REALTY INCOME CORP 10-Q

Item 1: Financial Statements REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited) June 30, 2023 December 31, 2022 ASSETS Real estate held for investment, at cost: Land $ 14,011,325 $ 12,948,835 Buildings and improvements 32,652,912 29,707,751 Total real estate held for investment, at cost 46,664,237 42,656,586 Less accumulated depreciation and amortization ( 5,485,766 ) ( 4,904,165 ) Real estate held for investment, net 41,178,471 37,752,421 Real estate and lease intangibles held for sale, net 17,324 29,535 Cash and cash equivalents 253,693 171,102 Accounts receivable, net 620,599 543,237 Lease intangible assets, net 5,238,400 5,168,366 Goodwill 3,731,478 3,731,478 Other assets, net 2,940,701 2,276,953 Total assets $ 53,980,666 $ 49,673,092 LIABILITIES AND EQUITY Distributions payable $ 182,855 $ 165,710 Accounts payable and accrued expenses 559,383 399,137 Lease intangible liabilities, net 1,439,968 1,379,436 Other liabilities 855,496 774,787 Line of credit payable and commercial paper 990,257 2,729,040 Term loan, net 1,324,285 249,755 Mortgages payable, net 841,690 853,925 Notes payable, net 16,475,589 14,278,013 Total liabilities 22,669,523 20,829,803 Commitments and contingencies (Note 17) Stockholders’ equity: Common stock and paid in capital, par value $ 0.01 per share, 1,300,000 shares authorized, 708,773 and 660,300 shares issued and outstanding as of June 30, 2023, and December 31, 2022, respectively 37,149,380 34,159,509 Distributions in excess of net income ( 6,102,226 ) ( 5,493,193 ) Accumulated other comprehensive income 96,057 46,833 Total stockholders’ equity 31,143,211 28,713,149 Noncontrolling interests 167,932 130,140 Total equity 31,311,143 28,843,289 Total liabilities and equity $ 53,980,666 $ 49,673,092 The accompanying notes to consolidated financial statements are an integral part of these statements. -2- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in thousands, except per share amounts) (unaudited) Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 REVENUE Rental (including reimbursable) $ 995,289 $ 800,800 $ 1,920,578 $ 1,600,365 Other 23,916 9,619 43,026 17,397 Total revenue 1,019,205 810,419 1,963,604 1,617,762 EXPENSES Depreciation and amortization 472,278 409,437 923,755 813,199 Interest 183,857 110,121 337,989 216,524 Property (including reimbursable) 94,703 52,180 164,100 104,522 General and administrative 36,829 34,139 70,996 66,838 Provisions for impairment 29,815 7,691 42,993 14,729 Merger and integration-related costs 341 2,729 1,648 9,248 Total expenses 817,823 616,297 1,541,481 1,225,060 Gain on sales of real estate 7,824 40,572 12,103 50,728 Foreign currency and derivative (loss) gain, net ( 2,552 ) 7,480 7,770 6,890 Gain on extinguishment of debt — 127 — 127 Equity in income and impairment of investment in unconsolidated entities 411 ( 6,627 ) 411 ( 5,673 ) Other income, net 3,020 2,806 5,750 4,658 Income before income taxes 210,085 238,480 448,157 449,432 Income taxes ( 12,932 ) ( 14,658 ) ( 24,882 ) ( 25,639 ) Net income 197,153 223,822 423,275 423,793 Net income attributable to noncontrolling interests ( 1,738 ) ( 615 ) ( 2,844 ) ( 1,217 ) Net income available to common stockholders $ 195,415 $ 223,207 $ 420,431 $ 422,576 Amounts available to common stockholders per common share: Net income available to common stockholders per common share, basic and diluted $ 0.29 $ 0.37 $ 0.63 $ 0.71 Weighted average common shares outstanding: Basic 674,109 601,672 667,357 597,778 Diluted 674,593 602,031 668,108 598,141 Net income available to common stockholders $ 195,415 $ 223,207 $ 420,431 $ 422,576 Total other comprehensive income (loss): Foreign currency translation adjustment 29,046 ( 48,992 ) 57,796 ( 59,698 ) Unrealized (loss) gain on derivatives, net ( 6,410 ) 33,454 ( 8,572 ) 77,144 Total other comprehensive income (loss) $ 22,636 $ ( 15,538 ) $ 49,224 $ 17,446 Comprehensive income available to common stockholders $ 218,051 $ 207,669 $ 469,655 $ 440,022 The accompanying notes to consolidated financial statements are an integral part of these statements. -3- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (in thousands) (unaudited) Three months ended June 30, 2023, and 2022 Shares of common stock Common stock and paid in capital Distributions in excess of net income Accumulated other comprehensive income Total stockholders’ equity Noncontrolling interests Total equity Balance, March 31, 2023 673,207 $ 34,958,608 $ ( 5,772,923 ) $ 73,421 $ 29,259,106 $ 128,232 $ 29,387,338 Net income — — 195,415 — 195,415 1,738 197,153 Other comprehensive income — — — 22,636 22,636 — 22,636 Distributions paid and payable — — ( 524,718 ) — ( 524,718 ) ( 1,597 ) ( 526,315 ) Share issuances, net of costs 35,519 2,183,194 — — 2,183,194 — 2,183,194 Contributions by noncontrolling interests — — — — — 39,559 39,559 Share-based compensation, net 47 7,578 — — 7,578 — 7,578 Balance, June 30, 2023 708,773 $ 37,149,380 $ ( 6,102,226 ) $ 96,057 $ 31,143,211 $ 167,932 $ 31,311,143 Balance, March 31, 2022 601,567 $ 30,236,374 $ ( 4,772,112 ) $ 37,917 $ 25,502,179 $ 76,546 $ 25,578,725 Net income — — 223,207 — 223,207 615 223,822 Other comprehensive loss — — — ( 15,538 ) ( 15,538 ) — ( 15,538 ) Distributions paid and payable — — ( 450,245 ) — ( 450,245 ) ( 894 ) ( 451,139 ) Share issuances, net of costs 15,961 1,060,529 — — 1,060,529 — 1,060,529 Share-based compensation, net 36 6,480 — — 6,480 — 6,480 Balance, June 30, 2022 617,564 $ 31,303,383 $ ( 4,999,150 ) $ 22,379 $ 26,326,612 $ 76,267 $ 26,402,879 Six months ended June 30, 2023 and 2022 Shares of common stock Common stock and paid in capital Distributions in excess of net income Accumulated other comprehensive income Total stockholders’ equity Noncontrolling interests Total equity Balance, December 31, 2022 660,300 $ 34,159,509 $ ( 5,493,193 ) $ 46,833 $ 28,713,149 $ 130,140 $ 28,843,289 Net income — — 420,431 — 420,431 2,844 423,275 Other comprehensive income — — — 49,224 49,224 — 49,224 Distributions paid and payable — — ( 1,029,464 ) — ( 1,029,464 ) ( 4,611 ) ( 1,034,075 ) Share issuances, net of costs 48,226 2,982,094 — — 2,982,094 2,982,094 Contributions by noncontrolling interests — — — — — 39,559 39,559 Share-based compensation, net 247 7,777 — — 7,777 — 7,777 Balance, June 30, 2023 708,773 $ 37,149,380 $ ( 6,102,226 ) $ 96,057 $ 31,143,211 $ 167,932 $ 31,311,143 Balance December 31, 2021 591,262 $ 29,578,212 $ ( 4,530,571 ) $ 4,933 $ 25,052,574 $ 76,826 $ 25,129,400 Net income — — 422,576 — 422,576 1,217 423,793 Other comprehensive income — — — 17,446 17,446 — 17,446 Distributions paid and payable — — ( 891,155 ) — ( 891,155 ) ( 1,776 ) ( 892,931 ) Share issuances, net of costs 26,133 1,720,573 — — 1,720,573 — 1,720,573 Share-based compensation, net 169 4,598 — — 4,598 — 4,598 Balance, June 30, 2022 617,564 $ 31,303,383 $ ( 4,999,150 ) $ 22,379 $ 26,326,612 $ 76,267 $ 26,402,879 The accompanying notes to consolidated financial statements are an integral part of these statements. -4- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six months ended June 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 423,275 $ 423,793 Adjustments to net income: Depreciation and amortization 923,755 813,199 Amortization of share-based compensation 13,923 11,643 Non-cash revenue adjustments ( 33,420 ) ( 25,332 ) Gain on extinguishment of debt — ( 127 ) Amortization of net premiums on mortgages payable ( 6,396 ) ( 7,091 ) Amortization of net premiums on notes payable ( 30,657 ) ( 31,423 ) Amortization of deferred financing costs 12,568 7,081 (Loss) gain on interest rate swaps ( 3,600 ) 1,446 Foreign currency and unrealized derivative loss, net ( 6,289 ) ( 6,890 ) Gain on sales of real estate ( 12,103 ) ( 50,728 ) Equity in income and impairment of investment in unconsolidated entities ( 411 ) 5,673 Distributions from unconsolidated entities — 1,490 Provisions for impairment on real estate 42,993 14,729 Change in assets and liabilities Accounts receivable and other assets 25,733 134,019 Accounts payable, accrued expenses and other liabilities 116,742 ( 34,921 ) Net cash provided by operating activities 1,466,113 1,256,561 CASH FLOWS FROM INVESTING ACTIVITIES Investment in real estate ( 4,686,800 ) ( 3,166,063 ) Improvements to real estate, including leasing costs ( 29,458 ) ( 29,654 ) Proceeds from sales of real estate 60,460 272,245 Return of investment from unconsolidated entities 3,927 746 Insurance proceeds received 7,198 16,046 Non-refundable escrow deposits ( 1,935 ) ( 13,815 ) Net cash used in investing activities ( 4,646,608 ) ( 2,920,495 ) CASH FLOWS FROM FINANCING ACTIVITIES Cash distributions to common stockholders ( 1,012,336 ) ( 884,109 ) Borrowings on line of credit and commercial paper programs 27,136,997 9,366,868 Payments on line of credit and commercial paper programs ( 28,911,973 ) ( 9,724,268 ) Proceeds from term loan 1,029,383 — Proceeds from notes payable issued 2,074,883 1,405,691 Principal payments on mortgages payable ( 8,070 ) ( 225,951 ) Proceeds from common stock offerings, net 2,976,683 1,712,696 Proceeds from dividend reinvestment and stock purchase plan 5,411 5,731 Distributions to noncontrolling interests ( 3,038 ) ( 1,776 ) Net (payments) receipts on derivative settlements ( 9,285 ) 7,474 Debt issuance costs ( 25,108 ) ( 27,272 ) Other items, including shares withheld upon vesting ( 6,146 ) ( 4,899 ) Net cash provided by financing activities 3,247,401 1,630,185 Effect of exchange rate changes on cash and cash equivalents 21,075 ( 24,955 ) Net increase (decrease) in cash, cash equivalents and restricted cash 87,981 ( 58,704 ) Cash, cash equivalents and restricted cash, beginning of period 226,881 332,369 Cash, cash equivalents and restricted cash, end of period $ 314,862 $ 273,665 For supplemental disclosures, see note 15, S upplemental Disclosures of Cash Flow Information . The accompanying notes to consolidated financial statements are an integral part of these statements. -5- Table of Contents REALTY INCOME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (unaudited) 1. Basis of Presentation 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 ("NYSE") under the symbol “O”. As of June 30, 2023, we owned or held interests in a diversified portfolio of 13,118 properties located in all 50 states of the United States ("U.S."), Puerto Rico, the United Kingdom ("U.K."), Spain, Italy, and Ireland, with approximately 255.5 million square feet of leasable space. Our accompanying unaudited consolidated financial statements were prepared from our books and records in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily an indication of the results that may be expected for the entire year. Readers of this quarterly report should refer to our audited consolidated financial statements for the year ended December 31, 2022, which are included in our 2022 Annual Report on Form 10-K , as certain disclosures that would substantially duplicate those contained in the audited financial statements have not been included in this report. The U.S. dollar (“USD”) is our reporting currency. Unless otherwise indicated, all dollar amounts are expressed in USD. For our consolidated subsidiaries whose functional currency is not the USD, we translate their financial statements into USD at the time we consolidate those subsidiaries’ financial statements. Generally, assets and liabilities are translated at the exchange rate in effect at the balance sheet date. The resulting translation adjustments are included in 'Accumulated other comprehensive income' ("AOCI") in the consolidated balance sheets. Certain balance sheet items, primarily equity and capital-related accounts, are reflected at the historical exchange rate. Income statement accounts are translated using the average exchange rate for the period. We and certain of our consolidated subsidiaries have intercompany and third-party debt that is not denominated in our functional currency. When the debt is remeasured to the functional currency of the entity, a gain or loss can result. The resulting adjustment is reflected in 'Foreign currency and derivative (loss) gain, net' in the consolidated statements of income and comprehensive income. Intercompany accounts and transactions are eliminated in consolidation. 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, which we typically have 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. -6- Table of Contents At June 30, 2023, Realty Income, L.P. and certain investments, including investments in joint ventures, are considered 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 June 30, 2023, and December 31, 2022 (in thousands): June 30, 2023 December 31, 2022 Net real estate $ 2,432,712 $ 920,032 Total assets $ 3,165,836 $ 1,082,346 Total liabilities $ 159,014 $ 60,127 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 interests that were created or assumed as part of a business combination or asset acquisition were recognized at fair value as of the date of the transaction (see note 9, Noncontrolling Interests ). Reclassification . Certain prior period amounts have been reclassified to conform to the current year presentation. Value-added tax receivable is now included in 'Other assets, net', in the consolidated balance sheets. Previously, this was categorized as 'Accounts receivable, net' in the consolidated balance sheets. 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Segment Reporting. We report our results in a single reportable segment, which reflects how our chief operating decision maker allocates resources and assesses our performance. 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 in the U.S., we generally will not be required to pay U.S. 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 TRS entities 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. For our international territories, we are liable for taxes in the United Kingdom and Spain. Accordingly, provisions have been made for U.K. and Spain income taxes. Therefore, 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 U.S. income taxes on our TRS entities, 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 primarily 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 international, 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 tax positions have been recorded on our consolidated financial statements. -7- Table of Contents 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, or percentage rent, 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. We 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 and other facts and circumstances related to the applicable clients. If we conclude the 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. 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 six months ended June 30, 2023 and 2022, there were no impairments of goodwill. Concentration of Credit Risk. There were no clients who accounted for more than more than 10% of our total revenue for each of the six months ended June 30, 2023, and 2022. Recent Accounting Pronouncements. The Company reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements. 2. Supplemental Detail for Certain Components of Consolidated Balance Sheets (in thousands): A. Accounts receivable, net, consist of the following at: June 30, 2023 December 31, 2022 Straight-line rent receivables, net $ 440,939 $ 363,993 Client receivables, net 179,660 179,244 $ 620,599 $ 543,237 B. Lease intangible assets, net, consist of the following at: June 30, 2023 December 31, 2022 In-place leases $ 5,649,747 $ 5,324,565 Accumulated amortization of in-place leases ( 1,715,425 ) ( 1,409,878 ) Above-market leases 1,824,355 1,697,367 Accumulated amortization of above-market leases ( 520,277 ) ( 443,688 ) $ 5,238,400 $ 5,168,366 -8- Table of Contents C. Other assets, net, consist of the following at: June 30, 2023 December 31, 2022 Financing receivables $ 1,556,342 $ 933,116 Right of use asset - operating leases, net 589,237 603,097 Right of use asset - financing leases 538,168 467,920 Value-added tax receivable 51,983 24,726 Prepaid expenses 39,595 28,128 Impounds related to mortgages payable 37,174 18,152 Derivative assets and receivables – at fair value 32,730 83,100 Restricted escrow deposits 23,995 37,627 Credit facility origination costs, net 14,730 17,196 Corporate assets, net 13,649 12,334 Investment in sales type lease 6,003 5,951 Non-refundable escrow deposits 1,935 5,667 Other items 35,160 39,939 $ 2,940,701 $ 2,276,953 D. Accounts payable and accrued expenses consist of the following at: June 30, 2023 December 31, 2022 Notes payable - interest payable $ 169,773 $ 129,202 Derivative liabilities and payables – at fair value 93,017 64,724 Accrued costs on properties under development 65,981 26,559 Property taxes payable 63,337 45,572 Value-added tax payable 44,981 23,375 Accrued income taxes 40,826 22,626 Accrued property expenses 26,718 25,290 Mortgages, term loans, and credit line - interest payable 7,802 5,868 Other items 46,948 55,921 $ 559,383 $ 399,137 E. Lease intangible liabilities, net, consist of the following at: June 30, 2023 December 31, 2022 Below-market leases $ 1,728,348 $ 1,617,870 Accumulated amortization of below-market leases ( 288,380 ) ( 238,434 ) $ 1,439,968 $ 1,379,436 F. Other liabilities consist of the following at: June 30, 2023 December 31, 2022 Lease liability - operating leases, net $ 428,178 $ 440,096 Rent received in advance and other deferred revenue 358,086 269,645 Lease liability - financing leases 49,208 49,469 Security deposits 20,024 15,577 $ 855,496 $ 774,787 3. Investments in Real Estate A. Acquisitions of Real Estate Below is a summary of our acquisitions for the six months ended June 30, 2023: Number of Properties Leasable Square Feet (in thousands) Investment ($ in millions) Weighted Average Lease Term (Years) Initial Weighted Average Cash Lease Yield (1) Acquisitions - U.S. 747 12,483 $ 3,408.9 15.9 6.9 % Acquisitions - Europe 31 4,181 788.7 9.3 7.4 % Total acquisitions 778 16,664 $ 4,197.6 14.6 7.0 % Properties under development (2) 219 5,635 569.9 16.5 6.5 % Total (3) 997 22,299 $ 4,767.5 14.8 6.9 % -9- Table of Contents (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 $ 1.5 million received as settlement credits as reimbursement of free rent periods for the six months ended June 30, 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 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) Includes £ 8.7 million of investments in three U.K. development properties and € 10.2 million of investment in one Spain development property, converted at the applicable exchange rates on the funding dates. (3) Our clients occupying the new properties are 89.9 % retail and 10.1 % industrial based on annualized contractual rent. Approximately 26 % of the annualized contractual rent generated from acquisitions during the six months ended June 30, 2023 is from our investment grade rated clients, their subsidiaries or affiliated companies. The aggregate purchase price of the assets acquired during the six months ended June 30, 2023 has been allocated as follows (in millions): Acquisitions - USD Acquisitions - Sterling Acquisitions - Euro Land (1) $ 665.4 £ 141.0 € 15.2 Buildings and improvements 2,259.3 318.8 22.1 Lease intangible assets (2) 328.6 76.3 14.4 Other assets (3) 620.9 59.7 — Lease intangible liabilities (4) ( 99.4 ) ( 6.8 ) ( 0.9 ) Other liabilities (5) ( 57.0 ) ( 0.1 ) — $ 3,717.8 £ 588.9 € 50.8 (1) Sterling-denominated land includes £ 7.6 million of right of use assets under long-term ground leases. (2) The weighted average amortization period for acquired lease intangible assets is 11.6 years. (3) USD-denominated other assets consist entirely of financing receivables with above-market terms. Sterling-denominated other assets consist of £ 11.1 million of financing receivables with above-market terms and £ 48.6 million of right-of-use assets accounted for as finance leases. (4) The weighted average amortization period for acquired lease intangible liabilities is 16.8 years. (5) USD-denominated other liabilities consist entirely of deferred rent on certain below-market leases. The properties acquired during the six months ended June 30, 2023 generated total revenues of $ 70.8 million and net income of $ 32.9 million during the six months ended June 30, 2023. B. Investments in Existing Properties During the six months ended June 30, 2023, we capitalized costs of $ 31.9 million on existing properties in our portfolio, consisting of $ 26.3 million for non-recurring building improvements, $ 5.5 million for re-leasing costs, and $ 0.1 million for recurring capital expenditures. In comparison, during the six months ended June 30, 2022, we capitalized costs of $ 37.8 million on existing properties in our portfolio, consisting of $ 31.8 million for non-recurring building improvements, $ 3.2 million for re-leasing costs, and $ 2.8 million for recurring capital expenditures. C. Properties with Existing Leases The value of the in-place and above-market leases is recorded to 'Lease intangible assets, net' on our consolidated balance sheets, and the value of the below-market leases is recorded to 'Lease intangible liabilities, net' on our consolidated balance sheets. The values of the in-place leases are amortized as depreciation and amortization expense. The amounts amortized to expense for all of our in-place leases, for the six months ended June 30, 2023, and 2022 were $ 319.4 million and $ 318.3 million, respectively. The values of the above-market and below-market leases are amortized over the term of the respective leases, including any bargain renewal options, as an adjustment to rental revenue in the consolidated statements of income and comprehensive income. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for the six months ended June 30, 2023, and 2022 were $ 86.8 million and $ 48.6 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. -10- Table of Contents 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 June 30, 2023 (dollars in thousands): Net increase (decrease) to rental revenue Increase to amortization expense 2023 $ ( 31,009 ) $ 313,260 2024 ( 56,416 ) 571,588 2025 ( 49,649 ) 492,288 2026 ( 41,955 ) 439,340 2027 ( 33,293 ) 381,063 Thereafter 348,212 1,736,783 Totals $ 135,890 $ 3,934,322 D. Gain on Sales of Real Estate The following table summarizes our properties sold during the periods indicated below (dollars in millions): Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Number of properties 29 70 55 104 Net sales proceeds $ 31.9 $ 150.0 $ 60.5 $ 272.2 Gain on sales of real estate $ 7.8 $ 40.6 $ 12.1 $ 50.7 4. Revolving Credit Facility and Commercial Paper Programs A. 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 USD. Our revolving credit facility also has a $ 1.0 billion expansion option, which is subject to obtaining lender commitments. Under our revolving credit facility, our current investment grade credit ratings provide for USD borrowings at the Secured Overnight Financing Rate ("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 the Sterling Overnight Indexed Average (“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 Euro Interbank Offered Rate (“EURIBOR”), plus 0.725 %, and a revolving credit facility fee of 0.125 %, for all-in pricing of 0.85 % over one-month EURIBOR. As of June 30, 2023, we had a borrowing capacity of $ 3.4 billion available on our revolving credit facility (subject to customary conditions to borrowing) and an outstanding balance of $ 867.5 million, comprised of £ 644.0 million Sterling and € 45.0 million Euro borrowings, as compared to an outstanding balance at December 31, 2022 of $ 2.0 billion, comprised of € 1.8 billion Euro and £ 70.0 million Sterling borrowings. The weighted average interest rate on outstanding borrowings under our revolving credit facility was 4.6 % and 1.5 % during the six months ended June 30, 2023, and 2022, respectively. At June 30, 2023, our weighted average interest rate on borrowings outstanding under our revolving credit facility was 5.6 %. Our revolving credit facility is subject to various leverage and interest coverage ratio limitations, and at June 30, 2023, we were in compliance with the covenants under our revolving credit facility. As of June 30, 2023, credit facility origination costs of $ 14.7 million are included in other assets, net, as compared to $ 17.2 million at December 31, 2022, on our consolidated balance sheets. These costs are being amortized over the remaining term of our revolving credit facility. B. 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 -11- Table of Contents 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. 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 loans and our outstanding senior unsecured notes. Proceeds from commercial paper borrowings are used for general corporate purposes. As of June 30, 2023, the balance of borrowings outstanding under our commercial paper programs was $ 122.7 million, consisting entirely of USD borrowings, as compared to $ 701.8 million outstanding commercial paper borrowings, including € 361.0 million of Euro-denominated borrowings, at December 31, 2022. The weighted average interest rate on outstanding borrowings under our commercial paper programs was 4.5 % and 0.8 % for the six months ended June 30, 2023, and 2022, respectively. As of June 30, 2023, our weighted average interest rate on outstanding borrowings under our commercial paper programs was 5.4 %. 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. The commercial paper borrowings generally carry a term of less than a year . 5. 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 June 30, 2023, we had $ 1.1 billion in multicurrency borrowings, 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 June 30, 2023, the effective interest rate, after giving effect to the interest rate swaps, 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 June 30, 2023, the effective interest rate on this term loan, after giving effect to the interest rate swap, was 3.8 %. At June 30, 2023, deferred financing costs of $ 4.4 million are included net of the term loans principal balance, as compared to $ 0.2 million related to our $ 250.0 million term loan at December 31, 2022, on our consolidated balance sheets. These costs are being amortized over the remaining term of the term loans. As of June 30, 2023, we were in compliance with the covenants contained in the term loans. 6. Mortgages Payable During the six months ended June 30, 2023, we made $ 8.1 million in principal payments, including the full repayment of one mortgage for $ 5.7 million. No mortgages were assumed during the six months ended June 30, 2023. 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. 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 June 30, 2023, we were in compliance with these covenants. The balance of our deferred financing costs, which are classified as part of 'Mortgages payable, net', on our consolidated balance sheets, was $ 0.7 million at June 30, 2023 and $ 0.8 million at December 31, 2022. These costs are being amortized over the remaining term of each mortgage. -12- Table of Contents The following table summarizes our mortgages payable as of June 30, 2023 and December 31, 2022 (dollars in millions): As Of Number of Properties (1) Weighted Average Stated Interest Rate (2) Weighted Average Effective Interest Rate (3) Weighted Average Remaining Years Until Maturity Remaining Principal Balance Unamortized Premium and Deferred Financing Costs Balance, net Mortgage Payable Balance June 30, 2023 135 4.8 % 3.3 % 0.9 $ 836.3 $ 5.4 $ 841.7 December 31, 2022 136 4.8 % 3.3 % 1.4 $ 842.3 $ 11.6 $ 853.9 (1) At June 30, 2023, there were 17 mortgages on 135 properties and at December 31, 2022, there were 18 mortgages on 136 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 June 30, 2023 and December 31, 2022, all mortgages were at fixed interest rates. (2) Stated interest rates ranged from 3.0 % to 6.9 % at June 30, 2023 and December 31, 2022, respectively. (3) Effective interest rates ranged from 2.0 % to 6.6 % and 2.7 % to 6.6 % at June 30, 2023 and December 31, 2022, respectively. The following table summarizes the maturity of mortgages payable as of June 30, 2023, excluding $ 5.4 million related to unamortized net premiums and deferred financing costs (dollars in millions): Year of Maturity Principal 2023 $ 14.1 2024 740.5 2025 43.9 2026 12.0 2027 22.3 Thereafter 3.5 Totals $ 836.3 -13- Table of Contents 7. Notes Payable A. General At June 30, 2023, our senior unsecured notes and bonds are USD-denominated and Sterling-denominated. Foreign-denominated notes are converted at the applicable exchange rate on the balance sheet date. The following are sorted by maturity date (in thousands): Carrying Value (USD) as of Maturity Dates Principal (Currency Denomination) June 30, 2023 December 31, 2022 4.600 % Notes due 2024 February 6, 2024 $ 499,999 $ 499,999 $ 499,999 3.875 % Notes due 2024 July 15, 2024 $ 350,000 350,000 350,000 3.875 % Notes due 2025 April 15, 2025 $ 500,000 500,000 500,000 4.625 % Notes due 2025 November 1, 2025 $ 549,997 549,997 549,997 5.050 % Notes due 2026 January 13, 2026 $ 500,000 500,000 — 0.750 % Notes due 2026 March 15, 2026 $ 325,000 325,000 325,000 4.875 % Notes due 2026 June 1, 2026 $ 599,997 599,997 599,997 4.125 % Notes due 2026 October 15, 2026 $ 650,000 650,000 650,000 1.875 % Notes due 2027 January 14, 2027 £ 250,000 317,700 301,225 3.000 % Notes due 2027 January 15, 2027 $ 600,000 600,000 600,000 1.125 % Notes due 2027 July 13, 2027 £ 400,000 508,320 481,960 3.950 % Notes due 2027 August 15, 2027 $ 599,873 599,873 599,873 3.650 % Notes due 2028 January 15, 2028 $ 550,000 550,000 550,000 3.400 % Notes due 2028 January 15, 2028 $ 599,816 599,816 599,816 2.200 % Notes due 2028 June 15, 2028 $ 499,959 499,959 499,959 4.700 % Notes due 2028 December 15, 2028 $ 400,000 400,000 — 3.250 % Notes due 2029 June 15, 2029 $ 500,000 500,000 500,000 3.100 % Notes due 2029 December 15, 2029 $ 599,291 599,291 599,291 4.850 % Notes due 2030 March 15, 2030 $ 600,000 600,000 — 3.160 % Notes due 2030 June 30, 2030 £ 140,000 177,912 168,686 1.625 % Notes due 2030 December 15, 2030 £ 400,000 508,320 481,960 3.250 % Notes due 2031 January 15, 2031 $ 950,000 950,000 950,000 3.180 % Notes due 2032 June 30, 2032 £ 345,000 438,426 415,691 5.625 % Notes due 2032 October 13, 2032 $ 750,000 750,000 750,000 2.850 % Notes due 2032 December 15, 2032 $ 699,655 699,655 699,655 1.800 % Notes due 2033 March 15, 2033 $ 400,000 400,000 400,000 1.750 % Notes due 2033 July 13, 2033 £ 350,000 444,780 421,715 4.900 % Notes due 2033 July 15, 2033 $ 600,000 600,000 — 2.730 % Notes due 2034 May 20, 2034 £ 315,000 400,302 379,544 5.875 % Bonds due 2035 March 15, 2035 $ 250,000 250,000 250,000 3.390 % Notes due 2037 June 30, 2037 £ 115,000 146,142 138,563 2.500 % Notes due 2042 January 14, 2042 £ 250,000 317,700 301,225 4.650 % Notes due 2047 March 15, 2047 $ 550,000 550,000 550,000 Total principal amount $ 16,383,189 $ 14,114,156 Unamortized net premiums, deferred financing costs and cumulative basis adjustment on fair value hedge (1) 92,400 163,857 $ 16,475,589 $ 14,278,013 (1) In January 2023, in conjunction with the pricing of these senior unsecured notes due January 2026, we entered into three-year , fixed-to-variable interest rate swaps, which are accounted for as fair value hedges. See Note 11, Derivative Instruments for further details. -14- Table of Contents The following table summarizes the maturity of our notes and bonds payable as of June 30, 2023, excluding $ 92.4 million related to unamortized net premiums, deferred financing costs, and basis adjustment on interest rate swaps designated as fair value hedges (dollars in millions): Year of Maturity Principal 2023 $ — 2024 850.0 2025 1,050.0 2026 2,075.0 2027 2,025.9 Thereafter 10,382.3 Totals $ 16,383.2 As of June 30, 2023, the weighted average interest rate on our notes and bonds payable was 3.6 %, and the weighted average remaining years until maturity was 6.7 years. Interest incurred on all of the notes and bonds was $ 144.1 million and $ 103.0 million for the three months ended June 30, 2023, and 2022, respectively, and $ 274.4 million and $ 206.1 million for the six months ended June 30, 2023, and 2022, respectively. Our outstanding notes and bonds are unsecured; accordingly, we have not pledged any assets as collateral for these or any other obligations. 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. 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 June 30, 2023, we were in compliance with these covenants. B. Note Issuances During the six months ended June 30, 2023, we issued the following notes and bonds (in millions): Date of Issuance Maturity Date Principal amount Price of par value Effective semi-annual yield to maturity 5.050 % Notes January 2023 January 2026 $ 500.0 (1) 99.618 % 5.189 % 4.850 % Notes January 2023 March 2030 $ 600.0 98.813 % 5.047 % 4.700 % Notes April 2023 December 2028 $ 400.0 98.949 % 4.912 % 4.900 % Notes April 2023 July 2033 $ 600.0 98.020 % 5.148 % (1) In January 2023, we issued $ 500 million of 5.05 % senior unsecured notes due January 13, 2026, which are callable at par on January 13, 2024. In July 2023, we issued € 550.0 million of 4.875 % senior unsecured notes due July 2030 and € 550.0 million of 5.125 % senior unsecured notes due July 2034. See note 18, Subsequent Events, for further details. -15- Table of Contents 8. Issuances of Common Stock A. At-the-Market ("ATM") Program Under our current ATM program, we may offer and sell up to 120.0 million shares of common stock (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 under the ticker symbol "O" at prevailing market prices or at negotiated prices. Upon settlement, subject to certain exceptions, we may elect, in our sole discretion, to cash settle or net share settle all or any portion of our obligations under any forward sale agreement, in which cases we may not receive any proceeds (in the case of cash settlement) or will not receive any proceeds (in the case of net share settlement), and we may owe cash (in the case of cash settlement) or shares of our common stock (in the case of net share settlement) to the relevant forward purchaser. As of June 30, 2023, we had 24.3 million additional 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 programs (dollars in millions): Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Shares of common stock issued under the ATM program (1) 35,475,153 15,899,972 48,139,631 25,973,181 Gross proceeds $ 2,195.7 $ 1,067.3 $ 2,997.4 $ 1,727.5 Sales agents' commissions and other offering expenses ( 15.2 ) ( 10.7 ) ( 20.7 ) ( 14.8 ) Net proceeds $ 2,180.5 $ 1,056.6 $ 2,976.7 $ 1,712.7 (1) During the three and six months ended June 30, 2023, 20.7 million and 46.3 million shares were sold, respectively, and 35.5 million and 48.1 million shares were settled pursuant to forward sale confirmations, respectively. In addition, as of June 30, 2023, 4.9 million shares of common stock subject to forward sale confirmations have been executed, but not settled, at a weighted average initial price of $ 59.33 per share. We currently expect to fully settle forward sale agreements outstanding by September 30, 2023, representing $ 287.0 million in net proceeds, for which the weighted average forward price at June 30, 2023 was $ 58.72 per share. B. Dividend Reinvestment and Stock Purchase Plan ("DRSPP") Our DRSPP, provides our common stockholders, as well as new investors, with a convenient and economical method of purchasing our common stock and reinvesting their distributions. Our DRSPP also allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions. Our DRSPP authorizes up to 26.0 million common shares to be issued. At June 30, 2023, we had 11.1 million shares remaining for future issuance under our DRSPP program. The following table outlines common stock issuances pursuant to our DRSPP program (dollars in millions): Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Shares of common stock issued under the DRSPP program 44,118 43,260 85,781 84,631 Gross proceeds $ 2.7 $ 2.9 $ 5.4 $ 5.7 9. Noncontrolling Interests As of June 30, 2023, we have six entities with noncontrolling interests that we consolidate, consisting of our operating partnership, (Realty Income, L.P.), a joint venture formed in 2023 in connection with the acquisition of properties, a joint venture acquired in December 2019, and three development joint ventures ( one acquired in December 2020, one acquired in May 2021, and one acquired in April 2023). -16- Table of Contents The following table represents the change in the carrying value of all noncontrolling interests through June 30, 2023 (in thousands): Realty Income, L.P. units (1) Other Noncontrolling Interests Total Carrying value at December 31, 2022 $ 115,801 $ 14,339 $ 130,140 Contributions (2) — 39,559 39,559 Distributions (3) ( 2,826 ) ( 1,785 ) ( 4,611 ) Allocation of net income 1,925 919 2,844 Carrying value at June 30, 2023 $ 114,900 $ 53,032 $ 167,932 (1) 1,795,167 units were outstanding as of both June 30, 2023 and December 31, 2022. (2) Includes contributions of $ 39.2 million for the issuance of a 5.0 % joint venture interest as partial consideration paid on property acquisitions and contributions of $ 0.4 million related to a 5.0 % interest in a development joint venture. (3) Includes a non-cash reduction of noncontrolling interest of $ 1.5 million from our partner's responsibility to absorb construction cost overages for a development joint venture during the six months ended June 30, 2023. 10. 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 Fair value measurements 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 Fair value measurements 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 Fair value measurements 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. A. 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 aggregate fair value of our term loans approximates carrying value due to the frequent repricing of the variable interest rate charged on the borrowing. -17- Table of Contents The following table reflects the carrying amounts and estimated fair values of our financial instruments (in millions): June 30, 2023 December 31, 2022 Carrying value Fair value Carrying value Fair value Mortgages payable (1) $ 836.3 $ 812.5 $ 842.3 $ 810.4 Notes and bonds payable (2) $ 16,383.2 $ 14,553.6 $ 14,114.2 $ 12,522.8 (1) Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums was $ 6.0 million at June 30, 2023, and $ 12.4 million at December 31, 2022. Also excludes deferred financing costs of $ 0.7 million at June 30, 2023, and $ 0.8 million at December 31, 2022. (2) Excludes non-cash net premiums recorded on notes payable. The unamortized balance of the net premiums was $ 168.8 million at June 30, 2023, and $ 224.6 million at December 31, 2022. Also excludes deferred financing costs of $ 71.8 million and basis adjustment on interest rate swaps designated as fair value hedges of $ 4.6 million at June 30, 2023, and $ 60.7 million of deferred financing costs at December 31, 2022. The estimated fair values of our mortgages payable and private senior notes payable have been calculated by discounting the future cash flows using an interest rate based upon the relevant forward interest rate curve, plus an applicable credit-adjusted spread. Because this methodology includes unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated fair values related to our mortgages payable is categorized as level three on the three-level valuation hierarchy. The estimated fair values of our publicly-traded senior notes and bonds payable are based upon indicative market prices and recent trading activity of our senior notes and bonds payable. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values related to our notes and bonds payable is categorized as level two on the three-level valuation hierarchy. B. Financial Instruments Measured at Fair Value on a Recurring Basis For derivative assets and liabilities, we may utilize interest rate swaps, interest rate swaptions, and forward-starting swaps to manage interest rate risk, and cross-currency swaps, currency exchange swaps, and foreign currency forwards 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 June 30, 2023, and December 31, 2022, 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. C. Items Measured at Fair Value on a Non-Recurring Basis Impairment of Real Estate Investments 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. 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. -18- Table of Contents The following table summarizes our provisions for impairment on real estate investments during the periods indicated below (in millions): Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Carrying value prior to impairment $ 97.0 $ 64.5 $ 125.5 $ 98.2 Less: total provisions for impairment ( 29.8 ) ( 7.7 ) ( 43.0 ) ( 14.7 ) Carrying value after impairment $ 67.2 $ 56.8 $ 82.5 $ 83.5 The valuation of impaired assets is determined using valuation techniques including discounted cash flow analysis, analysis of recent comparable sales transactions and purchase offers received from third parties, which are Level 3 inputs. We may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate. Estimating future cash flows is highly subjective and estimates can differ materially from actual results. 11. Derivative Instruments In the normal course of business, our operations are exposed to economic risks from interest rates and foreign currency exchange rates. We may enter into derivative financial instruments to offset these underlying economic risks. Derivative Designated as Hedging Instruments - Cash Flow Hedges In order to hedge the foreign currency risk associated with interest payments on intercompany loans denominated in British Pound Sterling ("GBP") and Euro ("EUR"), we have a hedging strategy to enter into foreign currency forward contracts to sell GBP, USD, and EUR and buy EUR, USD, and GBP. 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 related to foreign currency derivative contracts will be reclassified to other gain and (loss) in the same period during which the hedged forecasted transactions affect earnings. To add stability to interest expense and to manage our exposure to interest rate movements associated with our term loans, we executed variable-to-fixed interest rate swaps. These interest rate swaps are designated as cash flow hedges. The interest rate swaps are recorded on the consolidated balances sheets at fair value. Changes to fair value are recorded to accumulated other comprehensive income, or AOCI, and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. To mitigate the impact of fluctuating interest rates, we have also entered into interest rate swaption agreements, structured as a swaption corridor, in anticipation of issuing USD denominated bonds. Interest rate swaption corridors are a combination of two swaption positions, whereby we purchase a payer swaption, which is an option that allows us to enter into a swap where we will pay the fixed rate and receive the floating rate of the swap, and sell a payer swaption, which is an option that provides the counterparty with the right to enter into a swap where we will receive the fixed rate and pay the floating rate of the swap. For the swaption corridor entered into during March 2023, the combination of purchasing the payer swaption and selling the swaption resulted in a premium being paid of $ 7.6 million. The interest rate swaptions are designated as cash flow hedges. Changes in fair value of the swaptions have been recorded in AOCI. Derivative Designated as Hedging Instruments - Fair Value Hedges Periodically, we enter into and designate fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and variable-rate debt. These swaps involve the receipt of fixed-rate amounts for variable interest rate payments over the life of the swaps without exchange of the underlying principal amount. We also designate some of our cross-currency swaps as fair value hedges. The purpose of these contracts is to hedge foreign currency risk associated with changes in spot rates on foreign-denominated debt. For these hedges, we have elected to exclude the change in fair value of the cross-currency swaps related to both time value and cross-currency basis spread from the assessment of hedge effectiveness (the "excluded component"). Changes in the fair value of the cross-currency swaps attributable to changes in the spot rates on the final notional exchanges and changes in the value of the hedged assets due to changes in the spot rates are recorded in 'Foreign currency -19- Table of Contents and derivative (loss) gain, net'. Changes in the fair value of the cross-currency swaps attributable to the excluded components are recorded to Other comprehensive income and will be recognized in Foreign currency and derivative (loss) gain, net on a systematic and rational basis, as net cash settlements and interest accruals on the respective cross currency swaps occur, over the remaining life of the hedging instruments. Derivatives Not Designated as Hedging Instruments We enter into foreign currency exchange swap agreements to reduce the effects of currency exchange rate fluctuations between the USD, our reporting currency, and GBP and EUR. These derivative contracts generally mature within one year 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 (loss) gain, net' in the consolidated statements of income and comprehensive income. The following table summarizes the terms and fair values of our derivative financial instruments at June 30, 2023 and December 31, 2022 (dollars in millions): Derivative Type Number of Instruments (1) Notional Amount as of Weighted Average Strike Rate (2) Maturity Date (3) Fair Value - asset (liability) as of Derivatives Designated as Hedging Instruments June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 Interest rate swaps 9 $ 1,630.0 $ 250.0 4.26 % Jan 2024 - Jan 2026 $ 6.4 $ 5.6 Interest rate swaptions 6 1,000.0 — (4) Feb 2034 8.8 — Cross-currency swaps 3 320.0 320.0 (5) Oct 2032 ( 45.6 ) ( 33.3 ) Foreign currency forwards 24 144.0 185.5 (6) Jul 2023 - Dec 2024 6.9 16.1 $ 3,094.0 $ 755.5 $ ( 23.5 ) $ ( 11.6 ) Derivatives not Designated as Hedging Instruments Currency exchange swaps 1 $ 214.9 $ 2,427.7 (7) July 2023 $ 3.5 $ 58.8 Cross-currency swaps 3 280.0 280.0 (5) Oct 2032 ( 40.3 ) ( 29.5 ) $ 494.9 $ 2,707.7 $ ( 36.8 ) $ 29.3 Total of all Derivatives $ 3,588.9 $ 3,463.2 $ ( 60.3 ) $ 17.7 (1) This column represents the number of instruments outstanding as of June 30, 2023. (2) Weighted average strike rate is calculated using the notional value as of June 30, 2023. (3) This column represents maturity dates for instruments outstanding as of June 30, 2023. (4) Represent purchased payer swaptions with a strike rate of 3.75 % and a sold payer swaptions with a strike rate of 4.25 %. (5) USD fixed rate of 5.625 % and EUR weighted average fixed rate of 4.697 %. (6) Weighted average forward GBP-USD exchange rate of 1.34 . (7) Weighted average EUR-USD exchange rate of 1.07 . We measure our derivatives at fair value and include the balances within other assets and accounts payable as well as accrued expenses on our consolidated balance sheets. We have agreements with each of our derivative counterparties containing provisions under which we could be declared in default on our derivative obligations if repayment of our indebtedness is accelerated by the lender due to our default. -20- Table of Contents The following table summarizes the amount of unrecognized gain (loss) on derivatives in other comprehensive income (in thousands): Three months ended June 30, Six months ended June 30, Derivatives in Cash Flow Hedging Relationships 2023 2022 2023 2022 Cross-currency swaps $ — $ ( 6,986 ) $ — $ ( 5,091 ) Interest rate swaps 3,564 30,386 1,844 69,391 Foreign currency forwards ( 4,081 ) 10,054 ( 9,194 ) 12,844 Interest rate swaptions 4,840 — 3,553 — Total derivatives in cash flow hedging relationships $ 4,323 $ 33,454 $ ( 3,797 ) $ 77,144 Derivatives in Fair Value Hedging Relationships Cross-currency swaps $ ( 10,733 ) $ — $ ( 4,775 ) $ — Total derivatives in fair value hedging relationships $ ( 10,733 ) $ — $ ( 4,775 ) $ — Total unrealized (loss) gain on derivatives $ ( 6,410 ) $ 33,454 $ ( 8,572 ) $ 77,144 The following table summarizes the amount of gain (loss) on derivatives reclassified from AOCI (in thousands): Three months ended June 30, Six months ended June 30, Derivatives in Cash Flow Hedging Relationships Location of Gain (Loss) Recognized in Income 2023 2022 2023 2022 Cross-currency swaps Foreign currency and derivative gain (loss), net $ — $ 21,527 $ — $ 27,641 Interest rate swaps Interest income 3,259 ( 2,153 ) 4,739 ( 4,683 ) Foreign currency forwards Foreign currency and derivative gain (loss), net 892 — 2,323 — Interest rate swaptions Interest expense ( 2,358 ) — ( 2,358 ) — Total derivatives in cash flow hedging relationships $ 1,793 $ 19,374 $ 4,704 $ 22,958 Derivatives in Fair Value Hedging Relationships Cross-currency swaps Foreign currency and derivative gain (loss), net $ 190 $ — $ 484 $ — Total derivatives in fair value hedging relationships $ 190 $ — $ 484 $ — Net increase to net income $ 1,983 $ 19,374 $ 5,188 $ 22,958 We expect to reclassify $ 18.2 million from AOCI as a decrease to interest expense relating to interest rate swaps and interest rate swaption and $ 6.6 million from AOCI to foreign currency gain relating to foreign currency forwards within the next twelve months. -21- Table of Contents The following table details our foreign currency and derivative gains (losses), net included in income (in thousands): Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Realized foreign currency and derivative gain (loss), net: (Loss) gain on the settlement of undesignated derivatives $ ( 981 ) $ 79,308 $ ( 1,326 ) $ 76,628 Gain on the settlement of designated derivatives reclassified from AOCI 1,082 21,527 2,807 27,641 (Loss) gain on the settlement of transactions with third parties ( 51 ) 1,004 1,275 952 Total realized foreign currency and derivative gain, net $ 50 $ 101,839 $ 2,756 $ 105,221 Unrealized foreign currency and derivative gain (loss), net: (Loss) gain on the change in fair value of undesignated derivatives $ ( 7,394 ) $ 37,274 $ ( 8,176 ) $ 59,995 Gain (loss) on remeasurement of certain assets and liabilities 4,792 ( 131,633 ) 13,190 ( 158,326 ) Total unrealized foreign currency and derivative (loss) gain, net $ ( 2,602 ) $ ( 94,359 ) $ 5,014 $ ( 98,331 ) Total foreign currency and derivative (losses) gains, net $ ( 2,552 ) $ 7,480 $ 7,770 $ 6,890 12. Lessor Operating Leases At June 30, 2023, we owned or held interests in 13,118 properties. Of the 13,118 properties, 12,882 , or 98.2 %, are single-client properties, and the remaining are multi-client properties. At June 30, 2023, 137 properties were available for lease or sale. The majority of our leases are accounted for as operating leases. Substantially all of our leases are net leases where our client pays or reimburses us for property taxes and assessments and carries insurance coverage for public liability, property damage, fire and extended coverage. Rent based on a percentage of our client's gross sales, or percentage rent, for the three months ended June 30, 2023, and 2022 was $ 1.7 million, and $ 2.2 million, respectively. Percentage rent for the six months ended June 30, 2023, and 2022 was $ 5.8 million, and $ 6.0 million, respectively. 13. Distributions Paid and Payable We pay monthly distributions to our common stockholders. The following is a summary of monthly distributions paid per common share for the periods indicated below: 2023 2022 January $ 0.2485 $ 0.2465 February 0.2485 0.2465 March 0.2545 0.2465 April 0.2550 0.2470 May 0.2550 0.2470 June 0.2550 0.2470 Total $ 1.5165 $ 1.4805 At June 30, 2023, a distribution of $ 0.2555 per common share was payable and was paid in July 2023. 14. 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. -22- Table of Contents 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 (shares in thousands): Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Weighted average shares used for the basic net income per share computation 674,109 601,672 667,357 597,778 Incremental shares from share-based compensation 409 359 392 363 Dilutive effect of forward ATM offerings 75 — 359 — Weighted average shares used for diluted net income per share computation 674,593 602,031 668,108 598,141 Unvested shares from share-based compensation that were anti-dilutive 182 16 147 16 Weighted average partnership common units convertible to common shares that were anti-dilutive 1,795 1,061 1,795 1,061 Weighted average forward ATM offerings that were anti-dilutive 322 — 223 — 15. Supplemental Disclosures of Cash Flow Information The following table summarizes our supplemental cash flow information during the periods indicated below (in thousands): Six months ended June 30, 2023 2022 Supplemental disclosures: Cash paid for interest $ 324,711 $ 229,929 Cash paid for income taxes $ 8,081 $ 30,091 Non-cash activities: Net (decrease) increase in fair value of derivatives $ ( 77,982 ) $ 146,181 Increase in noncontrolling interests from property acquisitions $ 39,156 $ — Mortgages assumed at fair value $ — $ 45,079 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): June 30, 2023 June 30, 2022 Cash and cash equivalents shown in the consolidated balance sheets $ 253,693 $ 172,849 Restricted escrow deposits (1) 23,995 100,098 Impounds related to mortgages payable (1) 37,174 718 Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows $ 314,862 $ 273,665 (1) Included within other assets, net on the consolidated balance sheets (see note 2, Supplemental Detail for Certain Components of Consolidated Balance Sheets ). 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. 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. This note should be read in conjunction with the more complete discussion of our 2021 Plan included in note 17 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022. The amount of share-based compensation costs recognized in 'General and administrative' in the consolidated statements of income and comprehensive income was $ 7.6 million and $ 6.6 million during the three months ended -23- Table of Contents June 30, 2023, and 2022, respectively, and $ 13.9 million and $ 11.6 million during the six months ended June 30, 2023 and 2022, respectively. A. Restricted Stock and Restricted Stock Units During the six months ended June 30, 2023, we granted 219,951 shares of common stock under the 2021 Plan. This included 40,000 total shares of restricted stock granted to the independent members of our Board of Directors in connection with our annual awards in May 2023, 20,000 shares of which vested immediately and 20,000 shares of which vest in equal parts over a three-year service period. Our restricted stock awards granted to employees vest over a service period not exceeding four-years . During the six months ended June 30, 2023, we also granted 14,876 restricted stock units, all of which vest over a four-year service period. As of June 30, 2023, the remaining unamortized share-based compensation expense related to restricted stock awards and units totaled $ 21.7 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. B. Performance Shares During the six months ended June 30, 2023, we granted 193,868 performance shares, as well as dividend equivalent rights, to our executive officers. The performance shares are earned based on our Total Shareholder Return (TSR) performance relative to select industry indices and peer groups as well as achievement of certain operating metrics, and vest 50 % on the first and second January 1 after the end of the three-year performance period, subject to continued service. As of June 30, 2023, the remaining share-based compensation expense related to the performance shares totaled $ 24.3 million. The performance shares are being recognized on a tranche-by-tranche basis over the service period. The fair value of the performance shares was estimated on the date of grant using a Monte Carlo Simulation model. 17. 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 June 30, 2023, we had commitments of $ 15.2 million, which primarily relate to re-leasing costs, recurring capital expenditures, and non-recurring building improvements. In addition, as of June 30, 2023, we had committed $ 764.9 million under construction contracts related to development projects, which have estimated rental revenue commencement dates between July 2023 and July 2024. 18. Subsequent Events A. Dividends In July 2023, we declared a dividend of $ 0.2555 per share to our common stockholders, which will be paid in August 2023. B. ATM Forward Offerings As of August 3, 2023, ATM forward agreements for a total of 11.0 million shares remain unsettled with total expected net proceeds of approximately $ 651.4 million of which 6.1 million shares were executed in July 2023. C. Notes Issuance In July 2023, we issued € 550.0 million of 4.875 % senior unsecured notes due July 2030 (the “2030 Notes”), and € 550.0 million of 5.125 % senior unsecured notes due July 2034 (the “2034 Notes”). The public offering price for the 2030 Notes was 99.421 % of the principal amount for an effective annual yield to maturity of 4.975 %, and the public offering price for the 2034 Notes was 99.506 % of the principal amount for an effective annual yield to maturity of 5.185 %. Interest on the 2030 Notes and the 2034 Notes is paid annually. -24- Table of Contents