REALTY INCOME CORP 10-Q

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including the documents incorporated by reference, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. When used in this quarterly report, the words “estimated,” “anticipated,” “expect,” “believe,” “intend,” “continue,” “should,” “may,” “likely,” “plans,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include discussions of our business and portfolio (including our growth strategies and our intention to acquire or dispose of additional properties and the timing of these acquisitions and dispositions), re-lease, re-development and speculative development of properties and expenditures related thereto; future operations and results; the announcement of operating results, strategy, plans, and the intentions of management; and trends in our business, including trends in the market for long-term net leases of freestanding, single-client properties. Forward-looking statements are subject to risks, uncertainties, and assumptions about Realty Income Corporation which may cause our actual future results to differ materially from expected results. Some of the factors that could cause actual results to differ materially are, among others, our continued qualification as a real estate investment trust; general domestic and foreign business, economic, or financial conditions; competition; fluctuating interest and currency rates; inflation and its impact on our clients and us; access to debt and equity capital markets and other sources of funding; continued volatility and uncertainty in the credit markets and broader financial markets; other risks inherent in the real estate business including our clients' defaults under leases, increased client bankruptcies, potential liability relating to environmental matters, illiquidity of real estate investments, and potential damages from natural disasters; impairments in the value of our real estate assets; changes in domestic and foreign income tax laws and rates; our clients' solvency; property ownership through joint ventures and partnerships which may limit control of the underlying investments; the continued evolution of the COVID-19 pandemic or future epidemics or pandemics, measures taken to limit their spread, the impacts on us, our business, our clients (including those in the theater and fitness industries), and the economy generally; the loss of key personnel; the outcome of any legal proceedings to which we are a party or which may occur in the future; acts of terrorism and war; and any effects of uncertainties regarding whether the anticipated benefits or results of our merger with VEREIT, Inc. in November 2021 will be achieved. Additional factors that may cause risks and uncertainties include those discussed in the sections entitled “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements are not guarantees of future plans and performance and speak only as of the date this quarterly report was filed with the Securities and Exchange Commission ("SEC"). Actual plans and operating results may differ materially from what is expressed or forecasted in this quarterly report and forecasts made in the forward-looking statements discussed in this quarterly report might not materialize. We do not undertake any obligation to update forward-looking statements or publicly release the results of any forward-looking statements that may be made to reflect events or circumstances after the date these statements were made. OVERVIEW Realty Income, The Monthly Dividend Company ® , is an S&P 500 company and member of the S&P 500 Dividend Aristocrats ® index for having increased its dividend every year for over 25 consecutive years. We invest in people and places to deliver dependable monthly dividends that increase over time. The Company is structured as a real estate investment trust ("REIT"), requiring us annually to distribute at least 90% of our taxable income (excluding net capital gains) in the form of dividends to its stockholders. The monthly dividends are supported by the cash flow generated from real estate owned under long-term net lease agreements with our commercial clients. Realty Income was founded in 1969 and listed on the New York Stock Exchange ("NYSE") in 1994 under the trading symbol "O". Over the past 54 years, Realty Income has been acquiring and managing freestanding commercial properties that generate rental revenue under long-term net lease agreements with our commercial clients. At March 31, 2023, our diversified portfolio consisted of: • Owned or held interests in 12,492 properties; • An occupancy rate of 99.0%, or 12,361 properties leased and 131 properties available for lease or sale; • Clients doing business in 84 separate industries; -25- Table of Contents • Locations in all 50 United States ("U.S."), Puerto Rico, the United Kingdom ("U.K."), Spain, and Italy; • Approximately 246.7 million square feet of leasable space; • A weighted average remaining lease term (excluding rights to extend a lease at the option of the client) of approximately 9.4 years; and • An average leasable space per property of approximately 19,750 square feet; approximately 13,300 square feet per retail property and approximately 229,300 square feet per industrial property. Of the 12,492 properties in the portfolio at March 31, 2023, 12,263, or 98.2%, are single-client properties, of which 12,134 were leased, and the remaining are multi–client properties. At March 31, 2023, approximately 40.8% of our total portfolio annualized contractual rent comes from properties leased to our investment grade clients, their subsidiaries or affiliated companies. At March 31, 2023, our top 20 clients (based on percentage of total portfolio annualized contractual rent) represented approximately 40.5% of our annualized rent and 12 of these clients have investment grade credit ratings or are subsidiaries or affiliates of investment grade companies. Approximately 92% of our annualized retail contractual rent as of March 31, 2023, is derived from our clients with a service, non-discretionary, and/or low price point component to their business. Unless otherwise specified, references to rental revenue in the Management's Discussion and Analysis of Financial Condition and Results of Operations are exclusive of reimbursements from clients for recoverable real estate taxes and operating expenses totaling $59.6 million and $44.0 million for the three months ended March 31, 2023, and 2022, respectively. RECENT DEVELOPMENTS Increases in Monthly Dividends to Common Stockholders We have continued our 54-year policy of paying monthly dividends. In addition, we increased the dividend three times during 2023. As of April 2023, we have paid 102 consecutive quarterly dividend increases and increased the dividend 120 times since our listing on the NYSE in 1994. The following table summarizes our dividend increases in 2023: 2023 Dividend increases Month Declared Month Paid Dividend per share Increase per share 1st increase Dec 2022 Jan 2023 $0.2485 $0.0005 2nd increase Feb 2023 Mar 2023 $0.2545 $0.0060 3rd increase Mar 2023 Apr 2023 $0.2550 $0.0005 The dividends paid per share during the three months ended March 31, 2023, totaled approximately $0.7515, as compared to approximately $0.7395 during the three months ended March 31, 2022, an increase of $0.0120, or 1.6%. The monthly dividend of $0.2550 per share represents a current annualized dividend of $3.06 per share, and an annualized dividend yield of 4.8% based on the last reported sale price of our common stock on the NYSE of $63.32 on March 31, 2023. Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will be in any future period. -26- Table of Contents Acquisitions During the Three Months Ended March 31, 2023 Below is a listing of our acquisitions in the U.S. and Europe for the period indicated below: Number of Properties Leasable Square Feet (in thousands) Investment ($ in millions) Weighted Average Lease Term (Years) Initial Weighted Average Cash Lease Yield (1) Three months ended March 31, 2023 (2) Acquisitions - U.S. 197 5,926 $ 1,048.9 10.0 7.0 % Acquisitions - Europe 20 2,437 389.7 12.6 7.6 % Total acquisitions 217 8,363 $ 1,438.6 10.7 7.2 % Properties under development (3) 122 2,319 235.6 14.8 6.0 % Total (4) 339 10,682 $ 1,674.2 11.2 7.0 % (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 (defined as the monthly aggregate cash amount charged to clients, inclusive of monthly base rent receivables), 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 weighted average cash lease yield includes approximately $0.7 million received as settlement credits as reimbursement of free rent periods for the three months ended March 31, 2023. In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does not provide for a fixed rate of return on a property under development or expansion, the initial average cash lease yield is computed as follows: estimated cash net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs. (2) None of our investments during the three months ended March 31, 2023, caused any one client to be 10% or more of our total assets at March 31, 2023. (3) Includes three U.K. development properties that represent investments of £3.8 million Sterling during the three months ended March 31, 2023, converted at the applicable exchange rate on the funding date. (4) Our clients occupying the new properties are 85.5% retail and 14.5% industrial based on annualized contractual rent. Approximately 42% of the annualized contractual rent generated from acquisitions during the three months ended March 31, 2023, is from our investment grade rated clients, their subsidiaries or affiliated companies. Note Issuances In January 2023, we issued $500.0 million of 5.05% senior unsecured notes due January 2026 and $600.0 million of 4.85% senior unsecured notes due March 2030. In April 2023, we issued $400.0 million of 4.70% senior unsecured notes due December 2028 and $600.0 million of 4.90% senior unsecured notes due July 2033. Term Loans In January 2023, we entered into a term loan agreement, permitting us to incur multicurrency term loans, up to an aggregate of $1.5 billion in total borrowings. As of March 31, 2023, we had $1.1 billion in multicurrency borrowings under our new term loan agreement, including $90.0 million, £705.0 million and €85.0 million in outstanding borrowings. See note 5 , Term Loans, for further details. Portfolio Discussion Leasing Results At March 31, 2023, we had 131 properties available for lease or sale out of 12,492 properties in our portfolio, representing a 99.0% occupancy rate based on the number of properties in the portfolio. Our property-level occupancy rates exclude properties with ancillary leases only, such as cell towers and billboards . Below is a summary of our portfolio activity for the period indicated below: Properties available for lease at December 31, 2022 126 Lease expirations (1) 192 Re-leases to same client (155) Re-leases to new client (6) Vacant dispositions (26) Properties available for lease at March 31, 2023 131 (1) Includes scheduled and unscheduled expirations (including leases rejected in bankruptcy), as well as future expirations resolved in the periods indicated above. -27- Table of Contents During the three months ended March 31, 2023, the new annualized contractual rent on re-leases was $36.1 million, as compared to the previous annual rent of $35.5 million on the same units, representing a rent recapture rate of 101.7% on the units re-leased. We re-leased two units to new clients without a period of vacancy, and six units to new clients after a period of vacancy. As part of our re-leasing costs, we pay leasing commissions to unrelated, third-party real estate brokers consistent with the commercial real estate industry standard, and sometimes provide rent concessions to our clients. We do not consider the collective impact of the leasing commissions or rent concessions to our clients to be material to our financial position or results of operations. Impact of COVID-19 Certain of our clients have been slower to recover economically from the effects of the COVID-19 pandemic (including those in the theater industry). However, even in light of this, during 2023 we have continued to collect contractual rent across our total portfolio at levels that are consistent with pre-pandemic rent collection. We cannot assure that our historical rent collections will be indicative of our future rental collections as the extent to which the COVID-19 pandemic (or future pandemics) will impact our operations and those of our clients in the future is not known and will depend on future developments. The impact of the COVID-19 pandemic, or future pandemics, on us, our business, our clients, and the economy generally is discussed further in "Item 1A, Risk Factors" in Part I of our Annual Report on Form 10-K for the year ended December 31, 2022. Theater Industry Update For the period from January 2023 through April 2023, we collected all of the contractual rent (1) across our theater portfolio. As of March 31, 2023 , we had cumulative reserves of $33.0 million on properties leased to Cineworld Group plc and its affiliates ("Cineworld"), the parent of the entities that lease certain of our theater portfolios, including Regal Cinemas, which commenced Chapter 11 reorganization proceedings during September 2022. These reserves for Cineworld, representing a reduction of rental revenue, primarily relate to contractual rent and expense recoveries recorded during the COVID-19 pandemic in 2020, and during the fourth quarter of 2022, and exclude straight-line rent reserves. Total receivables, net of reserves and excluding straight line rent receivables, from Cineworld and its affiliates were $14.1 million at March 31, 2023, which include both deferred contractual rent and deferred expense recoveries. (1) We define contractual rent as the monthly aggregate cash amount charged to clients, inclusive of monthly base rent receivables. Charged amounts have not been adjusted for any COVID-19 related rent relief granted and include contractual rent from any clients in bankruptcy. Impact of Real Estate and Credit Markets In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, including the current market, the global credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and global credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly. LIQUIDITY AND CAPITAL RESOURCES Capital Philosophy Our goal is to deliver dependable monthly dividends to our stockholders that increase over time. Historically, we have met our principal short-term and long-term capital needs, including the funding of high-quality real estate acquisitions, property development, and capital expenditures, by issuing common stock, preferred stock, long-term unsecured notes and term loan borrowings. Over the long term, we believe that common stock should be the majority of our capital structure. We may issue common stock when we believe our share price is at a level that allows for the proceeds of an offering to be accretively invested into additional properties or to permanently finance properties that were initially financed by our revolving credit facility, commercial paper programs, or shorter-term debt securities. However, we cannot assure you that we will have access to the capital markets at all times and at terms that are acceptable to us. Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,” which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs, and cash distributions to common stockholders, primarily through cash provided by operating activities, borrowings under our revolving credit facility, short-term term loans, and under our commercial paper programs, and through public securities offerings. As of -28- Table of Contents March 31, 2023, there are approximately $1.2 billion of obligations becoming due during 2023, which we expect to fund through a combination of the following: • Cash and cash equivalents; • Future cash flows from operations; • Issuances of common stock or debt; and • Additional borrowings under our revolving credit facility (after deducting outstanding borrowings under our commercial paper programs). We may choose to mitigate our financial exposure to exchange rate risk for properties acquired outside the U.S. through the issuance of debt securities denominated in the same local currency and through currency derivatives. We may leave a portion of our foreign cash flow unhedged to reinvest in additional properties in the same local currency. Conservative Capital Structure We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At March 31, 2023, our total outstanding borrowings of senior unsecured notes and bonds, term loans, mortgages payable, revolving credit facility and commercial paper were $18.7 billion, or approximately 30.5% of our total market capitalization of $61.5 billion. We define our total market capitalization at March 31, 2023, as the sum of: • Shares of our common stock outstanding of 673,206,775, plus total common units outstanding of 1,795,167, multiplied by the last reported sales price of our common stock on the NYSE of $63.32 per share on March 31, 2023, or $42.7 billion; • Outstanding borrowings of $1.1 billion on our revolving credit facility, comprised of $770.0 million USD and £305.0 million Sterling borrowings; • Outstanding borrowings of $157.5 million on our commercial paper programs, consisting entirely of €145.0 million of Euro-denominated borrowings; • Outstanding mortgages payable of $842.1 million, excluding net mortgage premiums of $9.2 million and deferred financing costs of $0.7 million; • Outstanding borrowings on our term loans of $1.3 billion, excluding deferred financing costs of $6.5 million; and • Outstanding senior unsecured notes and bonds of $15.3 billion, including Sterling-denominated notes of £2.6 billion, and excluding $133.3 million related to unamortized net premiums, deferred financing costs, and basis adjustment on interest rate swaps designated as fair value hedges. Universal Shelf Registration In June 2021, we filed a shelf registration statement with the SEC, which is effective for a term of three years and will expire in June 2024. In accordance with SEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock, or depositary shares, and (6) any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. -29- Table of Contents Equity Capital Raising Under our At-the-Market ("ATM") Program, up to 120,000,000 shares of common stock may be offered and sold (1) by us to, or through, a consortium of banks acting as our sales agents or (2) by a consortium of banks acting as forward sellers on behalf of any forward purchasers contemplated thereunder, in each case by means of ordinary brokers’ transactions on the NYSE at prevailing market prices, at prices related to prevailing market prices or at negotiated prices or by any other methods permitted by applicable law. We currently expect to fully physically cash settle any forward sale agreement with the respective forward purchaser on one or more dates specified by us on or prior to the maturity date of such forward sale agreement, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward sale agreement multiplied by the relevant forward price per share. During the three months ended March 31, 2023, we issued 12,664,478 shares and raised $796.2 million of net proceeds under the ATM programs. With respect to forward sales pursuant to our ATM program, we do not initially receive any proceeds from any sale of shares of our common stock borrowed by a forward purchaser and sold through a forward seller. As of March 31, 2023, there were 19,619,215 shares of common stock subject to forward sale agreements through our ATM program, with a weighted average initial price of $62.59 per share, representing approximately $1.2 billion in estimated net proceeds (assuming full physical settlement of all outstanding shares of common stock subject to such forward sale agreements and certain assumptions made with respect to settlement dates), which have been executed but not settled. The weighted average forward price at March 31, 2023 was $62.17 per share, after price deduction and adjustments. As of March 31, 2023, we had 45,081,312 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. Our Dividend Reinvestment and Stock Purchase Plan, (our "DRSPP") authorizes up to 26,000,000 common shares to be issued. During the three months ended March 31, 2023, we issued 41,663 shares and raised approximately $2.7 million under our DRSPP. At March 31, 2023, we had 11,118,162 shares remaining for future issuance under our DRSPP program. Revolving Credit Facility We have a $4.25 billion unsecured revolving multicurrency credit facility that matures in June 2026, includes two six-month extensions that can be exercised at our option and allows us to borrow in up to 14 currencies, including U.S. dollars. Our revolving credit facility also has a $1.0 billion expansion feature, which is subject to obtaining lender commitments. Under our revolving credit facility, our current investment grade credit ratings provide for USD borrowings at SOFR, plus 0.725% with a SOFR adjustment charge of 0.10% and a revolving credit facility fee of 0.125%, for all-in pricing of 0.95% over SOFR, British Pound Sterling at SONIA, plus 0.725% with a SONIA adjustment charge of 0.0326% and a revolving credit facility fee of 0.125%, for all-in pricing of 0.8826% over SONIA, and Euro Borrowings at one-month EURIBOR, plus 0.725%, and a revolving credit facility fee of 0.125%, for all-in pricing of 0.85% over one-month EURIBOR. 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 in different currencies. Our credit facility is unsecured and accordingly, we have not pledged any assets as collateral for this obligation . At March 31, 2023, we had a borrowing capacity of $3.1 billion available on our revolving credit facility (subject to customary conditions to borrowings) and an outstanding balance of $1.1 billion, comprised of $770.0 million USD and £305.0 million Sterling borrowings. The weighted average interest rate on borrowings under our revolving credit facility during the three months ended March 31, 2023, was 3.7% per annum. Our revolving credit facility is subject to various leverage and interest coverage ration limitations, and as of March 31, 2023, we were in compliance with these covenants. We expect to use our credit facility to acquire additional properties and for other general corporate purposes. Any additional borrowings will increase our exposure to interest rate risk. Commercial Paper Programs We have a USD-denominated unsecured commercial paper program, under which we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding of $1.5 billion, as well as a Euro-denominated unsecured commercial paper program, which permits us to issue additional unsecured commercial notes up to a maximum aggregate amount of $1.5 billion (or foreign currency equivalent). Our Euro-denominated unsecured commercial paper program may be issued in USD or various foreign currencies, including but not limited to, Euros, Sterling, Swiss Francs, Yen, Canadian Dollars, and Australian Dollars, in each case, pursuant to customary terms in the European commercial paper market. -30- Table of Contents At March 31, 2023, we had an outstanding balance of $157.5 million, consisting entirely of €145.0 million of Euro-denominated borrowings. The weighted average interest rate on borrowings under our commercial paper programs was 3.5% for the three months ended March 31, 2023. The commercial paper borrowings outstanding at March 31, 2023 matured in April 2023. We use our $4.25 billion revolving credit facility as a liquidity backstop for the repayment of the notes issued under the commercial paper programs. We generally use our credit facility and commercial paper borrowings for the short-term financing of new property acquisitions. Thereafter, we generally seek to refinance those borrowings with the net proceeds of long-term or more permanent financing, including the issuance of equity or debt securities. We cannot assure you, however, that we will be able to obtain any such refinancing, or that market conditions prevailing at the time of the refinancing will enable us to issue equity or debt securities at acceptable terms. We regularly review our credit facility and commercial paper programs and may seek to extend, renew or replace our credit facility and commercial paper programs, to the extent we deem appropriate. Term Loans In January 2023, we entered into a term loan agreement, permitting us to incur multicurrency term loans, up to an aggregate of $1.5 billion in total borrowings. As of March 31, 2023, we had $1.1 billion in multicurrency borrowings under our new term loan agreement, including $90.0 million, £705.0 million and €85.0 million in outstanding borrowings. The 2023 term loans initially mature in January 2024 and include two 12-month maturity extensions that can be exercised at our option. Our A3/A- credit ratings provide for a borrowing rate of 80 basis points over the applicable benchmark rate, which includes adjusted SOFR for USD-denominated loans, adjusted SONIA for Sterling-denominated loans, and EURIBOR for Euro-denominated loans. In conjunction with our 2023 term loans, we entered into interest rate swaps which fix our per annum interest rate. As of March 31, 2023, the effective interest rate, after giving effect to the interest rate swap, was 5.0%. We also have a $250.0 million senior unsecured term loan, which matures in March 2024. In conjunction with this term loan, we also entered into an interest rate swap. As of March 31, 2023, the effective interest rate on this term loan, after giving effect to the interest rate swap, was 3.8%. As of March 31, 2023, we were in compliance with the covenants contained in the term loans. Mortgage Debt As of March 31, 2023, we had $842.1 million of mortgages payable, of which £30.6 million related to a Sterling-denominated mortgage. Over a majority of our mortgages payable were assumed in connection with our merger with VEREIT, Inc. in November 2021 or with our property acquisitions. No mortgages were assumed during the three months ended March 31, 2023. At March 31, 2023, we had net premiums totaling $9.2 million on these mortgages and deferred financing costs of $0.7 million. We expect to pay off the mortgages payable as soon as prepayment penalties have declined to a level that would make it economically feasible to do so. During the three months ended March 31, 2023, we made $1.2 million in principal payments. 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 March 31, 2023, we were in compliance with these covenants. Notes Outstanding As of March 31, 2023, our senior unsecured note and bond obligations had a total principal amount of $15.3 billion, including Sterling- denominated notes of £2.6 billion, and excluding $133.3 million related to unamortized net premiums, deferred financing costs, and basis adjustment on interest rate swaps designated as fair value hedges. See note 7, Notes Payable, to our consolidated financial statements for the full list of senior unsecured notes and bonds, along with maturity dates. Please note that this listing does not include the $400.0 million of 4.70% senior unsecured notes due December 2028 and $600.0 million of 4.90% senior unsecured notes due July 2033, which were issued in April 2023. All of our outstanding notes and bonds have fixed interest rates and contain various covenants, with which we remained in compliance as of March 31, 2023. Interest on our £400 million of 1.625% senior unsecured notes issued in October 2020, our £400 million of 1.125% senior unsecured notes issued in July 2021, our £350 million of 1.750% senior unsecured notes also issued in July 2021, our £250 million of 1.875% senior unsecured notes issued in January 2022, and £250 million of 2.500% senior unsecured notes also issued in January 2022 is paid annually. Interest on our remaining senior unsecured note and bond obligations is paid semiannually. The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our senior notes and bonds. These calculations, which are not based on accounting principles -31- Table of Contents generally accepted in the United States of America ("U.S. GAAP"), are presented to investors to show our ability to incur additional debt under the terms of our senior notes and bonds as well as to disclose our current compliance with such covenants and are not measures of our liquidity or performance. The actual amounts as of March 31, 2023, are: Note Covenants Required Actual Limitation on incurrence of total debt < 60% of adjusted assets 40.6 % Limitation on incurrence of secured debt < 40% of adjusted assets 1.9 % Debt service coverage (trailing 12 months) (1) > 1.5x 4.6x Maintenance of total unencumbered assets > 150% of unsecured debt 252.8 % (1) Our debt service coverage ratio is calculated on a pro forma basis for the preceding four-quarter period on the assumptions that: (i) the incurrence of any debt (as defined in the covenants) incurred by us since the first day of such four-quarter period and the application of the proceeds therefrom (including to refinance other debt since the first day of such four-quarter period), (ii) the repayment or retirement of any of our debt since the first day of such four-quarter period, and (iii) any acquisition or disposition by us of any asset or group since the first day of such four quarters had in each case occurred on April 1, 2022 and subject to certain additional adjustments. Such pro forma ratio has been prepared on the basis required by that debt service covenant, reflects various estimates and assumptions and is subject to other uncertainties, and therefore does not purport to reflect what our actual debt service coverage ratio would have been had transactions referred to in clauses (i), (ii) and (iii) of the preceding sentence occurred as of April 1, 2022, nor does it purport to reflect our debt service coverage ratio for any future period. The following is our calculation of debt service and fixed charge coverage at March 31, 2023 (in thousands, for trailing twelve months): Net income available to common stockholders $ 895,058 Plus: interest expense, excluding the amortization of deferred financing costs 496,358 Less: gain on extinguishment of debt (367) Plus: provision for taxes 46,152 Plus: depreciation and amortization 1,718,104 Plus: provisions for impairment 32,001 Plus: pro forma adjustments 302,673 Less: gain on sales of real estate (97,080) Income available for debt service, as defined $ 3,392,899 Total pro forma debt service charge $ 730,667 Debt service and fixed charge coverage ratio 4.6 Cash Reserves We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our properties. We intend to retain an appropriate amount of cash as working capital. At March 31, 2023, we had cash and cash equivalents totaling $164.6 million, inclusive of £75.8 million denominated in Sterling and €30.2 million denominated in Euro. We believe that our cash and cash equivalents on hand, cash provided from operating activities, and borrowing capacity is sufficient to meet our liquidity needs for the next twelve months. We intend, however, to use permanent or long-term capital to fund property acquisitions and to repay future borrowings under our credit facility and commercial paper programs. Credit Agency Ratings The borrowing interest rates under our revolving credit facility are based upon our ratings assigned by credit rating agencies. As of March 31, 2023, we were assigned the following investment grade corporate credit ratings on our senior unsecured notes and bonds: Moody’s Investors Service has assigned a rating of A3 with a “stable” outlook and Standard & Poor’s Ratings Group has assigned a rating of A- with a “stable” outlook. In addition, we were assigned the following ratings on our commercial paper at March 31, 2023: Moody's Investors Service has assigned a rating of P-2 and Standard & Poor's Ratings Group has assigned a rating of A-2. Based on our credit agency ratings as of March 31, 2023, interest rates under our credit facility for U.S. borrowings would have been at the SOFR, plus 0.725% with a SOFR adjustment charge of 0.10% and a revolving credit facility fee of 0.125%, for all-in pricing of 0.95% over SOFR, for British Pound Sterling borrowings, at the SONIA, plus 0.725% with a SONIA adjustment charge of 0.0326% and a revolving credit facility fee of 0.125%, for all-in pricing of -32- Table of Contents 0.8826% over SONIA, and for Euro Borrowings at one-month EURIBOR, plus 0.725%, and a revolving credit facility fee of 0.125%, for all-in pricing of 0.85% over one-month EURIBOR. In addition, our credit facility provides that the interest rates can range between: (i) SOFR/SONIA/EURIBOR, plus 1.40% if our credit rating is lower than BBB-/Baa3 or our senior unsecured debt is unrated and (ii) SOFR/SONIA/EURIBOR, plus 0.70% if our credit rating is A/A2 or higher. In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which range from: (i) 0.30% for a rating lower than BBB-/Baa3 or unrated, and (ii) 0.10% for a credit rating of A/A2 or higher. We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease. The credit ratings assigned to us could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that our ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, a rating is not a recommendation to buy, sell or hold our debt securities, preferred stock or common stock. Table of Obligations The following table summarizes the maturity of each of our obligations as of March 31, 2023 (dollars in millions): Year due Credit Facility and Commercial Paper Programs (1) Senior Unsecured Notes and Bonds (2) Term Loans (3) Mortgages Payable (4) Interest (5) Ground Leases Paid by Realty Income (5) Ground Leases Paid by Our Clients (7) Other (8) Totals 2023 $ 157.5 $ — $ — $ 20.9 $ 511.1 $ 7.9 $ 23.4 $ 485.5 $ 1,206.3 2024 — 850.0 1,304.5 740.5 603.2 13.3 30.6 34.9 3,577.0 2025 — 1,050.0 — 42.9 523.5 11.5 30.0 1.7 1,659.6 2026 1,147.4 2,075.0 — 12.0 436.2 17.2 29.2 0.8 3,717.8 2027 — 2,004.0 — 22.3 358.6 8.9 26.3 0.3 2,420.4 Thereafter — 9,317.7 — 3.5 1,602.7 288.0 266.5 1.2 11,479.6 Totals $ 1,304.9 $ 15,296.7 $ 1,304.5 $ 842.1 $ 4,035.3 $ 346.8 $ 406.0 $ 524.4 $ 24,060.7 (1) The initial term of the credit facility expires in June 2026 and includes, at our option, two six-month extensions. At March 31, 2023, there were $1.1 billion borrowings under our revolving credit facility. Commercial paper programs outstanding at March 31, 2023 were $157.5 million, which matured in April 2023. (2) Excludes $133.3 million related to unamortized net premiums, deferred financing costs, and basis adjustment on interest rate swaps designated as fair value hedges. The table of obligations also excludes the April 2023 issuances of $400.0 million of senior unsecured notes due December 2028 and $600.0 million of senior unsecured notes due July 2033. (3) Excludes deferred financing cost of $6.5 million. (4) Excludes both non-cash net premiums recorded on the mortgages payable of $9.2 million and deferred financing costs of $0.7 million. (5) Interest on the term loans, notes, bonds, mortgages payable, credit facility and commercial paper programs has been calculated based on outstanding balances at period end through their respective maturity dates. Excludes interest on the April 2023 issuances of $400.0 million of senior unsecured notes due December 2028 and $600.0 million of senior unsecured notes due July 2033. (6) We currently pay the ground lessors directly for the rent under the ground leases. (7) Our clients, who are generally sub-clients under ground leases, are responsible for paying the rent under these ground leases. In the event our client fails to pay the ground lease rent, we are primarily responsible. (8) “Other” consists of $509.5 million of commitments under construction contracts, and $14.9 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements. Our credit facility, commercial paper programs, term loans, and notes payable obligations are unsecured. Accordingly, we have not pledged any assets as collateral for these obligations. DIVIDEND POLICY Distributions are paid monthly to holders of shares of our common stock. Distributions are paid monthly to the limited partners holding common units of Realty Income, L.P., each on a per unit basis that is equal to the amount paid per share to our common stockholders. In order to maintain our status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our taxable income (excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our taxable income (including net capital gains). In 2022, our cash distributions to common stockholders totaled $1.81 billion, or approximately 95.3% of our estimated taxable income of $1.90 billion. Certain measures are available to us to reduce or eliminate our tax exposure as a REIT, and accordingly, no provision for federal income taxes, other than our taxable REIT -33- Table of Contents subsidiaries (each, a "TRS"), has been made. Our estimated taxable income reflects non-cash deductions for depreciation and amortization. Our estimated taxable income is presented to show our compliance with REIT dividend requirements and is not a measure of our liquidity or operating performance. We intend to continue to make distributions to our stockholders that are sufficient to meet this dividend requirement and that will reduce or eliminate our exposure to income taxes. Furthermore, we believe our cash on hand and funds from operations are sufficient to support our current level of cash distributions to our stockholders. We distributed $0.7515 per share to stockholders during the three months ended March 31, 2023, representing 76.7% of our diluted AFFO per share of $0.98. Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, FFO, Normalized FFO, AFFO, cash flow from operations, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, our debt service requirements, and any other factors the Board of Directors may deem relevant. In addition, our credit facility contains financial covenants that could limit the amount of distributions payable by us in the event of a default, and which prohibit the payment of distributions on our common stock in the event that we fail to pay when due (subject to any applicable grace period) any principal or interest on borrowings under our credit facility. Distributions of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary income, except to the extent that we recognize capital gains and declare a capital gains dividend, or that such amounts constitute “qualified dividend income” subject to a reduced rate of tax. The maximum tax rate of non-corporate taxpayers for “qualified dividend income” is generally 20%. In general, dividends payable by REITs are not eligible for the reduced tax rate on qualified dividend income, except to the extent that certain holding requirements have been met with respect to the REIT’s stock and the REIT’s dividends are attributable to dividends received from certain taxable corporations (such as our TRSs) or to income that was subject to tax at the corporate or REIT level (for example, if we distribute taxable income that we retained and paid tax on in the prior taxable year). However, non-corporate stockholders, including individuals, generally may deduct up to 20% of dividends from a REIT, other than capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning after December 31, 2017 and before January 1, 2026. Distributions in excess of earnings and profits generally will first be treated as a non-taxable reduction in the stockholders’ basis in their stock, but not below zero. Distributions in excess of that basis generally will be taxable as a capital gain to stockholders who hold their shares as a capital asset. None of the distributions to our common stockholders, made or deemed to have been made in 2022, were classified as a return of capital for federal income tax purposes. RESULTS OF OPERATIONS The following is a comparison of our results of operations for the three months ended March 31, 2023 and 2022. Total Revenue The following summarizes our total revenue (dollars in thousands): Three months ended March 31, 2023 2022 Change REVENUE Rental (excluding reimbursable) $ 865,709 $ 755,562 $ 110,147 Rental (reimbursable) 59,580 44,003 15,577 Other 19,110 7,778 11,332 Total revenue $ 944,399 $ 807,343 $ 137,056 -34- Table of Contents Rental Revenue (excluding reimbursable) The table below summarizes our rental revenue (excluding reimbursable, dollars in thousands): Three months ended March 31, Number of Properties Square Footage (1) 2023 2022 Change Properties acquired during 2023 & 2022 1,548 38,670,402 $ 136,301 $ 5,904 $ 130,397 Same store rental revenue (2) 10,728 191,114,310 719,701 718,088 1,613 Orion Divestiture 92 10,093,123 — 413 (413) Constant currency adjustment (3) N/A N/A (1,619) 4,634 (6,253) Properties sold during and prior to 2023 210 5,438,143 794 5,655 (4,861) Straight-line rent and other non-cash adjustments N/A N/A 1,851 8,249 (6,398) Vacant rents, development and other (4) 216 8,362,042 5,440 10,910 (5,470) Other excluded revenue (5) N/A N/A 3,241 1,709 1,532 Totals $ 865,709 $ 755,562 $ 110,147 (1) Excludes 5,902,586 square feet from properties ground leased to clients and 2,679,071 square feet from properties with no land or building ownership. (2) The same store rental revenue percentage increase for the three months ended March 31, 2023 as compared with the same period in the prior year is 0.2%. (3) For purposes of comparability, same store rental revenue is presented on a constant currency basis using the exchange rate as of March 31, 2023, of 1.24 British Pound Sterling ("GBP")/USD and 1.09 Euro ("EUR")/USD. None of the properties in Italy met our same store pool definition for the periods presented. (4) Relates to the aggregate of (i) rental revenue from properties (191 properties comprising 7,613,225 square feet) that were available for lease during part of 2023 or 2022, and (ii) rental revenue for properties (25 properties comprising 748,817 square feet) under development or completed developments that do not meet our same store pool definition for the periods presented. (5) Primarily consists of reimbursements for tenant improvements and rental revenue that is not contractual base rent such as lease termination settlements. For purposes of determining the same store rent property pool, we include all properties that were owned for the entire year-to-date period, for both the current and prior year, except for properties during the current or prior year that; (i) were vacant at any time, (ii) were under development or redevelopment, or (iii) were involved in eminent domain and rent was reduced. Each of the exclusions from the same store pool are separately addressed within the applicable sentences above, explaining the changes in rental revenue for the period. Of the 12,492 properties in the portfolio at March 31, 2023, 12,263, or 98.2%, are single-client properties and the remaining are multi-client properties. Of the 12,263 single-client properties, 12,134, or 98.9%, were net leased at March 31, 2023. Of the 13,119 in-place leases in the portfolio, which excludes 185 vacant units, 11,049, or 84.2%, were under leases that provide for increases in rents through: • Base rent increases tied to inflation (typically subject to ceilings); • Percentage rent based on a percentage of the clients’ gross sales; • Fixed increases; or • A combination of two or more of the above rent provisions. Rent based on a percentage of our client's gross sales, or percentage rent, was $4.1 million and $3.7 million for the three months ended March 31, 2023 and 2022, respectively. Percentage rent represents less than 1.0% of rental revenue. At March 31, 2023, our portfolio of 12,492 properties was 99.0% leased with 131 properties available for lease, as compared to 99.0% leased with 126 properties available for lease at December 31, 2022, and 98.6% leased with 156 properties available for lease at March 31, 2022. It has been our experience that approximately 1% to 4% of our property portfolio will be available for lease at any given time; however, it is possible that the number of properties available for lease or sale could increase in the future, given the nature of economic cycles and other unforeseen global events, such as the COVID-19 pandemic. -35- Table of Contents Rental Revenue (reimbursable) A number of our leases provide for contractually obligated reimbursements from clients for recoverable real estate taxes and operating expenses. Contractually obligated reimbursements by our clients increased by $15.6 million, which is proportional to overall portfolio growth. Other Revenue Other revenue primarily relates to interest income recognized on financing receivables for certain leases with above-market terms. Other revenue increased by $11.3 million due to a higher number of leases with above-market terms, which is proportional to overall portfolio growth. Total Expenses The following summarizes our total expenses (dollars in thousands): Three months ended March 31, 2023 2022 Change EXPENSES Depreciation and amortization $ 451,477 $ 403,762 $ 47,715 Interest 154,132 106,403 47,729 Property (excluding reimbursable) 9,817 8,339 1,478 Property (reimbursable) 59,580 44,003 15,577 General and administrative 34,167 32,699 1,468 Provisions for impairment 13,178 7,038 6,140 Merger and integration-related costs 1,307 6,519 (5,212) Total expenses $ 723,658 $ 608,763 $ 114,895 Total revenue (1) $ 884,819 $ 763,340 General and administrative expenses as a percentage of total revenue (1) 3.9 % 4.3 % Property expenses (excluding reimbursable) as a percentage of total revenue (1) 1.1 % 1.1 % (1) Excludes rental revenue (reimbursable). Depreciation and Amortization Depreciation and amortization increased by $47.7 million primarily due to overall portfolio growth from acquisitions. As discussed in the sections entitled “Funds from Operations ("FFO") Available to Common Stockholders and Normalized Funds from Operations ("Normalized FFO") Available to Common Stockholders" and “Adjusted Funds from Operations ("AFFO") Available to Common Stockholders,” depreciation and amortization is a non-cash item that is added back to net income available to common stockholders for our calculation of FFO, Normalized FFO, and AFFO. -36- Table of Contents Interest Expense The following is a summary of the components of our interest expense (dollars in thousands): Three months ended March 31, 2023 2022 Interest on our credit facility, commercial paper, term loans, notes, mortgages and interest rate swaps $ 167,966 $ 120,962 Credit facility commitment fees 1,328 937 Amortization of debt origination and deferred financing costs 6,071 3,123 (Loss) gain on interest rate swaps (1,801) 722 Amortization of net mortgage premiums (3,200) (3,561) Amortization of net note premiums (15,532) (15,740) Capital lease obligation 403 335 Interest capitalized (1,103) (375) Interest expense $ 154,132 $ 106,403 Credit facility, commercial paper, term loans, mortgages and notes Average outstanding balances (dollars in thousands) $ 18,658,173 $ 15,529,939 Average interest rates 3.59 % 3.07 % The increase in interest expense for the three months ended March 31, 2023 is primarily due to the following: (i) January 2023 issuances of $500.0 million and $600.0 million in principle of notes, (ii) the January 2023 issuance of our 2023 term loans, (iii) the October 2022 issuance of $750.0 million in principal of notes, (iv) the June 2022 issuance of £600 million in principal of Sterling denominated notes, and (v) the January 2022 issuance of £500 million in principal of Sterling-denominated notes as well as higher average balances and rates on the credit facility and commercial paper borrowings, all of which was partially offset by lower mortgage interest as a result of mortgage payoffs. During the three months ended March 31, 2023, the weighted average interest rate on our principal borrowings consisted of: • Revolving credit facility of $1.1 billion was 3.7%; • Commercial paper of $157.5 million was 3.5%; • Term loans of $1.3 billion was 4.6%; • Mortgages payable of $842.1 million was 4.8%; • Notes and bonds payable of $15.3 billion was 3.4%; and • Notes, bonds, mortgages, term loans, and credit facility and commercial paper of $18.7 billion was 3.6%. Property Expenses (excluding reimbursable) Property expenses (excluding reimbursable) consist of costs associated with properties available for lease, non-net-leased properties and general portfolio expenses. Expenses related to properties available for lease and non-net-leased properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections and legal fees. General portfolio costs include, but are not limited to, insurance, legal, property inspections, and title search fees. Property expenses (excluding reimbursable) increased $1.5 million for the three months ended March 31, 2023 primarily due to our increased portfolio size, resulting in higher property taxes and insurance. Property Expenses (reimbursable) Property expenses (reimbursable) consist of reimbursable property taxes and operating costs paid on behalf of our clients. Property expenses (reimbursable) increased by $15.6 million for the three months ended March 31, 2023, which is proportional to overall portfolio growth. General and Administrative Expenses General and administrative expenses are expenditures related to the operations of our company, including employee-related costs, professional fees, and other general overhead costs associated with running our business. -37- Table of Contents General and administrative expenses increased $1.5 million for the three months ended March 31, 2023, primarily due to higher payroll-related compensation costs associated with the growth of the company. Provisions for Impairment The following table summarizes provisions for impairment during the periods indicated below (dollars in millions): Three months ended March 31, 2023 2022 Carrying value prior to impairment $ 35.6 $ 44.8 Less: total provisions for impairment (13.2) (7.0) Carrying value after impairment $ 22.4 $ 37.8 Depending on impairment triggering events during the applicable period, impairments are typically recorded for properties sold, in the process of being sold, vacant, in bankruptcy, or experiencing difficulties with collection of rent. Merger and Integration-Related Costs Merger and integration-related costs consist of advisory fees, attorney fees, accountant fees, and incremental and non-recurring costs necessary to convert data and systems, retain employees and otherwise enable us to operate the acquired business or assets efficiently. We incurred approximately $1.3 million and $6.5 million of merger and integration-related transaction costs during the three months ended March 31, 2023, and 2022, respectively, in conjunction with our merger with VEREIT, Inc. in November 2021. Gain on Sales of Real Estate The following summarizes our property dispositions (dollars in millions): Three months ended March 31, 2023 2022 Number of properties sold 26 34 Net sales proceeds $ 28.6 $ 122.2 Gain on sales of real estate $ 4.3 $ 10.2 Foreign Currency and Derivative Gain (Loss), Net We borrow in the functional currencies of the countries in which we invest. Net foreign currency gain and loss are primarily related to the remeasurement of intercompany debt from foreign subsidiaries. Derivative gain and loss primarily relates to mark-to-market adjustments on derivatives that do not qualify for hedge accounting and settlement of designated derivatives reclassified from AOCI. Foreign currency and derivative gain, net for the three months ended March 31, 2022 was $10.3 million and primarily comprised of foreign currency gains related to the remeasurement of intercompany debt. Equity in Income of Unconsolidated Entities Equity in income of unconsolidated entities for the three months ended March 31, 2022, related to three equity method investments acquired in our merger with VEREIT, Inc. in November 2021, which were all sold during 2022. Other Income, Net Certain miscellaneous non-recurring revenue is included in other income, net. The increase of $0.9 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was related to other non-recurring settlements. Income Taxes Income taxes are for city and state income and franchise taxes, and for international income taxes accrued or paid by us and our subsidiaries. The increase in income taxes for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, is primarily attributable to our increased volume of U.K. investments, which contributed to higher U.K. income taxes. -38- Table of Contents Net Income Available to Common Stockholders The following summarizes our net income available to common stockholders (dollars in millions, except per share data): Three months ended March 31, 2023 2022 % Change Net income available to common stockholders $ 225.0 $ 199.4 12.8 % Net income per share (1) $ 0.34 $ 0.34 0.0 % (1) All per share amounts are presented on a diluted per common share basis. The calculation to determine net income available to common stockholders includes provisions for impairment, gain from the sale of properties, and foreign currency gain and loss, which can vary from period to period based on timing and significantly impact net income available to common stockholders. Adjusted Earnings before Interest, Taxes, Depreciation and Amortization for Real Estate ("Adjusted EBITDA re" ) Nareit established an EBITDA metric for real estate companies (i.e., EBITDA for real estate, or EBITDA re ) it believed would provide investors with a consistent measure to help make investment decisions among REITs. Our definition of “Adjusted EBITDA re ” is generally consistent with the Nareit definition, other than our adjustments to remove foreign currency and derivative gain and loss, excluding gain and loss from the settlement of foreign currency forwards not designated as hedges (which is consistent with our previous calculations of "Adjusted EBITDA"). We define Adjusted EBITDA re , a non–GAAP financial measure, for the most recent quarter as earnings (net income) before (i) interest expense, including non-cash loss (gain) on swaps, (ii) income and franchise taxes, (iii) real estate depreciation and amortization, (iv) provisions for impairment, (v) merger and integration-related costs, (vi) gain on sales of real estate, (vii) foreign currency and derivative (gain) loss, net (as described in the Adjusted Funds from Operations section), and (viii) our proportionate share of interest expense and real estate depreciation and amortization from unconsolidated entities. Our Adjusted EBITDA re may not be comparable to Adjusted EBITDA re reported by other companies or as defined by Nareit, and other companies may interpret or define Adjusted EBITDA re differently than we do. Management believes Adjusted EBITDA re to be a meaningful measure of a REIT’s performance because it provides a view of our operating performance, analyzes our ability to meet interest payment obligations before the effects of income tax, depreciation and amortization expense, provisions for impairment, gain on sales of real estate and other items, as defined above, that affect comparability, including the removal of non-recurring and non-cash items that industry observers believe are less relevant to evaluating the operating performance of a company. In addition, EBITDA re is widely followed by industry analysts, lenders, investors, rating agencies, and others as a means of evaluating the operational cash generating capacity of a company prior to servicing debt obligations. Management also believes the use of an annualized quarterly Adjusted EBITDA re metric, which we refer to as Annualized Adjusted EBITDA re , is meaningful because it represents our current earnings run rate for the period presented. Annualized Adjusted EBITDA re and Annualized Pro Forma Adjusted EBITDA re , as defined below, are also used to determine the vesting of performance share awards granted to executive officers. Annualized Adjusted EBITDA re should be considered along with, but not as an alternative to net income as a measure of our operating performance. We define Annualized Pro Forma Adjusted EBITDA re as Annualized Adjusted EBITDA re , subject to certain adjustments to incorporate Adjusted EBITDA re from properties we acquired or stabilized during the applicable quarter and to remove Adjusted EBITDA re from properties we disposed of during the applicable quarter, and include transaction accounting adjustments in accordance with U.S. GAAP, giving pro forma effect to all transactions as if they occurred at the beginning of the applicable period. Our calculation includes all adjustments consistent with the requirements to present Adjusted EBITDA re on a pro forma basis in accordance with Article 11 of Regulation S-X. The Annualized Pro Forma Adjustments are consistent with the debt service coverage ratio calculated under financial covenants for our senior unsecured notes. We believe Annualized Pro Forma Adjusted EBITDA re is a useful non-GAAP supplemental measure, as it excludes properties that were no longer owned at the balance sheet date and includes the annualized rent from properties acquired during the quarter. Management also uses our ratios of net debt-to-Annualized Adjusted EBITDA re and net debt-to Annualized Pro Forma Adjusted EBITDA re as measures of leverage in assessing our financial performance, which is calculated as net debt (which we define as total debt per the consolidated balance sheets, excluding deferred financing costs and net premiums and discounts, but including our proportionate share on debt from unconsolidated entities, less cash and cash equivalents), divided by annualized quarterly Adjusted EBITDA re and annualized Pro Forma Adjusted EBITDA re , respectively. -39- Table of Contents The following is a reconciliation of net income (which we believe is the most comparable U.S. GAAP measure) to Adjusted EBITDA re and Annualized Pro Forma EBITDA re calculations for the period indicated below (dollars in thousands): Three months ended March 31, 2023 2022 Net income $ 226,122 $ 199,971 Interest 154,132 106,403 Income taxes 11,950 10,981 Depreciation and amortization 451,477 403,762 Provisions for impairment 13,178 7,038 Merger and integration-related costs 1,307 6,519 Gain on sales of real estate (4,279) (10,156) Foreign currency and derivative (gains) losses, net (10,322) 590 Proportionate share of adjustments for unconsolidated entities — 1,092 Quarterly Adjusted EBITDA re $ 843,565 $ 726,200 Annualized Adjusted EBITDA re (1) $ 3,374,260 $ 2,904,800 Annualized Pro Forma Adjustments $ 83,015 $ 61,312 Annualized Pro Forma Adjusted EBITDA re $ 3,457,275 $ 2,966,112 Total debt per the consolidated balance sheets, excluding deferred financing costs and net premiums and discounts $ 18,748,217 $ 15,695,516 Proportionate share for unconsolidated entities debt, excluding deferred financing costs — 86,006 Less: Cash and cash equivalents (164,576) (151,624) Net Debt (2) $ 18,583,641 $ 15,629,898 Net Debt/Annualized Adjusted EBITDA re 5.5 x 5.4 x Net Debt/Annualized Pro Forma Adjusted EBITDA re 5.4 x 5.3 x (1) We calculate Annualized Adjusted EBITDA re by multiplying the Quarterly Adjusted EBITDA re by four. (2) Net Debt is total debt per our consolidated balance sheets, excluding deferred financing costs and net premiums and discounts, but including our proportionate share on debt from unconsolidated entities, less cash and cash equivalents. As described above, the Annualized Pro Forma Adjustments, which include transaction accounting adjustments in accordance with U.S. GAAP, consist of adjustments to incorporate the Adjusted EBITDA re from properties we acquired or stabilized during the applicable quarter and remove Adjusted EBITDA re from properties we disposed of during the applicable quarter, giving pro forma effect to all transactions as if they occurred at the beginning of the period, consistent with the requirements of Article 11 of Regulation S-X. The following table summarizes our Annualized Pro Forma Adjusted EBITDA re calculation for the period indicated below: Three months ended March 31, Dollars in thousands 2023 2022 Annualized pro forma adjustments from properties acquired or stabilized $ 85,835 $ 64,805 Annualized pro forma adjustments from properties disposed (2,820) (3,493) Annualized Pro forma Adjustments $ 83,015 $ 61,312 -40- Table of Contents FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS ("FFO") AND NORMALIZED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS ("Normalized FFO") We define FFO, a non-GAAP measure, consistent with the National Association of Real Estate Investment Trusts' definition, as net income available to common stockholders, plus depreciation and amortization of real estate assets, plus provisions for impairments of depreciable real estate assets, and reduced by gain on property sales. We define Normalized FFO, a non-GAAP financial measure, as FFO excluding merger and integration-related costs related to our merger with VEREIT, Inc. We define diluted FFO and diluted normalized FFO as FFO and normalized FFO adjusted for dilutive noncontrolling interests. The following summarizes our FFO and Normalized FFO (dollars in millions, except per share data): Three months ended March 31, 2023 2022 % Change FFO available to common stockholders $ 684.3 $ 601.4 13.8 % FFO per share (1) $ 1.03 $ 1.01 2.0 % Normalized FFO available to common stockholders $ 685.6 $ 607.9 12.8 % Normalized FFO per share (1) $ 1.04 $ 1.02 2.0 % (1) All per share amounts are presented on a diluted per common share basis. The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable U.S. GAAP measure) to FFO and Normalized FFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts): -41- Table of Contents Three months ended March 31, 2023 2022 Net income available to common stockholders $ 225,016 $ 199,369 Depreciation and amortization 451,477 403,762 Depreciation of furniture, fixtures and equipment (542) (478) Provisions for impairment 13,178 7,038 Gain on sales of real estate (4,279) (10,156) Proportionate share of adjustments for unconsolidated entities — 2,235 FFO adjustments allocable to noncontrolling interests (559) (354) FFO available to common stockholders $ 684,291 $ 601,416 FFO allocable to dilutive noncontrolling interests 1,420 808 Diluted FFO $ 685,711 $ 602,224 FFO available to common stockholders $ 684,291 $ 601,416 Merger and integration-related costs 1,307 6,519 Normalized FFO available to common stockholders $ 685,598 $ 607,935 Normalized FFO allocable to dilutive noncontrolling interests 1,420 808 Diluted Normalized FFO $ 687,018 $ 608,743 FFO per common share Basic $ 1.04 $ 1.01 Diluted $ 1.03 $ 1.01 Normalized FFO per common share, basic and diluted $ 1.04 $ 1.02 Distributions paid to common stockholders $ 497,245 $ 438,280 FFO available to common stockholders in excess of distributions paid to common stockholders $ 187,046 $ 163,136 Normalized FFO available to common stockholders in excess of distributions paid to common stockholders $ 188,353 $ 169,655 Weighted average number of common shares used for FFO and Normalized FFO: Basic 660,462,399 593,827,299 Diluted 663,034,011 595,102,548 We consider FFO and Normalized FFO to be appropriate supplemental measures of a REIT’s operating performance as they are based on a net income analysis of property portfolio performance that adds back items such as depreciation and impairments for FFO, and adds back merger and integration-related costs, for Normalized FFO. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. -42- Table of Contents ADJUSTED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS ("AFFO") We define AFFO, a non-GAAP measure, as FFO adjusted for unique revenue and expense items, which we believe are not as pertinent to the measurement of our ongoing operating performance. We define diluted AFFO as AFFO adjusted for dilutive noncontrolling interests. The following summarizes our AFFO (dollars in millions, except per share data): Three months ended March 31, % Change 2023 2022 AFFO available to common stockholders $ 650.7 $ 580.1 12.2 % AFFO per share (1) $ 0.98 $ 0.98 0.0 % (1) All per share amounts are presented on a diluted per common share basis. We consider AFFO to be an appropriate supplemental measure of our performance. Most companies in our industry use a similar measurement, but they may use the term “CAD” (for Cash Available for Distribution), “FAD” (for Funds Available for Distribution) or other terms. Our AFFO calculations may not be comparable to AFFO, CAD or FAD reported by other companies, and other companies may interpret or define such terms differently than we do. The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable U.S. GAAP measure) to Normalized FFO and AFFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts): Three months ended March 31, 2023 2022 Net income available to common stockholders $ 225,016 $ 199,369 Cumulative adjustments to calculate Normalized FFO (1) 460,582 408,566 Normalized FFO available to common stockholders 685,598 607,935 Amortization of share-based compensation 6,300 5,002 Amortization of net debt premiums and deferred financing costs (2) (13,688) (17,096) Non-cash (gain) loss on interest rate swaps (1,801) 722 Straight-line impact of cash settlement on interest rate swaps (3) 1,797 — Leasing costs and commissions (444) (2,373) Recurring capital expenditures (53) (13) Straight-line rent and expenses, net (36,485) (27,822) Amortization of above and below-market leases, net 17,358 13,642 Proportionate share of adjustments for unconsolidated entities — (2,064) Other adjustments (4) (7,854) 2,165 AFFO available to common stockholders $ 650,728 $ 580,098 AFFO allocable to dilutive noncontrolling interests 1,431 820 Diluted AFFO $ 652,159 $ 580,918 AFFO per common share: Basic $ 0.99 $ 0.98 Diluted $ 0.98 $ 0.98 Distributions paid to common stockholders $ 497,245 $ 438,280 AFFO available to common stockholders in excess of distributions paid to common stockholders $ 153,483 $ 141,818 Weighted average number of common shares used for computation per share: Basic 660,462,399 593,827,299 Diluted 663,034,011 595,102,548 -43- Table of Contents (1) See reconciling items for Normalized FFO presented under “Funds from Operations Available to Common Stockholders ("FFO") and Normalized Funds from Operations Available to Common Stockholders ("Normalized FFO")". (2) Includes the amortization of premiums and discounts on notes payable and assumption of our mortgages payable, which are being amortized over the life of the applicable debt, and costs incurred and capitalized upon issuance and exchange of our notes payable, assumption of our mortgages payable and issuance of our term loans, which are also being amortized over the lives of the applicable debt. No costs associated with our credit facility agreements or annual fees paid to credit rating agencies have been included. (3) Represents the straight-line amortization of $72.0 million gain realized upon the termination of $500.0 million in notional interest rate swaps, over the term of the $750.0 million of 5.625% senior unsecured notes due October 2032. (4) Includes foreign currency gain and loss as a result of intercompany debt and remeasurement transactions, mark-to-market adjustments on investments and derivatives that do not qualify for hedge accounting, obligations related to financing lease liabilities, and adjustments allocable to noncontrolling interests. We believe the non-GAAP financial measure AFFO provides useful information to investors because it is a widely accepted industry measure of the operating performance of real estate companies that is used by industry analysts and investors who look at and compare those companies. In particular, AFFO provides an additional measure to compare the operating performance of different REITs without having to account for differing depreciation assumptions and other unique revenue and expense items which are not pertinent to measuring a particular company’s on-going operating performance. Therefore, we believe that AFFO is an appropriate supplemental performance metric, and that the most appropriate U.S. GAAP performance metric to which AFFO should be reconciled is net income available to common stockholders. Presentation of the information regarding FFO, Normalized FFO, and AFFO is intended to assist the reader in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO, Normalized FFO, and AFFO in the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO, Normalized FFO, and AFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as alternatives to net income as an indication of our performance. FFO, Normalized FFO, and AFFO should not be considered as alternatives to reviewing our cash flows from operating, investing, and financing activities. In addition, FFO, Normalized FFO, and AFFO should not be considered as measures of liquidity, our ability to make cash distributions, or our ability to pay interest payments. PROPERTY PORTFOLIO INFORMATION At March 31, 2023, out of the 12,492 properties that we owned or held interest in, 12,361 properties were leased under net lease agreements. A net lease typically requires the client to be responsible for monthly rent and certain property operating expenses including property taxes, insurance, and maintenance. In addition, clients of our properties typically pay rent increases based on: (1) fixed increases, (2) increases tied to inflation (typically subject to ceilings), or (3) additional rent calculated as a percentage of the clients' gross sales above a specified level. We define total portfolio annualized contractual rent as the monthly aggregate cash amount charged to clients, inclusive of monthly base rent receivables, but excluding percentage rent and reimbursements from clients, as of the balance sheet date, multiplied by 12, excluding percentage rent. We believe total portfolio annualized contractual rent is a useful supplemental operating measure, as it excludes properties that were no longer owned at the balance sheet date and includes the annualized rent from properties acquired during the quarter. Total portfolio annualized contractual rent has not been reduced to reflect reserves recorded as adjustments to U.S. GAAP rental revenue in the periods presented and excludes unconsolidated entities. Top 10 Industry Concentrations We are engaged in a single business activity, which is the leasing of property to clients, generally on a net basis. That business activity spans various geographic boundaries and includes property types and clients engaged in various industries. Even though we have a single segment, we believe our investors continue to view diversification as a key component of our investment philosophy and so we believe it remains important to present certain information regarding our property portfolio classified according to the business of the respective clients, expressed as a percentage of our total portfolio annualized contractual rent: -44- Table of Contents Percentage of Total Portfolio Annualized Contractual Rent by Industry (1) As of Mar 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019 Grocery stores 10.2% 10.0% 10.2% 9.8% 7.9% Convenience stores 8.7 8.6 9.1 11.9 12.3 Dollar stores 7.3 7.4 7.5 7.6 7.9 Home improvement 5.8 5.6 5.1 4.3 2.9 Restaurants - quick service 5.8 6.0 6.6 5.3 5.8 Drug stores 5.8 5.7 6.6 8.2 8.8 Restaurants - casual dining 4.9 5.1 5.9 2.8 3.2 Health and fitness 4.3 4.4 4.7 6.7 7.0 Automotive service 4.0 4.0 3.2 2.7 2.6 General merchandise 3.8 3.7 3.7 3.4 2.5 (1) The presentation of Top 10 Industry Concentrations combines total portfolio contractual rent from the U.S. and Europe. Europe consists of properties in the U.K., starting in May 2019, in Spain, starting in September 2021, and in Italy, starting in October 2022. Property Type Composition The following table sets forth certain property type information regarding our property portfolio as of March 31, 2023 (dollars in thousands): Property Type Number of Properties Approximate Leasable Square Feet (1) Total Portfolio Annualized Contractual Rent Percentage of Total Portfolio Annualized Contractual Rent Retail 12,103 160,734,000 $ 2,905,859 82.0 % Industrial 351 80,486,500 469,304 13.3 Gaming 1 3,096,700 100,000 2.8 Other (2) 37 2,411,200 64,502 1.9 Totals 12,492 246,728,400 $ 3,539,665 100.0 % (1) Includes leasable building square footage. Excludes 2,962 acres of leased land categorized as agriculture at March 31, 2023. (2) "Other" includes 27 properties classified as agriculture, consisting of approximately 272,400 leasable square feet and $37.4 million in annualized contractual rent and ten properties classified as office, consisting of approximately 2.1 million leasable square feet and $27.1 million in annualized contractual rent. -45- Table of Contents Client Diversification The following table sets forth the 20 largest clients in our property portfolio, expressed as a percentage of total portfolio annualized contractual rent, which does not give effect to deferred rent, at March 31, 2023: Client Number of Leases Percentage of Total Portfolio Annualized Contractual Rent (1) Dollar General 1,540 4.0 % Walgreens 357 3.6 7-Eleven 635 3.4 Dollar Tree / Family Dollar 1,135 3.4 Wynn Resorts 1 2.8 FedEx 80 2.5 LA Fitness 76 2.0 B&Q (Kingfisher) 41 1.8 Sainsbury's 28 1.8 BJ's Wholesale Clubs 33 1.7 CVS Pharmacy 191 1.6 Wal-Mart / Sam's Club 67 1.6 Lifetime Fitness 21 1.5 Tractor Supply 180 1.4 AMC Theaters 35 1.3 Red Lobster 200 1.3 Regal Cinemas (Cineworld) 41 1.3 Tesco 18 1.3 Lowe's 40 1.2 Kroger 36 1.1 Total 4,755 40.5 % (1) Amounts for each client are calculated independently; therefore, the individual percentages may not sum to the total. -46- Table of Contents Lease Expirations The following table sets forth certain information regarding the timing of the lease term expirations in our portfolio (excluding rights to extend a lease at the option of the client) and their contribution to total portfolio annualized contractual rent as of March 31, 2023 (dollars in thousands): Total Portfolio (1) Expiring Leases Approximate Leasable Square Feet Total Portfolio Annualized Contractual Rent Percentage of Total Portfolio Annualized Contractual Rent Year Retail Non-Retail 2023 429 10 4,268,600 $ 66,738 1.9 % 2024 679 35 12,808,900 147,337 4.2 2025 897 36 14,527,100 206,217 5.8 2026 821 33 16,498,300 193,593 5.5 2027 1,401 35 22,055,800 284,740 8.0 2028 1,380 49 26,266,900 312,930 8.8 2029 961 20 20,324,200 252,442 7.1 2030 573 20 15,529,100 182,571 5.2 2031 530 39 21,992,200 248,711 7.0 2032 962 34 17,626,300 251,387 7.1 2033 628 16 14,970,100 185,924 5.3 2034 568 7 10,437,000 216,862 6.1 2035 427 3 5,200,000 112,124 3.2 2036 420 8 7,636,300 137,516 3.9 2037 477 9 8,292,500 130,712 3.7 2038-2143 1,551 61 25,745,000 609,861 17.2 Totals 12,704 415 244,178,300 $ 3,539,665 100.0 % (1) Leases on our multi-client properties are counted separately in the table above. This table excludes 185 vacant units. -47- Table of Contents Geographic Diversification The following table sets forth certain geographic information regarding our property portfolio as of March 31, 2023 (dollars in thousands): Location Number of Properties Percent Leased Approximate Leasable Square Feet Percentage of Total Portfolio Annualized Contractual Rent Alabama 397 98 % 4,316,200 1.9 % Alaska 6 100 299,700 0.1 Arizona 247 100 3,722,600 2.0 Arkansas 243 100 2,654,100 1.1 California 350 99 11,494,900 5.7 Colorado 169 99 2,687,100 1.4 Connecticut 24 96 1,191,000 0.4 Delaware 24 100 141,100 0.1 Florida 792 99 10,133,400 5.0 Georgia 555 99 9,078,600 3.5 Hawaii 22 100 47,800 0.2 Idaho 27 100 189,100 0.1 Illinois 543 99 12,869,300 5.2 Indiana 416 99 8,151,900 2.7 Iowa 105 100 3,432,300 0.9 Kansas 189 100 4,656,000 1.1 Kentucky 364 99 6,200,700 1.7 Louisiana 339 100 5,129,700 1.8 Maine 55 100 1,091,000 0.5 Maryland 79 97 3,067,500 1.3 Massachusetts 91 100 6,201,200 4.1 Michigan 473 99 5,836,800 2.7 Minnesota 257 99 4,296,000 1.9 Mississippi 285 100 4,302,700 1.2 Missouri 383 98 5,150,900 1.8 Montana 24 100 223,100 0.1 Nebraska 80 98 1,132,500 0.4 Nevada 74 100 2,665,700 0.9 New Hampshire 31 97 568,200 0.3 New Jersey 145 97 2,243,100 1.6 New Mexico 107 100 1,343,500 0.6 New York 245 98 4,559,000 2.8 North Carolina 403 98 8,224,600 3.0 North Dakota 21 100 427,800 0.2 Ohio 693 99 15,519,600 4.1 Oklahoma 313 99 4,232,700 1.7 Oregon 41 100 650,400 0.4 Pennsylvania 342 97 6,230,800 2.5 Rhode Island 7 100 101,700 0.1 South Carolina 313 99 4,445,600 1.8 South Dakota 33 100 518,700 0.2 Tennessee 447 98 7,220,300 2.5 Texas 1,569 99 26,003,600 10.3 Utah 37 100 1,537,500 0.5 Vermont 7 100 134,900 0.1 Virginia 364 99 7,335,600 2.4 Washington 79 100 1,783,500 0.9 West Virginia 78 100 758,600 0.4 Wisconsin 284 100 5,767,000 1.9 Wyoming 23 100 157,700 0.1 Puerto Rico 6 100 59,400 0.1 United Kingdom 232 100 21,506,500 10.3 Spain 52 100 3,960,100 1.0 Italy 7 100 1,075,100 0.4 Totals/average 12,492 99 % 246,728,400 100.0 % -48- Table of Contents IMPACT OF INFLATION Leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, or retail price index in the case of certain leases in the U.K. (typically subject to ceilings), or increases in the clients’ sales volumes. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation and other costs (including increases in employment and other fees and expenses). Moreover, our use of net lease agreements tends to reduce our exposure to rising property expenses due to inflation because the client is responsible for property expenses. Even though net leases reduce our exposure to rising property expenses due to inflation, substantial inflationary pressures and increased costs may have an adverse impact on our clients if increases in their operating expenses exceed increases in revenue, which may adversely affect our clients' ability to pay rent. Additionally, inflationary periods may cause us to experience increased costs of financing, make it difficult to refinance debt at attractive rates or at all, and may adversely affect the properties we can acquire if the cost of financing an acquisition is in excess of our anticipated earnings from such property, thereby limiting the properties that can be acquired. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS For information on the impact of new accounting standards on our business, see note 1, Basis of Presentation , to our Consolidated Financial Statements. CRITICAL ACCOUNTING POLICIES Our consolidated financial statements have been prepared in accordance with U.S. GAAP and are the basis for our discussion and analysis of financial condition and results of operations. Preparing our consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We believe that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. There have been no material changes to the Critical Accounting Policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in note 2, Summary of Significant Accounting Policies and Procedures and New Accounting Standards, to our consolidated financial statements in our Annual Report.