Edgar Filing: REALTY INCOME CORP

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

ý Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2018, or

o Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-13374

REALTY INCOME CORPORATION

(Exact name of registrant as specified in its charter)

Maryland

33-0580106

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer Identification

Number)

11995 El Camino Real, San Diego, California 92130

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (858) 284-5000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

There were 295,116,368 shares of common stock outstanding as of October 25, 2018.

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REALTY INCOME CORPORATION

Index to Form 10-Q

September 30, 2018


PART I.	FINANCIAL INFORMATION	Page
Item 1:	Financial Statements

	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Forward-Looking Statements	20
	The Company	20
	Recent Developments	23
	Liquidity and Capital Resources	27
	Results of Operations	32
	Funds from Operations Available to Common Stockholders (FFO)	39
	Adjusted Funds from Operations Available to Common Stockholders (AFFO)	40
	Property Portfolio Information	41
	Impact of Inflation	47
	Impact of Recent Accounting Pronouncements	47
	Other Information	47

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4:	Controls and Procedures	50

PART II.	OTHER INFORMATION

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	50

Ite m 6:	Exhibits	50

SIGNATURE		54

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)


	September 30, 2018		December 31, 2017
ASSETS	(unaudited)
Real estate, at cost:
Land	$	4,562,343	$	4,080,400
Buildings and improvements	11,666,564		10,936,069
Total real estate, at cost	16,228,907		15,016,469
Less accumulated depreciation and amortization	(2,607,309)		(2,346,644)
Net real estate held for investment	13,621,598		12,669,825
Real estate held for sale, net	65,376		6,674
Net real estate	13,686,974		12,676,499
Cash and cash equivalents	6,666		6,898
Accounts receivable, net	135,866		119,533
Acquired lease intangible assets, net	1,212,679		1,194,930
Goodwill	14,861		14,970
Other assets, net	38,279		45,336
Total assets	$	15,095,325	$	14,058,166

LIABILITIES AND EQUITY
Distributions payable	$	65,749	$	60,799
Accounts payable and accrued expenses	119,144		109,523
Acquired lease intangible liabilities, net	309,665		268,796
Other liabilities	109,854		116,869
Line of credit payable	774,000		110,000
Term loans, net	319,571		445,286
Mortgages payable, net	310,206		325,941
Notes payable, net	5,375,882		5,230,244
Total liabilities	7,384,071		6,667,458
Commitments and contingencies
Stockholders’ equity:
Common stock and paid in capital, par value $0.01 per share, 370,100,000 shares authorized, 295,145,532 shares issued and outstanding as of September 30, 2018 and 284,213,685 shares issued and outstanding as of December 31, 2017	10,220,092		9,624,264
Distributions in excess of net income	(2,543,852)		(2,252,763)
Total stockholders’ equity	7,676,240		7,371,501
Noncontrolling interests	35,014		19,207
Total equity	7,711,254		7,390,708
Total liabilities and equity	$	15,095,325	$	14,058,166

The accompanying notes to consolidated financial statements are an integral part of these statements.

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share data) (unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2018		2017		2018		2017
REVENUE
Rental	$	324,773	$	293,455	$	945,191	$	867,325
Tenant reimbursements	12,479		11,933		35,174		34,918
Other	829		1,532		4,897		2,872
Total revenue	338,081		306,920		985,262		905,115

EXPENSES
Depreciation and amortization	136,967		127,569		402,069		371,755
Interest	69,342		62,951		195,385		185,935
General and administrative	16,332		13,881		49,970		43,227
Property (including reimbursable)	15,806		17,267		48,594		52,828
Income taxes	1,302		1,133		3,733		2,621
Provisions for impairment	6,862		365		25,034		8,072
Total expenses	246,611		223,166		724,785		664,438
Gain on sales of real estate	7,813		4,319		18,818		17,689
Net income	99,283		88,073		279,295		258,366
Net income attributable to noncontrolling interests	(284)		(133)		(753)		(420)
Net income attributable to the Company	98,999		87,940		278,542		257,946
Preferred stock dividends	—		—		—		(3,911)
Excess of redemption value over carrying value of preferred shares redeemed	—		—		—		(13,373)
Net income available to common stockholders	$	98,999	$	87,940	$	278,542	$	240,662

Amounts available to common stockholders per common share:
Net income, basic and diluted	$	0.34	$	0.32	$	0.97	$	0.89
Weighted average common shares outstanding:
Basic	290,664,368		275,511,870		286,599,191		270,584,365
Diluted	291,207,186		276,050,671		287,105,285		271,126,114

The accompanying notes to consolidated financial statements are an integral part of these statements.

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands) (unaudited)


	Nine months ended September 30,
	2018		2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	279,295	$	258,366
Adjustments to net income:
Depreciation and amortization	402,069		371,755
Amortization of share-based compensation	12,527		10,641
Non-cash revenue adjustments	(5,781)		(2,783)
Amortization of net premiums on mortgages payable	(1,167)		(1,580)
Amortization of deferred financing costs	5,337		6,819
Gain on interest rate swaps	(3,064)		(1,228)
Gain on sales of real estate	(18,818)		(17,689)
Provisions for impairment on real estate	25,034		8,072
Change in assets and liabilities
Accounts receivable and other assets	(1,540)		(892)
Accounts payable, accrued expenses and other liabilities	(4,050)		10,067
Net cash provided by operating activities	689,842		641,548
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in real estate	(1,437,377)		(964,719)
Improvements to real estate, including leasing costs	(22,432)		(11,834)
Proceeds from sales of real estate	83,024		69,486
Insurance proceeds received	7,121		12,746
Collection of loans receivable	5,267		92
Non-refundable escrow deposits for pending acquisitions	(3,275)		—
Net cash used in investing activities	(1,367,672)		(894,229)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions to common stockholders	(564,747)		(509,987)
Cash dividends to preferred stockholders	—		(6,168)
Borrowings on line of credit	1,670,000		1,189,000
Payments on line of credit	(1,006,000)		(1,651,000)
Principal payment on term loan	(125,866)		—
Proceeds from notes and bonds payable issued	497,500		711,812
Principal payment on notes payable	(350,000)		(175,000)
Principal payments on mortgages payable	(14,608)		(123,524)
Redemption of preferred stock	—		(408,750)
Proceeds from common stock offerings, net	—		704,938
Proceeds from dividend reinvestment and stock purchase plan	6,966		67,813
Proceeds from At-the-Market (ATM) program	588,860		487,998
Distributions to noncontrolling interests	(1,391)		(1,652)
Debt issuance costs	(4,436)		(6,663)
Other items, including shares withheld upon vesting	(14,862)		(11,455)
Net cash provided by financing activities	681,416		267,362
Net increase in cash, cash equivalents and restricted cash	3,586		14,681
Cash, cash equivalents and restricted cash, beginning of period	12,142		15,681
Cash, cash equivalents and restricted cash, end of period	$	15,728	$	30,362

For supplemental disclosures, see note 17.

The accompanying notes to consolidated financial statements are an integral part of these statements.

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REALTY INCOME CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(unaudited)

1. Management Statement

The consolidated financial statements of Realty Income Corporation (“Realty Income”, the “Company”, “we”, “our” or “us”) were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. Readers of this quarterly report should refer to our audited consolidated financial statements for the year ended December 31, 2017, which are included in our 2017 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.

At September 30, 2018 we owned 5,694 properties, located in 49 states and Puerto Rico, containing over 92.7 million leasable square feet.

2. Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements

A. The accompanying consolidated financial statements include the accounts of Realty Income and other subsidiaries for which we make operating and financial decisions (i.e., control), after elimination of all material intercompany balances and transactions. We consolidate entities that we control and record a noncontrolling interest for the portion that we do not own. Noncontrolling interest that was created or assumed as part of a business combination was recognized at fair value as of the date of the transaction (see note 11). We have no unconsolidated investments.

B. We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended. We believe we have qualified and continue to qualify as a REIT. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income. Assuming our dividends equal or exceed our taxable net income, we generally will not be required to pay federal corporate income taxes on such income. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements, except for federal income taxes of our taxable REIT subsidiaries. The income taxes recorded on our consolidated statements of income represent amounts paid by Realty Income and its subsidiaries for city and state income and franchise taxes.

C. We assign a portion of goodwill to our applicable property sales, which results in a reduction of the carrying amount of our goodwill. In order to allocate goodwill to the carrying amount of properties that we sell, we utilize a relative fair value approach based on the original methodology for assigning goodwill. As we sell properties, our goodwill will likely continue to gradually decrease over time. Based on our analysis of goodwill during the second quarters of 2018 and 2017, we determined there was no impairment on our existing goodwill.

D. In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers. This ASU, as amended by ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, outlines a comprehensive model for companies to use in accounting for revenue arising from contracts with customers, and will apply to transactions such as the sale of real estate. This ASU, which is effective for interim and annual periods beginning after December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also to provide certain additional disclosures. We adopted this standard effective as of January 1, 2018 and utilized the cumulative effect transition method of adoption. The adoption of this guidance did not have a material impact on our financial position or results of operations.

E. In February 2016, the FASB issued ASU 2016-02 (Topic 842, Leases), as clarified and amended by ASU 2018-01, which amended Topic 840, Leases. Under this amended topic, the accounting applied by a lessor is largely unchanged from that applied under Topic 840, Leases. The large majority of operating leases should remain classified as operating leases, and lessors should continue to recognize lease income for those leases on a generally straight-line basis over the lease term. Although primarily a lessor, we are also a lessee under several ground lease arrangements. Upon adoption, we will recognize lease obligations for ground leases with a

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corresponding right of use asset, and are currently evaluating other impacts this amendment may have on our consolidated financial statements. The amendments included in this topic are effective, for interim and annual periods beginning after December 15, 2018. We plan to adopt this standard when it becomes effective beginning January 1, 2019, and we expect to elect the practical expedients available for implementation under the standard.

3. Supplemental Detail for Certain Components of Consolidated Balance Sheets (dollars in thousands)


A.	Acquired lease intangible assets, net, consist of the following at:	September 30, 2018		December 31, 2017
	Acquired in-place leases	$	1,311,676	$	1,272,897
	Accumulated amortization of acquired in-place leases	(521,014)		(444,221)
	Acquired above-market leases	571,341		487,933
	Accumulated amortization of acquired above-market leases	(149,324)		(121,679)
		$	1,212,679	$	1,194,930


B.	Other assets, net, consist of the following at:	September 30, 2018		December 31, 2017
	Prepaid expenses	$	16,250	$	12,851
	Impounds related to mortgages payable	7,529		4,565
	Corporate assets, net	5,825		6,074
	Non-refundable escrow deposits for pending acquisitions	3,275		7,500
	Credit facility origination costs	2,206		4,366
	Restricted escrow deposits	1,533		679
	Receivable for property rebuilds	—		3,919
	Notes receivable issued in connection with property sales	—		5,267
	Other items	1,661		115
		$	38,279	$	45,336


C.	Distributions payable consist of the following declared distributions at:	September 30, 2018		December 31, 2017
	Common stock distributions	$	65,597	$	60,713
	Noncontrolling interests distributions	152		86
		$	65,749	$	60,799


D.	Accounts payable and accrued expenses consist of the following at:	September 30, 2018		December 31, 2017
	Notes payable - interest payable	$	57,664	$	64,058
	Property taxes payable	23,632		11,718
	Accrued costs on properties under development	4,044		2,681
	Mortgages, term loans, credit line - interest payable and interest rate swaps	3,859		2,360
	Other items	29,945		28,706
		$	119,144	$	109,523


E.	Acquired lease intangible liabilities, net, consist of the following at:	September 30, 2018		December 31, 2017
	Acquired below-market leases	$	398,011	$	340,906
	Accumulated amortization of acquired below-market leases	(88,346)		(72,110)
		$	309,665	$	268,796


F.	Other liabilities consist of the following at:	September 30, 2018		December 31, 2017
	Rent received in advance and other deferred revenue	$	98,085	$	105,284
	Security deposits	6,211		6,259
	Capital lease obligations	5,558		5,326
		$	109,854	$	116,869

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4. Investments in Real Estate

We acquire land, buildings and improvements necessary for the successful operations of commercial tenants.

A. Acquisitions During the First Nine Months of 2018 and 2017

During the first nine months of 2018, we invested $1.47 billion in 591 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.3%. The 591 new properties and properties under development or expansion are located in 37 states, will contain approximately 4.3 million leasable square feet, and are 100% leased with a weighted average lease term of 14.4 years. The tenants occupying the new properties operate in 20 industries and the property types consist of 96.1% retail and 3.9% industrial, based on rental revenue. None of our investments during 2018 caused any one tenant to be 10% or more of our total assets at September 30, 2018.

The $1.47 billion invested during the first nine months of 2018 was allocated as follows: $535.7 million to land, $846.1 million to buildings and improvements, $112.5 million to intangible assets related to leases, and $28.9 million to intangible liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with these acquisitions.

The properties acquired during the first nine months of 2018 generated total revenues of $31.4 million and net income of $16.8 million during the nine months ended September 30, 2018.

In comparison, during the first nine months of 2017, we invested $956.9 million in 177 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.5%. The 177 new properties and properties under development or expansion were located in 35 states, contained approximately 4.3 million leasable square feet, and were 100% leased with a weighted average lease term of 14.9 years. The tenants occupying the new properties operated in 21 industries and the property types consisted of 96.6% retail and 3.4% industrial, based on rental revenue.

The $956.9 million invested during the first nine months of 2017 was allocated as follows: $235.4 million to land, $582.7 million to buildings and improvements, $154.3 million to intangible assets related to leases, and $15.5 million to intangible liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with these acquisitions.

The properties acquired during the first nine months of 2017 generated total revenues of $19.7 million and net income of $9.4 million during the nine months ended September 30, 2017.

The initial weighted average contractual lease rate for a property is generally computed as estimated contractual net operating income, which, in the case of a net leased property, is equal to the aggregate base rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that a tenant could default on the payment of contractual rent, we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above.

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 contractual lease rate is computed as follows: estimated 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. Of the $1.47 billion we invested during the first nine months of 2018, $69.7 million was invested in 11 properties under development or expansion with an initial weighted average contractual lease rate of 6.8%. Of the $956.9 million we invested during the first nine months of 2017, $16.4 million was invested in 13 properties under development or expansion with an initial weighted average contractual lease rate of 7.3%.

B. Investments in Existing Properties

During the first nine months of 2018 , we capitalized costs of $12.3 million on existing properties in our portfolio, consisting of $2.8 million for re-leasing costs, $529,000 for recurring capital expenditures and $8.9 million for non-recurring building improvements. In comparison, during the first nine months of 2017, we capitalized costs of $9.5 million on existing properties in our portfolio, consisting of $1.2 million for re-leasing costs, $536,000 for recurring capital expenditures and $7.8 million for non-recurring building improvements.

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C. Properties with Existing Leases

Of the $1.47 billion we invested during the first nine months of 2018, approximately $307.5 million was used to acquire 147 properties with existing leases. In comparison, of the $956.9 million we invested during the first nine months of 2017, approximately $562.1 million was used to acquire 68 properties with existing leases. The value of the in-place and above-market leases is recorded to acquired lease intangible assets, net on our consolidated balance sheets, and the value of the below-market leases is recorded to acquired 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 first nine months of 2018 and 2017 were $79.8 million and $79.1 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 on our consolidated statements of income. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for the first nine months of 2018 and 2017 were $12.4 million and $10.2 million, respectively. If a lease was to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense, as appropriate.

The following table presents the estimated impact during the next five years and thereafter related to the amortization of the acquired above-market and below-market lease intangibles and the amortization of the in-place lease intangibles at September 30, 2018 (in thousands):


	Net decrease to rental revenue		Increase to amortization expense
2018	$	(4,388)	$	26,568
2019	(17,043)		98,078
2020	(16,314)		92,326
2021	(15,075)		84,355
2022	(13,369)		72,765
Thereafter	(46,164)		416,571
Totals	$	(112,352)	$	790,662

5. Credit Facility

At September 30, 2018, we had a $2.0 billion unsecured revolving credit facility, or our credit facility, with an initial term that expired in June 2019 and included, at our option, two six-month extensions. Our credit facility had a $1.0 billion accordion expansion option. Under our credit facility, our investment grade credit ratings as of September 30, 2018 provided for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 0.85% with a facility commitment fee of 0.125%, for all-in drawn pricing of 0.975% over LIBOR. The borrowing rate was subject to an interest rate floor and could change if our investment grade credit ratings changed. We also had other interest rate options available to us under our credit facility. Our credit facility was unsecured and, accordingly, we did not pledge any assets as collateral for this obligation.

In October 2018, we entered into a new $3.25 billion unsecured credit facility to amend and restate our credit facility. For more information, please see note 21.

At September 30, 2018, credit facility origination costs of $2.2 million are included in other assets, net on our consolidated balance sheet. These costs were being amortized over the remaining term of our credit facility.

At September 30, 2018, we had a borrowing capacity of approximately $1.2 billion available on our credit facility (subject to customary conditions to borrowing) and an outstanding balance of $774.0 million, as compared to an outstanding balance of $110.0 million at December 31, 2017.

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The weighted average interest rate on outstanding borrowings under our credit facility was 2.8% during the first nine months of 2018 and 1.9% during the first nine months of 2017. At September 30, 2018 and December 31, 2017, the weighted average interest rate on outstanding borrowings under our credit facility was 3.1% and 4.5%, respectively.

Our credit facility is subject to various leverage and interest coverage ratio limitations, and at September 30, 2018, we were in compliance with the covenants on our credit facility.

6. Term Loans

In December 2017, in conjunction with the acquisition of a portfolio of properties, we entered into a $125.9 million promissory note, which was paid in full at maturity in January 2018. Borrowings under this note bore interest at 1.52%.

In June 2015, in conjunction with entering into our credit facility, we entered into a $250.0 million senior unsecured term loan maturing on June 30, 2020. Borrowing under this term loan bears interest at the current one-month LIBOR, plus 0.90%. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest rate on this term loan at 2.62%.

In January 2013, in conjunction with our acquisition of American Realty Capital Trust, Inc., or ARCT, we entered into a $70.0 million senior unsecured term loan with an initial maturity date of January 2018. Borrowing under this term loan bore interest at the current one-month LIBOR, plus 1.10%. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixed our per annum interest rate on this term loan at 2.05%. In January 2018, we entered into a six-month extension of this loan, which included, at our option, two additional six-month extensions. In June 2018, we exercised our first six-month extension of this loan, which now matures in January 2019. Borrowing during the extension periods bears interest at the current one-month LIBOR, plus 0.90%. The interest rate swap terminated upon the initial maturity in January 2018.

Deferred financing costs of $1.2 million incurred in conjunction with the $250.0 million term loan and $368,000 incurred in conjunction with the $70.0 million term loan are being amortized over the remaining terms of each respective term loan. The net balance of these deferred financing costs, which was $429,000 at September 30, 2018, and $580,000 at December 31, 2017, is included within term loans, net on our consolidated balance sheets.

In October 2018, in connection with our entry into our new $3.25 billion unsecured credit facility, we entered into an additional $250.0 million senior unsecured term loan. For more information, please see note 21.

7. Mortgages Payable

During the first nine months of 2018, we made $14.6 million in principal payments, including the repayment of one mortgage in full for $11.0 million. During the first nine months of 2017, we made $123.5 million in principal payments, including the repayment of seven mortgages in full for $118.6 million. No mortgages were assumed during the first nine months of 2018 or 2017. The assumed mortgages are secured by the properties on which the debt was placed and are considered non-recourse debt with limited customary exceptions for items such as solvency, bankruptcy, misrepresentation, fraud, misapplication of payments, environmental liabilities, failure to pay taxes, insurance premiums, liens on the property, violations of the single purpose entity requirements, and uninsured losses. We expect to pay off our outstanding mortgages as soon as prepayment penalties make it economically feasible to do so.

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 September 30, 2018, 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 $196,000 at September 30, 2018 and $236,000 at December 31, 2017. These costs are being amortized over the remaining term of each mortgage.

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The following is a summary of all our mortgages payable as of September 30, 2018 and December 31, 2017, respectively (dollars in thousands):


As Of	Number of Properties ⁽¹⁾	Weighted Average Stated Interest Rate ⁽²⁾		Weighted Average Effective Interest Rate ⁽³⁾		Weighted Average Remaining Years Until Maturity	Remaining Principal Balance		Unamortized Premium and Deferred Financing Costs Balance, net		Mortgage Payable Balance
9/30/2018	61	5.1	%	4.6	%	3.4	$	305,674	$	4,532	$	310,206
12/31/2017	62	5.0	%	4.4	%	4.0	$	320,283	$	5,658	$	325,941

⁽¹⁾At September 30, 2018, there were 27 mortgages on 61 properties. At December 31, 2017, there were 28 mortgages on 62 properties. The mortgages require monthly payments with principal payments due at maturity. The mortgages are at fixed interest rates, except for three mortgages on three properties totaling $29.4 million and $29.9 million at September 30, 2018 and December 31, 2017, respectively. After factoring in arrangements which limit our exposure to interest rate risk and effectively fix our per annum interest rates, our mortgage debt subject to variable rates totals $22.1 million at September 30, 2018 and $22.4 million at December 31, 2017.

⁽²⁾Stated interest rates ranged from 3.8% to 6.9% at September 30, 2018, while stated interest rates ranged from 3.4% to 6.9% at December 31, 2017.

⁽³⁾Effective interest rates ranged from 1.6% to 6.1% at September 30, 2018, while effective interest rates ranged from 2.6% to 5.5% at December 31, 2017.

The following table summarizes the maturity of mortgages payable, excluding net premiums of $4.7 million and deferred financing costs of $196,000, as of September 30, 2018 (dollars in millions):


Year of Maturity	Principal
2018	$	7.3
2019	20.7
2020	82.4
2021	67.0
2022	109.7
Thereafter	18.6
Totals	$	305.7

8. Notes Payable

A. General

Our senior unsecured notes and bonds consist of the following, sorted by maturity date (dollars in millions):


	September 30, 2018		December 31, 2017
2.000% notes, issued in October 2012 and due in January 2018	$	—	$	350
5.750% notes, issued in June 2010 and due in January 2021	250		250
3.250% notes, $450 issued in October 2012 and $500 issued in December 2017, both due in October 2022	950		950
4.650% notes, issued in July 2013 and due in August 2023	750		750
3.875% notes, issued in June 2014 and due in July 2024	350		350
3.875% notes, issued in April 2018 and due in April 2025	500		—
4.125% notes, $250 issued in September 2014 and $400 issued in March 2017, both due in October 2026	650		650
3.000% notes, issued in October 2016 and due in January 2027	600		600
3.650% notes, issued in December 2017 and due in January 2028	550		550
5.875% bonds, $100 issued in March 2005 and $150 issued in June 2011, both due in March 2035	250		250
4.650% notes, $300 issued in March 2017 and $250 issued in December 2017, both due in March 2047	550		550
Total principal amount	5,400		5,250
Unamortized net original issuance premiums and deferred financing costs	(24)		(20)
	$	5,376	$	5,230

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The following table summarizes the maturity of our notes and bonds payable as of September 30, 2018, excluding net unamortized original issuance premiums and deferred financing costs (dollars in millions):


Year of Maturity	Principal



2021	$	250
2022	950
Thereafter	4,200
Totals	$	5,400

As of September 30, 2018, the weighted average interest rate on our notes and bonds payable was 4.0% and the weighted average remaining years until maturity was 9.0 years.

B. Note Repayment

In January 2018, we repaid our $350.0 million of outstanding 2.000% notes, plus accrued and unpaid interest upon maturity.

C. Note Issuances

In April 2018, we issued $500.0 million of 3.875% senior unsecured notes due 2025, or the 2025 Notes. The public offering price for the 2025 Notes was 99.50% of the principal amount, for an effective yield to maturity of 3.957%. The net proceeds of approximately $493.1 million from this offering were used to repay borrowings outstanding under our credit facility, to fund investment opportunities, and for other general corporate purposes.

In March 2017, we issued $300.0 million of 4.650% senior unsecured notes due 2047, or the 2047 Notes, and $400.0 million of 4.125% senior unsecured notes due 2026, or the 2026 Notes. The public offering price for the 2047 Notes was 99.97% of the principal amount for an effective yield to maturity of 4.65%. The public offering price for the 2026 Notes was 102.98% of the principal amount for an effective yield to maturity of 3.75%. The 2026 Notes constituted a further issuance of, and formed a single series with, the $250.0 million aggregate principal amount of senior notes due 2026, issued in September 2014. The net proceeds of approximately $705.2 million from the offerings were used to repay borrowings outstanding under our credit facility to fund investment opportunities, and for other general corporate purposes.

9. Issuances of Common Stock

A. Issuances of Common Stock in an Overnight Offering

In March 2017, we issued 11,850,000 shares of common stock in an overnight offering. After underwriting discounts and other offering costs of $29.8 million, the net proceeds of $704.9 million were used to repay borrowings under our credit facility.

B. Dividend Reinvestment and Stock Purchase Plan

Our Dividend Reinvestment and Stock Purchase Plan, or 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 common stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions. Our DRSPP authorizes up to 26,000,000 common shares to be issued. During the first nine months of 2018, we issued 131,072 shares and raised approximately $7.0 million under our DRSPP. During the first nine months of 2017, we issued 1,155,883 shares and raised approximately $67.8 million under our DRSPP. From the inception of our DRSPP through September 30, 2018, we have issued 14,194,614 shares and raised approximately $668.8 million.

Our DRSPP includes a waiver approval process, allowing larger investors or institutions, per a formal approval process, to purchase shares at a small discount, if approved by us. We did not issue shares under the waiver approval process during the first nine months of 2018. During the first nine months of 2017, we issued 927,695 shares and raised $54.7 million under the waiver approval process. These shares are included in the total activity for the first nine months of 2017 noted in the preceding paragraph.

C. At-the-Market (ATM) Programs

In October 2017, following the issuance and sale of the initial 12,000,000 shares under our prior "at-the-market" equity distribution plan, we established a new “at-the-market” equity distribution plan, or our ATM program, pursuant to which we are permitted to offer and sell up to 17,000,000 additional shares of common stock to, or through, a

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consortium of banks acting as our sales agents by means of ordinary brokers’ transactions on the NYSE at prevailing market prices or at negotiated prices. During the first nine months of 2018, we issued 10,630,616 shares and raised approximately $588.9 million under the ATM program. During the first nine months of 2017, we issued 8,506,559 shares and raised approximately $488.0 million under the ATM program. From the inception of our ATM programs through September 30, 2018, we have issued 25,038,145 shares authorized by our ATM programs and raised approximately $1.4 billion.

10. Redemption of Preferred Stock

In April 2017, we redeemed all of the 16,350,000 shares of our 6.625% Monthly Income Class F Preferred Stock, or the Class F preferred stock, for $25 per share, plus accrued dividends. We issued an irrevocable notice of redemption with respect to the Class F preferred stock in March 2017, and, as a result, we incurred a non-cash charge of $13.4 million for the first nine months of 2017, representing the Class F preferred stock original issuance costs that we paid in 2012.

11. Noncontrolling Interests

In January 2013, we completed our acquisition of ARCT. Equity issued as consideration for this transaction included common and preferred partnership units issued by Tau Operating Partnership, L.P., or Tau Operating Partnership, the consolidated subsidiary which owns properties acquired through the ARCT acquisition. We and our subsidiaries hold a 99.4% interest in Tau Operating Partnership, and consolidate the entity.

In June 2013, we completed the acquisition of a portfolio of properties by issuing common partnership units in Realty Income, L.P. as consideration for the acquisition. Additionally, in March and April 2018, we completed the acquisition of an additional portfolio of properties, by paying both cash and by issuing additional common partnership units in Realty Income, L.P as consideration for the acquisitions. At September 30, 2018, the remaining units from these issuances represent a 1.5% ownership in Realty Income, L.P. We hold the remaining 98.5% interests in this entity and consolidate the entity.

Neither of the common partnership units have voting rights. Both common partnership units are entitled to monthly distributions equal to the amount paid to common stockholders of Realty Income, and are redeemable in cash or Realty Income common stock, at our option, and at a conversion ratio of one to one, subject to certain exceptions. Noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the balance sheet was appropriate. We determined that the units meet the requirements to qualify for presentation as permanent equity.

In 2016, we completed the acquisition of two properties by acquiring a controlling interest in two separate entities. We are the managing member of each of these entities, and possess the ability to control the business and manage the affairs of these entities. At September 30, 2018, we and our subsidiaries held 95.0% and 74.0% interests, respectively, and fully consolidated these entities in our consolidated financial statements.

The following table represents the change in the carrying value of all noncontrolling interests through September 30, 2018 (dollars in thousands):


	Tau Operating Partnership units⁽¹⁾		Realty Income, L.P. units⁽²⁾		Other Noncontrolling Interests		Total
Carrying value at December 31, 2017	$	13,322	$	2,160	$	3,725	$	19,207
Reallocation of equity	572		(43)		(37)		492
Redemptions	—		(2,829)		—		(2,829)
Shares issued in conjunction with acquisition	—		18,848		—		18,848
Distributions	(627)		(595)		(235)		(1,457)
Allocation of net income	250		448		55		753
Carrying value at September 30, 2018	$	13,517	$	17,989	$	3,508	$	35,014

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⁽¹⁾317,022 Tau Operating Partnership units were issued on January 22, 2013 and remained outstanding as of September 30, 2018 and December 31, 2017.

⁽²⁾534,546 Realty Income, L.P. units were issued on June 27, 2013, 242,007 units were issued on March 30, 2018 and 131,790 units were issued on April 30, 2018. 373,797 and 88,182 remained outstanding as of September 30, 2018 and December 31, 2017, respectively.

Tau Operating Partnership, Realty Income, L.P. and the two entities acquired in 2016 are considered variable interest entities, or VIEs, in which we are deemed the primary beneficiary based on our controlling financial interests. Below is a summary of selected financial data of our consolidated VIEs at September 30, 2018 and December 31, 2017 (in thousands):


	September 30, 2018		December 31, 2017
Net real estate	$	2,933,150	$	2,936,397
Total assets	3,303,585		3,342,443
Total debt	197,960		210,384
Total liabilities	328,573		313,295

12. Fair Value of Financial Instruments

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 disclosure for assets and liabilities measured at fair value requires allocation to a three-level valuation hierarchy. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, accounts receivable, escrow deposits, loans receivable, line of credit payable, term loans and all other liabilities, due to their short-term nature or interest rates and terms that are consistent with market, except for our notes receivable issued in connection with property sales, mortgages payable and our senior notes and bonds payable, which are disclosed as follows (dollars in millions):


September 30, 2018	Carrying value		Estimated fair value
Mortgages payable assumed in connection with acquisitions ⁽¹⁾	$	305.7	$	310.5
Notes and bonds payable ⁽²⁾	5,400.0		5,397.6


December 31, 2017	Carrying value		Estimated fair value
Notes receivable issued in connection with property sales	$	5.3	$	5.3
Mortgages payable assumed in connection with acquisitions ⁽¹⁾	320.3		334.2
Notes and bonds payable ⁽²⁾	5,250.0		5,475.3

⁽¹⁾Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums was $4.7 million at September 30, 2018, and $5.9 million at December 31, 2017. Also excludes deferred financing costs of $196,000 at September 30, 2018 and $236,000 at December 31, 2017.

⁽²⁾Excludes non-cash original issuance premiums and discounts recorded on notes payable. The unamortized balance of the net original issuance premiums was $10.8 million at September 30, 2018, and $14.3 million at December 31, 2017. Also excludes deferred financing costs of $35.0 million at September 30, 2018 and $34.1 million at December 31, 2017.

The estimated fair values of our notes receivable issued in connection with property sales and our mortgages 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 notes receivable and mortgages payable is categorized as level three on the three-level valuation hierarchy.

The estimated fair values of our 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

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fair values, related to our notes and bonds payable, is categorized as level two on the three-level valuation hierarchy.

We record interest rate swaps on the consolidated balance sheet at fair value. At September 30, 2018, interest rate swaps in a liability position valued at $162,000 were included in accounts payable and accrued expenses and interest rate swaps in an asset position valued at $4.6 million were included in other assets, net on the consolidated balance sheet. The fair value of our interest rate swaps are based on valuation techniques including discounted cash flow analysis on the expected cash flows of each swap, using both observable and unobservable market-based inputs, including interest rate curves. Because this methodology uses observable and unobservable inputs, and the unobservable inputs are not significant to the fair value measurement, the measurement of interest rate swaps is categorized as level two on the three-level valuation hierarchy.

13. Gain on Sales of Real Estate

During the third quarter of 2018, we sold 20 properties for $35.5 million, which resulted in a gain of $7.8 million. During the third quarter of 2017, we sold 17 properties for $25.5 million, which resulted in a gain of $4.3 million.

During the first nine months of 2018, we sold 60 properties for $83.0 million, which resulted in a gain of $18.8 million. During the first nine months of 2017, we sold 46 properties for $69.5 million, which resulted in a gain of $17.7 million.

14. Impairments

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A provision is made for impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key factors that we utilize in this analysis include projected rental rates, estimated holding periods, historical sales and re-leases, capital expenditures and property sales capitalization rates. If a property is classified as held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell, and depreciation of the property ceases.

During the third quarter of 2018, we recorded total provisions for impairment of $6.9 million on 12 properties classified as held for sale and seven sold properties. For the first nine months of 2018, we recorded total provisions for impairment of $25.0 million on 16 properties classified as held for sale, two properties classified as held for investment, and 21 sold properties.

In comparison, for the third quarter of 2017, we recorded total provisions for impairment of $365,000 on four sold properties. For the first nine months of 2017, we recorded total provisions for impairment of $8.1 million on four properties classified as held for investment and 17 sold properties.

15. Distributions Paid and Payable

A. Common Stock

We pay monthly distributions to our common stockholders. The following is a summary of monthly distributions paid per common share for the first nine months of 2018 and 2017:


Month	2018		2017
January	$	0.2125	$	0.2025
February	0.2190		0.2105
March	0.2190		0.2105
April	0.2195		0.2110
May	0.2195		0.2110
June	0.2195		0.2110
July	0.2200		0.2115
August	0.2200		0.2115
September	0.2200		0.2115
Total	$	1.9690	$	1.8910

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At September 30, 2018, a distribution of $0.2205 per common share was payable and was paid in October 2018.

B. Class F Preferred Stock

In April 2017, we redeemed all 16,350,000 shares of our Class F preferred stock. During the first nine months of 2017, we paid three monthly dividends to holders of our Class F preferred stock totaling $0.414063 per share, or $3.9 million. In April 2017, we paid a final monthly dividend of $0.101215 per share, or $1.7 million, which was recorded as interest expense, since these dividends accrued subsequent to the March 2017 notice of redemption.

16. Net Income per Common Share

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income available to common stockholders, plus income attributable to dilutive shares and convertible common units, for the period by the weighted average number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period.

The following is a reconciliation of the denominator of the basic net income per common share computation to the denominator of the diluted net income per common share computation.


	Three months ended September 30,			Nine months ended September 30,
	2018	2017	2018	2017
Weighted average shares used for the basic net income per share computation	290,664,368	275,511,870	286,599,191	270,584,365
Incremental shares from share-based compensation	225,796	221,779	189,072	224,727
Weighted average partnership common units convertible to common shares that were dilutive	317,022