Quarterly Report (10-q)

Date : 08/06/2019 @ 7:46PM
Source : Edgar (US Regulatory)
Stock : Realty Income Corporation (O)
Quote : 76.56  0.0 (0.00%) @ 12:00AM

Quarterly Report (10-q)

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OQ110Q2019NEXTGENONLY_IMAGE1.JPG
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
FORM  10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019 , or
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange On Which Registered
Common Stock, $0.01 Par Value
O
New York Stock Exchange
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        No 
Indicate by check mark whether the registrant has submitted electronically 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 such files).  Yes       No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," “accelerated filer,” "reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer

 
Non-accelerated filer

 
Smaller reporting company

 
 
 
 
 
 
 
 
 
 
 
Emerging growth company

 
 
 
 
 
 
 
 
 
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      No 
There were 318,227,804 shares of common stock outstanding as of July 30, 2019 .




REALTY INCOME CORPORATION
Index to Form 10-Q
June 30, 2019
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

-1-


PART 1. FINANCIAL INFORMATION
Item 1.     Financial Statements
REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
 
June 30, 2019

 
December 31, 2018

ASSETS
(unaudited)

 
 
Real estate, at cost:
 
 
 
Land
$
5,058,572

 
$
4,682,660

Buildings and improvements
12,774,967

 
11,858,806

Total real estate, at cost
17,833,539

 
16,541,466

Less accumulated depreciation and amortization
(2,911,779
)
 
(2,714,534
)
Net real estate held for investment
14,921,760

 
13,826,932

Real estate held for sale, net
18,506

 
16,585

Net real estate
14,940,266

 
13,843,517

Cash and cash equivalents
27,136

 
10,387

Accounts receivable
165,470

 
144,991

Lease intangible assets, net
1,308,564

 
1,199,597

Goodwill
14,536

 
14,630

Other assets, net
292,658

 
47,361

Total assets
$
16,748,630

 
$
15,260,483

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Distributions payable
$
72,752

 
$
67,789

Accounts payable and accrued expenses
156,859

 
133,765

Lease intangible liabilities, net
330,893

 
310,866

Other liabilities
251,244

 
127,109

Line of credit payable
8,000

 
252,000

Term loans, net
498,829

 
568,610

Mortgages payable, net
299,397

 
302,569

Notes payable, net
6,268,062

 
5,376,797

Total liabilities
7,886,036

 
7,139,505

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Common stock and paid in capital, par value $0.01 per share, 740,200,000 shares authorized, 318,218,713 shares issued and outstanding as of June 30, 2019 and 370,100,000 shares authorized, 303,742,090 shares issued and outstanding as of December 31, 2018
11,722,036

 
10,754,495

Distributions in excess of net income
(2,869,937
)
 
(2,657,655
)
Accumulated other comprehensive loss
(14,597
)
 
(8,098
)
Total stockholders’ equity
8,837,502

 
8,088,742

Noncontrolling interests
25,092

 
32,236

Total equity
8,862,594

 
8,120,978

Total liabilities and equity
$
16,748,630

 
$
15,260,483

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

-2-


REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share data) (unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
 
2019

 
2018

 
2019

 
2018

REVENUE
 

 
 

 
 
 
 
Rental (including reimbursable)
$
364,252

 
$
325,265

 
$
718,289

 
$
643,113

Other
1,198

 
3,621

 
1,526

 
4,068

Total revenue
365,450

 
328,886

 
719,815

 
647,181

 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
Depreciation and amortization
150,426

 
133,999

 
287,943

 
265,102

Interest
72,488

 
66,628

 
142,508

 
126,043

General and administrative
18,585

 
17,954

 
33,693

 
33,638

Property (including reimbursable)
21,342

 
16,236

 
42,978

 
32,788

Income taxes
1,155

 
1,208

 
2,600

 
2,431

Provisions for impairment
13,061

 
3,951

 
17,733

 
18,172

Total expenses
277,057

 
239,976

 
527,455

 
478,174

Gain on sales of real estate
6,891

 
7,787

 
14,154

 
11,005

Foreign currency and derivative gains, net
136

 

 
136

 

Net income
95,420

 
96,697

 
206,650

 
180,012

Net income attributable to noncontrolling interests
(226
)
 
(317
)
 
(514
)
 
(469
)
Net income available to common stockholders
$
95,194

 
$
96,380

 
$
206,136

 
$
179,543

 
 
 
 
 
 
 
 
Amounts available to common stockholders per common share:
 
 
 
 
 
 
 
Net income, basic and diluted
$
0.31

 
$
0.34

 
$
0.67

 
$
0.63

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
311,032,972

 
284,928,969

 
307,293,949

 
284,469,689

Diluted
311,322,162

 
285,372,256

 
307,580,127

 
284,924,336

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Net income available to common stockholders
$
95,194

 
$
96,380

 
$
206,136

 
$
179,543

Foreign currency translation adjustment
(6
)
 

 
(6
)
 

Unrealized loss on derivatives, net
(2,794
)
 

 
(6,493
)
 

Comprehensive income available to common stockholders
$
92,394

 
$
96,380

 
$
199,637

 
$
179,543


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

-3-


REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY  
(dollars in thousands) (unaudited)

Three Months Ended June 30, 2019 and 2018
 
 
Shares of
common
stock

 
Common
stock and
paid in
capital

 
Distributions
in excess of
net income

 
Accumulated other comprehensive loss

 
Total
stockholders’
equity

 
Noncontrolling
interests

 
Total
equity

Balance, March 31, 2019
 
303,807,421

 
$
10,748,467

 
$
(2,752,775
)
 
$
(11,797
)
 
$
7,983,895

 
$
25,181

 
$
8,009,076

Net income
 

 

 
95,194

 

 
95,194

 
226

 
95,420

Other comprehensive loss
 

 

 

 
(2,800
)
 
(2,800
)
 

 
(2,800
)
Distributions paid and payable
 

 

 
(212,356
)
 

 
(212,356
)
 
(315
)
 
(212,671
)
Share issuances, net of costs
 
14,384,215

 
969,162

 

 

 
969,162

 

 
969,162

Share-based compensation, net
 
27,077

 
4,407

 

 

 
4,407

 

 
4,407

Balance, June 30, 2019
 
318,218,713

 
$
11,722,036

 
$
(2,869,937
)
 
$
(14,597
)
 
$
8,837,502

 
$
25,092

 
$
8,862,594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2018
 
284,380,175

 
$
9,625,200

 
$
(2,357,220
)
 
$

 
$
7,267,980

 
$
29,679

 
$
7,297,659

Net Income
 

 

 
96,380

 

 
96,380

 
317

 
96,697

Distributions paid and payable
 

 

 
(188,953
)
 

 
(188,953
)
 
(473
)
 
(189,426
)
Share issuances, net of costs
 
5,622,401

 
295,897

 

 

 
295,897

 

 
295,897

Issuance of common partnership units
 

 

 

 

 

 
6,704

 
6,704

Reallocation of equity
 

 
(492
)
 

 

 
(492
)
 
492

 

Share-based compensation, net
 
21,699

 
4,938

 

 

 
4,938

 

 
4,938

Balance, June 30, 2018
 
290,024,275

 
$
9,925,543

 
$
(2,449,793
)
 
$

 
$
7,475,750

 
$
36,719

 
$
7,512,469


Six Months Ended June 30, 2019 and 2018
 
 
Shares of
common
stock

 
Common
stock and
paid in
capital

 
Distributions
in excess of
net income

 
Accumulated other comprehensive loss

 
Total
stockholders’
equity

 
Noncontrolling
interests

 
Total
equity

Balance, December 31, 2018
 
303,742,090

 
$
10,754,495

 
$
(2,657,655
)
 
$
(8,098
)
 
$
8,088,742

 
$
32,236

 
$
8,120,978

Net income
 

 

 
206,136

 

 
206,136

 
514

 
206,650

Other comprehensive loss
 

 

 

 
(6,499
)
 
(6,499
)
 

 
(6,499
)
Distributions paid and payable
 

 

 
(418,418
)
 

 
(418,418
)
 
(588
)
 
(419,006
)
Share issuances, net of costs
 
14,416,113

 
971,313

 

 

 
971,313

 

 
971,313

Issuance of common partnership units
 

 

 

 

 

 
6,286

 
6,286

Redemption of common units
 

 
(6,869
)
 

 

 
(6,869
)
 
(13,356
)
 
(20,225
)
Share-based compensation, net
 
60,510

 
3,097

 

 

 
3,097

 

 
3,097

Balance, June 30, 2019
 
318,218,713

 
$
11,722,036

 
$
(2,869,937
)
 
$
(14,597
)
 
$
8,837,502

 
$
25,092

 
$
8,862,594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
284,213,685

 
$
9,624,264

 
$
(2,252,763
)
 
$

 
$
7,371,501

 
$
19,207

 
$
7,390,708

Net income
 

 

 
179,543

 

 
179,543

 
469

 
180,012

Distributions paid and payable
 

 

 
(376,573
)
 

 
(376,573
)
 
(829
)
 
(377,402
)
Share issuances, net of costs
 
5,668,334

 
298,115

 

 

 
298,115

 

 
298,115

Issuance of common partnership units
 

 

 

 

 

 
18,848

 
18,848

Redemption of common units
 
60,000

 
1,468

 

 

 
1,468

 
(1,468
)
 

Reallocation of equity
 

 
(492
)
 

 

 
(492
)
 
492

 

Share-based compensation, net
 
82,256

 
2,188

 

 

 
2,188

 

 
2,188

Balance, June 30, 2018
 
290,024,275

 
$
9,925,543

 
$
(2,449,793
)
 
$

 
$
7,475,750

 
$
36,719

 
$
7,512,469



-4-


REALTY INCOME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands) (unaudited)
 
              Six Months Ended
              June 30,
 
2019

 
2018

CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
206,650

 
$
180,012

Adjustments to net income:
 
 
 
Depreciation and amortization
287,943

 
265,102

Amortization of share-based compensation
7,291

 
8,657

Non-cash revenue adjustments
(4,351
)
 
(4,029
)
Amortization of net premiums on mortgages payable
(708
)
 
(813
)
Amortization of deferred financing costs
3,960

 
3,469

Loss (gain) on interest rate swaps
1,364

 
(2,799
)
Foreign currency and derivative gains, net
(136
)
 

Gain on sales of real estate
(14,154
)
 
(11,005
)
Provisions for impairment on real estate
17,733

 
18,172

Change in assets and liabilities
 
 
 
Accounts receivable and other assets
(11,250
)
 
2,785

Accounts payable, accrued expenses and other liabilities
(4,679
)
 
17,718

Net cash provided by operating activities
489,663

 
477,269

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Investment in real estate
(1,604,575
)
 
(829,818
)
Improvements to real estate, including leasing costs
(11,767
)
 
(17,017
)
Proceeds from sales of real estate
51,052

 
47,526

Insurance proceeds received

 
3,836

Collection of loans receivable

 
5,267

Non-refundable escrow deposits
(9,619
)
 

Net cash used in investing activities
(1,574,909
)
 
(790,206
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Cash distributions to common stockholders
(413,410
)
 
(373,044
)
Borrowings on line of credit
1,404,000

 
1,140,000

Payments on line of credit
(1,648,000
)
 
(716,000
)
Principal payment on term loan
(70,000
)
 
(125,866
)
Proceeds from notes and bonds payable issued
895,774

 
497,500

Principal payment on notes payable

 
(350,000
)
Principal payments on mortgages payable
(2,492
)
 
(13,447
)
Proceeds from common stock offerings, net
845,061

 

Proceeds from dividend reinvestment and stock purchase plan
4,098

 
4,806

Proceeds from At-the-Market (ATM) program, net
122,155

 
297,983

Redemption of common units
(20,225
)
 

Distributions to noncontrolling interests
(635
)
 
(758
)
Debt issuance costs
(7,331
)
 
(4,436
)
Other items, including shares withheld upon vesting
(4,195
)
 
(11,143
)
Net cash provided by financing activities
1,104,800

 
345,595

Effect of exchange rate changes on cash and cash equivalents
(733
)
 

Net increase in cash, cash equivalents and restricted cash
18,821

 
32,658

Cash, cash equivalents and restricted cash, beginning of period
21,071

 
12,142

Cash, cash equivalents and restricted cash, end of period
$
39,892

 
$
44,800

For supplemental disclosures, see note 17.
The accompanying notes to consolidated financial statements are an integral part of these statements.


-5-


REALTY INCOME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(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, 2018 , which are included in our 2018 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. Unless otherwise indicated, all dollar amounts are expressed in United States (U.S.) dollars.
At June 30, 2019 we owned 5,951 properties, located in 49 states, Puerto Rico and the United Kingdom (U.K.), consisting of over 98.4 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 10).  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 and comprehensive income represent amounts paid by Realty Income and its subsidiaries for city and state income and franchise taxes and for U.K. income 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 2019 and 2018, respectively, we determined there was no impairment on our existing goodwill.
D.  In February 2016, the FASB issued ASU 2016-02 (Topic 842, Leases ), 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 our leases remain classified as operating leases, and we continue to recognize lease income on a generally straight-line basis over the lease term. Although primarily a lessor, we are also a lessee under several ground lease arrangements. We adopted this standard effective as of January 1, 2019 using the effective date method, and elected the practical expedients available for implementation under the standard. As a result, we recognize lease obligations for ground leases designated as operating and financing leases with corresponding right of use assets and liabilities (see note 3). Additionally, above-market rents on certain of our leases under which we are a lessor are accounted for as financing receivables amortizing over the lease term, and below-market rents on certain of our leases under which we are a lessor are accounted for as prepaid rent (see note 3). Also, as a result of the adoption of this standard, tenant reimbursable revenue and property expenses are now presented on a gross basis as both tenant reimbursement revenue included in rental revenue, and as a reimbursable expense included in property expenses, respectively, on our consolidated statements of income and comprehensive income. Property taxes and insurance paid directly by the lessee to a third party will continue to be presented on a net basis. These presentation changes had no impact on our results of operations. As a result, there was no restatement of prior issued financial statements and, similarly, no cumulative effect adjustment to opening

-6-


equity; however, we have elected to aggregate prior period tenant reimbursement revenue within rental revenue to be consistent with the current period presentation within the statements of income and comprehensive income.
E.  In connection with our acquisition of properties in the U.K. during the second quarter of 2019, we adopted accounting guidance applicable under Topic 830, Foreign Currency Matters . The functional currency of the U.K. subsidiary holding the acquired properties is the British pound sterling. Assets and liabilities from our foreign-owned subsidiary are translated into U.S. dollars using the exchange rate in effect at the consolidated balance sheet date. Equity accounts are translated at historical rates, except for retained earnings, whereas the impact is calculated via the income statement translation process. Revenue and expense accounts are translated using the weighted average exchange rates during the period. The cumulative translation adjustments from our U.K. subsidiary are recorded in accumulated other comprehensive income in the consolidated statements of equity. We have intercompany debt denominated in the British pound sterling, which is the same currency as the functional currency of our U.K. subsidiary. When this debt is remeasured against the functional currency of the Company, which is the U.S. dollar, a gain or loss can result. Such transaction gains or losses realized upon settlement of a foreign currency transaction, which may include intercompany transactions, are included in net income under the caption ‘Foreign currency and derivative gains (losses), net’.
3. Supplemental Detail for Certain Components of Consolidated Balance Sheets (dollars in thousands):
A.
Lease intangible assets, net, consist of the following at:
June 30, 2019

 
December 31, 2018

 
In-place leases
$
1,400,686

 
$
1,321,979

 
Accumulated amortization of in-place leases
(587,683
)
 
(546,573
)
 
Above-market leases
674,515

 
583,109

 
Accumulated amortization of above-market leases
(178,954
)
 
(158,918
)
 
 
$
1,308,564

 
$
1,199,597


B.
Other assets, net, consist of the following at:
June 30, 2019

 
December 31, 2018

 
Right of use asset - operating leases, net
$
125,346

 
$

 
Financing receivables
59,938

 

 
Right of use asset - financing leases
36,901

 

 
Credit facility origination costs, net
12,564

 
14,248

 
Prepaid expenses
11,443

 
11,595

 
Impounds related to mortgages payable
11,433

 
9,555

 
Value-added tax receivable
10,644

 

 
Non-refundable escrow deposits
9,619

 
200

 
Corporate assets, net
5,446

 
5,681

 
Derivative assets and receivables - at fair value
5,433

 
3,100

 
Restricted escrow deposits
1,323

 
1,129

 
Other items
2,568

 
1,853

 
 
$
292,658

 
$
47,361


C.
Distributions payable consist of the following declared distributions at:
June 30, 2019

 
December 31, 2018

 
Common stock distributions
$
72,647

 
$
67,636

 
Noncontrolling interests distributions
105

 
153

 
 
$
72,752

 
$
67,789


D.
Accounts payable and accrued expenses consist of the following at:
June 30, 2019

 
December 31, 2018

 
Notes payable - interest payable
$
74,879

 
$
73,094

 
Property taxes payable
19,073

 
14,511

 
Derivative liabilities and payables - at fair value
15,794

 
7,001

 
Accrued costs on properties under development
10,978

 
8,137

 
Value-added tax payable
10,644

 

 
Mortgages, term loans, and credit line - interest payable
1,273

 
1,596

 
Other items
24,218

 
29,426

 
 
$
156,859

 
$
133,765



-7-


E.
Lease intangible liabilities, net, consist of the following at:
June 30, 2019

 
December 31, 2018

 
Below-market leases
$
433,548

 
$
404,938

 
Accumulated amortization of below-market leases
(102,655
)
 
(94,072
)
 
 
$
330,893

 
$
310,866


F.
Other liabilities consist of the following at:
June 30, 2019

 
December 31, 2018

 
Lease liability - operating leases, net
$
126,778

 
$

 
Rent received in advance and other deferred revenue
112,301

 
115,380

 
Security deposits
6,374

 
6,093

 
Lease liability - financing leases
5,791

 

 
Capital lease obligation

 
5,636

 
 
$
251,244

 
$
127,109


4.
Investments in Real Estate
We acquire land, buildings and improvements necessary for the successful operations of commercial tenants.
A. Acquisitions During the First Six Months of 2019 and 2018
Below is a summary of our acquisitions for the second quarter and six months ended June 30, 2019:
 
Number of Properties

 
Square Feet
(in millions)

 
Investment
($ in millions)

 
Weighted Average Lease Term (Years)
 
Initial Average Cash Lease Yield

Three months ended June 30, 2019 (1)
 
 
 
 
 
 
 
 
 
Acquisitions - U.S. (in 28 states)
78

 
2.3

 
$
532.3

 
14.8
 
6.9
%
Acquisitions - U.K. (2)
12

 
1.1

 
549.2

 
14.8
 
5.3
%
Total Acquisitions
90

 
3.4

 
1,081.5

 
14.8
 
6.1
%
Properties under Development - U.S.
12

 
0.4

 
13.2

 
15.9
 
7.3
%
Total (3)
102

 
3.8

 
$
1,094.7

 
14.8
 
6.1
%
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2019 (1)
 
 
 
 
 
 
 
 
 
Acquisitions - U.S. (in 34 states)
175

 
4.2

 
$
1,040.9

 
15.9
 
6.8
%
Acquisitions - U.K. (2)
12

 
1.1

 
549.2

 
14.8
 
5.3
%
Total Acquisitions
187

 
5.3

 
1,590.1

 
15.5
 
6.3
%
Properties under Development - U.S.
12

 
0.4

 
24.1

 
16.5
 
7.2
%
Total (4)
199

 
5.7

 
$
1,614.2

 
15.6
 
6.3
%
(1)  
None of our investments during 2019 caused any one tenant to be 10% or more of our total assets at June 30, 2019. All of our 2019 investments are 100% leased.    
(2)  
Represents investment of £433.9 million , multiplied by the applicable exchange rate on the closing date of the acquisition.
(3)  
The tenants occupying the new properties operate in 15 industries, and are 99.4% retail and 0.6% industrial, based on rental revenue. Approximately 12% of the rental revenue generated from acquisitions during the second quarter of 2019 is from investment grade rated tenants and their subsidiaries.
(4)  
The tenants occupying the new properties operate in 17 industries, and are 99.1% retail and 0.9% industrial, based on rental revenue. Approximately 18% of the rental revenue generated from acquisitions during the first six months of 2019 is from investment grade rated tenants and their subsidiaries.
The $1.6 billion invested during the first six months of 2019 was allocated as follows: $436.3 million to land, of which $17.4 million related to right of use assets under long-term ground leases, $976.1 million to buildings and improvements, $183.7 million to intangible assets related to leases, $60.2 million to financing receivables related to certain leases with above-market terms, $32.2 million to intangible liabilities related to below-market leases, and $8.2 million to prepaid rent related to certain leases with below-market terms. There was no contingent consideration associated with these acquisitions.
The properties acquired during the first six months of 2019 generated total revenues of $19.7 million and net income of $10.0 million during the six months ended June 30, 2019 .

-8-


Below is a summary of our acquisitions for the second quarter and six months ended June 30, 2018:
 
Number of Properties

 
Square Feet
(in millions)

 
Investment
($ in millions)

 
Weighted Average Lease Term (Years)
 
Initial Average Cash Lease Yield

Three months ended June 30, 2018 (1)
 
 
 
 
 
 
 
 
 
Acquisitions - U.S. (in 24 states)
180

 
1.0

 
$
286.5

 
14.2
 
6.5
%
Properties under Development - U.S.
10

 
0.9

 
60.5

 
10.7
 
6.7
%
Total (2)
190

 
1.9

 
$
347.0

 
13.6
 
6.5
%
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2018 (1)
 
 
 
 
 
 
 
 
 
Acquisitions - U.S. (in 32 states)
348

 
1.8

 
$
792.5

 
14.1
 
6.3
%
Properties under Development - U.S.
10

 
1.0

 
64.3

 
10.8
 
6.7
%
Total (3)
358

 
2.8

 
$
856.8

 
13.8
 
6.3
%
(1)  
All of our 2018 investments were 100% leased upon acquisition.
(2)  
The tenants occupying the new properties operated in 15 industries and the property types consisted of 85% retail and 15% industrial, based on rental revenue. Approximately 52% of the rental revenue generated from acquisitions during the second quarter of 2018 was from investment grade rated tenants and their subsidiaries.
(3)  
The tenants occupying the new properties operated in 17 industries, and the property types consisted of 93.7% retail and 6.3% industrial, based on rental revenue. Approximately 71% of the rental revenue generated from acquisitions during the first six months of 2018 was from investment grade rated tenants and their subsidiaries.
The $856.8 million invested during the first six months of 2018 was allocated as follows: $314.0 million to land, $489.7 million to buildings and improvements, $78.3 million to intangible assets related to leases, and $25.2 million to intangible liabilities related to certain leases with below-market terms. There was no contingent consideration associated with these acquisitions.
The properties acquired during the first six months of 2018 generated total revenues of $10.6 million and net income of $5.3 million during the six months ended June 30, 2018 .
The initial average cash lease yield for a property is generally computed as estimated contractual first year cash net operating income, which, in the case of a net leased property, is equal to the aggregate 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 average cash lease yield is computed as follows: estimated cash net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs.

B.    Investments in Existing Properties
During the first six months of 2019 , we capitalized costs of $6.1 million on existing properties in our portfolio, consisting of $1.0 million for re-leasing costs, $172,000 for recurring capital expenditures and $4.9 million for non-recurring building improvements. In comparison, during the first six months of 2018 , we capitalized costs of $5.6 million on existing properties in our portfolio, consisting of $2.5 million for re-leasing costs, $147,000 for recurring capital expenditures and $3.0 million for non-recurring building improvements.

C.    Properties with Existing Leases
Of the $1.6 billion we invested during the first six months of 2019 , approximately $929.7 million was used to acquire 75 properties with existing leases. In comparison, of the $856.8 million we invested during the first six months of 2018 , approximately $225.8 million was used to acquire 107 properties with existing leases. The value of the in-place and above-market leases is recorded to lease intangible assets, net on our consolidated balance sheets, and the value of the below-market leases is recorded to lease intangible liabilities, net on our consolidated balance sheets.

-9-


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 six months of 2019 and 2018 were $57.8 million and $53.1 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 and comprehensive income. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for the first six months of 2019 and 2018 were $7.8 million and $7.9 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 above-market and below-market lease intangibles and the amortization of the in-place lease intangibles at June 30, 2019 (dollars in thousands):
 
Net
decrease to
rental revenue

Increase to
amortization
expense

2019
$
(10,994
)
$
51,751

2020
(21,343
)
99,284

2021
(20,186
)
91,089

2022
(18,651
)
79,286

2023
(17,199
)
68,992

Thereafter
(76,295
)
422,601

Totals
$
(164,668
)
$
813,003


5.
Credit Facility
We have a $3.25 billion unsecured revolving credit facility, or our credit facility, with an initial term that expires in March 2023 and includes, at our option, two six -month extensions. Our credit facility has a $1.0 billion expansion option. Under our credit facility, our investment grade credit ratings as of June 30, 2019 provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 0.775% with a facility commitment fee of 0.125% , for all-in drawn pricing of 0.90% over LIBOR . The borrowing rate is subject to an interest rate floor and may change if our investment grade credit ratings change. We also have other interest rate options available to us under our credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.
At June 30, 2019 and December 31, 2018, credit facility origination costs of $12.6 million and $14.2 million , respectively, 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 June 30, 2019 , we had a borrowing capacity of approximately $3.0 billion available on our credit facility (subject to customary conditions to borrowing) and an outstanding balance of $8.0 million , as compared to an outstanding balance of $252.0 million at December 31, 2018 .
The weighted average interest rate on outstanding borrowings under our credit facility was 3.3% during the first six months of 2019 and 2.7% during the first six months of 2018 . At June 30, 2019 and December 31, 2018 , the weighted average interest rate on outstanding borrowings under our credit facility was 3.2% . Our credit facility is subject to various leverage and interest coverage ratio limitations, and at June 30, 2019 , we were in compliance with the covenants on our credit facility.
6.
Term Loans

In October 2018, in conjunction with entering into our revolving credit facility, we entered into a  $250.0 million  senior unsecured term loan, which matures in March 2024. Borrowing under this term loan bears interest at the current one-month LIBOR, plus  0.85% . In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest on this term loan at  3.89% .

-10-


In June 2015, in conjunction with entering into our previous credit facility, we entered into a $250.0 million senior unsecured term loan maturing in June 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, until the interest rate swap's termination in January 2018, effectively fixed our per annum interest rate on this term loan at  2.05% . In 2018, we entered into  two  separate  six –month extensions of this loan, during which periods the interest was born at the current one-month LIBOR , plus  0.90% . In January 2019, we paid off the outstanding principal and interest on this term loan.

Deferred financing costs of  $1.2 million  incurred in conjunction with the  $250.0 million  term loan maturing June 2020 and  $1.1 million  incurred in conjunction with the  $250.0 million  term loan maturing March 2024 are being amortized over the remaining terms of each respective term loan. The net balance of these deferred financing costs, which was $1.2 million at June 30, 2019 , and $1.4 million at December 31, 2018 , is included within term loans, net on our consolidated balance sheets.
7.
Mortgages Payable
During the first six months of 2019 , we made $2.5 million in principal payments. During the first six months of 2018 , we made $13.4 million in principal payments, including the repayment of one mortgage in full for $11.0 million . No mortgages were assumed during the first six months of 2019 or 2018 . 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.
Our mortgages contain customary covenants, such as limiting our ability to further mortgage each applicable property or to discontinue insurance coverage without the prior consent of the lender. At June 30, 2019 , 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 $156,000 at June 30, 2019 and $183,000 at December 31, 2018 . These costs are being amortized over the remaining term of each mortgage.
The following is a summary of all our mortgages payable as of June 30, 2019 and December 31, 2018 , 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

6/30/2019
 
60
 
5.1
%
 
4.6
%
 
2.7
 
$
295,886

 
$
3,511

 
$
299,397

12/31/2018
 
60
 
5.1
%
 
4.6
%
 
3.2
 
$
298,377

 
$
4,192

 
$
302,569

(1)  
  At June 30, 2019 and December 31, 2018 , there were 26 mortgages on 60 properties. The mortgages require monthly payments with principal payments due at maturity. The mortgages are at fixed interest rates, except for two mortgages on two properties totaling $23.0 million and $23.3 million at June 30, 2019 and December 31, 2018 , 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 $15.8 million at June 30, 2019 and $16.0 million at December 31, 2018 .
(2)  Stated interest rates ranged from 3.8% to 6.9% at June 30, 2019 and December 31, 2018 .
(3)  Effective interest rates ranged from 3.8% to 7.7% at June 30, 2019 , while effective interest rates ranged from 1.1% to 7.7% at December 31, 2018 .
The following table summarizes the maturity of mortgages payable, excluding net premiums of $3.7 million and deferred financing costs of $156,000 , as of June 30, 2019 (dollars in millions):

-11-


Year of Maturity
 
Principal

2019
 
$
18.2

2020
 
82.4

2021
 
67.0

2022
 
109.7

2023
 
6.7

Thereafter
 
11.9

Totals
 
$
295.9


8.
Notes Payable
A. General
Our senior unsecured notes and bonds consist of the following, sorted by maturity date (dollars in millions):
 
June 30, 2019

 
December 31, 2018

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

 
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

3.250% notes, issued in June 2019 and due in June 2029
500

 

2.730% notes, issued in May 2019 and due in May 2034 (1)
400

 

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
6,300

 
5,400

Unamortized net original issuance premiums and deferred financing costs
(32
)
 
(23
)
 
$
6,268

 
$
5,377


(1)  
Represents the principal balance (in U.S. dollars) of the Sterling-denominated private placement of £315.0 million based on the applicable exchange rate on June 30, 2019.

The following table summarizes the maturity of our notes and bonds payable as of June 30, 2019 , excluding net unamortized original issuance premiums and deferred financing costs (dollars in millions):
Year of Maturity
 
Principal

2021
 
$
250

2022
 
950

2023
 
750

Thereafter
 
4,350

Totals
 
$
6,300


As of June 30, 2019 , the weighted average interest rate on our notes and bonds payable was 3.9% and the weighted average remaining years until maturity was 8.8 years . All of our outstanding notes and bonds payable have fixed interest rates and contain various covenants, with which we remained in compliance as of June 30, 2019 . Additionally, interest on all of our senior unsecured note and bond obligations is paid semiannually.
B. Note Repayment
In January 2018, we repaid our $350 million of outstanding 2.000% notes, plus accrued and unpaid interest upon maturity.

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C.      Note Issuances
In May 2019, we issued £315 million of 2.730% senior unsecured notes due May 2034, or the 2034 Notes, through a private placement.
In June 2019, we issued  $500 million  of  3.250%  senior unsecured notes due June 2029, or the 2029 Notes. The public offering price for the 2029 Notes was  99.36%  of the principal amount, for an effective yield to maturity of  3.326% and net proceeds of approximately $492.2 million .
In April 2018, we issued  $500 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% and net proceeds of approximately $493.1 million .
The net proceeds from these 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. Issuance of Common Stock in an Overnight Underwritten Public Offering
In May 2019, we issued 12,650,000 shares of common stock in an overnight underwritten public offering. After deducting underwriting discounts and other offering costs of $31.0 million , the net proceeds of $845.1 million were used to repay borrowings under our credit facility, to fund investment opportunities, and for other general corporate purposes.
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 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 second quarter of 2019, we issued 27,520 shares and raised approximately $1.9 million under our DRSPP. During the first six months of 2019 , we issued 59,418 shares and raised approximately $4.1 million under our DRSPP. During the second quarter of 2018, we issued 47,128 shares and raised approximately $2.5 million under our DRSPP. During the first six months of 2018 , we issued 93,061 shares and raised approximately $4.8 million  under our DRSPP.  From the inception of our DRSPP through June 30, 2019 , we have issued 14,289,228 shares and raised approximately $675.0 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 six months of 2019 or 2018 .
C.    At-the-Market (ATM) Programs
Under our "at-the-market" equity distribution plan, or our ATM program, shares of common stock may be offered and sold (1) by us to, or through, a consortium of banks acting as our sales agents or (2) by a consortium of banks acting as forward sellers on behalf of any forward purchasers contemplated thereunder, in each case by means of ordinary brokers' transactions on the NYSE at prevailing market prices or at negotiated prices. Our ATM program authorizes up to 28,961,855 common shares to be issued. During the second quarter and first six months of 2019, we issued 1,706,695 shares and raised approximately $124.2 million under the ATM program. During the second quarter and first six months of 2018, we issued 5,575,273 shares and raised approximately $298.0 million under the ATM program. From the inception of our current and prior ATM programs through  June 30, 2019 , we have issued  35,252,834  shares and raised  $2.1 billion . At June 30, 2019 , we had  18,747,166  shares remaining for future issuance under our ATM program.
10.    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. In January 2019, we redeemed all  317,022  remaining common units of Tau Operating Partnership for cash, and paid off the outstanding balance and interest on the  $70.0 million  senior unsecured term loan entered in January 2013 in conjunction with our acquisition of ARCT. Following the redemption, we hold  100%  of the ownership interests of Tau

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Operating Partnership and continue to consolidate the entity. As part of this transaction, our taxable REIT subsidiary, Crest Net Lease, obtained a 0.11% interest in Tau Operating Partnership.
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 2019 and in March and April 2018, we completed the acquisitions of additional properties, by paying both cash and by issuing additional common partnership units in Realty Income, L.P as consideration for the acquisitions. At June 30, 2019 , the remaining units from these issuances represent a 1.9% ownership in Realty Income, L.P.  We hold the remaining 98.1% 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. In December 2018, we acquired all of the outstanding minority ownership interests associated with one of these entities. We are the managing member of the remaining entity, and possess the ability to control the business and manage the affairs of the entity. At June 30, 2019 , we and our subsidiaries held a 95.0% interest in the remaining entity, which is fully consolidated into our consolidated financial statements.
The following table represents the change in the carrying value of all noncontrolling interests through June 30, 2019 (dollars in thousands):
 
Tau Operating
Partnership units (1)

 
Realty Income, L.P.
units (2)

 
Other
Noncontrolling
Interests

 
Total

Carrying value at December 31, 2018
$
13,356

 
$
17,912

 
$
968

 
$
32,236

Redemptions
(13,356
)
 

 

 
(13,356
)
Shares issued in conjunction with acquisition

 
6,286

 

 
6,286

Distributions

 
(588
)
 

 
(588
)
Allocation of net income

 
505

 
9

 
514

Carrying value at June 30, 2019
$

 
$
24,115

 
$
977

 
$
25,092

(1)  317,022 Tau Operating Partnership units were issued on January 22, 2013. No shares remained outstanding as of June 30, 2019 , and 317,022 shares remained outstanding as of December 31, 2018 .
(2)  534,546 Realty Income, L.P. units were issued on June 27, 2013, 242,007 units were issued on March 30, 2018, 131,790 units were issued on April 30, 2018, and 89,322 units were issued on March 28, 2019. 463,119 and 373,797 remained outstanding as of June 30, 2019 and December 31, 2018 , respectively.
At December 31, 2018 , Tau Operating Partnership, Realty Income, L.P., and an entity acquired during 2016 were considered variable interest entities, or VIEs, in which we were deemed the primary beneficiary based on our controlling financial interests. In January 2019, we redeemed all  317,022  remaining Tau Operating Partnership units held by nonaffiliates for $20.2 million and recorded the excess over carrying value of $6.9 million as a reduction to common stock and paid in capital. Following the redemption, we hold 100% of the ownership interests of Tau Operating Partnership, L.P., and continue to consolidate the entity. At June 30, 2019 , Realty Income, L.P. and the entity acquired during 2016 were considered VIEs. Below is a summary of selected financial data of consolidated VIEs at  June 30, 2019   and  December 31, 2018  (in thousands):
 
June 30, 2019

 
December 31, 2018

Net real estate
$
644,571

 
$
2,903,093

Total assets
737,441

 
3,259,495

Total debt
15,800

 
191,565

Total liabilities
102,408

 
320,800



-14-


11.    Financial Instruments and Fair Value Measurements
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The 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 mortgages payable assumed in connection with acquisitions and our senior notes and bonds payable, which are disclosed as follows (dollars in millions):
June 30, 2019
Carrying value

 
Estimated fair value

Mortgages payable assumed in connection with acquisitions (1)
$
295.9

 
$
305.3

Notes and bonds payable (2)
6,299.9

 
6,713.7

December 31, 2018
Carrying value

 
Estimated fair value

Mortgages payable assumed in connection with acquisitions (1)
$
298.4

 
$
305.7

Notes and bonds payable (2)
5,400.0

 
5,430.0

(1)  
Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums was $3.7 million at June 30, 2019 , and $4.4 million at December 31, 2018 . Also excludes deferred financing costs of $156,000 at June 30, 2019 and $183,000 at December 31, 2018 .
(2)  
Excludes non-cash original issuance premiums and discounts recorded on notes payable. The unamortized balance of the net original issuance premiums was $6.8 million at June 30, 2019 , and $10.5 million at December 31, 2018 . Also excludes deferred financing costs of $38.6 million at June 30, 2019 and $33.7 million at December 31, 2018 .
The estimated fair values of our mortgages payable assumed in connection with acquisitions and private senior notes payable have been calculated by discounting the future cash flows using an interest rate based upon the relevant forward interest rate curve, plus an applicable credit-adjusted spread.  Because this methodology includes unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated fair values related to our mortgages payable is categorized as level three on the three-level valuation hierarchy.
The estimated fair values of our publicly-traded senior notes and bonds payable are based upon indicative market prices and recent trading activity of our senior notes and bonds payable. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values, related to our notes and bonds payable, is categorized as level two on the three-level valuation hierarchy.
We record interest rate swaps on the consolidated balance sheet at fair value. Prior to our adoption of hedge accounting in October 2018, the change in fair value of interest rate swaps was recognized through interest expense. Following adoption, changes to fair value are recorded to accumulated other comprehensive income, or AOCI.
In May 2019, we entered into four cross-currency swaps to exchange £130 million for $166 million maturing in May 2034, in order to hedge the foreign currency risk associated with our Sterling-denominated intercompany loan receivable from our consolidated foreign subsidiary. These cross-currency swaps were designated as cash flow hedges on their trade date. Gains and losses, representing hedge components excluded from the assessment of effectiveness, are recognized in earnings over the life of the hedges on a systematic and rational basis, as documented at hedge inception in accordance with our accounting policy election. The earnings recognition of excluded components is presented in foreign currency and derivative gains, net on our consolidated statements of income and comprehensive income, which is the same caption item as the hedged transactions.
The following table summarizes the terms and fair values of our derivative financial instruments at June 30, 2019  and December 31, 2018 (dollars in millions):

-15-


Derivative Type
Hedge Designation
Notional Amount
Strike
Effective Date
Maturity Date
Fair Value - asset (liability)
 
 
June 30,
December 31,
 
 
 
June 30,
December 31,
 
 
2019
2018
 
 
 
2019
2018
Interest rate swap
Cash flow
$
7.1

$
7.2

6.03%
09/25/2012
09/03/2021
$
(0.3
)
$
(0.2
)
Interest rate swap
Cash flow
250.0

250.0

1.72%
06/30/2015
06/30/2020
0.4

3.0

Interest rate swap
Cash flow
250.0

250.0

3.04%
10/24/2018
03/24/2024
(15.5
)
(6.8
)
Cross-currency swap (1)
Cash flow
41.6


(2)  
05/20/2019
05/22/2034
1.2


Cross-currency swap (1)
Cash flow
41.6


(3)  
05/20/2019
05/22/2034
1.3


Cross-currency swap (1)
Cash flow
41.6


(4)  
05/20/2019
05/22/2034
0.9


Cross-currency swap (1)
Cash flow
41.6


(5)  
05/20/2019
05/22/2034
0.6


 
 
$
673.5

$
507.2

 
 
 
$
(11.4
)
$
(4.0
)
(1)  
Represents GBP-USD cross-currency swap.
(2)  
GBP fixed rates initially at 4.82% and escalating to 10.96% , and USD fixed rate at 9.800% .
(3)  
GBP fixed rates initially at 4.82% and escalating to 10.96% , and USD fixed rate at 9.803% .
(4)  
GBP fixed rates initially at 4.82% and escalating to 10.96% , and USD fixed rate at 9.745% .
(5)  
GBP fixed rates initially at 4.82% and escalating to 10.96% , and USD fixed rate at 9.755% .
We measure our derivatives at fair value and include the balances within other assets and accounts payable and accrued expenses on our consolidated balance sheets.
We have agreements with each of our derivative counterparties containing provisions under which we could be declared in default on our derivative obligations if repayment of our indebtedness is accelerated by the lender due to our default.
We utilize interest rate swap agreements to manage interest rate risk and cross-currency swaps to manage foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, spot and forward rates, as well as option volatility. 
To comply with the provisions of ASC 820, Fair Value Measurement , we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within level two on the three-level valuation hierarchy, the credit valuation adjustments associated with our derivatives utilize level three inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by ourselves and our counterparties. However, at June 30, 2019 and December 31, 2018, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.  As a result, we determined that our derivative valuations in their entirety are classified as level two on the three-level valuation hierarchy.
Unrealized gains and losses in AOCI are reclassified to interest expense in the case of interest rate swaps and to foreign currency gains and losses, net in the case of cross-currency swaps, when the related hedged items are recognized. During the three and six months ended June 30, 2019, we reclassified $454,000 and  $1.1 million , respectively, from AOCI as an increase to interest expense for our interest rate swaps and $1.4 million for the three and six months ended June 30, 2019 for cross-currency swaps into foreign exchange gains. We did not reclassify any unrealized gains or losses from AOCI to interest expense or foreign exchange gains during the first six months of 2018.
We expect to reclassify  $5.5 million  from AOCI as an increase to interest expense relating to interest rate swaps and $1.6 million from AOCI to foreign currency gain relating to cross-currency swaps within the next twelve months.

-16-


12.      Operating Leases
 
A.      At June 30, 2019 , we owned 5,951 properties in 49 states, Puerto Rico, and the U.K. Of the 5,951 properties, 5,922 , or 99.5% , are single-tenant properties, and the remaining are multi-tenant properties. At June 30, 2019 , 102 properties were available for lease or sale.
 
Substantially all of our leases are net leases where the tenant pays or reimburses us for property taxes and assessments, maintains the interior and exterior of the building and leased premises, and carries insurance coverage for public liability, property damage, fire and extended coverage.
 
Rent based on a percentage of a tenants’ gross sales, or percentage rents, for the second quarter of 2019 and 2018 was $495,000 and $449,000 , respectively. Percentage rents for the first six months of 2019 and 2018 were $4.1 million and $3.8 million , respectively.

At June 30, 2019 , minimum future annual rents to be received on the operating leases for the next five years and thereafter are as follows (dollars in thousands):
2019
$
702,914

2020
1,391,004

2021
1,346,312

2022
1,279,325

2023
1,197,424

Thereafter
8,049,370

Total
$
13,966,349


 
B.      Major Tenants - No individual tenant’s rental revenue, including percentage rents, represented more than 10% of our total revenue for each of the six months ended June 30, 2019 and 2018.
13.    Gain on Sales of Real Estate

The following table summarizes our properties sold during the periods indicated below (dollars in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Number of properties
18

 
26

 
37

 
40

Net sales proceeds
$
28.6

 
$
33.7

 
$
51.1

 
$
47.5

Gain on sales of real estate
$
6.9

 
$
7.8

 
$
14.2

 
$
11.0


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 second quarter of 2019 , we recorded total provisions for impairment of $13.1 million on eight properties classified as held for sale, two properties classified as held for investment, and four sold properties. For the first six months of 2019 , we recorded total provisions for impairment of $17.7 million on ten properties classified as held for sale, two properties classified as held for investment, and 12 sold properties.
In comparison, during the second quarter of 2018 , we recorded total provisions for impairment of $4.0 million on one property classified as held for investment and 17 sold properties. For the first six months of 2018 , we recorded total provisions for impairment of $18.2 million on two properties classified as held for investment and 23 sold properties.

-17-


15.    Distributions Paid and Payable
We pay monthly distributions to our common stockholders. The following is a summary of monthly distributions paid per common share for the first six months of 2019 and 2018 :
Month
2019

 
2018

January
$
0.2210

 
$
0.2125

February
0.2255

 
0.2190

March
0.2255

 
0.2190

April
0.2260

 
0.2195

May
0.2260

 
0.2195