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 domestic and international 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; current 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. As of June 30, 2023, we owned or held interests in 13,118 properties located in all 50 U.S. states, Puerto Rico, the United Kingdom ("U.K."), Spain, Italy, and Ireland, with approximately 255.5 million square feet of leasable space leased to clients doing business in 85 separate industries. Of the 13,118 properties in our portfolio as of June 30, 2023, 12,882, or 98.2%, were single-client properties, of which 12,747 were leased, and the remaining were multi–client properties. Our total portfolio of 13,118 properties as of June 30, 2023 had a weighted average remaining -25- Table of Contents lease term (excluding rights to extend a lease at the option of the client) of approximately 9.6 years. Total portfolio annualized contractual rent on our leases as of June 30, 2023 was $3.76 billion. As of June 30, 2023, approximately 39.7% of our total portfolio annualized contractual rent comes from properties leased to our investment grade clients, their subsidiaries or affiliated companies. As of June 30, 2023, our top 20 clients (based on percentage of total portfolio annualized contractual rent) represented approximately 40.8% of our annualized rent and 11 of these clients have investment grade credit ratings or are subsidiaries or affiliates of investment grade companies. Approximately 93% of our annualized retail contractual rent as of June 30, 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 $87.7 million and $41.0 million for the three months ended June 30, 2023, and 2022, respectively, and $147.3 million and $85.0 million during the six months ended June 30, 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 four times during 2023. As of July 2023, we have paid 103 consecutive quarterly dividend increases and increased the dividend 121 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 4th increase Jun 2023 Jul 2023 $0.2555 $0.0005 The dividends paid per share during the six months ended June 30, 2023, totaled approximately $1.5165, as compared to approximately $1.4805 during the six months ended June 30, 2022, an increase of $0.036, or 2.4%. The monthly dividend of $0.2555 per share represents a current annualized dividend of $3.066 per share, and an annualized dividend yield of 5.1% based on the last reported sale price of our common stock on the NYSE of $59.79 on June 30, 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. Acquisitions During the Three and Six Months Ended June 30, 2023 During the three months ended June 30, 2023, we invested $3.1 billion in 710 properties and properties under development or expansion at an initial weighted average cash lease yield of 6.9% . Of such properties, as of June 30, 2023, approximately 18% of the total annualized contractual rent of such properties was attributable to properties leased to investment grade clients. During the six months ended June 30, 2023, we invested $4.8 billion in 997 properties and properties under development or expansion at an initial weighted average cash lease yield of 6.9% . Of such properties, as of June 30, 2023, approximately 26% of the total annualized contractual rent of such properties was attributable to properties leased to investment grade clients. See note 3, Investments in Real Estate, to the consolidated financial statements for further details. Equity Capital Raising During the three months ended June 30, 2023, we raised $2.2 billion of net proceeds from the sale of common stock, primarily through our At-The-Market (ATM) program, with a weighted average price of $61.89. As of June 30, 2023, 4.9 million shares of common stock subject to forward sale confirmations have been executed but not settled. See note 8, Issuances of Common Stock, for further details. -26- Table of Contents Note Issuances 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. 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. In January 2023, we issued $500.0 million of 5.050% senior unsecured notes due January 2026 and $600.0 million of 4.85% senior unsecured notes due March 2030. Portfolio Discussion Leasing Results At June 30, 2023, we had 137 properties available for lease or sale out of 13,118 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: Three months ended June 30, 2023 Properties available for lease at March 31, 2023 131 Lease expirations (1) 216 Re-leases to same client (174) Re-leases to new client (8) Vacant dispositions (28) Properties available for lease at June 30, 2023 137 Six months ended June 30, 2023 Properties available for lease at December 31, 2022 126 Lease expirations (1) 408 Re-leases to same client (329) Re-leases to new client (14) Vacant dispositions (54) Properties available for lease at June 30, 2023 137 (1) Includes scheduled and unscheduled expirations (including leases rejected in bankruptcy), as well as future expirations resolved in the periods indicated above. During the three months ended June 30, 2023, the new annualized contractual rent on re-leases was $51.7 million, as compared to the previous annual rent of $50.0 million on the same units, representing a rent recapture rate of 103.4% on the units re-leased. We re-leased two units to new clients without a period of vacancy, and 11 units to new clients after a period of vacancy. During the six months ended June 30, 2023, the new annualized contractual rent on re-leases was $87.8 million, as compared to the previous annual rent of $85.5 million on the same units, representing a rent recapture rate of 102.7% on the units re-leased. We re-leased four units to new clients without a period of vacancy, and 17 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. Anticipated Transition of Chief Financial Officer Role On June 22, 2023, we announced the planned retirement of Christie Kelly as of Executive Vice President, Chief Financial Officer (CFO) and Treasurer, and the anticipated transition of that role to Jonathan Pong, currently the company's Senior Vice President, Head of Corporate Finance as part of our planned succession process, in each case, effective January 1, 2024. -27- Table of Contents Theater Industry Update As previously disclosed, Cineworld Group plc and its affiliates ("Cineworld") commenced Chapter 11 reorganization proceedings during September 2022. As of June 30, 2023, we own 35 properties leased to Cineworld, which represent 1.1% of our total portfolio annualized contractual rent. (1) D uring the three months ended June 30, 2023, we collected approximately 99.0% of contractual rent across our entire theater portfolio. Uncollected rent during the period was primarily related to unpaid contractual rent at properties leased to Cineworld, but subsequently rejected as part of the bankruptcy process. We remain in negotiations with Cineworld regarding the terms and conditions of the leases at the properties Cineworld currently operates. We expect to reach final resolution on these matters in 2023. As of June 30, 2023, we had cumulative reserves of $31.4 million on properties leased to Cineworld with total receivables, net of reserves, of $12.9 million. 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. (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 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 strategic focus on the use of net lease agreements reduces our exposure to rising property expenses due to inflation because the client is responsible for property expenses. Even though the utilization of 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 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. -28- Table of Contents LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2023, we had approximately $3.5 billion of liquidity, which consists of cash and cash equivalents of approximately $253.7 million, including £113.9 million denominated in Sterling and €40.2 million denominated in Euro, and $3.3 billion of availability under our $4.25 billion unsecured revolving credit facility, after deducting $122.7 million in commercial paper borrowings under our commercial paper programs (comprised of a $1.5 billion U.S. dollar-denominated unsecured commercial paper program and $1.5 billion, or foreign currency equivalent, Euro-denominated unsecured commercial paper program). We use our unsecured revolving credit facility as a liquidity backstop for the repayment of the notes issued under these programs. Our primary cash obligations, for the current year and subsequent years, are included in the “Material Cash Requirements” table, 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 June 30, 2023, there are approximately $1.1 billion of obligations becoming due through the remainder of 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 and our term loan (after deducting outstanding borrowings under our commercial paper programs). 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. Long-Term Liquidity Requirements 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. Capitalization As of June 30, 2023, our total market capitalization was $62.0 billion. Total market capitalization consisted of $42.5 billion of common equity (based on the June 30, 2023 closing price on the NYSE of $59.79 and assuming the conversion of common units of Realty Income, L.P.) and total outstanding borrowings of $19.5 billion on our senior unsecured notes and bonds, term loans, mortgages payable, revolving credit facility and commercial paper (excluding unamortized deferred financing costs, discounts, and premiums). Our total debt to market capitalization was 31.5% at June 30, 2023. ATM Program As of June 30, 2023, there were approximately 4.9 million shares of common stock subject to forward sale agreements through our ATM program, representing approximately $0.3 billion in expected net proceeds and a weighted average initial price of $59.33 per share, which have been executed at a weighted average price of $58.72 per share (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), but not settled. During the six months ended June 30, 2023, we settled approximately 48.1 million shares of common stock previously sold pursuant to forward sale agreements through our ATM program for approximately $3.0 billion of net proceeds. 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 -29- Table of Contents 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. 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. Debt and Financing Activities At June 30, 2023, our total outstanding borrowings of senior unsecured notes and bonds, term loans, mortgages payable, revolving credit facility and commercial paper were $19.5 billion, with a weighted average maturity of 5.9 years and a weighted average interest rate of 3.79%. As of June 30, 2023, approximately 92% of our total debt was fixed rate debt. See notes 4 through 7 to the consolidated financial statements for additional information about our outstanding debt, along with our debt financing activities during the six months ended June 30, 2023 below. Note Issuances During the six months ended June 30, 2023, we issued the following notes and bonds (in millions): Note Issuance 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 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 % 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%. New Term Loan 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. 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%. Covenants 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 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 June 30, 2023, are: Note Covenants Required Actual Limitation on incurrence of total debt < 60% of adjusted assets 39.5 % Limitation on incurrence of secured debt < 40% of adjusted assets 1.8 % Debt service coverage (trailing 12 months) (1) > 1.5x 4.6x Maintenance of total unencumbered assets > 150% of unsecured debt 259.8 % (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 July 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 July 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 June 30, 2023 (in thousands, for trailing twelve months): -30- Table of Contents Net income available to common stockholders $ 867,265 Plus: interest expense, excluding the amortization of deferred financing costs 566,816 Less: gain on extinguishment of debt (240) Plus: provision for taxes 44,425 Plus: depreciation and amortization 1,780,945 Plus: provisions for impairment 54,124 Plus: pro forma adjustments 354,489 Less: gain on sales of real estate (64,333) Income available for debt service, as defined $ 3,603,491 Total pro forma debt service charge $ 786,752 Debt service and fixed charge coverage ratio 4.6 Credit Agency Ratings The borrowing interest rates under our revolving credit facility are based upon our ratings assigned by credit rating agencies. As of June 30, 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 June 30, 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 June 30, 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 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 ranges 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. -31- Table of Contents Material Cash Requirements The following table summarizes the maturity of each of our obligations as of June 30, 2023 (dollars in millions): Credit Facility and Commercial Paper (1) Senior Unsecured Notes Term Loans (2) Mortgages Payable Interest (3) Ground Leases Paid by the Company (4) Ground Leases Paid by Our Clients (5) Other (6) Totals 2023 $ 122.7 $ — $ — $ 14.1 $ 354.6 $ 5.3 $ 15.5 $ 579.3 $ 1,091.5 2024 — 850.0 250.0 740.5 734.3 13.4 30.8 194.4 2,813.4 2025 — 1,050.0 — 43.9 646.5 11.5 30.1 0.7 1,782.7 2026 867.5 2,075.0 1,078.7 12.0 493.8 17.2 29.3 1.6 4,575.1 2027 — 2,025.9 — 22.3 408.6 8.9 26.5 0.3 2,492.5 Thereafter — 10,382.3 — 3.5 1,808.2 288.7 266.7 3.8 12,753.2 Totals $ 990.2 $ 16,383.2 $ 1,328.7 $ 836.3 $ 4,446.0 $ 345.0 $ 398.9 $ 780.1 $ 25,508.4 (1) The initial term of the credit facility expires in June 2026 and includes, at our option, two six-month extensions. At June 30, 2023, there were $867.5 million borrowings under our revolving credit facility, and commercial paper programs outstanding were $122.7 million, which matured in July 2023. (2) The maturity date for our 2023 multi-currency term loan assumes the two twelve-month extensions available at the company's option are fully exercised. (3) 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. It excludes interest on the July 2023 issuances of €550.0 million of senior unsecured notes due July 2030 and €550.0 million of senior unsecured notes due July 2034. (4) We currently pay the ground lessors directly for the rent under the ground leases. (5) Our clients, who are generally sub-tenants 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. (6) “Other” consists of $764.9 million of commitments under construction contracts, and $15.2 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements. 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 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 $1.5165 per share to stockholders during the six months ended June 30, 2023, representing 76.6% of our diluted AFFO per share of $1.98. 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 -32- Table of Contents 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 and six months ended June 30, 2023 and 2022. Total Revenue The following summarizes our total revenue (dollars in thousands): Three months ended June 30, Six months ended June 30, 2023 2022 Change 2023 2022 Change Rental (excluding reimbursable) $ 907,551 $ 759,825 $ 147,726 $ 1,773,259 $ 1,515,383 $ 257,876 Rental (reimbursable) 87,738 40,975 46,763 147,319 84,982 $ 62,337 Other 23,916 9,619 14,297 43,026 17,397 $ 25,629 Total revenue $ 1,019,205 $ 810,419 $ 208,786 $ 1,963,604 $ 1,617,762 $ 345,842 Rental Revenue (excluding reimbursable) The table below summarizes our rental revenue (excluding reimbursable) in the three and six months ended June 30, 2023 and 2022 (dollars in thousands): Number of Properties Three Months Ended June 30, Six months ended June 30, 2023 2022 Change 2023 2022 Change Properties acquired during 2023 & 2022 2,203 $ 186,693 $ 28,248 $ 158,445 $ 323,895 $ 34,237 $ 289,658 Same store rental revenue (1) 10,685 718,768 704,886 13,882 1,435,311 1,420,152 15,159 Constant currency adjustment (2) N/A (1,345) (937) (408) (5,258) 2,226 (7,484) Properties sold during and prior to 2023 243 135 5,537 (5,402) 1,193 11,907 (10,714) Straight-line rent and other non-cash adjustments N/A (7,912) 3,933 (11,845) (6,078) 12,188 (18,266) Vacant rents, development and other (3) 230 10,445 14,064 (3,619) 20,188 28,457 (8,269) Other excluded revenue (4) N/A 767 4,094 (3,327) 4,008 6,216 (2,208) Totals $ 907,551 $ 759,825 $ 147,726 $ 1,773,259 $ 1,515,383 $ 257,876 (1) Same store rental revenue increased by 2.0% and 1.1% for the three and six months ended June 30, 2023 as compared to the same periods in 2022, respectively. (2) For purposes of comparability, same store rental revenue is presented on a constant currency basis using the exchange rate as of June 30, 2023, of 1.27 British Pound Sterling ("GBP")/USD and 1.09 Euro ("EUR")/USD. None of the properties in Italy and Ireland met our same store pool definition for the periods presented. (3) Relates to the aggregate of (i) rental revenue from 203 properties that were available for lease during part of 2023 or 2022, and (ii) rental revenue for 27 properties under development or completed developments that do not meet our same store pool definition for the periods presented. (4) Primarily consists of reimbursements for tenant improvements and rental revenue that is not contractual base rent such as lease termination -33- Table of Contents 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 13,827 in-place leases in the portfolio, which excludes 196 vacant units, 11,636, 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 aforementioned rent provisions. Rent based on a percentage of our client's gross sales, or percentage rent, was $1.7 million in the three months ended June 30, 2023, $2.2 million for the three months ended June 30, 2022, $5.8 million for the six months ended June 30, 2023, and $6.0 million for the six months ended June 30, 2022. Percentage rent represents less than 1.0% of rental revenue. At June 30, 2023, our portfolio of 13,118 properties was 99.0% leased with 137 properties available for lease, as compared to 99.0% leased with 126 properties available for lease at December 31, 2022, and 98.9% leased with 132 properties available for lease at June 30, 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. 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 $46.8 million and $62.3 million for the three and six months ended June 30, 2023 as compared with the same periods in 2022, respectively, primarily due to higher recoverable real estate tax taxes from 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 $14.3 million and $25.6 million for the three and six months ended June 30, 2023 as compared to the same periods in 2022, respectively, due to a higher number of leases with above-market terms in recent acquisitions. Total Expenses The following summarizes our total expenses (in thousands): Three months ended June 30, Six months ended June 30, 2023 2022 Change 2023 2022 Change Depreciation and amortization $ 472,278 $ 409,437 $ 62,841 $ 923,755 $ 813,199 $ 110,556 Interest 183,857 110,121 73,736 337,989 216,524 121,465 Property (excluding reimbursable) 6,965 11,205 (4,240) 16,781 19,540 (2,759) Property (reimbursable) 87,738 40,975 46,763 147,319 84,982 62,337 General and administrative 36,829 34,139 2,690 70,996 66,838 4,158 Provisions for impairment 29,815 7,691 22,124 42,993 14,729 28,264 Merger and integration-related costs 341 2,729 (2,388) 1,648 9,248 (7,600) Total expenses $ 817,823 $ 616,297 $ 201,526 $ 1,541,481 $ 1,225,060 $ 316,421 Total revenue (1) $ 931,467 $ 769,444 $ 1,816,285 $ 1,532,780 General and administrative expenses as a percentage of total revenue (1) 4.0 % 4.4 % 3.9 % 4.4 % Property expenses (excluding reimbursable) as a percentage of total revenue (1) 0.7 % 1.5 % 0.9 % 1.3 % (1) Excludes rental revenue (reimbursable). -34- Table of Contents Depreciation and Amortization Depreciation and amortization increased by $62.8 million and $110.6 million for the three and six months ended June 30, 2023 as compared to the same periods in 2022, respectively, primarily due to overall portfolio growth from acquisitions. Interest Expense The following is a summary of the components of our interest expense (in thousands): Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Interest on our credit facility, commercial paper, term loans, notes, mortgages and interest rate swaps $ 197,321 $ 124,313 $ 365,287 $ 245,288 Credit facility commitment fees 1,313 1,226 2,642 2,163 Amortization of debt origination and deferred financing costs 6,497 3,280 12,568 6,403 (Gain) loss on interest rate swaps (1,799) 724 (3,600) 1,446 Amortization of net mortgage premiums (3,196) (3,530) (6,396) (7,091) Amortization of net note premiums (15,125) (15,683) (30,657) (31,423) Capital lease obligation 402 356 805 678 Interest capitalized (1,556) (565) (2,660) (940) Interest expense $ 183,857 $ 110,121 $ 337,989 $ 216,524 Credit facility, commercial paper, term loans, mortgages and notes Average outstanding balances $ 20,406,982 $ 15,944,510 $ 19,594,007 $ 15,629,159 Weighted average interest rates 3.84 % 3.08 % 3.71 % 3.10 % Interest expense increased by $73.7 million and $121.5 million for the three and six months ended June 30, 2023 as compared to the same periods in 2022, primarily due to higher average debt and weighted average interest. See notes to the accompanying consolidated financial statements additional information regarding our indebtedness. 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 and include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections and legal fees. Property expenses (excluding reimbursable) decreased $4.2 million and $2.8 million for the three and six months ended June 30, 2023 as compared with the same periods in 2022, respectively, primarily due to our decrease in property tax expense. 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 $46.8 million and $62.3 million for the three and six months ended June 30, 2023 as compared with the same periods in 2022, respectively, 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. General and administrative expenses increased $2.7 million and $4.2 million for the three and six months ended June 30, 2023 as compared with the same periods in 2022, respectively, 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): -35- Table of Contents 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 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 $0.3 million and $1.6 million of merger and integration-related transaction costs during the three and six months ended June 30, 2023, respectively, compared to approximately $2.7 million and $9.2 million during the three and six months ended June 30, 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 June 30, Six months ended June 30, 2023 2022 2023 2022 Number of properties sold 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 Foreign Currency and Derivative (Loss) Gain, 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. Net foreign currency and derivative (loss) gain, net for the three and six months ended June 30, 2023 was a loss of $2.6 million and a gain of $7.8 million, respectively, primarily due to foreign currency fluctuations on undesignated foreign currency exchange swap agreements. In June 2022, following the early prepayment of our Sterling-denominated intercompany loan receivable from our consolidated foreign subsidiaries, we terminated the four cross-currency swaps used to hedge the foreign currency exposure of the intercompany loan. As the hedge relationship was terminated and the future principal and interest associated with the prepaid intercompany loan will not occur, $20.0 million gain was reclassified from AOCI. The reclassification from AOCI was offset by $7.9 million in losses from the intercompany loan remeasurement on the final exchange. Equity in Income and Impairment of Investment in Unconsolidated Entities Equity in income of unconsolidated entities relates to three equity method investments acquired in our merger with VEREIT, Inc. in November 2021, which were all sold during 2022. The income for the three and six months ended June 30, 2023 is attributable to distributions in excess of our basis. Following the sale of the properties, distributions primarily result from the release of holdbacks from property sales, refunds from taxing authorities and distributions of operating cash. The loss for the three and six months ended June 30, 2022 is primarily driven by an other than temporary impairment of $7.8 million related to the sale of these investments. Other Income, Net Certain miscellaneous non-recurring revenue is included in other income, net. The increase of $0.2 million and $1.1 million for the three and six months ended June 30, 2023 as compared to the same periods in 2022, respectively, was primarily due to higher interest income earned on cash balances from an increase in interest rates. -36- Table of Contents Income Taxes Income taxes primarily consist of international income taxes accrued or paid by us and our subsidiaries, as well as to state and local taxes. The decrease of $1.7 million and $0.8 million in income taxes for the three and six months ended June 30, 2023, as compared to the same periods in 2022, is primarily attributable to lower UK tax rates. NON-GAAP FINANCIAL MEASURES 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 (gains) losses, net (as described in the Adjusted Funds from Operations section), and (viii) our proportionate share of adjustments 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. -37- 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 June 30, 2023 2022 Net income $ 197,153 $ 223,822 Interest 183,857 110,121 Gain on extinguishment of debt — (127) Income taxes 12,932 14,658 Depreciation and amortization 472,278 409,437 Provisions for impairment 29,815 7,691 Merger and integration-related costs 341 2,729 Gain on sales of real estate (7,824) (40,572) Foreign currency and derivative losses (gains), net 2,552 (7,480) Gain on settlement of foreign currency forwards — 2,106 Proportionate share of adjustments from unconsolidated entities (411) 9,049 Quarterly Adjusted EBITDA re $ 890,693 $ 731,434 Annualized Adjusted EBITDA re (1) $ 3,562,772 $ 2,925,736 Annualized Pro Forma Adjustments $ 87,712 $ 55,756 Annualized Pro Forma Adjusted EBITDA re $ 3,650,484 $ 2,981,492 Total debt per the consolidated balance sheets, excluding deferred financing costs and net premiums and discounts $ 19,538,466 $ 15,738,383 Proportionate share for unconsolidated entities debt, excluding deferred financing costs — 86,006 Less: Cash and cash equivalents (253,693) (172,849) Net Debt (2) $ 19,284,773 $ 15,651,540 Net Debt/Annualized Adjusted EBITDA re 5.4 x 5.3 x Net Debt/Annualized Pro Forma Adjusted EBITDA re 5.3 x 5.2 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 EBITDAre from properties we acquired or stabilized during the applicable quarter and remove Adjusted EBITDAre 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 EBITDAre calculation for the period indicated below (dollars in thousands): Three months ended June 30, 2023 2022 Annualized pro forma adjustments from properties acquired or stabilized $ 87,510 $ 56,048 Annualized pro forma adjustments from properties disposed 202 (292) Annualized Pro forma Adjustments $ 87,712 $ 55,756 -38- 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 June 30, Six months ended June 30, 2023 2022 % Change 2023 2022 % Change FFO available to common stockholders $ 688.0 $ 608.8 13.0 % $ 1,372.3 $ 1,210.2 13.4 % FFO per share (1) $ 1.02 $ 1.01 1.0 % $ 2.05 $ 2.02 1.5 % Normalized FFO available to common stockholders $ 688.3 $ 611.5 12.6 % $ 1,373.9 $ 1,219.5 12.7 % Normalized FFO per share (1) $ 1.02 $ 1.02 0.0 % $ 2.06 $ 2.04 1.0 % (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): -39- Table of Contents Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Net income available to common stockholders $ 195,415 $ 223,207 $ 420,431 $ 422,576 Depreciation and amortization 472,278 409,437 923,755 813,199 Depreciation of furniture, fixtures and equipment (297) (489) (839) (967) Provisions for impairment 29,815 7,691 42,993 14,729 Gain on sales of real estate (7,824) (40,572) (12,103) (50,728) Proportionate share of adjustments for unconsolidated entities (465) 9,860 (465) 12,095 FFO adjustments allocable to noncontrolling interests (937) (319) (1,496) (673) FFO available to common stockholders $ 687,985 $ 608,815 $ 1,372,276 $ 1,210,231 FFO allocable to dilutive noncontrolling interests 1,371 776 2,791 1,584 Diluted FFO $ 689,356 $ 609,591 $ 1,375,067 $ 1,211,815 FFO available to common stockholders $ 687,985 $ 608,815 $ 1,372,276 $ 1,210,231 Merger and integration-related costs 341 2,729 1,648 9,248 Normalized FFO available to common stockholders $ 688,326 $ 611,544 $ 1,373,924 $ 1,219,479 Normalized FFO allocable to dilutive noncontrolling interests 1,371 776 2,791 1,584 Diluted Normalized FFO $ 689,697 $ 612,320 $ 1,376,715 $ 1,221,063 FFO per common share Basic $ 1.02 $ 1.01 $ 2.06 $ 2.02 Diluted $ 1.02 $ 1.01 $ 2.05 $ 2.02 Normalized FFO per common share, basic and diluted $ 1.02 $ 1.02 $ 2.06 $ 2.04 Distributions paid to common stockholders $ 515,091 $ 445,829 $ 1,012,336 $ 884,109 FFO available to common stockholders in excess of distributions paid to common stockholders $ 172,894 $ 162,986 $ 359,940 $ 326,122 Normalized FFO available to common stockholders in excess of distributions paid to common stockholders $ 173,235 $ 165,715 $ 361,588 $ 335,370 Weighted average number of common shares used for FFO and Normalized FFO: Basic 674,109 601,672 667,357 597,778 Diluted 676,388 603,091 669,903 599,201 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. -40- 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 June 30, Six months ended June 30, 2023 2022 % Change 2023 2022 % Change AFFO available to common stockholders $ 671.7 $ 583.7 15.1 % $ 1,322.5 $ 1,163.8 13.6 % AFFO per share (1) $ 1.00 $ 0.97 3.1 % $ 1.98 $ 1.94 2.1 % (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): -41- Table of Contents Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Net income available to common stockholders $ 195,415 $ 223,207 $ 420,431 $ 422,576 Cumulative adjustments to calculate Normalized FFO (1) 492,911 388,337 953,493 796,903 Normalized FFO available to common stockholders 688,326 611,544 1,373,924 1,219,479 Gain on extinguishment of debt — (127) — (127) Amortization of share-based compensation 7,623 6,641 13,923 11,643 Amortization of net debt premiums and deferred financing costs (2) (10,509) (16,948) (24,197) (34,044) Non-cash (gain) loss on interest rate swaps (1,799) 724 (3,600) 1,446 Straight-line impact of cash settlement on interest rate swaps (3) 1,797 — 3,595 — Leasing costs and commissions (5,032) (794) (5,476) (3,167) Recurring capital expenditures (85) (173) (138) (186) Straight-line rent and expenses, net (33,963) (27,554) (70,448) (55,376) Amortization of above and below-market leases, net 19,670 16,402 37,028 30,044 Proportionate share of adjustments for unconsolidated entities — (2,090) — (4,154) Other adjustments (4) 5,709 (3,897) (2,145) (1,732) AFFO available to common stockholders $ 671,737 $ 583,728 $ 1,322,466 $ 1,163,826 AFFO allocable to dilutive noncontrolling interests 1,382 787 2,813 1,607 Diluted AFFO $ 673,119 $ 584,515 $ 1,325,279 $ 1,165,433 AFFO per common share: Basic 1.00 0.97 $ 1.98 $ 1.95 Diluted 1.00 0.97 $ 1.98 $ 1.94 Distributions paid to common stockholders $ 515,091 $ 445,829 $ 1,012,336 $ 884,109 AFFO available to common stockholders in excess of distributions paid to common stockholders $ 156,646 $ 137,899 $ 310,130 $ 279,717 Weighted average number of common shares used for computation per share: Basic 674,109 601,672 667,357 597,778 Diluted 676,388 603,091 669,903 599,201 (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 net premiums 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 are non-cash in nature, straight-line payments from cross-currency swaps, 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. -42- Table of Contents 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 June 30, 2023, out of the 13,118 properties that we owned or held interest in, 12,981 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: -43- Table of Contents Percentage of Total Portfolio Annualized Contractual Rent by Industry (1) As of Jun 30, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019 Convenience Stores 11.1% 8.6% 9.1% 11.9% 12.3% Grocery 9.9 10.0 10.2 9.8 7.9 Dollar Stores 7.1 7.4 7.5 7.6 7.9 Home Improvement 5.9 5.6 5.1 4.3 2.9 Drug Stores 5.8 5.7 6.6 8.2 8.8 Restaurants-Quick Service 5.5 6.0 6.6 5.3 5.8 Restaurants-Casual Dining 4.8 5.1 5.9 2.8 3.2 Health and Fitness 4.2 4.4 4.7 6.7 7.0 Automotive Service 4.0 4.0 3.2 2.7 2.6 General Merchandise 3.7 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, in Italy, starting in October 2022, and in Ireland, starting in June 2023. Property Type Composition The following table sets forth certain property type information regarding our property portfolio as of June 30, 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 12,722 166,983,000 $ 3,097,985 82.5 % Industrial 358 82,978,500 492,865 13.1 Gaming 1 3,096,700 100,000 2.7 Other (2) 37 2,411,200 64,592 1.7 Totals 13,118 255,469,400 $ 3,755,442 100.0 % (1) Includes leasable building square footage. Excludes 2,962 acres of leased land categorized as agriculture at June 30, 2023. (2) "Other" includes 27 properties classified as agriculture, consisting of approximately 0.3 million 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 $27.2 million in annualized contractual rent. -44- 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 June 30, 2023: Client Number of Leases Percentage of Total Portfolio Annualized Contractual Rent (1) Dollar General 1,579 3.8 % Walgreens 362 3.8 Dollar Tree / Family Dollar 1,162 3.3 7-Eleven 634 3.2 EG Group Limited 414 2.7 Wynn Resorts 1 2.7 FedEx 79 2.3 B&Q (Kingfisher) 45 1.9 Sainsbury's 35 1.9 LA Fitness 73 1.8 BJ's Wholesale Clubs 33 1.6 Lifetime Fitness 22 1.5 CVS Pharmacy 192 1.5 Wal-Mart / Sam's Club 67 1.5 Tractor Supply 184 1.4 Tesco 20 1.3 AMC Theaters 35 1.3 Red Lobster 200 1.2 Regal Cinemas (Cineworld) 35 1.1 Lowe's 40 1.1 Total 5,212 40.8 % (1) Amounts for each client are calculated independently; therefore, the individual percentages may not sum to the total. -45- 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 June 30, 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 290 4 2,399,900 $ 41,120 1.1 % 2024 640 30 11,722,100 135,249 3.6 2025 902 36 14,547,300 207,867 5.5 2026 842 33 16,660,200 197,022 5.2 2027 1,421 36 22,388,600 290,526 7.7 2028 1,470 54 27,542,000 331,018 8.8 2029 1,012 25 21,926,900 270,987 7.2 2030 585 20 15,789,100 187,762 5.0 2031 540 39 22,238,400 257,989 6.9 2032 969 33 17,739,300 255,151 6.8 2033 672 16 15,579,600 197,693 5.4 2034 578 7 10,565,900 221,600 5.9 2035 430 3 5,222,900 113,601 3.0 2036 424 8 7,737,200 140,243 3.7 2037 504 9 8,607,300 135,066 3.6 2038-2143 2,128 67 31,919,500 772,548 20.6 Totals 13,407 420 252,586,200 $ 3,755,442 100.0 % (1) Leases on our multi-client properties are counted separately in the table above. This table excludes 196 vacant units. -46- Table of Contents Geographic Diversification The following table sets forth certain geographic information regarding our property portfolio as of June 30, 2023 (dollars in thousands): Location Number of Properties Percent Leased Approximate Leasable Square Feet Percentage of Total Portfolio Annualized Contractual Rent Alabama 404 99 % 4,379,300 1.8 % Alaska 6 100 299,700 0.1 Arizona 253 100 3,996,100 1.9 Arkansas 256 100 2,775,000 1.0 California 351 99 12,415,900 5.6 Colorado 170 98 2,697,500 1.1 Connecticut 53 98 1,759,200 0.7 Delaware 24 100 141,100 0.1 Florida 880 99 10,528,000 5.3 Georgia 571 98 9,141,400 3.4 Hawaii 22 100 47,800 0.2 Idaho 27 100 189,100 0.1 Illinois 554 99 13,221,500 5.1 Indiana 427 99 8,197,900 2.6 Iowa 107 100 3,452,300 0.9 Kansas 193 99 4,690,400 1.0 Kentucky 372 99 6,288,400 1.6 Louisiana 353 100 5,275,400 2.0 Maine 85 99 1,208,700 0.6 Maryland 79 97 3,067,500 1.2 Massachusetts 207 100 6,672,000 4.8 Michigan 474 99 5,893,600 2.6 Minnesota 258 98 4,343,400 1.8 Mississippi 301 99 4,493,600 1.2 Missouri 388 98 5,393,400 1.9 Montana 24 100 223,100 0.1 Nebraska 79 99 1,122,500 0.3 Nevada 74 100 2,665,700 0.9 New Hampshire 54 98 667,300 0.5 New Jersey 146 97 2,282,900 1.5 New Mexico 108 100 1,343,500 0.5 New York 337 99 5,033,100 3.1 North Carolina 409 98 8,307,800 2.9 North Dakota 21 95 427,800 0.2 Ohio 714 99 15,990,500 4.1 Oklahoma 316 100 4,271,000 1.6 Oregon 41 100 650,400 0.4 Pennsylvania 346 97 6,241,500 2.4 Rhode Island 31 100 207,400 0.2 South Carolina 323 99 4,481,300 1.8 South Dakota 32 100 453,700 0.2 Tennessee 455 98 7,292,000 2.4 Texas 1,590 99 26,416,400 10.1 Utah 39 100 1,585,500 0.5 Vermont 18 100 173,500 0.1 Virginia 367 99 7,352,500 2.3 Washington 80 100 1,815,200 0.9 West Virginia 81 100 769,900 0.3 Wisconsin 286 100 6,577,200 2.0 Wyoming 23 100 157,700 0.1 Puerto Rico 6 100 59,400 0.1 United Kingdom 241 100 23,003,000 10.5 Spain 53 100 3,960,100 0.9 Italy 7 100 1,075,100 0.4 Ireland 2 100 294,200 0.1 Totals/average 13,118 99 % 255,469,400 100.0 % -47- Table of Contents 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.