REALTY INCOME CORP 10-Q

Item 1A: Risk Factors You should carefully consider the risks described below and those risks described in "Item 1A, Risk Factors" in Part I of our Annual Report on Form 10-K for the year ended December 31, 2022, as our business, financial condition and results of operations could be adversely affected by any of the risks and uncertainties described therein and herein. Risks Related to the Proposed Merger The announcement and pendency of the Merger may have an adverse effect on our business, operating results and price of our common stock. We are subject to risks in connection with the announcement and pendency of the Merger, including, but not limited to, the following: • Market reaction to the announcement and pendency of the Merger; • Changes in our business, operating results, market price of our common stock and prospects generally; • Market assessments of the likelihood that the Merger will be consummated; • The amount of consideration offered per share is based on a fixed exchange ratio, and will not be adjusted to account for changes in our or Spirit’s respective business, assets, liabilities, prospects, outlook, financial condition or results of operations, or any other changes, during the pendency of the Merger, including any change in the market price of, analyst estimates of, or projections relating to, our common stock or Spirit’s common stock; • Potential adverse effects on our relationships with our current clients, suppliers and other business partners, or those with which we are seeking to establish business relationships, due to uncertainties about the Merger; • We have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and many of these fees and costs are payable by us regardless of whether the Merger is consummated; • We may incur unexpected costs, liabilities or delays in connection with or with respect to the Merger; • Potential adverse effects to our ability to raise capital during the pendency of the Merger, or the impact of the Merger on our or Spirit’s existing or future indebtedness, or our ability to assume such indebtedness on favorable terms, or at all; • Potential adverse effects on our ability to attract, recruit, retain and motivate current and prospective employees who may be uncertain about their future roles and relationships with us following the completion of the Merger, and the possibility that our employees could lose productivity as a result of uncertainty regarding their employment following the Merger; • The pendency and outcome of any legal proceedings that may be instituted against us, our directors, executive officers and others relating to the transactions contemplated by the Merger Agreement; -49- Table of Contents • The inherent risks, costs and uncertainties associated with integrating the operations successfully and risks of not achieving all or any of the anticipated benefits of the Merger, or the risk that the anticipated benefits of the Merger may not be fully realized or take longer to realize than expected; • Competitive pressures in the markets in which we and Spirit operate; • Potential restrictions on the conduct of our business prior to the completion of the Merger pursuant to the terms of the Merger Agreement; • The inability for our stockholders to realize the anticipated benefits of the Merger; • The occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; and • The possibility of disruption to our business, including increased costs and diversion of management time and resources that could otherwise have been devoted to other opportunities that may have been beneficial to us. Any of these risks could adversely affect our results of operations, financial condition and business prospects. The Merger may not be completed on the terms or timeline currently contemplated, or at all. Completion of the Merger is subject to many conditions and if these conditions are not satisfied or waived, the Merger will not be completed, which could adversely affect our operations . The closing of the Merger is subject to certain conditions, including: (1) approval by Spirit’s stockholders of the Merger; (2) the effectiveness of the registration statement on Form S-4 to be filed with the SEC by us in connection with the transactions contemplated by the Merger Agreement; (3) approval for listing on the New York Stock Exchange (“NYSE”) of the shares of our common stock and our Series A Preferred Stock to be issued in the Merger or reserved for issuance in connection therewith; (4) no injunction or law prohibiting the Merger; (5) accuracy of each party’s representations, subject in most cases to materiality or material adverse effect qualifications; (6) compliance by each party with its covenants in all material respects; (7) with respect to the other party, there not having occurred since the date of the Merger Agreement any event, development, change or occurrence that has had or would reasonably be expected to have had, individually or in the aggregate, a material adverse effect; (8) receipt by each of us and Spirit of an opinion to the effect that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and (9) receipt by Spirit of an opinion that we qualify as a REIT under the Code and receipt by us of an opinion that Spirit qualifies as a REIT under the Code. We cannot provide assurance that these conditions to completing the Merger will be satisfied or waived, and accordingly, that the Merger will be completed on the terms or timeline that the parties anticipate or at all. Failure to consummate the Merger may adversely affect our results of operations, financial condition and business prospects for many reasons, including, among others: (i) we will have incurred substantial costs relating to the Merger, such as legal, accounting, financial advisor, filing, printing and mailing fees and integration costs that have already been incurred or will continue to be incurred until the closing of the Merger, which could adversely affect our financial conditions, results of operations and ability to make distributions to its stockholders and to pay the principal of and interest on its debt securities and other indebtedness; (ii) the Merger, whether or not it closes, will divert the attention of our management instead of enabling it to more fully pursue other opportunities that could be beneficial to us, without realizing any of the benefits of having completed the Merger or the other transactions contemplated by the Merger Agreement; and (iii) any reputational harm due to the adverse perception of any failure to successfully complete the Merger. Our common stockholders will be diluted by the Merger, if consummated. The Merger will dilute the ownership position of our common stockholders. Additionally, upon the closing of the Merger, we will issue 6,900,000 shares of Series A Preferred Stock, which, in certain circumstances, can be converted into our common stock. Consequently, our common stockholders, as a general matter, will have less voting control and influence over our management and policies after the effective time of the Merger than they currently exercise over our management and policies. Potential litigation instituted against us, Spirit or our respective directors challenging the proposed Merger may prevent the Merger from becoming effective within the expected timeframe or at all. Potential litigation related to the Merger may result in injunctive or other relief prohibiting, delaying or otherwise adversely affecting the parties’ ability to complete the Merger. Such relief may prevent the Merger from becoming effective within the expected timeframe or at all. In addition, defending against such claims may be expensive and -50- Table of Contents divert management’s attention and resources, which could adversely affect the respective businesses of us and Spirit. We expect to incur substantial expenses related to the Merger and the transactions contemplated by the Merger Agreement. We expect to incur substantial expenses in completing the Merger and integrating the operations of Spirit with ours. There are a large number of systems that must be integrated, separated or terminated in connection with the Merger, and the other transactions contemplated by the Merger Agreement, including leasing, billing, management information, purchasing, accounting and finance, sales, payroll and benefits, fixed asset, lease administration and regulatory compliance. While we have assumed that a certain level of transaction, integration and termination expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of the expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. The expenses in connection with the Merger and the transactions contemplated by the Merger Agreement are expected to be significant, although the aggregate amount and timing of such charges are uncertain. Following the Merger, if consummated, we may be unable to integrate the operations of Spirit successfully, or realize the anticipated synergies and related benefits of the Merger and the transactions contemplated by the Merger Agreement or do so within the anticipated time frame. The Merger involves the combination of two companies which currently operate as independent public companies. We will be required to devote significant management attention and resources to integrating the operations of Spirit. Potential difficulties we may encounter in the integration process include the following: • the inability to successfully combine Spirit’s operations with ours in a manner that permits the combined company to achieve the cost savings anticipated to result from the Merger, which would result in some anticipated benefits of the Merger not being realized in the time frame anticipated or at all; • lost sales and clients as a result of certain clients of either of us or Spirit deciding not to do business with the combined company; • the continued complexities associated with managing a multi-national combined company, integrating certain personnel from the two companies, and the potential complexities associated with the separation of personnel; • the complexities with combining two companies; • the failure to retain key employees of either of the two companies; • potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Merger and the transactions contemplated by the Merger Agreement; and • performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the Merger and integrating Spirit's operations with ours. For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with clients, customers, vendors, joint venture partners and employees or to achieve the anticipated benefits of the Merger, or could otherwise adversely affect our business and financial results.