OP from the merger closing date to December 31, 2021. The following unaudited pro forma information presents a summary of our combined results of operations for the years ended December 31, 2021 and 2020 as if our merger with VEREIT had occurred on January 1, 2020 (in millions, except per share data). The following pro forma financial information is not necessarily indicative of the results of operations had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses. The following information excludes the impact of the spin-off of office assets to Orion Office REIT Inc. Year Ended December 31, 2021 2020 Total revenues $ 3,082.9 $ 2,828.0 Net income $ 762.9 $ 317.2 Basic and diluted earnings per share $ 1.39 $ 0.62 The unaudited pro forma financial information above includes the following nonrecurring significant adjustment made to account for certain costs incurred as if our merger with VEREIT had been completed on January 1, 2020: merger and integration-related costs of $ 167.4 million were excluded within the pro forma financial information for 2021, but included for 2020. D. Litigation Relating to the Merger Purported stockholders of VEREIT filed 12 lawsuits challenging disclosures related to the merger ( Stein v. VEREIT, Inc., et. al. , Case No. 1:21-cv-01409 (D. Ct. Md., June 7, 2021) (the “Stein Complaint”); Bowles v. VEREIT, Inc., et. al. , Case No. 1:21-cv-00845 (D. Ct. Del., June 10, 2021) (the “Bowles Complaint”); Leach v. VEREIT, Inc., et. al. , Case No. 1:21-cv-05270 (D. Ct. S.D.N.Y., June 14, 2021) (the “Leach Complaint”); Jenkins v. VEREIT, Inc., et. al. , Case No. 1:21-cv-05286 (D. Ct. S.D.N.Y., June 15, 2021) (the “Jenkins Complaint”); Tacka v. VEREIT, Inc., et. al. , Case No. 1:21-cv-05357 (D. Ct. S.D.N.Y., June 17, 2021) (the “Tacka Complaint”); Congregation Zichron Moishe v. VEREIT, Inc., et. al. , Case No. 1:21-cv-01729 (D. Ct. Colo., June 24, 2021) (the “Congregation Zichron Moishe Complaint”); Mishra v. VEREIT, Inc., et al. , Case No. 1:21-cv-01758 (D. Colo. June 28, 2021) (the “Mishra Complaint”) ; Walker v. VEREIT, Inc., et. al. , Case No. 1:21-cv-01791 (D. Ct. Colo. July 1, 2021) (the “Walker Complaint”); Ciccotelli v. VEREIT, Inc., et. al. , Case No. 2:21-cv-02983 (D. Ct. E.D. Pa. July 2, 2021) (the “Ciccotelli Complaint”); Upton v. VEREIT, Inc., et. al. , Case No. 1:21-cv-06129 (D. Ct. S.D.N.Y July 16, 2021) (the “Upton Complaint”); Matten v. VEREIT, Inc., et al. , Case No. 1:21-cv-06212 (S.D.N.Y. July 21, 2021) (the “Matten Complaint”); and Halberstam v. VEREIT, Inc., et al. , Case No. 1:21-cv-02000 (D. Colo. July 23, 2021 (the “Halberstam Complaint”)). Purported stockholders of Realty Income filed one lawsuit challenging the disclosures related to the merger ( Boyko v. Realty Income Corp., et. al. , Case No. 1:21-cv-01653 (D. Ct. Colo., June 16, 2021) (the “Boyko Complaint,” and collectively, the “Complaints”)). A stockholder of Realty Income also sent the Company a demand disclosure letter on June 30, 2021 (the “Demand Letter”). The Stein, Leach, Tacka, Matten and Halberstam Complaints named VEREIT and the members of the VEREIT board of directors as defendants. The Congregation Zichron Moishe, Mishra, Walker and Upton Complaints named VEREIT, VEREIT OP, and the members of the VEREIT board of directors as defendants. The Bowles and Ciccotelli Complaints named VEREIT, the members of the VEREIT board of directors, VEREIT OP, Realty Income, Merger -82- Table of Contents Sub 1 and Merger Sub 2 as defendants. The Jenkins Complaint named VEREIT, the members of the VEREIT board of directors, Realty Income, Merger Sub 1 and Merger Sub 2 as defendants. The Boyko Complaint named Realty Income and the members of the Realty Income board of directors as defendants. The Demand Letter was addressed to Realty Income and the members of the Realty Income board of directors. The Complaints each alleged generally that the entities and individual defendants named in such Complaint violated Section 14(a) and Rule 14a-9 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act by preparing and disseminating a registration statement that misstates or omits certain allegedly material information. The Demand Letter included similar allegations. Furthermore, the Jenkins Complaint also alleged that: (1) members of the VEREIT board of directors breached their fiduciary duties by entering into the transactions contemplated by the Merger Agreement through a flawed and unfair process and by failing to disclose all material information to VEREIT’s stockholders; and (2) VEREIT, Realty Income, Merger Sub 1 and Merger Sub 2 each aided and abetted such breach of fiduciary duty by the VEREIT board of directors. Each Complaint sought, among other things, injunctive relief enjoining the consummation of the Merger, and, if the Merger was consummated, rescission or rescissory damages and an award of the plaintiff’s costs, including attorneys’ and experts’ fees. The defendants believed that all of the claims asserted in the Complaints were without merit. On July 30, 2021, VEREIT filed a Form 8-K containing supplemental disclosures regarding the merger and related transactions in response to allegations set forth in the Complaints and the Demand Letter. In light of these additional disclosures, between August 2, 2021 and October 27, 2021, plaintiffs’ counsel in all of the cases voluntarily dismissed their respective complaints. Orion Divestiture Following of the closing of our merger with VEREIT, we contributed 92 office real estate assets, a consolidated real estate venture holding one office asset, and an unconsolidated real estate venture holding five office assets to a wholly owned subsidiary named Orion Office REIT Inc., or Orion. On November 12, 2021, we distributed the outstanding shares of Orion common stock to our shareholders (including legacy VEREIT stockholders who received shares of our common stock in our merger with VEREIT) on a pro rata basis at a rate of one share of Orion common stock for every ten shares of Realty Income common stock held on November 12, 2021, the applicable record date, which we refer to as the Orion Divestiture. The fair market value of these shares for tax distribution was determined to be $ 20.6272 per share, which was calculated using the five day volume weighted average share price after issuance. For more detail, see note 12, Distributions Paid and Payable . Following the Orion Divestiture, Orion began operating as a separate, independent public company. In conjunction with the Orion Divestiture, we incurred approximately $ 6.0 million of transaction costs during the year ended December 31, 2021, which were included in the $ 167.4 million of merger and integration-related costs within our consolidated statements of income and comprehensive income. As part of the Orion Divestiture, Orion paid us a dividend of $ 425.0 million and reimbursed $ 170.2 million to us for the early redemption of mortgage loans underlying the contributed assets prior to the effectuation of the Orion Divestiture. The distribution of Orion resulted in the derecognition of net assets of $ 1.74 billion, which net of the aforementioned cash payments of $ 595.2 million, resulted in a reduction to additional paid in capital of $ 1.14 billion. In connection with the divestiture, we entered into certain agreements with Orion to effect our legal and structural separation, including a transition services agreement (TSA) and reverse TSA to provide certain administrative and other services for a limited time, and tax matters. As of December 31, 2021, those agreements are still in effect. -83- Table of Contents 4. Supplemental Detail for Certain Components of Consolidated Balance Sheets (in thousands): A. Accounts Receivable, net, consist of the following at: December 31, 2021 December 31, 2020 Straight-line rent receivables, net $ 231,943 $ 174,074 Client receivables, net 194,825 111,627 $ 426,768 $ 285,701 B. Lease intangible assets, net, consist of the following at: December 31, 2021 December 31, 2020 In-place leases $ 4,791,846 $ 1,840,704 Accumulated amortization of in-place leases ( 804,050 ) ( 744,375 ) Above-market leases 1,591,382 866,567 Accumulated amortization of above-market leases ( 303,874 ) ( 252,241 ) $ 5,275,304 $ 1,710,655 C. Other assets, net, consist of the following at: December 31, 2021 December 31, 2020 Right of use asset - operating leases, net $ 631,515 $ 112,049 Financing receivables 323,921 131,291 Right of use asset - financing leases 218,332 118,585 Restricted escrow deposits 68,541 21,220 Derivative assets and receivables – at fair value 29,593 10 Non-refundable escrow deposits 28,560 1,000 Prepaid expenses 18,062 11,795 Corporate assets, net 10,915 8,598 Investment in sales type leases 7,492 — Impounds related to mortgages payable 5,249 4,983 Note receivable 4,455 — Credit facility origination costs, net 4,352 7,705 Other items 18,592 2,881 $ 1,369,579 $ 420,117 D. Accounts payable and accrued expenses consist of the following at: December 31, 2021 December 31, 2020 Notes payable - interest payable $ 108,227 $ 83,219 Derivative liabilities and payables – at fair value 70,617 73,356 Property taxes payable 36,173 23,413 Accrued property expenses 27,344 5,401 Accrued costs on properties under development 19,665 12,685 Accrued income taxes 19,152 8,077 Value-added tax payable 11,297 5,182 Merger and integration-related costs 10,699 — Mortgages, term loans, and credit line - interest payable 3,874 1,044 Other items 44,080 28,959 $ 351,128 $ 241,336 E. Lease intangible liabilities, net, consist of the following at: December 31, 2021 December 31, 2020 Below-market leases $ 1,460,701 $ 460,895 Accumulated amortization of below-market leases ( 152,480 ) ( 139,697 ) $ 1,308,221 $ 321,198 F. Other liabilities consist of the following at: December 31, 2021 December 31, 2020 Lease liability - operating leases, net $ 461,748 $ 114,559 Rent received in advance and other deferred revenue 242,122 130,231 Lease liability - financing leases 43,987 6,256 Security deposits 11,340 5,817 $ 759,197 $ 256,863 -84- Table of Contents 5. Investments in Real Estate We acquire land, buildings and improvements necessary for the successful operations of commercial clients. A. Acquisitions during 2021 and 2020 Below is a summary of our acquisitions for the year ended December 31, 2021 (information is unaudited and excludes properties assumed on November 1, 2021 in conjunction with our merger with VEREIT): Number of Properties Leasable Square Feet Investment ($ in thousands) Weighted Average Lease Term (Years) Initial Weighted Average Cash Lease Yield (1) Year ended December 31, 2021 (2) Acquisitions - U.S. (in 43 states) 714 14,727,335 $ 3,608,573 14.1 5.5 % Acquisitions - Europe (U.K. and Spain) 129 9,196,345 2,558,909 11.6 5.5 % Total Acquisitions 843 23,923,680 $ 6,167,482 13.1 5.5 % Properties under Development (3) 68 2,681,676 243,278 15.7 6.0 % Total (4) 911 26,605,356 $ 6,410,760 13.2 5.5 % (1) The initial weighted average cash lease yield for a property is generally computed as estimated contractual first year cash net operating income, which, in the case of a net leased property, is equal to the aggregate cash base rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that a client could default on the payment of contractual rent, we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above. Contractual net operating income used in the calculation of initial average cash yield includes approximately $ 8.5 million received as settlement credits for 41 properties as reimbursement of free rent periods for the year ended December 31, 2021. In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does not provide for a fixed rate of return on a property under development or expansion, the initial weighted 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 2021 caused any one client to be 10% or more of our total assets at December 31, 2021. (3) Includes £ 7.0 million of investments in U.K. development properties, converted at the applicable exchange rate on the funding date. (4) Our clients occupying the new properties are 83.6 % retail and 16.4 % industrial, based on rental revenue. Approximately 40 % of the rental revenue generated from acquisitions during 2021 is from our investment grade rated clients, their subsidiaries or affiliated companies. Acquired properties accounted for as asset acquisitions during the year ended December 31, 2021, which had no associated contingent consideration, were allocated as follows (in millions): Acquisitions - U.S. Acquisitions - U.K. Acquisitions - Spain Year ended December 31, 2021 (USD) (£ Sterling) (€ Euro) Land (1) $ 1,059.3 £ 422.3 € 108.4 Buildings and improvements 1,795.8 904.3 168.8 Lease intangible assets (2) 579.8 249.0 37.8 Other assets (3) 503.7 40.4 21.9 Lease intangible liabilities (4) ( 92.2 ) ( 6.8 ) — Other liabilities (5) ( 130.6 ) ( 0.3 ) ( 16.5 ) $ 3,715.8 £ 1,608.9 € 320.4 (1) U.K. land includes £ 5.5 million of right of use assets under long-term ground leases. (2) The weighted average amortization period for acquired lease intangible assets is 12.8 years. (3) U.S. other assets consists of $ 161.5 million of financing receivables with above-market terms, $ 76.7 million of right-of-use assets accounted for as finance leases, $ 5.8 million in investments in sales-type leases, and $ 259.7 million of right of use assets under ground leases accounted for as operating leases. U.K. other assets consists of £ 7.2 million of financing receivables with above-market terms, £ 33.2 million of right-of-use assets accounted for as finance leases, and £ 13,000 of right of use assets under ground leases accounted for as operating leases. Spain other assets consists entirely of financing receivables with above-market terms. (4) The weighted average amortization period for acquired lease intangible liabilities i s 15.9 years. (5) U.S. other liabilities consists of $ 27.1 million of deferred rent on certain below-market leases, $ 67.4 million of lease liabilities under ground leases accounted for as operating leases, and $ 36.1 million for lease liabilities under financing leases. U.K. other liabilities consists of £ 288,000 of a GBP mortgage premium and £ 13,000 of lease liabilities under ground leases. Spain other liabilities consists entirely of deferred rent on certain below-market leases. Acquired properties accounted for as asset acquisitions during 2021 generated total revenues of $ 136.6 million and net income of $ 25.8 million during the year ended December 31, 2021. -85- Table of Contents Below is a summary of our acquisitions for the year ended December 31, 2020 (unaudited): Number of Properties Leasable Square Feet Investment ($ in thousands) Weighted Average Lease Term (Years) Initial Weighted Average Cash Lease Yield Year Ended December 31, 2020 (1) Acquisitions - U.S. (in 30 states) 202 5,476,009 $ 1,302,220 14.9 5.8 % Acquisitions - U.K. (2) 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 (3) 244 9,197,360 $ 2,307,281 13.2 5.9 % (1) None of our investments during 2020 caused any one client to be 10% or more of our total assets at December 31, 2020. (2) 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. (3) Our clients occupying the new properties 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. Acquired properties accounted for as asset acquisitions during the year ended December 31, 2020, which had no associated contingent consideration, were allocated as follows (in millions): Acquisitions - U.S. Acquisitions - U.K. Year Ended December 31, 2020 (USD) (£ Sterling) Land (1) $ 338.4 £ 253.4 Buildings and improvements 760.0 259.1 Lease intangible assets (2) 206.6 145.3 Other assets (3) 52.6 50.6 Lease intangible liabilities (4) ( 9.3 ) ( 0.6 ) Other liabilities (5) ( 0.9 ) — $ 1,347.4 £ 707.8 (1) U.K. land includes £ 88.8 million of right of use assets under long-term ground leases. (2) The weighted average amortization period for acquired lease intangible assets is 15.8 years. (3) U.S. other assets consists of $ 51.9 million of 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 16.7 years. (5) U.S. other liabilities consists entirely of lease liabilities under ground leases. Acquired properties accounted for as asset acquisitions during 2020 generated total revenues of $ 54.6 million and net income of $ 19.4 million during the year ended December 31, 2020. B. Investments in Existing Properties During 2021, we capitalized costs of $ 21.9 million on existing properties in our portfolio, consisting of $ 6.3 million for re-leasing costs, $ 978,000 for recurring capital expenditures and $ 14.6 million for non-recurring building improvements. In comparison, 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. C. Properties with Existing Leases Of the $ 6.41 billion we invested during 2021, which excludes the 3,895 properties assumed in conjunction with our merger with VEREIT on November 1, 2021, approximately $ 5.02 billion was used to acquire 557 properties with existing leases. In comparison, of the $ 2.31 billion we invested during 2020, approximately $ 1.86 billion was used to acquire 127 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 2021, 2020, and 2019 were $ 247.5 million, $ 134.6 million, and $ 112.0 million, respectively. -86- Table of Contents 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 2021, 2020, and 2019 were $ 54.6 million, $ 30.9 million, and $ 22.1 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 December 31, 2021 (in thousands): Net increase (decrease) to rental revenue Increase to amortization expense 2022 $ ( 59,676 ) $ 611,012 2023 ( 57,819 ) 524,957 2024 ( 51,873 ) 465,087 2025 ( 46,018 ) 396,948 2026 ( 37,220 ) 353,006 Thereafter 273,319 1,636,786 Totals $ 20,713 $ 3,987,796 D. Gain on Sales of Real Estate The following summarizes our property dispositions (dollars in millions). These amounts exclude properties disposed from the spin-off of office properties to Orion Office REIT Inc. in November 2021. Year Ended December 31, 2021 2020 2019 Number of properties 154 126 93 Net sales proceeds $ 250.3 $ 262.5 $ 108.9 Gain on sales of real estate $ 55.8 $ 76.2 $ 30.0 These property sales do not represent a strategic shift that will have a major effect on our operations and financial results, and therefore do not require presentation as discontinued operations. E. Investment in Unconsolidated Entities The following is a summary of our investments in unconsolidated entities as of December 31, 2021 (in thousands): Ownership % (1) Number of Properties Carrying Amount of Investment as of (2) Equity in Income (2) Investment December 31, 2021 December 31, 2021 December 31, 2021 Industrial Partnerships 20 % 7 $ 140,967 $ 1,106 (1) Our ownership interest reflects legal ownership interest. Legal ownership may, at times, not equal our economic interest in the listed properties because of various provisions in certain entity agreements regarding capital contributions, distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns. As a result, our actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with legal ownership interests. (2) Our unconsolidated entities are a result of our merger with VEREIT. The total carrying amount of the investments was greater than the underlying equity in net assets by $ 100.3 million as of December 31, 2021. The difference relates to a step-up in fair value of the investment net assets acquired in connection with the merger with VEREIT on November 1, 2021. The step up in fair value was allocated to the individual investment assets and liabilities and is being amortized over the estimated useful life of the respective underlying tangible real estate assets, the lease term of the intangible real estate assets, and the remaining term of the mortgages payable. Prior to November 1, 2021, we did not own any unconsolidated entities. As a result of the merger with VEREIT, we assumed a preferred equity interest in the development of one distribution center for which we were entitled to receive a cumulative preferred return of 9 % per year on the initial contribution of $ 22.8 million along with a share in the profit earned in the event of the sale of the property to a third party. Under the acquisition method of accounting, this preferred equity interest was adjusted to its fair value of $ 38.1 million at the time of the merger. During December 2021, the distribution center was sold to a third party and we received proceeds of $ 38.3 million and recorded a $ 0.2 million gain on disposition. -87- Table of Contents The aggregate debt outstanding for unconsolidated entities was $ 431.8 million as of December 31, 2021, which is non-recourse to us. As our only equity method investment resulted from our merger with VEREIT on November 1, 2021, there was no debt relating to unconsolidated entities as of December 31, 2020. Each of us and our unconsolidated entity partners are subject to the provisions of the applicable entity agreements, which include provisions for when additional contributions may be required to fund certain cash shortfalls. 6. Revolving 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 December 31, 2021 provide for financing at 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 revolving credit facility. Our revolving credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation. LIBOR is in the process of being discontinued. While certain U.S. dollar LIBOR settings will continue to be published on the current basis until June 30, 2023, all other LIBOR settings either are no longer being published or are being published only for a limited time and only on a “synthetic” basis (i.e., not on the basis of submissions made by panel banks). The regulator of the administrator of LIBOR has prohibited any new use of LIBOR by firms subject to its supervision, and certain regulators in the United States have stated that no new contracts using U.S. dollar LIBOR should be entered into after 2021. Our revolving credit facility and term loan facility were amended in December 2021 to include provisions for establishing alternative reference rates when LIBOR is no longer available. At December 31, 2021, credit facility origination costs of $ 4.4 million are included in other assets, net, as compared to $ 7.7 million at December 31, 2020, on our consolidated balance sheet. These costs are being amortized over the remaining term of our revolving credit facility. At December 31, 2021, we had a borrowing capacity of $ 2.35 billion available on our revolving credit facility (subject to customary conditions to borrowing) and an outstanding balance of $ 650.0 million, as compared to no outstanding balance at December 31, 2020. The weighted average interest rate on outstanding borrowings under our revolving credit facility was 0.9 % during 2021 and 1.5 % during 2020. At December 31, 2021, the weighted average interest rate on borrowings outstanding under our revolving credit facility was 0.9 %. Our revolving credit facility is subject to various leverage and interest coverage ratio limitations, and at December 31, 2021, we were in compliance with the covenants on our revolving credit f acility. B. Commercial Paper Program We have 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 ranks 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, our term loan and our outstanding senior unsecured notes. Proceeds from commercial paper borrowings are used for general corporate purposes. At December 31, 2021, the balance of borrowings outstanding under our commercial paper program was $ 901.4 million as compared to no outstanding borrowings at December 31, 2020. The weighted average interest rate on borrowings under our commercial paper program was 0.2 % for 2021 and 0.3 % from inception of the plan in August 2020 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. The commercial paper borrowings generally carry a term of less than six months . The commercial paper borrowings outstanding at December 31, 2021 mature between January 2022 and April 2022. -88- Table of Contents 7. 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 %. At December 31, 2021, deferred financing costs of $ 443,000 are included net of the term loan principal balance, as compared to $ 642,000 at December 31, 2020, on our consolidated balance sheet. These costs are being amortized over the remaining term of the term loan. 8. Mortgages Payable During 2021, we made $ 66.6 million in principal payments, including the repayment of seven mortgages in full for $ 63.0 million. During 2020, we made $ 108.8 million in principal payments, including the repayment of nine mortgages in full for $ 103.4 million. During 2021, we assumed 11 mortgages totaling $ 881.1 million in principal, including ten mortgages from our merger with VEREIT totaling $ 839.1 million and a Sterling-denominated mortgage on one property totaling £ 31.0 million. No mortgages were assumed during 2020. Assumed mortgages are secured by the properties on which the debt was placed and are considered non-recourse debt with limited customary exceptions which vary from loan to loan. In September 2021, we completed the early redemption on $ 12.5 million in principal of a mortgage due June 2032, plus accrued and unpaid interest. As a result of the early redemption, we recognized a loss of $ 4.0 million on extinguishment of debt for 2021. In October 2021, we completed the early redemption on $ 9.6 million in principal of a mortgage due June 2022, plus accrued and unpaid interest. As a result of the early redemption, we recognized a loss of $ 315,000 on extinguishment of debt for 2021. 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 December 31, 2021, 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, at December 31, 2021 and 2020 was $ 790,000 and $ 973,000 , respectively. These costs are being amortized over the remaining term of each mortgage. The following summarizes our mortgages payable as of December 31, 2021 and 2020, 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 Finance Costs Balance, net Mortgage Payable Balance 12/31/2021 267 4.8 % 3.5 % 1.8 $ 1,114,129 $ 27,866 $ 1,141,995 12/31/2020 68 4.9 % 4.6 % 2.9 $ 299,631 $ 729 $ 300,360 (1) At December 31, 2021, there were 22 mortgages on 267 properties. At December 31, 2020, there were 18 mortgages on 68 properties. With the exception of one Sterling-denominated mortgage which is paid quarterly, the mortgages require monthly payments with principal payments due at maturity. At December 31, 2021 and December 31, 2020, all mortgages were at fixed interest rates. (2) Stated interest rates ranged from 3.0 % to 6.9 % and 3.8 % to 6.9 % at each of December 31, 2021 and 2020, respectively. (3) Effective interest rates ranged from 2.6 % to 6.0 % and 4.0 % to 5.5 % at each of December 31, 2021 and 2020, respectively. The following table summarizes the maturity of mortgages payable, excluding net premiums of $ 28.7 million and deferred financing costs of $ 790,000 , as of December 31, 2021 (in millions): Year of Maturity Principal 2022 $ 271.1 2023 62.1 2024 733.0 2025 42.0 2026 1.2 Thereafter 4.7 Totals $ 1,114.1 -89- Table of Contents 9. Notes Payable A. General Our senior unsecured notes and bonds consist of the following, sorted by maturity date (in millions): Principal Amount (Currency Denomination) Carrying Value (USD) as of December 31, 2021 December 31, 2020 3.250 % notes, $ 450 issued in October 2012 and $ 500 issued in December 2017, both due in October 2022 (1) $ 950 $ — $ 950 4.650 % notes, issued in July 2013 and due in August 2023 (2) $ 750 — 750 4.600 % notes, $ 500 issued February 2014, of which $ 485 was exchanged in November 2021, both due in February 2024 (3) $ 500 500 — 3.875 % notes, issued in June 2014 and due in July 2024 $ 350 350 350 3.875 % notes, issued in April 2018 and due in April 2025 $ 500 500 500 4.625 % notes, $ 550 issued October 2018, of which $ 544 was exchanged in November 2021, both due in November 2025 (3) $ 550 550 — 0.750 % notes, issued December 2020 and due in March 2026 $ 325 325 325 4.875 % notes, $ 600 issued June 2016, of which $ 596 was exchanged in November 2021, both due in June 2026 (3) $ 600 600 — 4.125 % notes, $ 250 issued in September 2014 and $ 400 issued in March 2017, both due in October 2026 $ 650 650 650 3.000 % notes, issued in October 2016 and due in January 2027 $ 600 600 600 1.125 % notes, issued in July 2021 and due in July 2027 £ 400 541 — 3.950 % notes, $ 600 issued August 2017, of which $ 594 was exchanged in November 2021, both due in August 2027 (3) $ 600 600 — 3.650 % notes, issued in December 2017 and due in January 2028 $ 550 550 550 3.400 % notes, $ 600 issued June 2020, of which $ 598 was exchanged in November 2021, both due in January 2028 (3) $ 600 600 — 2.200 % notes, $ 500 issued November 2020, of which $ 497 was exchanged in November 2021, both due in June 2028 (3) $ 500 500 — 3.250 % notes, issued in June 2019 and due in June 2029 $ 500 500 500 3.100 % notes, $ 600 issued December 2019, of which $ 596 was exchanged in November 2021, both due in December 2029 (3) (4) $ 599 599 — 1.625 % notes, issued in October 2020 and due December 2030 £ 400 541 547 3.250 % notes, $ 600 issued in May 2020 and $ 350 issued in July 2020, both due in January 2031 $ 950 950 950 2.850 % notes, $ 700 issued November 2020, of which $ 699 was exchanged in November 2021, both due in December 2032 (3) $ 700 700 — 1.800 % notes, issued in December 2020 and due in March 2033 $ 400 400 400 1.750 % notes, issued in July 2021 and due in July 2033 £ 350 474 — 2.730 % notes, issued in May 2019 and due in May 2034 £ 315 427 431 5.875 % bonds, $ 100 issued in March 2005 and $ 150 issued in June 2011, both due in March 2035 $ 250 250 250 4.650 % notes, $ 300 issued in March 2017 and $ 250 issued in December 2017, both due in March 2047 $ 550 550 550 Total principal amount $ 12,257 $ 8,303 Unamortized net premiums and deferred financing costs 243 ( 35 ) $ 12,500 $ 8,268 (1) In January 2021, we completed the early redemption of all $ 950.0 million in principal amount. (2) In December 2021, we completed the early redemption of all $ 750.0 million in principal amount. (3) In connection with our merger with VEREIT, we completed our debt exchange offer to exchange certain outstanding notes issued by VEREIT on November 9, 2021 for new notes issued by Realty Income. Please refer to Exchange Offers Associated with our Merger with VEREIT below for more details. Prior to the completion of our merger with VEREIT on November 1, 2021, these notes were not the obligation of Realty Income. (4) These notes were originally issued by VEREIT in December of 2019 for the principal amount of $ 600 million. The amount of Realty Income debt issued through the Exchange Offers was $ 599 million, resulting from cancellations due to late tenders that forfeited the early participation premium of $ 30 per $1,000 principal amount and cash paid in lieu of fractional shares. -90- Table of Contents In January 2022, we issued £ 250.0 million of 1.875 % senior unsecured notes due January 2027 and £ 250.0 million of 2.500 % senior unsecured notes due January 2042. See note 19, Subsequent Events . The following table summarizes the maturity of our notes and bonds payable as of December 31, 2021, excluding unamortized net premiums of $ 295.5 million and deferred financing costs of $ 53.1 million (in millions): Year of Maturity Principal 2024 $ 850 2025 1,050 2026 1,575 Thereafter 8,782 Totals $ 12,257 As of December 31, 2021, the weighted average interest rate on our notes and bonds payable was 3.3 % and the weighted average remaining years until maturity was 7.7 years. Interest incurred on all of the notes and bonds was $ 286.4 million for 2021, $ 252.0 million for 2020 and $ 233.5 million for 2019. The interest rate on each of these notes and bonds is fixed. Our outstanding notes and bonds are unsecured; accordingly, we have not pledged any assets as collateral for these or any other obligations. Additionally, with the exception of our £ 400.0 million of 1.625 % senior unsecured notes issued in October 2020, our £ 400.0 million of 1.125 % senior unsecured notes issued in July 2021, £ 350.0 million of 1.750 % senior unsecured notes also issued in July 2021, our £ 250.0 million of 1.875 % senior unsecured notes issued in January 2022, and £ 250.0 million of 2.500 % senior unsecured notes also issued in January 2022, in each case where interest is paid annually, interest on our remaining senior unsecured note and bond obligations is paid semiannually. All of these notes and bonds contain various covenants, including: (i) a limitation on incurrence of any debt which would cause our debt to total adjusted assets ratio to exceed 60 %; (ii) a limitation on incurrence of any secured debt which would cause our secured debt to total adjusted assets ratio to exceed 40 %; (iii) a limitation on incurrence of any debt which would cause our debt service coverage ratio to be less than 1.5 times; and (iv) the maintenance at all times of total unencumbered assets not less than 150 % of our outstanding unsecured debt. At December 31, 2021, we were in compliance with these covenants. B. Note Repayments We have redeemed the following principal amounts (in millions) of certain outstanding notes, prior to their maturity. As a result of these early redemptions, we have recognized the following losses on extinguishment of debt (in millions) recognized in our consolidated statements of income and comprehensive income: Loss on Extinguishment of Debt 2021 Repayments Principal Amount (1) Amount of Loss Period Recognized 4.650 % notes due August 2023 redeemed in December 2021 $ 750.0 $ 46.4 December 31, 2021 3.250 % notes due October 2022 redeemed in January 2021 $ 950.0 $ 46.5 March 31, 2021 2020 Repayments 5.750 % notes due January 2021 redeemed in January 2020 $ 250.0 $ 9.8 March 31, 2020 (1) The redeemed principal amounts presented exclude the amounts we paid in accrued and unpaid interest. . -91- Table of Contents C. Note Issuances During the three year period ended December 31, 2021 we issued the following notes and bonds (in millions): 2021 Issuances Date of Issuance Maturity Date Principal amount used Price of par value Effective yield to maturity 1.125 % notes July 2021 July 2027 £ 400 99.31 % 1.24 % 1.750 % notes July 2021 July 2033 £ 350 99.84 % 1.76 % 4.600 % notes (1) November 2021 February 2024 $ 485 100.00 % 4.60 % 4.625 % notes (1) November 2021 November 2025 $ 544 100.00 % 4.63 % 4.875 % notes (1) November 2021 June 2026 $ 596 100.00 % 4.88 % 3.950 % notes (1) November 2021 August 2027 $ 594 100.00 % 3.95 % 3.400 % notes (1) November 2021 January 2028 $ 598 100.00 % 3.40 % 2.200 % notes (1) November 2021 June 2028 $ 497 100.00 % 2.20 % 3.100 % notes (1) November 2021 December 2029 $ 596 100.00 % 3.10 % 2.850 % notes (1) November 2021 December 2032 $ 699 100.00 % 2.85 % 2020 Issuances Date of Issuance Maturity Date Principal amount used Price of par value Effective yield to maturity 3.250 % notes (2) May 2020 January 2031 $ 600 98.99 % 3.36 % 3.250 % notes (2) 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 % 2019 Issuances Date of Issuance Maturity Date Principal amount used Price of par value Effective yield to maturity 2.730 % notes May 2019 May 2034 £ 315 100.00 % 2.73 % 3.250 % notes June 2019 June 2029 $ 500 99.36 % 3.33 % (1) In connection with our merger with VEREIT, we completed our debt exchange offer to exchange all outstanding notes issued by VEREIT OP on November 9, 2021 for new notes issued by Realty Income, pursuant to which approximately 99.2 % of the outstanding notes issued by VEREIT OP were exchanged. We issued $ 1,000 principal amount of Realty Notes for each validly tendered VEREIT Notes with $ 1,000 principal amount. For this reason, we denote our “Price of par value” as 100 %. Prior to the completion of our merger with VEREIT on November 1, 2021, these notes were not the obligation of Realty Income. With respect to the notes originally issued by VEREIT OP that remained outstanding, we amended the indenture governing such notes to, among other things, eliminate substantially all of the restrictive covenants in such indenture. Additional details regarding the exchange offers are provided in the Exchange Offers Associated with our Merger with VEREIT section below. (2) 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. We intend to allocate an equal amount of the net proceeds from the July 2021 Sterling-denominated offering of 1.125 % notes due 2027 of £ 400.0 million, which approximated $ 546.3 million, and the July 2021 Sterling-denominated offering of 1.750 % notes due 2033 of £ 350.0 million, which approximated $ 480.6 million, as converted at the applicable exchange rate on the closing of the offerings, to finance or refinance, in whole or in part, new or existing eligible green projects in the categories outlined in our Green Financing Framework, which is designed to align with the International Capital Markets Association ("ICMA") Green Bond Principles 2021. Pending the allocation of an amount equal to the net proceeds from the offering of the notes to eligible green projects, we may temporarily use all or a portion of the net proceeds to repay any outstanding indebtedness or for liability management activities, or invest such net proceeds in accordance with our cash investment policy. 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 in 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 -92- Table of Contents 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. The gross proceeds from the May 2019 Sterling-denominated private placement of £ 315.0 million approximated $ 400.9 million, as converted at the applicable exchange rate on the closing of the offering, and were used to fund our initial investment in U.K. properties. The net proceeds of $ 493.5 million from the June 2019 note offering were used to repay borrowings outstanding under our credit facility, to fund investment opportunities, and for other general corporate purposes. D. Exchange Offers Associated with our Merger with VEREIT As part of our merger with VEREIT, Realty Income exchanged the following notes issued by VEREIT OP with notes of identical terms issued by Realty Income (in millions): Series of VEREIT Notes Tenders and Consents Received as of the Expiration Date (1) Percentage of Total Outstanding Principal Amount of Such Series of VEREIT Notes 4.600% Notes due 2024 $ 485 97.06 % 4.625% Notes due 2025 $ 544 98.95 % 4.875% Notes due 2026 $ 596 99.29 % 3.950% Notes due 2027 $ 594 99.02 % 3.400% Notes due January 2028 $ 598 99.66 % 2.200% Notes due June 2028 $ 497 99.42 % 3.100% Notes due 2029 $ 597 99.48 % 2.850% Notes due 2032 $ 700 99.93 % (1) The amount of VEREIT notes exchanged are higher than the amount that Realty Income issued as a result of cancellations due to late tenders that forfeited the early participation premium of $ 30 per $1,000 principal amount and cash paid in lieu of fractional shares. To induce holders of the VEREIT OP notes to participate in the exchange, Realty Income offered noteholders electing to exchange their notes a cash payment equal to 10 basis points of the note principal amount held. Across the various note classes, Realty Income had a success rate of approximately 99.2 % on the exchange, resulting in a cash payment of $ 4.6 million to participating noteholders. The exchange was accounted for as a modification of the existing VEREIT OP notes assumed in our merger with VEREIT . The interest rate, interest payment dates, redemption terms and maturity of each series of Realty Income notes issued by Realty Income in the exchange offers were the same as those of the corresponding series of VEREIT notes exchanged. With respect to the notes originally issued by VEREIT OP that remained outstanding, we amended the indenture governing such notes to, among other things, eliminate substantially all of the restrictive covenants in such indenture. 10. Issuances of Common Stock A. Issuance of Common Stock in Connection with VEREIT Acquisition On November 1, 2021, we completed our acquisition of VEREIT. As a result of the merger, former VEREIT common stockholders, VEREIT OP common unitholders and awardees of vested share awards separated from Realty Income and received approximately 162 million shares of Realty Income common stock, based on the shares of VEREIT common stock and common units of VEREIT OP outstanding as of October 29, 2021. For further details, please refer to note 3, Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture . B. Issuances of Common Stock in Overnight Underwritten Public Offerings In July 2021, we issued 9,200,000 shares of common stock, including 1,200,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares. After deducting underwriting discounts of $ 2.9 million, the net proceeds of $ 594.1 million were primarily used to repay borrowings under our $ 1.0 billion commercial paper program, to fund potential investment opportunities and for other general corporate purposes. In January 2021, we issued 12,075,000 shares of common stock, including 1,575,000 shares purchased by the underwriters upon the exercise of their option to purchase additional shares. After deducting underwriting discounts -93- Table of Contents of $ 19.3 million, the net proceeds of $ 669.6 million were used to fund property acquisitions and for general corporate purposes, and working capital. In March 2020, we issued 9,690,500 shares of common stock, including 690,500 shares purchased by the underwriters upon the exercise of their option to purchase additional shares. 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. The net proceeds of $ 845.4 million were used to repay borrowings under our credit facility, to fund investment opportunities, and for other general corporate purposes. C. At-the-Market (ATM) Program Under our "at-the-market" equity distribution plan, or our ATM program, up to 69,088,433 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 December 31, 2021, we had 29,387,491 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): Year Ended December 31, 2021 2020 2019 Shares of common stock issued under the ATM program 46,290,540 17,724,374 17,051,456 Gross proceeds $ 3,207.9 $ 1,094.9 $ 1,274.5 D. Dividend Reinvestment and Stock Purchase Plan Our Dividend Reinvestment and Stock Purchase Plan ("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 December 31, 2021, we had 11,335,379 shares remaining for future issuance under our DRSPP program. The following table outlines common stock issuances pursuant to our DRSPP program (dollars in millions): Year Ended December 31, 2021 2020 2019 Shares of common stock issued under the DRSPP program 168,000 149,289 117,522 Gross proceeds $ 11.2 $ 9.1 $ 8.4 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 no t issue shares under the waiver approval process during 2021, 2020 or 2019. 11. Noncontrolling Interests There are four entities with noncontrolling interests that we consolidate, including an operating partnership, Realty Income, L.P., two development joint ventures, one acquired in May 2021, one acquired in December 2020, and a joint venture acquired in 2019. From time to time, we complete the acquisitions of assets in by issuing additional common partnership units in Realty Income, L.P. as consideration for the acquisitions. In November 2021, we issued 300,604 common partnership units in Realty Income, L.P. in connection with the acquisition of seven properties and recorded $ 20.4 million of non-controlling interests. In December 2021, we issued 240,586 common partnership units in Realty Income, L.P. in connection with the acquisition of one property and recorded $ 16.6 million of non-controlling interests. In addition, during November 2021 we issued 56,400 of common partnership units in Realty Income, L.P. in exchange for VEREIT OP units in connection with our merger with VEREIT and recorded noncontrolling interests of $ 1.8 million. At December 31, 2021, outstanding common partnership units in Realty -94- Table of Contents Income, L.P. represent 4.2 % ownership interest in Realty Income L.P. We hold the remaining 95.8 % interest and consolidate the entity. None of our common partnership units have voting rights. Common partnership units are entitled to monthly distributions equal to the amount paid to common stockholders of Realty Income, and are redeemable in cash or Realty Income common stock, at our option, and at a conversion ratio of 1.02934 due to the Orion Divestiture, subject to certain exceptions. Prior to the Orion Divestiture, the conversion ratio was one to one. These issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the balance sheet was appropriate. We determined that the units meet the requirements to qualify for presentation as permanent equity. In May 2021 and December 2020, we completed the respective acquisition of a development property by acquiring a controlling interest in a joint venture. We are the managing member of these two joint ventures, and possess the ability to control the business and manage the affairs of these entities. At December 31, 2021, we and our subsidiaries held an 72.4 % interest in the joint venture established in May 2021 and an 94.5 % interest in the joint venture established in December 2020. In December 2019, we completed the acquisition of nine properties by acquiring a controlling interest in a joint venture. We are the managing member of this joint venture, and possess the ability to control the business and manage the affairs of this entity. At December 31, 2021, we and our subsidiaries held an 89.9 % interest, and consolidated this entity in our consolidated financial statements. The following table represents the change in the carrying value of all noncontrolling interests through December 31, 2021 (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 ) Additions to noncontrolling interest — 3,168 3,168 Distributions ( 1,297 ) ( 299 ) ( 1,596 ) Allocation of net income 848 172 1,020 Carrying value at December 31, 2020 $ 24,100 $ 8,147 $ 32,247 Contributions 36,975 6,415 43,390 Issued in merger 3,160 — 3,160 Orion divestiture ( 1,352 ) — ( 1,352 ) Reallocation of equity ( 42 ) — ( 42 ) Distributions ( 1,574 ) ( 294 ) ( 1,868 ) Allocation of net income 1,149 142 1,291 Carrying value at December 31, 2021 $ 62,416 $ 14,410 $ 76,826 (1) 242,007 units were issued on March 30, 2018, 131,790 units were issued on April 30, 2018, 89,322 units were issued on March 28, 2019, 56,400 units were issued on November 1, 2021, 300,604 units were issued on November 30, 2021, and 240,586 units were issued on December 30, 2021. 1,060,709 units remained outstanding as of December 31, 2021. At December 31, 2021 and 2020, respectively, Realty Income, L.P. and certain of our joint venture investments 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 December 31, 2021 and 2020 (in thousands): December 31, 2021 December 31, 2020 Net real estate $ 688,229 $ 635,963 Total assets $ 795,670 $ 723,668 Total liabilities $ 57,057 $ 47,962 -95- Table of Contents 12. 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 2021, 2020 and 2019: Month 2021 2020 2019 January $ 0.2345 $ 0.2275 $ 0.2210 February 0.2345 0.2325 0.2255 March 0.2345 0.2325 0.2255 April 0.2350 0.2330 0.2260 May 0.2350 0.2330 0.2260 June 0.2350 0.2330 0.2260 July 0.2355 0.2335 0.2265 August 0.2355 0.2335 0.2265 September 0.2355 0.2335 0.2265 October 0.2360 0.2340 0.2270 November 0.2360 0.2340 0.2270 December 0.2460 0.2340 0.2270 Total $ 2.8330 $ 2.7940 $ 2.7105 The following presents the federal income tax characterization of distributions paid or deemed to be paid per common share for the years: 2021 2020 2019 Ordinary income $ 1.5146899 $ 2.2798764 $ 2.1206964 Nontaxable distributions 3.2925615 0.4902835 0.5898036 Total capital gain distribution (1) 0.0854609 0.0238401 — Totals (2) $ 4.8927123 $ 2.7940000 $ 2.7105000 (1) Unrecaptured Section 1250 Gain of $ 0.0649153 , or 1.327 % of the total common dividends paid in 2021, and Section 897 Gain of $ 0.0854609 , or 1.747 % of the total common dividends paid in 2021, both represent additional characterization of, and are part of, total capital gain distribution. (2) The amount distributed in 2021 includes the $ 2.060 tax distribution of Orion shares, that occurred in conjunction with the Orion Divestiture on November 12, 2021, after our merger with VEREIT on November 1, 2021. The fair market value of these shares for tax distribution was determined to be $ 20.6272 per share, which was calculated using the five day volume weighted average share price after issuance. At December 31, 2021, a distribution of $ 0.2465 per common share was payable and was paid in January 2022. At December 31, 2020, a distribution of $ 0.2345 per common share was payable and was paid in January 2021. 13. Lessor Operating Leases At December 31, 2021, we owned 11,136 properties in all 50 U.S. states, Puerto Rico, the U.K. and Spain. Of the 11,136 properties, 11,043 , or 99.2 %, are single-client properties, and the remaining are multi-client properties. At December 31, 2021, 164 properties were available for lease or sale. Substantially all of our leases are net leases where our client 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. Rental revenue based on a percentage of our client's gross sales, or percentage rents, was $ 6.5 million for 2021, $ 5.1 million in 2020, and $ 8.0 million for 2019. -96- Table of Contents At December 31, 2021, minimum future annual rental revenue to be received on the operating leases for the next five years and thereafter are as follows (in thousands): Future Minimum Operating Lease Payments Future Minimum Direct Financing Lease Payments (1) 2022 $ 2,900,002 $ 1,925 2023 2,824,724 1,565 2024 2,683,176 510 2025 2,533,231 169 2026 2,362,933 171 Thereafter 14,918,244 484 Totals $ 28,222,310 $ 4,824 (1) Related to 18 properties which are subject to direct financing leases and, therefore, revenue is recognized as rental income on the discounted cash flows of the lease payments. Amounts reflect undiscounted cash flows to be received by the Company under the lease agreements on these respective properties. No individual client's rental revenue, including percentage rents, represented more than 10% of our total revenue for each of the years ended December 31, 2021, 2020 or 2019. 14. 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 exit price). ASC 820, Fair Value Measurements and Disclosures , sets forth a fair value hierarchy that categorizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. • Level 1 – Unadjusted quoted prices in active markets Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis. • Level 2 – Valuation Technique Using Observable Inputs Financial instruments classified as Level 2 are valued using quoted prices for identical instruments in markets that are not considered to be active, or quoted prices for similar assets or liabilities in active markets, or valuation techniques in which all significant inputs are observable, or can be corroborated by observable market data for substantially the entire contractual term of the financial asset or liability. • Level 3 – Valuation Technique Using Significant Unobservable Inputs Financial instruments are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data (unobservable inputs). Such inputs are generally determined based on observable inputs of a similar nature, historical observations on the level of the inputs, or other analytical techniques. We evaluate our hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from period to period. Changes in the type of inputs may result in a reclassification for certain assets. We have not historically had changes in classifications and do not expect that changes in classifications between levels will be frequent. Financial Instruments Not Measured at Fair Value on the Consolidated Balance Sheets The fair value of short-term financial instruments such as cash and cash equivalents, accounts receivable, escrow deposits, loans receivable, accounts payable, distributions payable, line of credit payable and commercial paper borrowings, and other liabilities approximate their carrying value in the accompanying consolidated balance sheets, due to their short-term nature. The fair value of our financial instruments not carried at fair value are disclosed as follows (in millions): -97- Table of Contents At December 31, 2021 Carrying value Estimated fair value Mortgages payable assumed in connection with acquisitions (1) $ 1,114.1 $ 1,154.7 Notes and bonds payable (2) $ 12,257.3 $ 13,114.5 At December 31, 2020 Carrying value Estimated fair value Mortgages payable assumed in connection with acquisitions (1) $ 299.6 $ 309.4 Notes and bonds payable (2) $ 8,302.4 $ 9,324.0 ( 1) Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums is $ 28.7 million at December 31, 2021, and $ 1.7 million at December 31, 2020. Also excludes deferred financing costs of $ 790,000 at December 31, 2021, and $ 973,000 at December 31, 2020. (2) Excludes non-cash premiums and discounts recorded on notes payable. The unamortized balance of the net premiums was $ 295.5 million at December 31, 2021, and $ 14.6 million at December 31, 2020. Also excludes deferred financing costs of $ 53.1 million at December 31, 2021 and $ 49.2 million at December 31, 2020. 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, including the senior notes and bonds payable assumed in the debt exchange offer on November 9, 2021 in connection with our merger with VEREIT. 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. Financial Instruments Measured at Fair Value on a Recurring Basis For derivative assets and liabilities, we utilize interest rate swaps and forward-starting swaps to manage interest rate risk, and cross-currency swaps, currency exchange swaps, foreign currency forwards and foreign currency collars 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 . Derivative fair values also include credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Although we have determined that the majority of the inputs used to value our derivatives fall within level two on the three-level valuation hierarchy, the credit valuation adjustments associated with our derivatives utilize level three inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by ourselves and our counterparties. However, at December 31, 2021 and 2020, 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. Items Measured at Fair Value on a Non-Recurring Basis Certain financial and nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments only under certain circumstances, such as when an impairment write-down occurs. During 2020, we identified the impact of the COVID-19 pandemic as an impairment triggering event for properties occupied by certain clients 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 38 properti es 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 -98- Table of Contents 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. The following table summarizes our provisions for impairment during the periods indicated below (dollars in millions): Year Ended December 31, 2021 2020 2019 Total provisions for impairment $ 39.0 $ 147.2 $ 40.2 Number of properties: Classified as held for sale 16 1 — Classified as held for investment 11 34 3 Sold 76 64 48 Derivative Designated as Hedging Instruments In order to hedge the foreign currency risk associated with interest payments on intercompany loans denominated in British Pound Sterling, or GBP, during the second quarter of 2021, we initiated a hedging strategy to enter into foreign currency forward contracts to sell GBP and buy U.S. Dollars, or USD. These foreign currency forwards are designated as cash flow hedges. Forward points on the forward contracts are included in the assessment of hedge effectiveness. Amounts reported in other comprehensive income (loss) related to foreign currency derivative contracts will be reclassified to other gains and (losses) in the same period during which the hedged forecasted transactions affect earnings. As of December 31, 2021, we had one interest rate swap in place on our $ 250.0 million unsecured term loan. Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. We designated this interest rate swap as a cash flow hedge in accordance with Topic 815, Derivatives and Hedging . This interest rate swap is recorded on the consolidated balances sheets at fair value. Changes to fair value are recorded to accumulated other comprehensive income, or AOCI, and are amortized through interest expense over the term of the associated debt. 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 AOCI. Upon the initial issuance of the 2031 Notes in May 2020, we amortized the AOCI balance over the term of the 2031 Notes. In 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 we 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. Upon the December 2020 issuance of $ 325.0 million of 0.750 % notes due March 2026 and $ 400.0 million of 1.800 % notes due March 2033, the AOCI balance associated with six of the forward starting swaps with a notional amount of $ 500.0 million began amortizing over the term. The AOCI balance being amortized represents the change in fair value on four swaps with a notional amount of $ 350.0 million from the July issuance of the 2031 notes through the December note issuances and the change in fair value from the two remaining forward starting swaps with a notional amount of $ 150.0 million from their June 2020 inception through the December note issuances. The notional amounts of the six swaps were first applied to the $ 400.0 million of 1.800 % notes due March 2033, with the remaining $ 100.0 million of notional applied to the $ 325.0 million of 0.750 % notes due March 2026. However, we elected not to terminate any of the six forward starting interest rate swaps, and redesignated the swaps in a new hedging relationship to hedge our exposure to the changes in the 10-year US treasury rates in anticipation of potential future debt offerings between December 2020 and December 2023. -99- Table of Contents 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. The following table summarizes the amount of unrealized gain (loss) on derivatives in other comprehensive income (loss) during the periods indicated below (in thousands): Years Ended December 31, Derivatives in Cash Flow Hedging Relationships 2021 2020 2019 Currency swaps $ 8,232 $ ( 2,169 ) $ ( 971 ) Interest rate swaps 34,659 ( 32,757 ) ( 8,219 ) Foreign currency forwards 7,557 — — Total unrealized gain (loss) on derivatives $ 50,448 $ ( 34,926 ) $ ( 9,190 ) The following table summarizes the amount of gain (loss) on derivatives reclassified from accumulated other comprehensive income (loss) during the periods indicated below (in thousands): Years Ended December 31, Derivatives in Cash Flow Hedging Relationships Location of Gain (Loss) Recognized in Income 2021 2020 2019 Currency swaps Foreign currency and derivative gain (loss), net $ 3,541 $ ( 3,617 ) $ ( 5,472 ) Interest rate swaps Interest expense ( 10,343 ) ( 11,434 ) ( 3,436 ) Net decrease to net income $ ( 6,802 ) $ ( 15,051 ) $ ( 8,908 ) We expect to reclassify $ 9.4 million from AOCI as an increase to interest expense relating to interest rate swaps and $ 3.3 million from AOCI to foreign currency gain relating to cross-currency swaps within the next twelve months. Derivatives Not Designated as Hedging Instruments Based on our potential exposure to changes in foreign currency exchange rate, primarily in British Pound Sterling and, to a lesser extent, the Euro, we initiated a program in the third quarter of 2021 to enter into foreign currency collars. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. Our foreign currency collars generally have maturities of five months or less and are not designated as hedge instruments for accounting purposes. The gains or loss on these derivative contracts are recognized in other income, net based on the changes in fair value. As of December 31, 2021, we had no outstanding foreign currency collars. In addition, from time to time we enter into currency exchange swap agreements to reduce the effects of currency exchange rate fluctuations between the British Pound Sterling and Euro. These derivative contracts generally mature within two months and are not designated as hedge instruments for accounting purposes. 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. The net gain from derivatives not designated in hedging relationships for 2021 totaled $ 9.7 million and resulted from short term currency exchange swaps and foreign currency collars. The net loss from derivatives not designated in hedging relationships for 2020 totaled $ 14.5 million and resulted from short term currency exchange swaps. -100- Table of Contents The following table summarizes the terms and fair values of our derivative financial instruments at December 31, 2021 and December 31, 2020 (dollars in millions): Derivative Type Number of Instruments (1) Accounting Classification Notional Amount as of December 31, Weighted Average Strike Rate (2) Maturity Date (3) Fair Value - asset (liability) as of December 31, Derivatives Designated as Hedging Instruments 2021 2020 2021 2020 Interest rate swap 1 Derivative $ 250.0 $ 250.0 3.04 % 03/2024 $ ( 11.9 ) $ ( 22.6 ) Cross-currency swaps (4) 4 Derivative 166.3 166.4 (5) 05/2034 ( 13.8 ) ( 21.4 ) Foreign currency forwards 32 Derivative 176.1 0.0 (6) 01/2022 - 08/2024 7.6 — Forward-starting swaps (7) 4 Derivative 300.0 300.0 1.86 % 11/2032 - 06/2033 ( 3.2 ) ( 16.5 ) Forward-starting swaps (7) 2 Hybrid debt 200.0 200.0 1.93 % 11/2032 - 06/2033 ( 5.1 ) ( 12.8 ) $ 1,092.4 $ 916.4 $ ( 26.4 ) $ ( 73.3 ) Derivatives not Designated as Hedging Instruments Currency exchange swaps (8) 4 Derivative 1,639.5 625.0 (9) 01/2022 - 02/2022 ( 14.7 ) ( 8.2 ) Total of all Derivatives $ 2,731.9 $ 1,541.4 $ ( 41.1 ) $ ( 81.5 ) (1) This column represents the number of instruments outstanding as of December 31, 2021. (2) Weighted average strike rate is calculated using the current notional value as of December 31, 2021. (3) This column represents maturity dates for instruments outstanding as of December 31, 2021. (4) Represents four British Pound Sterling, or GBP cross-currency swaps with notional amount of $ 166.3 million. (5) GBP fixed rates initially at 4.82 % and escalating to 10.96 %, and USD weighted average fixed rate at 9.78 %. (6) Weighted average forward GBP-USD exchange rate of 1.41 . (7) There were five treasury rate locks entered into during February 2020 that were terminated in June 2020 and converted into six forward starting interest rate swaps through a cashless settlement. For full discussion of the hedging arrangements for these six forward starting swaps, please refer to Derivative Designated as Hedging Instruments above. (8) Represents two British Pound Sterling, or GBP currency exchange swaps with notional amount of $ 1.36 billion and two Euro, or EUR currency exchange swaps with notional amount of $ 275.9 million. (9) Weighted average Forward GBP-USD exchange rate of 1.34 and Weighted Average Forward EUR-USD exchange rate of 1.16 . 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. Certain of our derivative transactions include credit support annex collateral agreements with derivative counterparties requiring collateral posting based on changes in value of the derivative. As of December 31, 2021 and December 31, 2020, no collateral has been posted related to such arrangements . -101- Table of Contents 15. Supplemental Disclosures of Cash Flow Information The following table summarizes our supplemental cash flow information during the periods indicated below (in thousands): 2021 2020 2019 Supplemental disclosures: Cash paid for interest $ 355,483 $ 285,617 $ 275,303 Cash paid for income taxes $ 19,676 $ 13,128 $ 4,221 Cash paid for merger and integration-related costs $ 157,115 $ — $ — Non-cash activities: Increase (decrease) in net derivative liability position at fair value $ ( 40,489 ) $ 55,205 $ — Mortgages assumed at fair value (1) $ 911,525 $ — $ 130,765 Notes payable assumed at fair value $ 4,946,965 $ — $ — Non-cash assets and liabilities assumed in merger $ 11,559,875 $ — $ — Non-cash assets and liabilities distributed in Orion Divestiture $ 1,142,121 $ — $ — Adoption of Accounting Standards Codifications Topic 842, Leases $ — $ — $ 131,982 Issuance of common partnership units of Realty Income, L.P. (2) $ 38,783 $ — $ 6,286 Acquisition of a controlling interest $ — $ — $ 5,084 (1) For 2021, includes £ 31.0 million Sterling, converted at the applicable exchange rate on the date of transaction, for one mortgage and $ 869.1 million, estimated at fair value, for ten mortgages from our merger with VEREIT. (2) For 2021, includes $ 1.8 million for the issuance of 56,400 units on November 1, 2021 that were a result of our merger with VEREIT, $ 20.4 million for the issuance of 300,604 units on November 30, 2021 that were a partial consideration for an acquisition of properties, and $ 16.6 million for the issuance of 240,586 units on December 30, 2021 that were issued to a new partner in connection with an industrial property contribution. For 2019, includes $ 6.3 million for the issuance of 89,322 units on March 28, 2019 that were a partial consideration for an acquisition of properties. 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 (in thousands): December 31, 2021 December 31, 2020 Cash and cash equivalents shown in the consolidated balance sheets $ 258,579 $ 824,476 Restricted escrow deposits (1) 68,541 21,220 Impounds related to mortgages payable (1) 5,249 4,983 Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows $ 332,369 $ 850,679 (1) Included within other assets, net on the consolidated balance sheets (see note 4). 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. -102- Table of Contents 16. Common Stock Incentive Plan In March 2021, our Board of Directors adopted, and in May 2021, stockholders approved, the Realty Income 2021 Incentive Award Plan, or 2021 Plan, to enable us to motivate, attract and retain the services of directors, employees and consultants, considered essential to our long-term success. The 2021 Plan offers our directors, employees and consultants an opportunity to own our stock and/or rights that will reflect our growth, development and financial success. Except as noted below, the aggregate number of shares of our common stock subject to options, stock purchase rights, or SPR, stock appreciation rights, or SAR, and other awards, will be no more 8,924,231 shares. The maximum number of shares that may be subject to options, SPR, SAR and other awards granted under the plan to any individual in any calendar year may not exceed 3,200,000 , and the maximum aggregate amount of cash that may be paid in cash during any calendar year with respect to one or more shares payable in cash shall be $ 10.0 million. The 2021 Plan replaced the Realty Income Corporation 2012 Incentive Award Plan, or the 2012 Plan, which was set to expire in March 2022. No further awards will be granted under the 2012 Plan. The disclosures below incorporate activity for both the 2012 Plan and the 2021 Plan. In connection with the Merger, shares which remained available for issuance under the VEREIT, Inc. 2021 Equity Incentive Plan immediately prior to the closing of the merger (as adjusted by the Exchange Ratio) may be used for awards under the 2021 Plan and will not reduce the shares authorized for grant under the 2021 Plan, to the extent that awards using such shares (i) are permitted without stockholder approval under applicable stock exchange rules, (ii) are made only to VEREIT service providers or individuals who become Realty Income service providers following the date of the consummation of the merger, and (iii) are only granted under the 2021 Plan during the period commencing on the date of the consummation of the merger and ending on June 2, 2031. As a result, 6,186,101 additional shares are available for issuance under the 2021 Plan. The amount of share-based compensation costs recognized in general and administrative expense on our consolidated statements of income and comprehensive income was $ 16.2 million during 2021, $ 16.5 million during 2020 (including $ 1.8 million of accelerated share-based compensation costs for our former Chief Financial Officer ("CFO")) and $ 13.7 million during 2019. In connection with the Merger, each outstanding VEREIT, Inc. stock option and restricted stock unit that were unvested as of November 1, 2021 were converted into equivalent options and restricted stock units, in each case with respect to shares of the Company's common stock, using the equity award exchange ratio in accordance with the merger agreement. The converted awards issued by Realty Income have identical terms to the original VEREIT, Inc. award grant. On November 1, 2021, we issued 442,418 shares of Realty Income common stock in settlement of equity awards that vested upon the separation of certain former-VEREIT employees and directors in connection with the merger. This issuance is excluded from the Restricted Stock Units and Stock Options sections below, as the awards were not granted under the 2021 Plan. The aggregate fair value of the converted awards was $ 71.6 million, of which i.) $ 44.0 million related to pre-combination services and is included in the consideration transferred in the merger (please refer to Note 3, Merger with VEREIT and Orion Divestiture ), ii.) $ 25.6 million of expense was recognized during November in merger and integration-related costs related to the acceleration of vesting upon the separation of certain employees in connection with the merger, and iii.) $ 2.0 million will be amortized through general and administrative expenses over the remaining vesting term for former VEREIT, Inc. employees who were retained by Realty Income. The following disclosures are inclusive of converted awards for former VEREIT employees continuing as employees of Realty Income, which are reflected as grants, as the replacement awards represent newly issued awards settled in Realty Income common shares. In connection with the Orion Divestiture, each stock option, restricted stock unit and performance award outstanding at November 12, 2021 was entitled to an equitable adjustment equal to the ratio of the five-day volume weighted average per-share price of Realty Income common stock prior to the Orion Divestiture divided by the five-day volume weighted average per-share of Realty Income common stock following the Orion Divestiture, resulting in an adjustment factor of approximately 1.002342 . The equitable adjustment was considered a modification in accordance with the provisions of ASC 718, Compensation-Stock Compensation . As a result, we compared the fair value of each award immediately prior to the equitable adjustment to the fair value immediately after the equitable adjustment to measure incremental compensation cost, if any. The equitable adjustment did not result in any incremental fair value. Therefore, no stock-based compensation expense was recorded as of result of the modification. The following disclosures are inclusive of these adjustments, which has been labeled 'Equitable adjustment - Orion Divestiture' throughout. -103- Table of Contents A. Restricted Stock The following table summarizes our common stock grant activity under our 2021 and 2012 Plans. 2021 2020 2019 Number of shares Weighted average price (1) Number of shares Weighted average price (1) Number of shares Weighted average price (1) Outstanding nonvested shares, beginning of year 219,482 $ 63.69 259,698 $ 58.39 307,821 $ 53.44 Shares granted 133,052 $ 64.27 103,473 $ 67.84 87,327 $ 69.83 Shares vested ( 124,505 ) $ 61.57 ( 141,486 ) $ 56.94 ( 126,363 ) $ 54.45 Shares forfeited ( 15,399 ) $ 65.09 ( 2,203 ) $ 66.48 ( 9,087 ) $ 55.71 Outstanding nonvested shares, end of each period 212,630 $ 65.20 219,482 $ 63.69 259,698 $ 58.39 (1) Grant date fair value. The vesting schedule for shares granted to non-employee directors is as follows: • For directors with less than six years of service at the date of grant, shares vest in 33.33 % annual increments upon re-election to the Board at each of the three Annual Meetings of Stockholders following the grant date; • For directors with six years of service at the date of grant, shares vest in 50 % annual increments upon re-election to the Board at each of the two Annual Meetings of Stockholders following the grant date; • For directors with seven years of service at the date of grant, shares are 100 % vested upon re-election to the Board in the following year; and • For directors with eight or more years of service at the date of grant, there is immediate vesting as of the date the shares of stock are granted. During May 2021, we granted 36,000 shares of restricted stock to the independent members of our Board of Directors, in connection with our annual awards, of which 24,000 shares vested immediately, and 12,000 shares vest in equal parts over a three-year service period. In addition, in November 2021, we granted 8,000 shares of restricted stock to the new members of our Board of Directors, which vest in equal parts over a three-year service period. Our restricted stock awards granted to employees typically vest annually in equal parts over a four-year service period. During 2021, 89,052 shares were granted to our employees, and vest over a four-year service period. As of December 31, 2021, the remaining unamortized share-based compensation expense related to restricted stock totaled $ 9.2 million, which is being amortized on a straight-line basis over the service period of each applicable award. The amount of share-based compensation is based on the fair value of the stock at the grant date. We define the grant date as the date the recipient and Realty Income have a mutual understanding of the key terms and conditions of the award, and the recipient of the grant begins to benefit from, or be adversely affected by, subsequent changes in the price of the shares. B. Performance Shares During 2021, 2020 and 2019, we granted annual performance share awards, as well as dividend equivalent rights, to our executive officers. The number of performance shares that vest for each of the three years is based on the achievement of the following performance goals: Weighting for year granted Annual Performance Awards Metrics 2021 2020 2019 Total shareholder return (“TSR”) ranking relative to MSCI US REIT Index 70 % 70 % 45 % TSR ranking relative to J.P. Morgan Net Lease Peer Group N/A N/A 26 % Dividend per share Growth Rate 15 % 15 % 16 % Debt-to-Adjusted EBITDA re Ratio N/A N/A 13 % Net Debt-to-Adjusted EBITDA re Ratio 15 % 15 % N/A The annual performance shares are earned based on our performance related to our metrics above, and vest 50 % on the first and second January 1 after the end of the three-year performance period, subject to continued service. The performance period for the 2019 performance awards began on January 1, 2019 and ended on December 31, 2021. The performance period for the 2020 performance awards began on January 1, 2020 and will end on -104- Table of Contents December 31, 2022. The performance period for the 2021 performance awards began on January 1, 2021 and will end on December 31, 2023. On November 15, 2021, the Compensation Committee approved a one-time grant of performance share awards and a one-time cash bonus to certain of our named executives in connection with the completion of our merger with VEREIT and the transactions contemplated thereby, including the Orion Divestiture (the "VEREIT Transaction"). The awards were made to reward the executives for the successful consummation of the VEREIT Transaction and were intended to retain and motivate the executives to achieve optimal synergies and incentivize further growth from the merger. The performance shares are earned based on our performance related to AFFO accretion ( 50 % weighting) and general and administrative expense synergies ( 50 % weighting), and vest 50 % upon the completion of the performance period. The remaining 50 % will vest on the one-year anniversary of the completion of the applicable performance period. All vesting is subject to continued service. The performance period is one year for the AFFO accretion targets from January 1, 2022 to December 31, 2022 and two years for the general and administrative expense synergies from January 1, 2022 to December 31, 2023. The fair value of the annual performance shares was estimated on the date of grant using a Monte Carlo Simulation model. The fair value of the one-time performance shares was based on the fair value of our common stock at the grant date and is dependent on the probability of satisfying the performance conditions stipulated in the award grant. The following table summarizes our performance share grant activity, inclusive of annual performance shares and the one-time performance shares related to the merger with VEREIT: 2021 2020 2019 Number of performance shares Weighted average price (1) Number of performance shares Weighted average price (1) Number of performance shares Weighted average price (1) Outstanding nonvested shares, beginning of year 291,759 $ 69.73 304,663 $ 62.25 223,392 $ 58.78 Equitable adjustment - Orion Divestiture (2) 752 — — Shares granted (3) 257,149 $ 64.18 136,729 $ 79.98 128,581 $ 65.34 Shares vested ( 109,113 ) $ 62.52 ( 139,012 ) $ 63.66 ( 47,310 ) $ 54.27 Shares forfeited ( 52,408 ) $ 65.83 ( 10,621 ) $ 66.64 — Outstanding nonvested shares, end of each period 388,139 $ 68.09 291,759 $ 69.73 304,663 $ 62.25 (1) Grant date fair value. (2) Effective with the Orion Divestiture on November 12, 2021, outstanding equity awards were adjusted by a conversion ratio of 1.002342 per one Realty Income share then held. (3) 194,053 shares granted relate to annual performance grants and 63,096 shares granted relate to one-time grant of performance shares. As of December 31, 2021, the remaining share-based compensation expense related to the performance shares totaled $ 14.6 million and is being recognized on a tranche-by-tranche basis over the service period. C. Restricted Stock Units During 2021, 2020 and 2019, and in connection with our merger with VEREIT, we also granted restricted stock units that primarily vest over service periods of three or four-years and have the same economic rights as shares of restricted stock: 2021 2020 2019 Number of restricted stock units Weighted average price (1) Number of restricted stock units Weighted average price (1) Number of restricted stock units Weighted average price (1) Outstanding nonvested shares, beginning of year 18,670 $ 70.38 15,511 $ 59.82 14,968 $ 54.62 Equitable adjustment - Orion Divestiture (2) 109 — — Shares granted 71,956 $ 68.96 9,966 $ 78.79 5,482 $ 69.58 Shares vested ( 23,368 ) $ 66.96 ( 6,807 ) $ 58.63 ( 4,939 ) $ 54.90 Shares forfeited — — — Outstanding nonvested shares, end of each period 67,367 $ 69.69 18,670 $ 70.38 15,511 $ 59.82 (1) Grant date fair value. -105- Table of Contents (2) Effective with the Orion Divestiture on November 12, 2021, outstanding equity awards were adjusted by a conversion ratio of 1.002342 per one Realty Income share then held. 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 expense amortization period for restricted stock units is the lesser of the four-year service period or the period over which the awardee reaches the qualifying retirement age. For employees who have already met the qualifying retirement age, restricted stock units are fully expensed at the grant date. As of December 31, 2021, the remaining share-based compensation expense related to the restricted stock units totaled $ 1.7 million and is being recognized on a straight-line basis over the service period. D. Stock Options During 2021, we also granted stock options, in connection with our merger with VEREIT. The following inputs and assumptions were used to calculate the weighted-average fair values of the options granted at the date of grant as follows: The fair value of the stock options as of their grant date is determined using the Black-Scholes option pricing model, which requires the input of assumptions including expected terms, expected volatility, dividend yield and risk free rate. The following table summarizes our stock option activity: Number of stock options Weighted average exercise price (1) Weighted average remaining contractual term (Years) Aggregate intrinsic value Outstanding nonvested options, beginning of year — Options granted 709,426 $ 53.80 Equitable adjustment - Orion Divestiture (2) 1,547 Options exercised ( 395,903 ) $ 54.54 Options forfeited — Outstanding nonvested options, end of each period 315,070 $ 52.89 2.4 $ 5,891,639 (1) Grant date fair value. (2) Effective with the Orion Divestiture on November 12, 2021, outstanding equity awards were adjusted by a conversion ratio of 1.002342 per one Realty Income share then held. Compensation expense for stock options is recognized on a straight-line basis over the service period described above. In 2021, we recorded $ 68,000 of expense related to stock options. As of December 31, 2021, there was $ 57,000 of unrecognized compensation expense related to stock options with a weighted-average remaining term of 0.2 years. 17. Segment Information We evaluate performance and make resource allocation decisions on an industry by industry basis. For financial reporting purposes, we have grouped our clients into 60 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 our clients to pay or reimburse us for 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 clients (in thousands): -106- Table of Contents Assets, as of December 31: 2021 2020 Segment net real estate: Automotive service $ 852,151 $ 328,340 Beverages 362,570 347,366 Child care 347,680 216,718 Convenience stores - U.S. 2,844,800 2,101,005 Dollar stores 2,303,906 1,420,210 Drug stores 2,182,432 1,555,106 Financial services 576,065 374,508 General merchandise - U.S. 1,289,735 730,806 Grocery stores - U.S. (1) 1,517,237 907,634 Grocery stores - U.K. (1) 1,963,057 1,131,760 Health and fitness 1,325,932 1,050,791 Health care - U.S. 670,864 289,244 Home furnishings - U.S. 583,564 109,631 Home improvement - U.S. 946,870 608,222 Home improvement - U.K. 780,308 187,289 Restaurants - casual dining 2,016,017 515,226 Restaurants - quick service - U.S. 2,689,806 1,062,918 Theaters - U.S. 750,877 767,117 Transportation services 1,039,220 729,640 Wholesale club 865,658 407,584 Other non-reportable segments 6,080,123 2,644,041 Total net real estate $ 31,988,872 $ 17,485,156 Intangible assets: Automotive service 125,543 55,018 Beverages 17,452 9,401 Child care 33,449 19,848 Convenience stores - U.S. 275,548 121,151 Dollar stores 366,319 77,176 Drug stores 355,779 167,975 Financial services 92,986 14,611 General merchandise - U.S. 254,343 108,646 Grocery stores - U.S. (1) 378,181 181,764 Grocery stores - U.K. (1) 426,714 282,211 Health and fitness 125,586 67,537 Health care - U.S. 103,143 21,032 Home furnishings - U.S. 210,654 9,336 Home improvement - U.S. 207,637 97,228 Home improvement - U.K. 158,667 57,369 Restaurants - casual dining 416,653 20,553 Restaurants - quick service - U.S. 270,092 47,517 Theaters - U.S. 33,527 28,292 Transportation services 125,971 53,902 Wholesale club 155,032 36,165 Other non-reportable segments 1,142,849 233,923 Goodwill (2) 3,676,705 14,180 Other corporate assets 2,195,800 1,530,294 Total assets $ 43,137,502 $ 20,740,285 (1) During 2021, we invested in 43 properties in Spain. As of December 31, 2021, grocery stores - Spain was not a reportable segment. (2) Goodwill has not yet been allocated to our individual operating segments; the allocation is pending the finalization of our purchase accounting. -107- Table of Contents Revenue for the years ended December 31, 2021 2020 2019 Segment rental revenue: Automotive service $ 47,830 $ 35,090 $ 32,365 Beverages 37,284 32,771 31,807 Child care 36,425 35,643 31,749 Convenience stores - U.S. 217,175 189,658 166,755 Dollar stores 149,136 126,719 102,695 Drug stores 153,174 140,993 127,853 Financial services 36,831 30,531 30,189 General merchandise - U.S. 72,442 49,352 35,366 Grocery stores - U.S. (1) 88,360 78,106 69,691 Grocery stores - U.K. (1) 100,500 51,459 17,819 Health and fitness 115,878 104,744 105,896 Health care - U.S. 33,579 25,563 21,011 Home furnishings - U.S. 21,457 12,447 10,490 Home improvement - U.S. 62,076 46,392 42,351 Home improvement - U.K. 34,470 4,224 — Restaurants - casual dining 71,338 46,265 45,238 Restaurants - quick service - U.S. 115,758 88,163 92,018 Theaters - U.S. 90,792 78,653 87,698 Transportation services 71,955 64,131 66,500 Wholesale club 46,061 38,713 38,117 Other non-reportable segments and contractually obligated reimbursements by our clients 462,437 359,916 329,210 Rental (including reimbursable) 2,064,958 1,639,533 1,484,818 Other 15,505 7,554 3,345 Total revenue $ 2,080,463 $ 1,647,087 $ 1,488,163 (1) During 2021, we invested in 43 properties in Spain. As of December 31, 2021, grocery stores - Spain was not a reportable segment. 18. 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 December 31, 2021, we had commitments of $ 74.7 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements. In addition, as of December 31, 2021, we had committed $ 285.7 million under construction contracts, the majority of which is expected to be paid in the next twelve months. We have certain properties that are subject to ground leases, which are accounted for as operating leases. -108- Table of Contents At December 31, 2021, minimum future rental payments for the next five years and thereafter are as follows (in millions): Operating Leases Finance Leases Total 2022 $ 38.3 $ 1.6 $ 39.9 2023 38.8 1.6 40.4 2024 38.7 1.4 40.1 2025 38.8 1.3 40.1 2026 36.7 1.3 38.0 Thereafter 468.5 45.4 513.9 Total $ 659.8 $ 52.6 $ 712.4 Present value adjustment for remaining lease payments (1) ( 198.1 ) ( 8.6 ) Total lease liability $ 461.7 $ 44.0 (1 ) The discount rates are specific for individual leases primarily based on the lease term. The range of discount rates used to calculate the present value of the operating lease payments is 0.41 % to 5.50 % and for finance lease payments is 0.54 % to 5.50 %. The weighted average discount rate was derived from estimated incremental borrowing rates based on our credit quality, as we did not have any borrowings at the balance sheet date with comparable terms to our lease agreements. At December 31, 2021, the weighted average discount rate for operating leases is 3.15 % and the weighted average remaining lease term is 21.5 years. At December 31, 2021, the weighted average discount rate for finance leases is 3.55 % and the weighted average remaining lease term is 22.8 years. 19. Subsequent Events A. Dividend Payments In January and February 2022, we declared a dividend of $ 0.2465 , which will be paid in February 2022 and March 2022, respectively. B. Note Issuances In January 2022, we issued £ 250.0 million of 1.875 % senior unsecured notes due January 2027 (the "January 2027 Notes") and £ 250.0 million of 2.500 % senior unsecured notes due January 2042 (the "January 2042 Notes"). The public offering price for the January 2027 Notes was 99.487 % of the principal amount for an effective semi-annual yield to maturity of 1.974 % and the public offering price for the January 2042 Notes was 98.445 % of the principal amount for an effective semi-annual yield to maturity of 2.584 %. Combined, the new issues of the January 2027 Notes and the January 2042 Notes have a weighted average term of approximately 12.5 years and a weighted average effective semi-annual yield to maturity of approximately 2.28 %. Item 9: Changes In and Disagreements With Accountants on Accounting and Financial Disclosure We have had no disagreements with our independent registered public accounting firm on accounting matters or financial disclosure, nor have we changed accountants in the two most recent fiscal years.