Leasing Results
At September 30, 2019, we had 102 properties available for lease out of 5,964 properties in our portfolio, which represents a 98.3% occupancy rate based on the number of properties in our portfolio.
The following tables summarize our leasing results for the periods indicated below:
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|
|
|
|
|
|
Properties available for lease at June 30, 2019
|
102
|
|
|
Lease expirations
|
50
|
|
|
Re-leases to same tenant (1)
|
(26
|
)
|
|
Re-leases to new tenant (1)(2)
|
(3
|
)
|
|
Dispositions
|
(21
|
)
|
|
Properties available for lease at September 30, 2019
|
102
|
|
|
|
|
|
(1)
|
The annual new rent on these re-leases was $6.96 million, as compared to the previous annual rent of $6.86 million on the same properties, representing a rent recapture rate of 101.5% on the properties re-leased during the quarter ended September 30, 2019.
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|
|
|
|
(2)
|
Re-leased to one new tenant after a period of vacancy, and two new tenants without vacancy
|
|
|
|
|
|
|
|
Properties available for lease at December 31, 2018
|
80
|
|
|
Lease expirations
|
260
|
|
|
Re-leases to same tenant (1)
|
(174
|
)
|
|
Re-leases to new tenant (1)(2)
|
(12
|
)
|
|
Dispositions
|
(52
|
)
|
|
Properties available for lease at September 30, 2019
|
102
|
|
|
|
|
|
(1)
|
The annual new rent on these re-leases was $48.52 million, as compared to the previous annual rent of $47.53 million on the same properties, representing a rent recapture rate of 102.1% on the properties re-leased during the quarter ended September 30, 2019.
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|
|
|
|
(2)
|
Re-leased to six new tenants after a period of vacancy, and six new tenants without vacancy.
|
As part of our re-leasing costs, we pay leasing commissions to unrelated, third party real estate brokers consistent with the commercial real estate industry standard, and sometimes provide tenant rent concessions. We do not consider the collective impact of the leasing commissions or tenant rent concessions to be material to our financial position or results of operations.
At September 30, 2019, our average annualized rental revenue was approximately $14.63 per square foot on the 5,862 leased properties in our portfolio. At September 30, 2019, we classified 28 properties with a carrying amount of $15.8 million as held for sale on our balance sheet. The expected sale of these properties does not represent a strategic shift that will have a major effect on our operations and financial results and is consistent with our existing disposition strategy to further enhance our real estate portfolio and maximize portfolio returns.
Investments in Existing Properties
In the third quarter of 2019, we capitalized costs of $4.9 million on existing properties in our portfolio, consisting of $851,000 for re-leasing costs, $406,000 for recurring capital expenditures, and $3.6 million for non-recurring building improvements. In the third quarter of 2018, we capitalized costs of $6.7 million on existing properties in our portfolio, consisting of $379,000 for re-leasing costs, $382,000 for recurring capital expenditures, and $5.9 million for non-recurring building improvements.
In the first nine months of 2019, we capitalized costs of $11.0 million on existing properties in our portfolio, consisting of $1.9 million for re-leasing costs, $577,000 for recurring capital expenditures, and $8.5 million for non-recurring building improvements. In 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.
The majority of our building improvements relate to roof repairs, HVAC improvements, and parking lot resurfacing and replacements. The amounts of our capital expenditures can vary significantly, depending on the rental market, tenant credit worthiness, the lease term and the willingness of tenants to pay higher rents over the terms of the leases.
We define recurring capital expenditures as mandatory and recurring landlord capital expenditure obligations that have a limited useful life. We define non-recurring capital expenditures as property improvements in which we invest additional capital that extend the useful life of the properties.
Capital Raising
During the third quarter of 2019, we raised $572.4 million from the sale of common stock at a weighted average price of $74.41.
During the first nine months of 2019, we raised $1.58 billion from the sale of common stock at a weighted average price of $71.31.
Pending $1.25 Billion Acquisition of Properties from CIM Real Estate Finance Trust, Inc.
In September 2019, we signed a definitive agreement to acquire 454 single-tenant retail properties from CIM Real Estate Finance Trust, Inc., a non-listed REIT which is sponsored by an affiliate of CIM Group, for approximately $1.25 billion in cash. Additionally, we expect to assume existing mortgage debt totaling approximately $131 million.
The transaction is expected to close in various tranches with the acquisition of most of the properties in the portfolio expected to close in 2019, subject to customary closing conditions.
Amended and Restated Credit Agreement
In August 2019, we amended and restated our unsecured credit facility, or our credit facility, in order to allow borrowings in multiple currencies. The amended and restated credit facility is otherwise substantively consistent with the prior credit agreement entered into in October 2018. Our credit facility consists of a $3.0 billion unsecured revolving credit facility with an initial term that expires in March 2023 and includes, at our option, two six-month extensions and a $250.0 million unsecured term loan due March 2024. The unsecured revolving credit facility allows us to borrow in up to 14 currencies, including U.S. dollars, and has a $1.0 billion expansion option. Under our credit facility, our investment grade credit ratings as of September 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.
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.
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.
Authorized Shares
In May 2019, our stockholders approved an increase in the number of authorized shares of our common stock under our articles of incorporation to 740,200,000 from 370,100,000.
Tau Operating Partnership Buyout and Term Loan Payoff
In January 2019, we redeemed all of the 317,022 remaining common units of Tau Operating Partnership, L.P. held by nonaffiliates for cash. Following the redemption, we hold 100% of the ownership interests of Tau Operating Partnership, L.P., and continue to consolidate the entity. Additionally, in January 2019, we 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 Operating Partnership, L.P., 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.
Select Financial Results
The following summarizes our select financial results (dollars in millions, except per share data):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
% Increase (decrease)
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Three months
|
|
|
Nine months
|
|
|
Net income available to common stockholders (1)
|
$
|
101.0
|
|
|
$
|
99.0
|
|
|
$
|
307.2
|
|
|
$
|
278.5
|
|
|
2.0
|
%
|
|
10.3
|
%
|
|
Net income per share (2)
|
$
|
0.32
|
|
|
$
|
0.34
|
|
|
$
|
0.98
|
|
|
$
|
0.97
|
|
|
(5.9
|
)%
|
|
1.0
|
%
|
|
Gain on sales of real estate
|
$
|
1.7
|
|
|
$
|
7.8
|
|
|
$
|
15.8
|
|
|
$
|
18.8
|
|
|
(78.2
|
)%
|
|
(16.0
|
)%
|
|
Provisions for impairment
|
$
|
13.5
|
|
|
$
|
6.9
|
|
|
$
|
31.2
|
|
|
$
|
25.0
|
|
|
95.7
|
%
|
|
24.8
|
%
|
|
FFO available to common stockholders
|
$
|
262.0
|
|
|
$
|
234.6
|
|
|
$
|
759.2
|
|
|
$
|
685.5
|
|
|
11.7
|
%
|
|
10.8
|
%
|
|
FFO per share (2)
|
$
|
0.82
|
|
|
$
|
0.81
|
|
|
$
|
2.43
|
|
|
$
|
2.39
|
|
|
1.2
|
%
|
|
1.7
|
%
|
|
AFFO available to common stockholders
|
$
|
265.4
|
|
|
$
|
236.2
|
|
|
$
|
768.0
|
|
|
$
|
687.7
|
|
|
12.4
|
%
|
|
11.7
|
%
|
|
AFFO per share (2)
|
$
|
0.83
|
|
|
$
|
0.81
|
|
|
$
|
2.46
|
|
|
$
|
2.40
|
|
|
2.5
|
%
|
|
2.5
|
%
|
(1) The calculation to determine net income available to common stockholders includes impairments, gains from the sale of properties, and foreign currency gains and losses, which can vary from period to period based on timing and can significantly impact net income available to common stockholders.
(2) All per share amounts are presented on a diluted per common share basis.
See our discussion of FFO and AFFO (which are not financial measures under generally accepted accounting principles, or GAAP), later in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this quarterly report, which includes a reconciliation of net income available to common stockholders to FFO and AFFO.
LIQUIDITY AND CAPITAL RESOURCES
Capital Philosophy
Historically, we have met our long-term capital needs by issuing common stock, preferred stock and long-term unsecured notes and bonds. Over the long term, we believe that common stock should be the majority of our capital structure; however, we may issue additional preferred stock or debt securities. We may issue common stock when we believe that our share price is at a level that allows for the proceeds of any offering to be accretively invested into additional properties. In addition, we may issue common stock to permanently finance properties that were initially financed by our credit facility or debt securities. However, we cannot assure you that we will have access to the capital markets at all times and at terms that are acceptable to us.
Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,” which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common and preferred stockholders, primarily through cash provided by operating activities, borrowing on our credit facility and periodically through public securities offerings.
Conservative Capital Structure
We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At September 30, 2019, our total outstanding borrowings of senior unsecured notes and bonds, term loans, mortgages payable and credit facility borrowings were $7.07 billion, or approximately 22.0% of our total market capitalization of $32.09 billion.
We define our total market capitalization at September 30, 2019 as the sum of:
|
|
|
|
•
|
Shares of our common stock outstanding of 325,910,281, plus total common units outstanding of 463,119, multiplied by the last reported sales price of our common stock on the NYSE of $76.68 per share on September 30, 2019, or $25.03 billion;
|
|
|
|
|
•
|
Outstanding mortgages payable of $278.9 million, excluding net mortgage premiums of $3.3 million and deferred financing costs of $143,000;
|
|
|
|
|
•
|
Outstanding borrowings of $500.0 million on our term loans, excluding deferred financing costs of $1.1 million; and
|
|
|
|
|
•
|
Outstanding senior unsecured notes and bonds of $6.29 billion, excluding net unamortized original issuance premiums of $6.6 million and deferred financing costs of $37.3 million.
|
Universal Shelf Registration
In November 2018, we filed a shelf registration statement with the SEC, which is effective for a term of three years and will expire in November 2021. In accordance with SEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock, or depositary shares, and (6) any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.
At-the-Market (ATM) Program
Under our ATM 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. At September 30, 2019, we had 11,083,783 shares remaining for future issuance under our current ATM program. We anticipate maintaining the availability of our ATM program in the future, including through replenishing the authorized shares issuable thereunder.
The following table outlines the common stock issuance pursuant to our ATM program (dollars in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Shares of common stock issued under the ATM program
|
7,663,383
|
|
|
5,055,343
|
|
|
9,370,078
|
|
|
10,630,616
|
|
|
Gross proceeds
|
$
|
570.3
|
|
|
$
|
290.9
|
|
|
$
|
694.4
|
|
|
$
|
588.9
|
|
Issuance of Common Stock
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.
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. 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 2019.
The following table outlines common stock issuances pursuant to our DRSPP program (dollars in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
Inception to Date
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
Shares of common stock issued under the DRSPP program
|
29,801
|
|
|
38,011
|
|
|
89,219
|
|
|
131,072
|
|
|
14,319,029
|
|
|
Gross proceeds
|
$
|
2.1
|
|
|
$
|
2.2
|
|
|
$
|
6.3
|
|
|
$
|
7.0
|
|
|
$
|
677.2
|
|
Revolving Credit Facility
In August 2019, we amended and restated our unsecured credit facility, or our credit facility, in order to allow borrowings in multiple currencies. The amended and restated credit agreement is otherwise substantively consistent with the prior credit agreement entered into in October 2018. Our credit facility consists of a $3.0 billion unsecured revolving credit facility with an initial term that expires in March 2023 and includes, at our option, two six-month extensions and a $250.0 million unsecured term loan due March 2024. The multicurrency revolving facility allows us to borrow in up to 14 currencies, including U.S. dollars. Our revolving credit facility has a $1.0 billion expansion option. Under our credit facility, our investment grade credit ratings as of September 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 September 30, 2019, we had no outstanding balance on our $3.0 billion revolving credit facility. The weighted average interest rate on borrowings under our revolving credit facility during the first nine months of 2019 was 3.2% per annum. We must comply with various financial and other covenants in our credit facility. At September 30, 2019, we were in compliance with these covenants. We expect to use our credit facility to acquire additional properties and for other general corporate purposes. Any additional borrowings will increase our exposure to interest rate risk.
We generally use our credit facility for the short-term financing of new property acquisitions. Thereafter, we generally seek to refinance those borrowings with the net proceeds of long-term or permanent financing, which may include the issuance of common stock, preferred stock or debt securities. We cannot assure you, however, that we will be able to obtain any such refinancing, or that market conditions prevailing at the time of the refinancing will enable us to issue equity or debt securities at acceptable terms.
Term Loans
In October 2018, in conjunction with entering into our 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%.
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%.
Mortgage Debt
As of September 30, 2019, we had $278.9 million of mortgages payable, all of which were assumed in connection with our property acquisitions. Additionally, at September 30, 2019, we had net premiums totaling $3.3 million on these mortgages and deferred financing costs of $143,000. We expect to pay off the mortgages payable as soon as prepayment penalties have declined to a level that would make it economically feasible to do so. During the first nine months of 2019, we made $19.5 million in principal payments, including the repayment of one mortgage in full for $15.8 million.
Notes Outstanding
Our senior unsecured note and bond obligations consist of the following as of September 30, 2019, sorted by maturity date (dollars in millions):
|
|
|
|
|
|
|
|
5.750% notes, issued in June 2010 and due in January 2021
|
$
|
250
|
|
|
3.250% notes, $450 issued in October 2012 and $500 issued in December 2017, both due in October 2022
|
950
|
|
|
4.650% notes, issued in July 2013 and due in August 2023
|
750
|
|
|
3.875% notes, issued in June 2014 and due in July 2024
|
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
|
|
|
3.000% notes, issued in October 2016 and due in January 2027
|
600
|
|
|
3.650% notes, issued in December 2017 and due in January 2028
|
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)
|
387
|
|
|
5.875% bonds, $100 issued in March 2005 and $150 issued in June 2011, both due in March 2035
|
250
|
|
|
4.650% notes, $300 issued in March 2017 and $250 issued in December 2017, both due in March 2047
|
550
|
|
|
Total principal amount
|
$
|
6,287
|
|
|
Unamortized net original issuance premiums and deferred financing costs
|
(31
|
)
|
|
|
$
|
6,256
|
|
(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 September 30, 2019.
All of our outstanding notes and bonds have fixed interest rates and contain various covenants, with which we remained in compliance as of September 30, 2019. Additionally, interest on all of our senior note and bond obligations is paid semiannually.
The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our senior notes and bonds. These calculations, which are not based on U.S. GAAP measurements, are presented to investors to show our ability to incur additional debt under the terms of our senior notes and bonds as well as to disclose our current compliance with such covenants, and are not measures of our liquidity or performance. The actual amounts as of September 30, 2019 are:
|
|
|
|
|
|
|
|
Note Covenants
|
Required
|
Actual
|
|
|
Limitation on incurrence of total debt
|
< 60% of adjusted assets
|
37.7
|
%
|
|
Limitation on incurrence of secured debt
|
< 40% of adjusted assets
|
1.5
|
%
|
|
Debt service coverage (trailing 12 months) (1)
|
> 1.5x
|
4.7x
|
|
|
Maintenance of total unencumbered assets
|
> 150% of unsecured debt
|
268.4
|
%
|
(1) Our debt service coverage ratio is calculated on a pro forma basis for the preceding four-quarter period on the assumptions that: (i) the incurrence of any Debt (as defined in the covenants) incurred by us since the first day of such four-quarter period and the application of the proceeds therefrom (including to refinance other Debt since the first day of such four-quarter period), (ii) the repayment or retirement of any of our Debt since the first day of such four-quarter period, and (iii) any acquisition or disposition by us of any asset or group since the first day of such four quarters had in each case occurred on October 1, 2018 and subject to certain additional adjustments. Such pro forma ratio has been prepared on the basis required by that debt service covenant, reflects various estimates and assumptions and is subject to other uncertainties, and therefore does not purport to reflect what our actual debt service coverage ratio would have been had transactions referred to in clauses (i), (ii) and (iii) of the preceding sentence occurred as of October 1, 2018, nor does it purport to reflect our debt service coverage ratio for any future period. Our fixed charge coverage ratio is calculated in the same manner as our debt service coverage ratio, except that preferred stock dividends are also added to the denominator; since we redeemed our Class F preferred dividends in April 2017, our fixed charge coverage ratio is equivalent to our debt service coverage ratio. The following is our calculation of debt service and fixed charge coverage at September 30, 2019 (in thousands, for trailing twelve months):
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
392,257
|
|
|
Plus: interest expense, excluding the amortization of deferred financing costs
|
277,533
|
|
|
Plus: provision for taxes
|
6,029
|
|
|
Plus: depreciation and amortization
|
575,078
|
|
|
Plus: provisions for impairment
|
32,471
|
|
|
Plus: pro forma adjustments
|
76,847
|
|
|
Less: gain on sales of real estate
|
(21,653
|
)
|
|
|
|
|
Income available for debt service, as defined
|
$
|
1,338,562
|
|
|
|
|
|
Total pro forma debt service charge
|
$
|
287,645
|
|
|
|
|
|
Debt service and fixed charge coverage ratio
|
4.7
|
|
Authorized Shares
In May 2019, our stockholders approved an increase in the number of authorized shares of our common stock under our articles of incorporation to 740,200,000 from 370,100,000.
Cash Reserves
We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our properties. We intend to retain an appropriate amount of cash as working capital. At September 30, 2019, we had cash and cash equivalents totaling $236.1 million.
We believe that our cash and cash equivalents on hand, cash provided from operating activities, and borrowing capacity is sufficient to meet our liquidity needs for the next twelve months. We intend, however, to use permanent or long-term capital to fund property acquisitions and to repay future borrowings under our credit facility.
Credit Agency Ratings
The borrowing interest rates under our revolving credit facility are based upon our ratings assigned by credit rating agencies. As of September 30, 2019, we were assigned the following investment grade corporate credit ratings on our senior unsecured notes and bonds: Moody’s Investors Service has assigned a rating of A3 with a “stable” outlook, Standard & Poor’s Ratings Group has assigned a rating of A- with a “stable” outlook, and Fitch Ratings has assigned a rating of BBB+ with a “stable” outlook.
Based on our ratings as of September 30, 2019, the facility interest rate was LIBOR, plus 0.775% with a facility commitment fee of 0.125%, for all-in drawn pricing of 0.90% over LIBOR. Our credit facility provides that the interest rate can range between: (i) LIBOR, plus 1.45% if our credit rating is lower than BBB-/Baa3 or unrated and (ii) LIBOR, plus 0.75% if our credit rating is A/A2 or higher. In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which range from: (i) 0.30% for a rating lower than BBB-/Baa3 or unrated, and (ii) 0.10% for a credit rating of A/A2 or higher.
We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease. The credit ratings assigned to us could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies and we cannot assure you that our ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, a rating is not a recommendation to buy, sell or hold our debt securities, preferred stock or common stock.
Table of Obligations
The following table summarizes the maturity of each of our obligations as of September 30, 2019 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of
Maturity
|
Credit
Facility (1)
|
|
Notes
and
Bonds (2)
|
|
Term
Loan (3)
|
|
Mortgages
Payable (4)
|
|
Interest (5)
|
|
Ground
Leases Paid by
Realty Income (6)
|
|
Ground
Leases Paid
by Our
Tenants (7)
|
|
Other (8)
|
|
Totals
|
|
|
2019
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1.2
|
|
$
|
59.6
|
|
$
|
0.4
|
|
$
|
3.4
|
|
$
|
8.3
|
|
$
|
72.9
|
|
|
2020
|
—
|
|
—
|
|
250.0
|
|
82.4
|
|
272.1
|
|
1.5
|
|
13.5
|
|
25.0
|
|
644.5
|
|
|
2021
|
—
|
|
250.0
|
|
—
|
|
67.0
|
|
256.1
|
|
1.3
|
|
13.2
|
|
—
|
|
587.6
|
|
|
2022
|
—
|
|
950.0
|
|
—
|
|
109.7
|
|
245.3
|
|
1.2
|
|
13.1
|
|
—
|
|
1,319.3
|
|
|
2023
|
—
|
|
750.0
|
|
—
|
|
6.7
|
|
210.5
|
|
1.2
|
|
13.1
|
|
—
|
|
981.5
|
|
|
Thereafter
|
—
|
|
4,337.1
|
|
250.0
|
|
11.9
|
|
1,252.8
|
|
19.9
|
|
82.1
|
|
—
|
|
5,953.8
|
|
|
Totals
|
$
|
—
|
|
$
|
6,287.1
|
|
$
|
500.0
|
|
$
|
278.9
|
|
$
|
2,296.4
|
|
$
|
25.5
|
|
$
|
138.4
|
|
$
|
33.3
|
|
$
|
9,559.6
|
|
|
|
|
|
(1)
|
The initial term of the credit facility expires in March 2023 and includes, at our option, two six–month extensions.
|
|
|
|
|
(2)
|
Excludes non-cash original issuance discounts and premiums recorded on notes payable of $6.6 million and deferred financing costs of $37.3 million at September 30, 2019.
|
|
|
|
|
(3)
|
Excludes deferred financing costs of $1.1 million.
|
|
|
|
|
(4)
|
Excludes both non–cash net premiums recorded on the mortgages payable of $3.3 million and deferred financing costs of $143,000 at September 30, 2019.
|
|
|
|
|
(5)
|
Interest on the term loans, notes, bonds, mortgages payable, and credit facility has been calculated based on outstanding balances as of September 30, 2019 through their respective maturity dates.
|
|
|
|
|
(6)
|
Realty Income currently pays the ground lessors directly for the rent under the ground leases.
|
|
|
|
|
(7)
|
Our tenants, who are generally sub-tenants under ground leases, are responsible for paying the rent under these ground leases. In the event a tenant fails to pay the ground lease rent, we are primarily responsible.
|
|
|
|
|
(8)
|
“Other” consists of $23.5 million of commitments under construction contracts and $9.8 million for re-leasing costs, recurring capital expenditures, and non-recurring building improvements.
|
Our revolving credit facility, term loans, and notes payable obligations are unsecured. Accordingly, we have not pledged any assets as collateral for these obligations.
No Unconsolidated Investments
We have no unconsolidated investments, nor do we engage in trading activities involving energy or commodity contracts.
Dividend Policy
Distributions are paid monthly to holders of shares of our common stock.
Distributions are paid monthly to the limited partners holding common units of Realty Income, L.P., each on a per unit basis that is generally equal to the amount paid per share to our common stockholders.
In order to maintain our status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our taxable income (excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our taxable income (including net capital gains). In 2018, our cash distributions to common stockholders totaled $761.6 million, or 133.4% of our taxable income of $571.0 million. Our taxable income reflects non-cash deductions for depreciation and amortization. Our taxable income is presented to show our compliance with REIT dividend requirements and is not a measure of our liquidity or operating performance. We intend to continue to make distributions to our stockholders that are sufficient to meet this dividend requirement and that will reduce or eliminate our exposure to income taxes. Furthermore, we believe our funds from operations are sufficient to support our current level of cash distributions to our stockholders. Our cash distributions to common stockholders in the first nine months of 2019 totaled $629.7 million, representing 82.0% of our adjusted funds from operations available to common stockholders of $768.0 million. In comparison, our 2018 cash distributions to common stockholders totaled $761.6 million, representing 82.4% of our adjusted funds from operations available to common stockholders of $924.6 million.
Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, FFO, AFFO, cash flow from operations, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, or the Code, our debt service requirements, and any other factors the Board of Directors may deem relevant. In addition, our credit facility contains financial covenants that could limit the amount of distributions payable by us in the event
of a default, and which prohibit the payment of distributions on the common or preferred stock in the event that we fail to pay when due (subject to any applicable grace period) any principal or interest on borrowings under our credit facility.
Distributions of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary income, except to the extent that we recognize capital gains and declare a capital gains dividend, or that such amounts constitute “qualified dividend income” subject to a reduced rate of tax. The maximum tax rate of non-corporate taxpayers for “qualified dividend income” is generally 20%. In general, dividends payable by REITs are not eligible for the reduced tax rate on qualified dividend income, except to the extent that certain holding requirements have been met with respect to the REIT’s stock and the REIT’s dividends are attributable to dividends received from certain taxable corporations (such as our taxable REIT subsidiaries) or to income that was subject to tax at the corporate or REIT level (for example, if we distribute taxable income that we retained and paid tax on in the prior taxable year). However, non-corporate stockholders, including individuals, generally may deduct up to 20% of dividends from a REIT, other than capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning after December 31, 2017 and before January 1, 2026.
Distributions in excess of earnings and profits generally will first be treated as a non-taxable reduction in the stockholders’ basis in their stock, but not below zero. Distributions in excess of that basis generally will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 22.9% of the distributions to our common stockholders, made or deemed to have been made in 2018, were classified as a return of capital for federal income tax purposes. We estimate that in 2019, between 15% and 25% of the distributions may be classified as a return of capital.
RESULTS OF OPERATIONS
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with GAAP, and are the basis for our discussion and analysis of financial condition and results of operations. Preparing our consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We believe that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018.
In order to prepare our consolidated financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments must be made with regard to critical accounting policies. Management must make significant assumptions in determining the fair value of assets acquired and liabilities assumed. When acquiring a property for investment purposes, we typically allocate the cost of real estate acquired, inclusive of transaction costs, to: (1) land, (2) building and improvements, and (3) identified intangible assets and liabilities, based in each case on their relative estimated fair values. Intangible assets and liabilities consist of above-market or below-market lease value of in-place leases and the value of in-place leases, as applicable. Additionally, above-market rents on certain leases under which we are a lessor are accounted for as financing receivables amortizing over the lease term, while below-market rents on certain leases under which we are a lessor are accounted for as prepaid rent. In an acquisition of multiple properties, we must also allocate the purchase price among the properties. The allocation of the purchase price is based on our assessment of estimated fair value and is often based upon the expected future cash flows of the property and various characteristics of the market where the property is located. In addition, any assumed mortgages receivable or payable are recorded at their estimated fair values. The estimated fair values of our mortgages payable have been calculated by discounting the future cash flows using applicable interest rates that have been adjusted for factors, such as industry type, tenant investment grade, maturity date, and comparable borrowings for similar assets. The use of different assumptions in the allocation of the purchase price of the acquired properties and liabilities assumed could affect the timing of recognition of the related revenue and expenses.
Another significant judgment must be made as to if, and when, impairment losses should be taken on our properties when events or a change in circumstances indicate that the carrying amount of the 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 inputs 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 held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell. The carrying value of our real estate is the largest component of our consolidated balance sheets. Our strategy of primarily holding properties, long-term, directly decreases the likelihood of their carrying values not being recoverable, thus requiring the recognition of an impairment. However, if our strategy, or one or more of the above assumptions were to change in the future, an impairment may need to be recognized. If events should occur that require us to reduce the carrying value of our real estate by recording provisions for impairment, they could have a material impact on our results of operations.
The following is a comparison of our results of operations for the three and nine months ended September 30, 2019, to the three and nine months ended September 30, 2018.
Total Revenue
The following summarizes our total revenue (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
Increase (decrease)
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Three months
|
|
|
Nine months
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental (excluding reimbursable)
|
$
|
356,789
|
|
|
$
|
324,773
|
|
|
$
|
1,041,327
|
|
|
$
|
945,191
|
|
|
$
|
32,016
|
|
|
$
|
96,136
|
|
|
Rental (reimbursable)
|
15,523
|
|
|
12,479
|
|
|
49,274
|
|
|
35,174
|
|
|
3,044
|
|
|
14,100
|
|
|
Other
|
1,935
|
|
|
829
|
|
|
3,461
|
|
|
4,897
|
|
|
1,106
|
|
|
(1,436
|
)
|
|
Total revenue
|
$
|
374,247
|
|
|
$
|
338,081
|
|
|
$
|
1,094,062
|
|
|
$
|
985,262
|
|
|
$
|
36,166
|
|
|
$
|
108,800
|
|
Rental Revenue (excluding reimbursable)
The increase in rental revenue (excluding reimbursable) in the third quarter of 2019 compared to the third quarter of 2018 is primarily attributable to:
|
|
|
|
•
|
The 231 properties (7.5 million square feet) we acquired in 2019, which generated $26.1 million of rent in the third quarter of 2019;
|
|
|
|
|
•
|
The 753 properties (4.8 million square feet) we acquired in 2018, which generated $28.3 million of rent in the third quarter of 2019, compared to $19.7 million in the third quarter of 2018, an increase of $8.6 million;
|
|
|
|
|
•
|
Same store rents generated on 4,836 properties (83.6 million square feet) during the third quarter of 2019 and 2018, increased by $3.6 million, or 1.2%, to $293.73 million from $290.18 million; partially offset by
|
|
|
|
|
•
|
A net decrease in straight-line rent and other non-cash adjustments to rent of $1.3 million in the third quarter of 2019 as compared to the third quarter of 2018;
|
|
|
|
|
•
|
A net decrease of $3.7 million relating to properties sold during 2019 and 2018 that were reported in continuing operations; and
|
|
|
|
|
•
|
A net decrease of $1.2 million relating to the aggregate of (i) rental revenue from properties (134 properties comprising 3.2 million square feet) that were available for lease during part of 2019 or 2018, (ii) rental revenue for ten properties under development, and (iii) lease termination settlements. In aggregate, the revenues for these items totaled $5.6 million in the third quarter of 2019, compared to $6.8 million in the third quarter of 2018.
|
The increase in rental revenue (excluding reimbursable) in the first nine months of 2019 compared to the first nine months of 2018 is primarily attributable to:
|
|
|
|
•
|
The 231 properties (7.5 million square feet) we acquired in the first nine months of 2019, which generated $44.9 million of rent in the first nine months of 2019;
|
|
|
|
|
•
|
The 753 properties (4.8 million square feet) we acquired in 2018, which generated $84.3 million of rent in the first nine months of 2019, compared to $29.7 million in the first nine months of 2018, an increase of $54.6 million; and
|
|
|
|
|
•
|
Same store rents generated on 4,836 properties (83.6 million square feet) during the first nine months of 2019 and 2018, increased by $12.4 million or 1.4%, to $882.53 million from $870.16 million; partially offset by
|
|
|
|
|
•
|
A net decrease in straight-line rent and other non-cash adjustments to rent of $2.3 million in the first nine months of 2019 as compared to the first nine months of 2018;
|
|
|
|
|
•
|
A net decrease of $11.4 million relating to properties sold in the first nine months of 2019 and during 2018 that were reported in continuing operations; and
|
|
|
|
|
•
|
A net decrease of $2.0 million relating to the aggregate of (i) rental revenue from properties (134 properties comprising 3.2 million square feet) that were available for lease during part of 2019 or 2018, (ii) rental revenue for ten properties under development, and (iii) lease termination settlements. In aggregate, the revenues for these items totaled $17.9 million in the first nine months of 2019 compared to $19.9 million in the first nine months of 2018.
|
For purposes of determining the same store rent property pool, we include all properties that were owned for the entire year-to-date period, for both the current and prior year, except for properties during the current or prior year that; (i) were vacant at any time, (ii) were under development or redevelopment, or (iii) were involved in eminent domain and rent was reduced. Each of the exclusions from the same store pool are separately addressed within the applicable sentences above, explaining the changes in rental revenue for the period.
Of the 5,964 properties in the portfolio at September 30, 2019, 5,934, or 99.5%, are single-tenant properties and the remaining are multi-tenant properties. Of the 5,934 single-tenant properties, 5,836, or 98.3%, were net leased at September 30, 2019. Of our 5,836 leased single-tenant properties, 5,038 or 86.3% were under leases that provide for increases in rents through:
|
|
|
|
•
|
Base rent increases tied to a consumer price index (typically subject to ceilings);
|
|
|
|
|
•
|
Percentage rent based on a percentage of the tenants’ gross sales;
|
|
|
|
|
•
|
A combination of two or more of the above rent provisions.
|
Percentage rent, which is included in rental revenue, was $407,000 in the third quarter of 2019, $454,000 in the third quarter of 2018, $4.5 million in the first nine months of 2019, and $4.3 million in the first nine months of 2018. We anticipate percentage rent to be less than 1% of rental revenue for 2019.
Our portfolio of real estate, leased primarily to commercial tenants under net leases, continues to perform well and provides dependable lease revenue supporting the payment of monthly dividends to our stockholders. At September 30, 2019, our portfolio of 5,964 properties was 98.3% leased with 102 properties available for lease, as compared to 98.6% leased, with 80 properties available for lease at December 31, 2018, and 98.8% leased with 71 properties available for lease at September 30, 2018. It has been our experience that approximately 1% to 4% of our property portfolio will be unleased at any given time; however, it is possible that the number of properties available for lease could exceed these levels in the future.
Rental Revenue (reimbursable)
A number of our leases provide for contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses. The increase in tenant reimbursements for the periods presented is primarily due to the growth of our portfolio due to acquisitions.
Other Revenue
The increase in other revenue in the third quarter of 2019 was primarily related to interest income recognized on financing receivables for certain leases with above-market terms as compared to the third quarter of 2018. The decrease in other revenue in the first nine months of 2019 was primarily related to lower proceeds from property insurance claims, condemnations and lower interest income from our investments in U.S. government money market funds as compared to the first nine months of 2018.
Total Expenses
The following summarizes our total expenses (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine months Ended
September 30,
|
|
|
Increase
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Three months
|
|
Nine months
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
$
|
149,424
|
|
|
$
|
136,967
|
|
|
$
|
437,367
|
|
|
$
|
402,069
|
|
|
$
|
12,457
|
|
|
$
|
35,298
|
|
|
Interest
|
73,410
|
|
|
69,342
|
|
|
215,918
|
|
|
195,385
|
|
|
4,068
|
|
|
20,533
|
|
|
General and administrative
|
16,460
|
|
|
16,332
|
|
|
50,153
|
|
|
49,970
|
|
|
128
|
|
|
183
|
|
|
Property (excluding reimbursable)
|
4,831
|
|
|
3,327
|
|
|
14,058
|
|
|
13,420
|
|
|
1,504
|
|
|
638
|
|
|
Property (reimbursable)
|
15,523
|
|
|
12,479
|
|
|
49,274
|
|
|
35,174
|
|
|
3,044
|
|
|
14,100
|
|
|
Income taxes
|
1,822
|
|
|
1,302
|
|
|
4,422
|
|
|
3,733
|
|
|
520
|
|
|
689
|
|
|
Provisions for impairment
|
13,503
|
|
|
6,862
|
|
|
31,236
|
|
|
25,034
|
|
|
6,641
|
|
|
6,202
|
|
|
Total expenses
|
$
|
274,973
|
|
|
$
|
246,611
|
|
|
$
|
802,428
|
|
|
$
|
724,785
|
|
|
$
|
28,362
|
|
|
$
|
77,643
|
|
|
Total revenue (1)
|
358,724
|
|
|
325,602
|
|
|
1,044,788
|
|
|
950,088
|
|
|
|
|
|
|
|
|
General and administrative expenses as a percentage of total revenue (1)
|
4.6
|
%
|
|
5.0
|
%
|
|
4.8
|
%
|
|
5.3
|
%
|
|
|
|
|
|
|
|
Property expenses (excluding reimbursable) as a percentage of total revenue (1)
|
1.3
|
%
|
|
1.0
|
%
|
|
1.3
|
%
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes rental revenue (reimbursable).
|
Depreciation and Amortization
The increase in depreciation and amortization in the third quarter and first nine months of 2019 was primarily due to the acquisition of properties in 2018 and the first nine months of 2019, which was partially offset by property sales in those same periods. As discussed in the sections entitled “Funds from Operations Available to Common Stockholders (FFO)” and “Adjusted Funds from Operations Available to Common Stockholders (AFFO),” depreciation and amortization is a non-cash item that is added back to net income available to common stockholders for our calculation of FFO and AFFO.
Interest Expense
The following is a summary of the components of our interest expense (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Interest on our credit facility, term loans, notes, mortgages and interest rate swaps
|
$
|
69,889
|
|
|
$
|
67,556
|
|
|
$
|
206,247
|
|
|
$
|
192,517
|
|
|
Credit facility commitment fees
|
958
|
|
|
639
|
|
|
2,844
|
|
|
1,896
|
|
|
Amortization of debt origination and deferred financing costs
|
2,552
|
|
|
2,083
|
|
|
6,930
|
|
|
6,168
|
|
|
Loss (gain) on interest rate swaps
|
694
|
|
|
(265
|
)
|
|
2,058
|
|
|
(3,064
|
)
|
|
Amortization of net mortgage premiums
|
(354
|
)
|
|
(354
|
)
|
|
(1,061
|
)
|
|
(1,167
|
)
|
|
Amortization of net note premiums
|
(211
|
)
|
|
(291
|
)
|
|
(784
|
)
|
|
(964
|
)
|
|
Obligations related to financing lease liabilities
|
78
|
|
|
78
|
|
|
233
|
|
|
233
|
|
|
Interest capitalized
|
(196
|
)
|
|
(104
|
)
|
|
(549
|
)
|
|
(234
|
)
|
|
Interest expense
|
$
|
73,410
|
|
|
$
|
69,342
|
|
|
$
|
215,918
|
|
|
$
|
195,385
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility, term loans, mortgages and notes
|
|
|
|
|
|
|
|
|
Average outstanding balances (dollars in thousands)
|
$
|
7,171,012
|
|
|
$
|
6,933,288
|
|
|
$
|
6,991,532
|
|
|
$
|
6,604,422
|
|
|
Average interest rates
|
3.88
|
%
|
|
3.89
|
%
|
|
3.93
|
%
|
|
3.88
|
%
|
The increase in interest expense from 2018 to 2019 for the third quarter and the first nine months is primarily due to the October 2018 issuance of our $250.0 million senior term loan, the May 2019 issuance of our 2.730% notes due 2034, the June 2019 issuance of our 3.250% notes due 2029, and a loss on our interest rate swaps during the third quarter and first nine months of 2019.
At September 30, 2019, we had no outstanding borrowings on our revolving credit facility. The weighted average interest rate on our:
|
|
|
|
•
|
Term loans outstanding of $500.0 million (excluding deferred financing costs of $1.1 million) was 3.3%;
|
|
|
|
|
•
|
Mortgages payable of $278.9 million (excluding net premiums totaling $3.3 million and deferred financing costs of $143,000 on these mortgages) was 5.2%;
|
|
|
|
|
•
|
Notes and bonds payable of $6.29 billion (excluding net unamortized original issue premiums of $6.6 million and deferred financing costs of $37.3 million) was 3.9%; and
|
|
|
|
|
•
|
Combined outstanding notes, bonds, mortgages and term loans of $7.07 billion (excluding all net premiums and deferred financing costs) was 3.9%.
|
General and Administrative Expenses
General and administrative expenses are expenditures related to the operations of our company, including employee–related costs, professional fees, and other general overhead costs associated with running our business. In October 2019, we had 184 employees, as compared to 166 employees in October 2018.
Property Expenses (excluding reimbursable)
Property expenses (excluding reimbursable) consist of costs associated with unleased properties, non-net-leased properties and general portfolio expenses. Expenses related to unleased properties and non-net-leased properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections and legal fees. General portfolio costs include, but are not limited to, insurance, legal, property inspections, and title search fees. At September 30, 2019, 102 properties were available for lease, as compared to 80 at December 31, 2018, and 71 at September 30, 2018.
The increase in property expenses (excluding reimbursable) in the third quarter and the first nine months of 2019 is primarily attributable to higher property taxes and maintenance associated with our expanding portfolio size.
Property Expenses (reimbursable)
The increase in property expenses (reimbursable) in the third quarter and first nine months of 2019 was primarily attributable to the increased portfolio size, which contributed to higher contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses primarily due to our acquisitions in each period.
Income Taxes
Income taxes are for city and state income and franchise taxes, and for U.K. income taxes paid by us and our subsidiaries.
Provisions for Impairment
The following table summarizes provisions for impairment during the periods indicated below (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Total provisions for impairment
|
$
|
13.5
|
|
|
$
|
6.9
|
|
|
$
|
31.2
|
|
|
$
|
25.0
|
|
|
Number of properties:
|
|
|
|
|
|
|
|
|
Classified as held for sale
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
Classified as held for investment
|
2
|
|
|
1
|
|
|
4
|
|
|
3
|
|
|
Sold
|
16
|
|
|
18
|
|
|
28
|
|
|
36
|
|
Gain on Sales of Real Estate
The following table summarizes our properties sold during the periods indicated below (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Number of properties sold
|
27
|
|
|
20
|
|
|
64
|
|
|
60
|
|
|
Net sales proceeds
|
$
|
21.5
|
|
|
$
|
35.5
|
|
|
$
|
72.6
|
|
|
$
|
83.0
|
|
|
Gain on sales of real estate
|
$
|
1.7
|
|
|
$
|
7.8
|
|
|
$
|
15.8
|
|
|
$
|
18.8
|
|
Foreign Currency and Derivative Gains, Net
We borrow in the functional currencies of the countries in which we invest. Foreign currency gains and losses are primarily a result of intercompany debt and certain remeasurement transactions.
Net Income Available to Common Stockholders
The following summarizes our net income available to common stockholders (dollars in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
% Increase (decrease)
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Three months
|
|
|
Nine months
|
|
|
Net income available to common stockholders
|
$
|
101.0
|
|
|
$
|
99.0
|
|
|
$
|
307.2
|
|
|
$
|
278.5
|
|
|
2.0
|
%
|
|
10.3
|
%
|
|
Net income per share (1)
|
$
|
0.32
|
|
|
$
|
0.34
|
|
|
$
|
0.98
|
|
|
$
|
0.97
|
|
|
(5.9
|
)%
|
|
1.0
|
%
|
(1) All per share amounts are presented on a diluted per common share basis.
The calculation to determine net income available to common stockholders includes impairments, gains from the sale of properties, and foreign currency gains and losses, which can vary from period to period based on timing and significantly impact net income available to the Company and available to common stockholders.
Adjusted Earnings before Interest, Taxes, Depreciation and Amortization for Real Estate (Adjusted EBITDAre)
The National Association of Real Estate Investment Trusts (NAREIT) came to the conclusion that a NAREIT-defined EBITDA metric for real estate companies (i.e., EBITDA for real estate, or EBITDAre) would provide investors with a consistent measure to help make investment decisions among REITs. Our definition of “Adjusted EBITDAre” is generally consistent with the NAREIT definition, other than our adjustment to remove foreign currency and derivative gains and losses, as described below (which is consistent with our previous calculations of "Adjusted EBITDA"). We define Adjusted EBITDAre, a non–GAAP financial measure, for the most recent quarter as earnings (net income) before (i) interest expense, including non-cash loss (gain) on swaps, (ii) income and franchise taxes,
(iii) real estate depreciation and amortization, (iv) impairment losses, (v) gain on sales of real estate, and (vi) foreign currency and derivative gains, net. Our Adjusted EBITDAre may not be comparable to Adjusted EBITDAre reported by other companies or as defined by NAREIT, and other companies may interpret or define Adjusted EBITDAre differently than we do. Management believes Adjusted EBITDAre to be a meaningful measure of a REIT’s performance because it is widely followed by industry analysts, lenders and investors. Management also believes the use of an annualized quarterly Adjusted EBITDAre metric is meaningful because it represents the company’s current earnings run rate for the period presented. The ratio of our total debt to our annualized quarterly Adjusted EBITDAre is also used to determine vesting of performance share awards granted to our executive officers. Adjusted EBITDAre should be considered along with, but not as an alternative to net income as a measure of our operating performance. Our ratio of debt to Adjusted EBITDAre, which is used by management as a measure of leverage, is calculated by annualizing quarterly Adjusted EBITDAre and then dividing by net debt. Net debt is total debt per the consolidated balance sheet, less cash and cash equivalents.
The following table summarizes our EBITDAre calculation for the periods indicated below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
|
Net income
|
$
|
101,275
|
|
$
|
99,283
|
|
|
Interest
|
73,410
|
|
69,342
|
|
|
Income taxes
|
1,822
|
|
1,302
|
|
|
Depreciation and amortization
|
149,424
|
|
136,967
|
|
|
Provisions for impairment
|
13,503
|
|
6,862
|
|
|
Gain on sales of real estate
|
(1,674
|
)
|
(7,813
|
)
|
|
Foreign currency and derivative gains, net
|
(327
|
)
|
—
|
|
|
Quarterly Adjusted EBITDAre
|
$
|
337,433
|
|
$
|
305,943
|
|
|
|
|
|
|
Annualized Adjusted EBITDAre (1)
|
$
|
1,349,732
|
|
$
|
1,223,772
|
|
|
Net Debt
|
$
|
6,801,325
|
|
$
|
6,772,993
|
|
|
Net Debt/Adjusted EBITDAre
|
5.0
|
|
5.5
|
|
|
|
|
|
(1)
|
We calculate Annualized Adjusted EBITDAre by multiplying the Quarterly Adjusted EBITDAre by four.
|
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (FFO)
The following summarizes our funds from operations available to common stockholders (FFO) (dollars in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
% Increase
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Three months
|
|
|
Nine months
|
|
|
FFO available to common stockholders
|
$
|
262.0
|
|
|
$
|
234.6
|
|
|
$
|
759.2
|
|
|
$
|
685.5
|
|
|
11.7
|
%
|
|
10.8
|
%
|
|
FFO per share (1)
|
$
|
0.82
|
|
|
$
|
0.81
|
|
|
$
|
2.43
|
|
|
$
|
2.39
|
|
|
1.2
|
%
|
|
1.7
|
%
|
(1) All per share amounts are presented on a diluted per common share basis.
The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net income available to common stockholders
|
$
|
101,049
|
|
|
$
|
98,999
|
|
|
$
|
307,185
|
|
|
$
|
278,542
|
|
|
Depreciation and amortization
|
149,424
|
|
|
136,967
|
|
|
437,367
|
|
|
402,069
|
|
|
Depreciation of furniture, fixtures and equipment
|
(136
|
)
|
|
(166
|
)
|
|
(438
|
)
|
|
(493
|
)
|
|
Provisions for impairment
|
13,503
|
|
|
6,862
|
|
|
31,236
|
|
|
25,034
|
|
|
Gain on sales of real estate
|
(1,674
|
)
|
|
(7,813
|
)
|
|
(15,828
|
)
|
|
(18,818
|
)
|
|
FFO adjustments allocable to noncontrolling interests
|
(135
|
)
|
|
(299
|
)
|
|
(327
|
)
|
|
(820
|
)
|
|
FFO available to common stockholders
|
$
|
262,031
|
|
|
$
|
234,550
|
|
|
$
|
759,195
|
|
|
$
|
685,514
|
|
|
FFO allocable to dilutive noncontrolling interests
|
362
|
|
|
217
|
|
|
1,032
|
|
|
667
|
|
|
Diluted FFO
|
$
|
262,393
|
|
|
$
|
234,767
|
|
|
$
|
760,227
|
|
|
$
|
686,181
|
|
|
|
|
|
|
|
|
|
|
|
FFO per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.82
|
|
|
$
|
0.81
|
|
|
$
|
2.44
|
|
|
$
|
2.39
|
|
|
Diluted
|
$
|
0.82
|
|
|
$
|
0.81
|
|
|
$
|
2.43
|
|
|
$
|
2.39
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid to common stockholders
|
$
|
216,248
|
|
|
$
|
191,703
|
|
|
$
|
629,658
|
|
|
$
|
564,747
|
|
|
FFO available to common stockholders in excess of distributions paid to common stockholders
|
$
|
45,783
|
|
|
$
|
42,847
|
|
|
$
|
129,537
|
|
|
$
|
120,767
|
|
|
Weighted average number of common shares used for computation per share:
|
|
|
|
|
|
|
|
|
Basic
|
319,945,932
|
|
|
290,664,368
|
|
|
311,556,279
|
|
|
286,599,191
|
|
|
Diluted
|
320,726,136
|
|
|
291,207,186
|
|
|
312,300,391
|
|
|
287,105,285
|
|
We define FFO, a non-GAAP measure, consistent with the National Association of Real Estate Investment Trusts' definition, as net income available to common stockholders, plus depreciation and amortization of real estate assets, plus impairments of depreciable real estate assets, and reduced by gains on property sales.
We consider FFO to be an appropriate supplemental measure of a REIT’s operating performance as it is based on a net income analysis of property portfolio performance that adds back items such as depreciation and impairments for FFO. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a supplemental performance measure. In addition, FFO is used as a measure of our compliance with the financial covenants of our credit facility.
ADJUSTED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (AFFO)
The following summarizes our adjusted funds from operations available to common stockholders (AFFO) (dollars in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
% Increase
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Three months
|
|
|
Nine months
|
|
|
AFFO available to common stockholders
|
$
|
265.4
|
|
|
$
|
236.2
|
|
|
$
|
768.0
|
|
|
$
|
687.7
|
|
|
12.4
|
%
|
|
11.7
|
%
|
|
AFFO per share (1)
|
$
|
0.83
|
|
|
$
|
0.81
|
|
|
$
|
2.46
|
|
|
$
|
2.40
|
|
|
2.5
|
%
|
|
2.5
|
%
|
(1) All per share amounts are presented on a diluted per common share basis.
We consider AFFO to be an appropriate supplemental measure of our performance. Most companies in our industry use a similar measurement, but they may use the term “CAD” (for Cash Available for Distribution), “FAD” (for Funds Available for Distribution) or other terms.
The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO and AFFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
Net income available to common stockholders
|
$
|
101,049
|
|
$
|
98,999
|
|
$
|
307,185
|
|
$
|
278,542
|
|
|
Cumulative adjustments to calculate FFO (1)
|
160,982
|
|
135,551
|
|
452,010
|
|
406,972
|
|
|
FFO available to common stockholders
|
262,031
|
|
234,550
|
|
759,195
|
|
685,514
|
|
|
Amortization of share-based compensation
|
3,187
|
|
3,870
|
|
10,478
|
|
12,527
|
|
|
Amortization of deferred financing costs (2)
|
1,299
|
|
1,014
|
|
3,471
|
|
2,872
|
|
|
Amortization of net mortgage premiums
|
(354
|
)
|
(354
|
)
|
(1,061
|
)
|
(1,167
|
)
|
|
Loss (gain) on interest rate swaps
|
694
|
|
(265
|
)
|
2,058
|
|
(3,064
|
)
|
|
Straight-line payments from cross-currency swaps (3)
|
1,754
|
|
—
|
|
2,553
|
|
—
|
|
|
Leasing costs and commissions
|
(851
|
)
|
(379
|
)
|
(1,880
|
)
|
(2,831
|
)
|
|
Recurring capital expenditures
|
(406
|
)
|
(382
|
)
|
(577
|
)
|
(529
|
)
|
|
Straight-line rent
|
(7,642
|
)
|
(6,575
|
)
|
(19,735
|
)
|
(18,207
|
)
|
|
Amortization of above and below-market leases
|
5,486
|
|
4,655
|
|
13,227
|
|
12,426
|
|
|
Other adjustments (4)
|
157
|
|
61
|
|
297
|
|
203
|
|
|
Total AFFO available to common stockholders
|
$
|
265,355
|
|
$
|
236,195
|
|
$
|
768,026
|
|
$
|
687,744
|
|
|
AFFO allocable to dilutive noncontrolling interests
|
368
|
|
227
|
|
1,064
|
|
692
|
|
|
Diluted AFFO
|
$
|
265,723
|
|
$
|
236,422
|
|
$
|
769,090
|
|
$
|
688,436
|
|
|
|
|
|
|
|
|
AFFO per common share:
|
|
|
|
|
|
Basic
|
$
|
0.83
|
|
$
|
0.81
|
|
$
|
2.47
|
|
$
|
2.40
|
|
|
Diluted
|
$
|
0.83
|
|
$
|
0.81
|
|
$
|
2.46
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
Distributions paid to common stockholders
|
$
|
216,248
|
|
$
|
191,703
|
|
$
|
629,658
|
|
$
|
564,747
|
|
|
|
|
|
|
|
|
AFFO available to common stockholders in excess of distributions paid to common stockholders
|
$
|
49,107
|
|
$
|
44,492
|
|
$
|
138,368
|
|
$
|
122,997
|
|
|
Weighted average number of common shares used for computation per share:
|
|
|
|
|
|
Basic
|
319,945,932
|
|
290,664,368
|
|
311,556,279
|
|
286,599,191
|
|
|
Diluted
|
320,726,136
|
|
291,207,186
|
|
312,300,391
|
|
287,105,285
|
|
|
|
|
|
(1)
|
See reconciling items for FFO presented under “Funds from Operations Available to Common Stockholders (FFO).”
|
|
|
|
|
(2)
|
Includes the amortization of costs incurred and capitalized upon issuance of our notes payable, assumption of our mortgages payable and upon issuance of our term loans. The deferred financing costs are being amortized over the lives of the respective mortgages and term loans. No costs associated with our credit facility agreements or annual fees paid to credit rating agencies have been included.
|
|
|
|
|
(3)
|
Straight-line payments from cross-currency swaps represent quarterly payments in U.S. dollars received by us from counterparties in exchange for associated foreign currency payments. These USD payments are fixed and determinable for the duration of the associated hedging transaction.
|
|
|
|
|
(4)
|
Includes adjustments allocable to noncontrolling interests, obligations related to financing lease liabilities, and foreign currency gains and losses as a result of intercompany debt and remeasurement transactions.
|
We believe the non-GAAP financial measure AFFO provides useful information to investors because it is a widely accepted industry measure of the operating performance of real estate companies that is used by industry analysts and investors who look at and compare those companies. In particular, AFFO provides an additional measure to compare the operating performance of different REITs without having to account for differing depreciation
assumptions and other unique revenue and expense items which are not pertinent to measuring a particular company’s on-going operating performance. Therefore, we believe that AFFO is an appropriate supplemental performance metric, and that the most appropriate GAAP performance metric to which AFFO should be reconciled is net income available to common stockholders.
Presentation of the information regarding FFO and AFFO is intended to assist the reader in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and AFFO in the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and AFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as alternatives to net income as an indication of our performance. FFO and AFFO should not be considered as alternatives to reviewing our cash flows from operating, investing, and financing activities. In addition, FFO and AFFO should not be considered as measures of liquidity, our ability to make cash distributions, or our ability to pay interest payments.
PROPERTY PORTFOLIO INFORMATION
At September 30, 2019, we owned a diversified portfolio:
|
|
|
|
•
|
With an occupancy rate of 98.3%, or 5,862 properties leased and 102 properties available for lease;
|
|
|
|
|
•
|
Leased to 274 different commercial tenants doing business in 49 separate industries;
|
|
|
|
|
•
|
Located in 49 U.S. states, Puerto Rico and the U.K.;
|
|
|
|
|
•
|
With over 100.5 million square feet of leasable space; and
|
|
|
|
|
•
|
With an average leasable space per property of approximately 16,852 square feet; approximately 11,873 square feet per retail property and 237,668 square feet per industrial property.
|
Of the 5,964 properties we owned at September 30, 2019, 5,862 were leased under net lease agreements. A net lease typically requires the tenant to be responsible for monthly rent and certain property operating expenses including property taxes, insurance, and maintenance. In addition, our tenants are typically subject to future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases.
At September 30, 2019, our 274 commercial tenants, which we define as retailers with over 50 locations and non-retailers with over $500 million in annual revenues, represented approximately 95% of our annualized revenue. We had 329 additional tenants, representing approximately 5% of our annualized revenue at September 30, 2019, which brings our total tenant count to 603 tenants.
Industry Diversification
The following table sets forth certain information regarding our property portfolio classified according to the business of the respective tenants, expressed as a percentage of our total rental revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Rental Revenue (excluding reimbursable) by Industry
|
|
|
For the
Quarter Ended
September 30, 2019
|
|
|
|
For the Years Ended
|
|
|
|
|
Dec 31,
2018
|
|
|
|
Dec 31,
2017
|
|
|
|
Dec 31,
2016
|
|
|
|
Dec 31,
2015
|
|
|
|
Dec 31,
2014
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
0.8
|
%
|
|
|
0.8
|
%
|
|
|
0.9
|
%
|
|
|
1.0
|
%
|
|
|
1.1
|
%
|
|
|
1.2
|
%
|
|
|
Apparel stores
|
1.1
|
|
|
|
1.3
|
|
|
|
1.6
|
|
|
|
1.9
|
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
Automotive collision services
|
1.2
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
Automotive parts
|
1.5
|
|
|
|
1.7
|
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
1.3
|
|
|
|
Automotive service
|
2.4
|
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
1.9
|
|
|
|
1.9
|
|
|
|
1.8
|
|
|
|
Automotive tire services
|
2.2
|
|
|
|
2.4
|
|
|
|
2.6
|
|
|
|
2.7
|
|
|
|
2.9
|
|
|
|
3.2
|
|
|
|
Beverages
|
2.2
|
|
|
|
2.5
|
|
|
|
2.7
|
|
|
|
2.6
|
|
|
|
2.7
|
|
|
|
2.8
|
|
|
|
Child care
|
2.2
|
|
|
|
1.7
|
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
2.0
|
|
|
|
2.2
|
|
|
|
Consumer appliances
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
Consumer electronics
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
Consumer goods
|
0.6
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
Convenience stores
|
11.6
|
|
|
|
11.2
|
|
|
|
9.6
|
|
|
|
8.7
|
|
|
|
9.2
|
|
|
|
10.1
|
|
|
|
Crafts and novelties
|
0.6
|
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
Diversified industrial
|
0.7
|
|
|
|
0.8
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
0.5
|
|
|
|
Dollar stores
|
7.1
|
|
|
|
7.5
|
|
|
|
7.9
|
|
|
|
8.6
|
|
|
|
8.9
|
|
|
|
9.6
|
|
|
|
Drug stores
|
8.9
|
|
|
|
10.2
|
|
|
|
10.9
|
|
|
|
11.2
|
|
|
|
10.6
|
|
|
|
9.5
|
|
|
|
Education
|
0.2
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
Electric utilities
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
Entertainment
|
0.4
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
Equipment services
|
0.4
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
Financial services
|
2.1
|
|
|
|
2.3
|
|
|
|
2.4
|
|
|
|
1.8
|
|
|
|
1.7
|
|
|
|
1.8
|
|
|
|
Food processing
|
0.5
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
1.4
|
|
|
|
General merchandise
|
2.7
|
|
|
|
2.3
|
|
|
|
2.0
|
|
|
|
1.8
|
|
|
|
1.7
|
|
|
|
1.5
|
|
|
|
Government services
|
0.7
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
Grocery stores
|
5.0
|
|
|
|
5.0
|
|
|
|
4.4
|
|
|
|
3.1
|
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
Health and beauty
|
0.3
|
|
|
|
0.2
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
Health and fitness
|
7.4
|
|
|
|
7.4
|
|
|
|
7.5
|
|
|
|
8.1
|
|
|
|
7.7
|
|
|
|
7.0
|
|
|
|
Health care
|
1.4
|
|
|
|
1.5
|
|
|
|
1.4
|
|
|
|
1.5
|
|
|
|
1.7
|
|
|
|
1.8
|
|
|
|
Home furnishings
|
0.7
|
|
|
|
0.8
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
Home improvement
|
3.1
|
|
|
|
3.0
|
|
|
|
2.6
|
|
|
|
2.5
|
|
|
|
2.4
|
|
|
|
1.7
|
|
|
|
Insurance
|
*
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
Jewelry
|
*
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
Machinery
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
Motor vehicle dealerships
|
1.7
|
|
|
|
1.9
|
|
|
|
2.1
|
|
|
|
1.9
|
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
Office supplies
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
Other manufacturing
|
0.6
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
Packaging
|
1.0
|
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
Paper
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
Pet supplies and services
|
0.6
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
Restaurants - casual dining
|
3.1
|
|
|
|
3.2
|
|
|
|
3.8
|
|
|
|
3.9
|
|
|
|
3.8
|
|
|
|
4.3
|
|
|
|
Restaurants - quick service
|
6.1
|
|
|
|
5.7
|
|
|
|
5.1
|
|
|
|
4.9
|
|
|
|
4.2
|
|
|
|
3.7
|
|
|
|
Shoe stores
|
0.3
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
Sporting goods
|
0.8
|
|
|
|
1.1
|
|
|
|
1.4
|
|
|
|
1.6
|
|
|
|
1.8
|
|
|
|
1.6
|
|
|
|
Telecommunications
|
0.5
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
Theaters
|
6.7
|
|
|
|
5.5
|
|
|
|
5.0
|
|
|
|
4.9
|
|
|
|
5.1
|
|
|
|
5.3
|
|
|
|
Transportation services
|
4.6
|
|
|
|
5.0
|
|
|
|
5.4
|
|
|
|
5.5
|
|
|
|
5.4
|
|
|
|
5.2
|
|
|
|
Wholesale clubs
|
2.7
|
|
|
|
3.0
|
|
|
|
3.3
|
|
|
|
3.6
|
|
|
|
3.8
|
|
|
|
4.1
|
|
|
|
Other
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
Total U.S.
|
98.1
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
U.K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grocery Stores
|
1.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Total U.K.
|
1.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Totals
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Property Type Composition
The following table sets forth certain property type information regarding our property portfolio as of September 30, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Property Type
|
Number of
Properties
|
Approximate
Leasable
Square Feet (1)
|
Rental Revenue for the
Quarter Ended
September 30, 2019 (2)
|
|
Percentage of
Rental Revenue
|
|
|
Retail
|
5,787
|
68,708,100
|
$
|
295,202
|
|
82.7
|
%
|
|
Industrial
|
120
|
28,520,100
|
41,395
|
|
11.6
|
|
|
Office
|
42
|
3,091,500
|
13,418
|
|
3.8
|
|
|
Agriculture
|
15
|
184,500
|
6,708
|
|
1.9
|
|
|
Totals
|
5,964
|
100,504,200
|
$
|
356,723
|
|
100.0
|
%
|
|
|
|
|
(1)
|
Includes leasable building square footage. Excludes 3,300 acres of leased land categorized as agriculture at September 30, 2019.
|
|
|
|
|
(2)
|
Includes rental revenue for all properties owned at September 30, 2019. Excludes revenue of $66 from sold properties and rental revenue (reimbursable) of $15,523.
|
Tenant Diversification
The following table sets forth the 20 largest tenants in our property portfolio, expressed as a percentage of total rental revenue at September 30, 2019:
|
|
|
|
|
|
|
|
|
Tenant
|
Number of
Leases
|
|
% of Rental
Revenue (1)
|
|
|
Walgreens
|
215
|
|
5.7
|
%
|
|
7-Eleven
|
398
|
|
5.1
|
%
|
|
FedEx
|
42
|
|
4.4
|
%
|
|
Dollar General
|
609
|
|
3.8
|
%
|
|
LA Fitness
|
55
|
|
3.6
|
%
|
|
AMC Theatres
|
34
|
|
3.2
|
%
|
|
Dollar Tree / Family Dollar
|
469
|
|
3.1
|
%
|
|
Regal Cinemas
|
41
|
|
3.1
|
%
|
|
Wal-Mart / Sam's Club
|
54
|
|
2.8
|
%
|
|
Lifetime Fitness
|
14
|
|
2.3
|
%
|
|
Circle K (Couche-Tard)
|
287
|
|
2.1
|
%
|
|
Sainsbury's
|
13
|
|
2.0
|
%
|
|
BJ's Wholesale Clubs
|
15
|
|
1.9
|
%
|
|
Treasury Wine Estates
|
17
|
|
1.8
|
%
|
|
CVS Pharmacy
|
84
|
|
1.7
|
%
|
|
Kroger
|
22
|
|
1.7
|
%
|
|
Super America (Marathon)
|
137
|
|
1.5
|
%
|
|
GPM Investments / Fas Mart
|
208
|
|
1.5
|
%
|
|
TBC Corp
|
159
|
|
1.4
|
%
|
|
Home Depot
|
17
|
|
1.3
|
%
|
|
Totals
|
2,890
|
|
54.0
|
%
|
|
|
|
|
(1)
|
Excludes rental revenue (reimbursable).
|
Service Category Diversification for our Retail Properties
The following table sets forth certain information regarding the properties owned at September 30, 2019, classified according to the business types and the level of services they provide (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Retail Rental Revenue for the Quarter Ended
September 30, 2019 (1)
|
|
Percentage of Retail Rental Revenue
|
|
|
Tenants Providing Services
|
|
|
|
Automotive collision services
|
$
|
4,293
|
|
1.5
|
%
|
|
Automotive service
|
8,505
|
|
2.9
|
|
|
Child care
|
7,864
|
|
2.7
|
|
|
Education
|
827
|
|
0.3
|
|
|
Entertainment
|
1,327
|
|
0.5
|
|
|
Equipment services
|
114
|
|
*
|
|
|
Financial services
|
6,561
|
|
2.2
|
|
|
Health and fitness
|
26,359
|
|
8.9
|
|
|
Health care
|
2,086
|
|
0.7
|
|
|
Telecommunications
|
80
|
|
*
|
|
|
Theaters
|
23,972
|
|
8.1
|
|
|
Transportation services
|
250
|
|
0.1
|
|
|
Other
|
197
|
|
0.1
|
|
|
|
82,435
|
|
28.0
|
|
|
Tenants Selling Goods and Services
|
|
|
|
Automotive parts (with installation)
|
1,704
|
|
0.6
|
|
|
Automotive tire services
|
7,766
|
|
2.6
|
|
|
Convenience stores
|
41,152
|
|
13.9
|
|
|
Health and beauty
|
13
|
|
*
|
|
|
Motor vehicle dealerships
|
6,033
|
|
2.0
|
|
|
Pet supplies and services
|
1,240
|
|
0.4
|
|
|
Restaurants - casual dining
|
10,264
|
|
3.5
|
|
|
Restaurants - quick service
|
21,880
|
|
7.4
|
|
|
|
90,052
|
|
30.4
|
|
|
Tenants Selling Goods
|
|
|
|
Apparel stores
|
4,001
|
|
1.4
|
|
|
Automotive parts
|
3,380
|
|
1.1
|
|
|
Book stores
|
113
|
|
*
|
|
|
Consumer electronics
|
1,112
|
|
0.4
|
|
|
Crafts and novelties
|
1,908
|
|
0.6
|
|
|
Dollar stores
|
25,209
|
|
8.5
|
|
|
Drug stores
|
30,390
|
|
10.3
|
|
|
General merchandise
|
7,239
|
|
2.5
|
|
|
Grocery stores
|
17,662
|
|
6.0
|
|
|
Grocery stores - UK
|
6,525
|
|
2.2
|
|
|
Home furnishings
|
2,167
|
|
0.7
|
|
|
Home improvement
|
9,624
|
|
3.3
|
|
|
Jewelry
|
175
|
|
0.1
|
|
|
Office supplies
|
569
|
|
0.2
|
|
|
Shoe stores
|
185
|
|
0.1
|
|
|
Sporting goods
|
2,988
|
|
1.0
|
|
|
Wholesale clubs
|
9,468
|
|
3.2
|
|
|
|
122,715
|
|
41.6
|
%
|
|
Totals
|
$
|
295,202
|
|
100.0
|
%
|
|
|
|
|
(1)
|
Includes rental revenue for all retail leases for properties owned at September 30, 2019. Excludes revenue of $61,521 from non-retail leases, $66 from sold properties, and $15,523 of rental revenue (reimbursable).
|
Lease Expirations
The following table sets forth certain information regarding the timing of the lease term expirations in our portfolio (excluding rights to extend a lease at the option of the tenant) and their contribution to rental revenue for the quarter ended September 30, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio(1)
|
|
|
Expiring
Leases
|
Approx.
Leasable
Sq. Feet
|
|
Rental Revenue for
the Quarter Ended
September 30, 2019
|
|
% of
Rental
Revenue
|
|
|
Year
|
Retail
|
Non-Retail
|
|
2019
|
49
|
4
|
383,400
|
|
$
|
1,729
|
|
0.5
|
%
|
|
2020
|
216
|
10
|
2,962,500
|
|
10,424
|
|
2.9
|
|
|
2021
|
327
|
16
|
5,288,900
|
|
15,297
|
|
4.3
|
|
|
2022
|
410
|
22
|
9,332,000
|
|
21,145
|
|
5.9
|
|
|
2023
|
541
|
23
|
9,973,300
|
|
30,687
|
|
8.6
|
|
|
2024
|
389
|
16
|
6,632,100
|
|
21,267
|
|
6.0
|
|
|
2025
|
365
|
16
|
6,582,500
|
|
23,736
|
|
6.7
|
|
|
2026
|
310
|
4
|
4,861,900
|
|
15,747
|
|
4.4
|
|
|
2027
|
523
|
5
|
6,318,000
|
|
21,977
|
|
6.1
|
|
|
2028
|
340
|
14
|
9,330,300
|
|
22,924
|
|
6.4
|
|
|
2029
|
422
|
7
|
8,413,100
|
|
23,832
|
|
6.7
|
|
|
2030
|
176
|
14
|
3,822,700
|
|
19,064
|
|
5.4
|
|
|
2031
|
313
|
25
|
6,176,200
|
|
28,141
|
|
7.9
|
|
|
2032
|
109
|
4
|
3,369,900
|
|
13,204
|
|
3.7
|
|
|
2033
|
275
|
1
|
3,239,600
|
|
16,955
|
|
4.8
|
|
|
2034-2044
|
987
|
6
|
11,902,800
|
|
70,008
|
|
19.7
|
|
|
Totals
|
5,752
|
187
|
98,589,200
|
|
$
|
356,137
|
|
100.0
|
%
|
|
|
|
|
(1)
|
The lease expirations for leases under construction are based on the estimated date of completion of those projects. Excludes revenue of $586 from 120 expired leases, $66 from sold properties, and $15,523 of rental revenue (reimbursable) at September 30, 2019. Leases on our multi-tenant properties are counted separately in the table above.
|
Geographic Diversification
The following table sets forth certain state-by-state information regarding our property portfolio as of September 30, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
Number of Properties
|
|
Percent Leased
|
|
Approximate Leasable
Square Feet
|
Rental Revenue
for the Quarter Ended
September 30, 2019 (1)
|
|
Percentage of Rental
Revenue
|
|
|
Alabama
|
170
|
|
97
|
%
|
1,594,400
|
$
|
5,973
|
|
1.7
|
%
|
|
Alaska
|
3
|
|
100
|
|
274,600
|
535
|
|
0.1
|
|
|
Arizona
|
119
|
|
100
|
|
1,823,200
|
7,296
|
|
2.1
|
|
|
Arkansas
|
86
|
|
100
|
|
919,900
|
2,460
|
|
0.7
|
|
|
California
|
200
|
|
99
|
|
6,394,800
|
31,428
|
|
8.8
|
|
|
Colorado
|
97
|
|
95
|
|
1,554,800
|
5,894
|
|
1.7
|
|
|
Connecticut
|
21
|
|
95
|
|
1,378,200
|
3,279
|
|
0.9
|
|
|
Delaware
|
18
|
|
100
|
|
93,000
|
661
|
|
0.2
|
|
|
Florida
|
399
|
|
98
|
|
4,360,300
|
19,362
|
|
5.4
|
|
|
Georgia
|
285
|
|
97
|
|
4,402,200
|
13,881
|
|
3.9
|
|
|
Idaho
|
12
|
|
100
|
|
87,000
|
398
|
|
0.1
|
|
|
Illinois
|
280
|
|
99
|
|
6,227,600
|
21,898
|
|
6.1
|
|
|
Indiana
|
192
|
|
99
|
|
2,353,400
|
9,409
|
|
2.6
|
|
|
Iowa
|
39
|
|
95
|
|
3,028,500
|
4,400
|
|
1.2
|
|
|
Kansas
|
112
|
|
96
|
|
2,097,500
|
5,883
|
|
1.6
|
|
|
Kentucky
|
84
|
|
99
|
|
1,721,700
|
4,885
|
|
1.4
|
|
|
Louisiana
|
120
|
|
97
|
|
1,682,700
|
5,410
|
|
1.6
|
|
|
Maine
|
18
|
|
100
|
|
203,700
|
1,225
|
|
0.3
|
|
|
Maryland
|
38
|
|
100
|
|
1,494,000
|
5,236
|
|
1.5
|
|
|
Massachusetts
|
58
|
|
91
|
|
782,100
|
3,851
|
|
1.1
|
|
|
Michigan
|
195
|
|
99
|
|
2,224,200
|
7,819
|
|
2.2
|
|
|
Minnesota
|
166
|
|
98
|
|
2,261,100
|
10,613
|
|
3.0
|
|
|
Mississippi
|
172
|
|
98
|
|
1,892,900
|
5,509
|
|
1.5
|
|
|
Missouri
|
176
|
|
95
|
|
2,837,900
|
9,136
|
|
2.6
|
|
|
Montana
|
12
|
|
100
|
|
89,100
|
552
|
|
0.2
|
|
|
Nebraska
|
46
|
|
100
|
|
708,800
|
1,763
|
|
0.5
|
|
|
Nevada
|
24
|
|
96
|
|
1,196,900
|
2,147
|
|
0.6
|
|
|
New Hampshire
|
13
|
|
100
|
|
313,100
|
1,404
|
|
0.4
|
|
|
New Jersey
|
75
|
|
99
|
|
1,051,300
|
5,866
|
|
1.6
|
|
|
New Mexico
|
36
|
|
100
|
|
375,100
|
1,277
|
|
0.4
|
|
|
New York
|
127
|
|
99
|
|
2,868,800
|
15,736
|
|
4.4
|
|
|
North Carolina
|
191
|
|
99
|
|
3,183,200
|
10,773
|
|
3.0
|
|
|
North Dakota
|
5
|
|
100
|
|
95,700
|
178
|
|
*
|
|
|
Ohio
|
312
|
|
98
|
|
7,649,200
|
17,414
|
|
4.9
|
|
|
Oklahoma
|
183
|
|
99
|
|
2,247,000
|
7,655
|
|
2.1
|
|
|
Oregon
|
28
|
|
100
|
|
591,500
|
2,338
|
|
0.7
|
|
|
Pennsylvania
|
222
|
|
98
|
|
2,226,900
|
10,962
|
|
3.1
|
|
|
Rhode Island
|
3
|
|
100
|
|
158,000
|
815
|
|
0.2
|
|
|
South Carolina
|
179
|
|
96
|
|
1,791,200
|
8,181
|
|
2.3
|
|
|
South Dakota
|
18
|
|
100
|
|
203,700
|
476
|
|
0.1
|
|
|
Tennessee
|
249
|
|
99
|
|
3,676,800
|
11,497
|
|
3.2
|
|
|
Texas
|
720
|
|
99
|
|
10,815,700
|
39,237
|
|
11.0
|
|
|
Utah
|
22
|
|
100
|
|
933,000
|
2,267
|
|
0.6
|
|
|
Vermont
|
2
|
|
100
|
|
88,000
|
365
|
|
0.1
|
|
|
Virginia
|
212
|
|
99
|
|
3,134,900
|
10,242
|
|
2.9
|
|
|
Washington
|
49
|
|
98
|
|
896,800
|
3,106
|
|
0.9
|
|
|
West Virginia
|
26
|
|
100
|
|
427,300
|
1,463
|
|
0.4
|
|
|
Wisconsin
|
125
|
|
98
|
|
2,834,400
|
7,484
|
|
2.1
|
|
|
Wyoming
|
8
|
|
100
|
|
60,800
|
317
|
|
0.1
|
|
|
Puerto Rico
|
4
|
|
100
|
|
28,300
|
149
|
|
*
|
|
|
U.K.
|
13
|
|
100
|
|
1,169,000
|
6,618
|
|
1.9
|
|
|
TotalsAverage
|
5,964
|
|
98
|
%
|
100,504,200
|
$
|
356,723
|
|
100.0
|
%
|
|
|
|
|
(1)
|
Includes rental revenue for all properties owned at September 30, 2019. Excludes revenue of $66 from sold properties and $15,523 of tenant reimbursement revenue.
|
IMPACT OF INFLATION
Tenant leases generally provide for limited increases in rent as a result of increases in the tenants’ sales volumes, increases in the consumer price index (typically subject to ceilings), or fixed increases. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.
Moreover, our use of net lease agreements tends to reduce our exposure to rising property expenses due to inflation because the tenant is responsible for property expenses. Inflation and increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
For information on the impact of recent accounting pronouncements on our business, see note 2 of the Notes to the Consolidated Financial Statements.
OTHER INFORMATION
Our common stock is listed on the NYSE under the ticker symbol “O” with a CUSIP number of 756109-104. Our central index key number is 726728.
We maintain a corporate website at www.realtyincome.com. On our website we make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, Form 3s, Form 4s, Form 5s, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file these reports with the Securities and Exchange Commission, or SEC. None of the information on our website is deemed to be part of this report.
Corporate Responsibility
Realty Income is committed to conducting our business according to the highest ethical standards. We are dedicated to providing an engaging, diverse, and safe work environment for our employees, operating our business in an environmentally conscious manner, and upholding our corporate responsibilities as a public company for the benefit of our shareholders. As The Monthly Dividend Company®, our mission is to provide our stockholders with monthly dividends that increase over time. How we manage and use the physical, financial and talent resources that enable us to achieve this mission, demonstrates our commitment to corporate responsibility.
Environmental Practices
Our focus on the environment is demonstrated by how we manage our day-to-day activities at our corporate headquarters. At our headquarters, we promote energy efficiency and encourage practices such as:
|
|
|
|
•
|
Powering down office equipment at the end of the day;
|
|
|
|
|
•
|
Implementing file-sharing technology and automatic “duplex mode” to limit paper use;
|
|
|
|
|
•
|
Adopting electronic approval systems;
|
|
|
|
|
•
|
Encouraging employees to carpool to our headquarters; and
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With respect to recycling and reuse practices, we encourage the use of recycled products and the recycling of materials during our operations. Cell phones, wireless devices and office equipment are recycled or donated whenever possible. In 2018, we sent more than 28,500 pounds of paper to our offsite partner for recycling.
In addition, our headquarters was constructed according to the State of California energy efficiency standards (specifically following California Green Building Standards Code and Title 24 of the California Code of Regulations), with features such as an automatic lighting control system with light-harvesting technology, a building management system that monitors and controls energy use, an energy-efficient PVC roof and heating and cooling system, and drought-tolerant landscaping with recycled materials. We continue to evaluate our current operations, strive to improve our environmental performance, and implement sustainable business practices.
The properties in our portfolio are primarily net leased to our tenants who are responsible for maintaining the buildings and are in control of their energy usage and environmental sustainability practices. We work with our tenants to promote environmental responsibility at the properties we own, with some locations achieving LEED (Leadership in Energy and Environmental Design) certification.
Our Asset Management team has engaged with a renewable energy development company to identify assets that would maximize energy efficiency initiatives throughout our property portfolio. These initiatives include solar energy arrays, battery storage, and charging stations. In addition, we continue to explore regional opportunities with our tenants in order to qualify for city and county renewable energy or energy efficiency programs to conserve our world’s finite resources.
Realty Income also has an internal "Green Team" that encourages our employees to focus on environmentally-smart choices to further reduce our environmental impact as a company. The Green Team, which includes executive and officer-level employees, works to positively impact the environment through education and engagement within the company and local communities, focusing on waste, energy, and water management.
Company Culture and Employees
We put great effort into cultivating an inclusive company culture. We are one team, and together we are committed to a culture that provides an engaging work environment and encourages respect, collaboration, humility, transparency, and integrity. Regular open communication is central to how we work, and our employees take pride in our 50-year history of providing monthly dividends to our stockholders. We hire talented employees with diverse backgrounds and perspectives, and work to provide an environment where capable team members have fulfilling careers in the real estate industry.
Social Responsibility
We are committed to providing a positive and engaging work environment for our employees and taking an active role in the betterment of the communities in which our employees and shareholders live and work. Our employees are awarded compensation that is in line with those of our peers and competitors, including generous healthcare benefits (medical, dental, vision) for all employees and their families, participation in a 401(k) plan with a matching contribution from Realty Income, restricted stock awards based on company performance, competitive paid time-off benefits, a well-being program, continued education and development opportunities, up to 16 weeks of paid maternity leave, and an infant-at-work program for new parents. We also have a long-standing commitment to being an equal opportunity employer and adhere to all Equal Employer Opportunity Policy guidelines.
We believe that giving back to our community is an extension of our mission to improve the lives of our shareholders, our employees, and their families. Realty Income and its employees have taken an active role in supporting communities through civic involvement with non-profit organizations and corporate donations. Our non-profit activities resulted in approximately 810 company-sponsored employee volunteer hours in 2018, principally through our partnership with San Diego Habitat for Humanity. We are proud of the efforts we have made to date and look forward to continuing to strengthen our impact as part of the successful operations of The Monthly Dividend Company®.
Additional information on Realty Income’s commitment to social responsibility may be found on our website.
Corporate Governance
We believe that nothing is more important than a company’s reputation for integrity and serving as a responsible fiduciary for its shareholders. We are committed to managing the company for the benefit of our stockholders and are focused on maintaining good corporate governance. Practices that illustrate this commitment include, but are not limited to:
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Our Board of Directors is currently comprised of nine directors, eight of whom are independent, non-employee directors;
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In accordance with our continued focus on board refreshment, in July 2018, we added two new independent, non-employee directors;
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Our Board of Directors is elected on an annual basis with a majority vote standard;
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Our Directors conduct annual self-evaluations and participate in orientation and continuing education programs;
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An Enterprise Risk Management evaluation is conducted annually to identify and assess company risk;
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Each committee within our Board of Directors is comprised entirely of independent directors; and
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We adhere to all other corporate governance principles outlined in our Corporate Governance Guidelines. These guidelines, as well as our bylaws, committee charters and other governance documents may be found on our website.
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Business Ethics
We are committed to conducting our business according to the highest ethical standards and upholding our corporate responsibilities as a public company operating for the benefit of our shareholders. Our Board of Directors has adopted a Code of Business Ethics that applies to our directors, officers, and other employees. The Code of Business Ethics includes our commitment to dealing fairly with all of our customers, service providers, suppliers, and competitors. We conduct annual training with our employees regarding ethical behavior and require all employees to acknowledge the terms of, and abide by, our Code of Business Ethics, which is also available on our website. Our employees have access to members of our Board of Directors to report anonymously, if desired, any suspicion of misconduct by any member of our senior management or executive team. Anonymous reporting is always available through the company’s whistleblower hotline and reported to our Audit Committee quarterly.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate changes primarily as a result of our credit facility, term loans, mortgages payable, and long-term notes and bonds used to maintain liquidity and expand our real estate investment portfolio and operations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flow and to lower our overall borrowing costs. To achieve these objectives we issue long-term notes and bonds, primarily at fixed rates.
In order to mitigate and manage the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps and caps. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks, including counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. To limit counterparty credit risk we will seek to enter into such agreements with major financial institutions with favorable credit ratings. There can be no assurance that we will be able to adequately protect against the foregoing risks or realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging activities. We do not enter into any derivative transactions for speculative or trading purposes.
The following table presents by year of expected maturity, the principal amounts, average interest rates and estimated fair values of our fixed and variable rate debt as of September 30, 2019. This information is presented to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in millions):
Expected Maturity Data
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Year of Maturity
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Fixed rate
debt
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Weighted average rate
on fixed rate debt
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2019
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$
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1.2
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5.61
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%
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2020
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332.4
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3.21
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2021
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317.0
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5.73
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2022
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1,059.7
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3.43
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2023
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756.7
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4.65
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Thereafter
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4,599.0
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3.81
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Totals (1)
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$
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7,066.0
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3.90
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%
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Fair Value (2)
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$
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7,629.2
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(1)
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Excludes net premiums recorded on mortgages payable, net original issuance premiums recorded on notes payable and deferred financing costs on mortgages payable, notes payable, and term loans. At September 30, 2019, the unamortized balance of net premiums on mortgages payable is $3.3 million, the unamortized balance of net original issuance premiums on notes payable is $6.6 million, and the balance of deferred financing costs on mortgages payable is $143,000, on notes payable is $37.3 million, and on term loans is $1.1 million.
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(2)
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We base the estimated fair value of the publicly-traded fixed rate senior notes and bonds at September 30, 2019 on the indicative market prices and recent trading activity of our senior notes and bonds payable. We base the estimated fair value of our fixed rate and variable rate mortgages and private senior notes payable at September 30, 2019 on the relevant forward interest rate curve, plus an applicable credit-adjusted spread. We believe that the carrying value of the credit facility balance and term loans balance reasonably approximate their estimated fair values at September 30, 2019.
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The table above incorporates only those exposures that exist as of September 30, 2019. It does not consider those exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations, would depend on the exposures that arise during the period, our hedging strategies at the time, and interest rates.
All of our outstanding notes and bonds have fixed interest rates. At September 30, 2019, all of our mortgages payable had fixed interest rates, except one variable rate mortgage on one property totaling $7.1 million, which has been subsequently swapped to a fixed interest rate. Interest on our credit facility and term loan balances is variable. However, the variable interest rate feature on our term loans has been mitigated by interest rate swap agreements.
During the second quarter of 2019, we commenced foreign operations and acquired real property in the U.K. As a result, we are subject to currency fluctuations that may, from time to time, affect our financial condition and results of operations. Increases or decreases in the value of British pound sterling relative to the U.S. dollar impact the amount of net income we earn from our investments in the U.K. We mitigate these foreign currency exposures with non-U.S. denominated borrowings and cross-currency swaps. If we increase our international presence through investments in properties outside the U.S., we may also decide to transact additional business or borrow funds in currencies other than U.S. dollars.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of and for the quarter ended September 30, 2019, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.