2 0 1 6 A N N U A L R E P O R T
HIGH-QUALITY
RESULTS
COMPOUND AVERAGE ANNUAL TOTAL SHAREHOLDER RETURN
SINCE 1994 NYSE LISTING
16.9%
10.9%
10.1%
9.4%
9.2%
REALTY INCOME
EQUITY REIT
INDEX
DOW JONES
INDUSTRIAL
AVERAGE
S&P 500
NASDAQ
COMPOSITE
SUPPORTED BY CONSISTENT COMPOUND AVERAGE ANNUAL
DIVIDEND GROWTH OF 4.6%
ANNUALIZED DIVIDENDS AND DIVIDEND INCREASES(1)
$2.43
$0.90
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
(1) Annualized dividend amount reflects the December declared dividend rate per share multiplied by 12
TABLE OF CONTENTS
HISTORICAL FINANCIAL PERFORMANCE 2
LETTER TO SHAREHOLDERS 4
HIGH-QUALITY PORTFOLIO 12
DISCIPLINED INVESTMENT PROCESS 16
CONSERVATIVE CAPITAL STRUCTURE 18
MONTHLY DIVIDENDS 19
2016 FORM 10-K 20
COMPANY INFORMATION 89
2016 PERFORMANCE HIGHLIGHTS
16.0%
TOTAL SHAREHOLDER
RETURN
5.1%
AFFO PER SHARE
GROWTH
5.3%
DIVIDEND PER
SHARE GROWTH
98.3%
PORTFOLIO
OCCUPANCY
$1.86 Billion
INVESTED IN HIGH-QUALITY
REAL ESTATE
$1.2 Billion
ATTRACTIVELY PRICED
CAPITAL RAISED
HISTORICAL FINANCIAL PERFORMANCE
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
For the Years Ended December 31,
2016
2015
2014
2013
2012
2011
2010
2009
Total revenue(1)
$1,060
$980
$895
$760
$484
$422
$346
$329
Net income available to common stockholders
$288
$257
$228
$204
$115
$133
$107
$107
Funds from operations (“FFO”)(2)
$735
$652
$563
$462
$269
$249
$194
$191
Adjusted funds from operations (“AFFO”)(2)
$736
$647
$562
$463
$274
$253
$197
$193
Dividends paid to common stockholders
$611
$533
$479
$409
$236
$219
$183
$178
AT YEAR END
Real estate at cost, before accumulated depreciation(3) $13,864 $12,297 $11,154 $9,899 $5,921 $4,972 $4,113 $3,439
Number of properties
4,944
4,538
4,327
3,896
3,013
2,634
2,496
2,339
Gross leasable square feet (millions)
83
76
71
63
38
27
21
Properties acquired(4)
Cost of properties acquired(4)
Properties sold
Net proceeds from sale of properties
Number of commercial tenants(5)
Number of industries
Number of states
Portfolio occupancy rate
19
16
505
286
506
974
423
164
186
$1,859 $1,259 $1,402 $4,670 $1,165 $1,016
$714
$58
77
$91
248
47
49
38
46
75
$66
$107
$134
240
234
205
47
49
47
49
47
49
44
$51
150
44
49
26
$24
136
38
49
28
$27
122
32
49
25
$20
118
30
49
98.3%
98.4%
98.4%
98.2%
97.2%
96.7%
96.6%
96.8%
Remaining weighted average lease term (years)
9.8
10.0
10.2
10.8
11.0
11.3
11.4
11.2
PER COMMON SHARE DATA(6)
Net income (diluted)
Funds from operations (“FFO”)(2)
$1.13
$1.09
$1.04
$1.06
$0.86
$1.05
$1.01
$1.03
$2.88
$2.77
$2.58
$2.41
$2.02
$1.98
$1.83
$1.84
Adjusted funds from operations (“AFFO”)(2)
$2.88
$2.74
$2.57
$2.41
$2.06
$2.01
$1.86
$1.86
Dividends paid
$2.392 $2.271 $2.192 $2.147 $1.772 $1.737 $1.722 $1.707
Annualized dividend amount(7)
$2.43
$2.29
$2.20
$2.19
$1.82
$1.75
$1.73
$1.72
Common shares outstanding (millions)
260
250
225
207
133
133
118
104
INVESTMENT RESULTS
Closing price on December 31,
Dividend yield(8)(9)
$57.48 $51.63 $47.71 $37.33 $40.21 $34.96 $34.20 $25.91
4.6%
4.4%
5.9%
5.3%
5.1%
5.1%
6.6%
7.4%
Total return to stockholders(10)
16.0%
13.0%
33.7%
(1.8%)
20.1%
7.3%
38.6%
19.3%
(1) F(cid:81)(cid:84) (cid:91)(cid:71)(cid:67)(cid:84)(cid:85) (cid:82)(cid:84)(cid:75)(cid:81)(cid:84) (cid:86)(cid:81) (cid:20)(cid:18)1(cid:24)(cid:14) (cid:86)(cid:81)(cid:86)(cid:67)(cid:78) (cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71) (cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85) (cid:67)(cid:79)(cid:81)(cid:87)(cid:80)(cid:86)(cid:85) (cid:84)(cid:71)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:75)(cid:386)(cid:71)(cid:70) (cid:86)(cid:81) (cid:75)(cid:80)(cid:69)(cid:81)(cid:79)(cid:71) (cid:72)(cid:84)(cid:81)(cid:79) (cid:70)(cid:75)(cid:85)(cid:69)(cid:81)(cid:80)(cid:86)(cid:75)(cid:80)(cid:87)(cid:71)(cid:70) (cid:81)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:14) (cid:68)(cid:87)(cid:86) (cid:71)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85) (cid:73)(cid:67)(cid:75)(cid:80) (cid:81)(cid:80) (cid:85)(cid:67)(cid:78)(cid:71)(cid:85)(cid:14)
(cid:86)(cid:71)(cid:80)(cid:67)(cid:80)(cid:86) (cid:84)(cid:71)(cid:75)(cid:79)(cid:68)(cid:87)(cid:84)(cid:85)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:14) (cid:67)(cid:80)(cid:70) (cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71) (cid:72)(cid:84)(cid:81)(cid:79) C(cid:84)(cid:71)(cid:85)(cid:86) N(cid:71)(cid:86) L(cid:71)(cid:67)(cid:85)(cid:71)(cid:14) (cid:67) (cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:91) (cid:81)(cid:72) R(cid:71)(cid:67)(cid:78)(cid:86)(cid:91) I(cid:80)(cid:69)(cid:81)(cid:79)(cid:71)(cid:16) C(cid:81)(cid:80)(cid:85)(cid:75)(cid:85)(cid:86)(cid:71)(cid:80)(cid:86) (cid:89)(cid:75)(cid:86)(cid:74) R(cid:71)(cid:67)(cid:78)(cid:86)(cid:91) I(cid:80)(cid:69)(cid:81)(cid:79)(cid:71)(cid:111)(cid:85) (cid:386)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78) (cid:84)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:75)(cid:80)(cid:73)
(cid:79)(cid:71)(cid:86)(cid:74)(cid:81)(cid:70)(cid:81)(cid:78)(cid:81)(cid:73)(cid:91) (cid:69)(cid:74)(cid:67)(cid:80)(cid:73)(cid:71)(cid:85)(cid:14) (cid:20)(cid:18)1(cid:24) (cid:86)(cid:81)(cid:86)(cid:67)(cid:78) (cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71) (cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85) (cid:67)(cid:82)(cid:82)(cid:84)(cid:81)(cid:90)(cid:75)(cid:79)(cid:67)(cid:86)(cid:71)(cid:78)(cid:91) (cid:6)(cid:20)(cid:16)(cid:21) (cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:81)(cid:72) (cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71) (cid:72)(cid:84)(cid:81)(cid:79) C(cid:84)(cid:71)(cid:85)(cid:86) N(cid:71)(cid:86) L(cid:71)(cid:67)(cid:85)(cid:71)
(2) R(cid:71)(cid:72)(cid:71)(cid:84) (cid:86)(cid:81) (cid:47)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:111)(cid:85) D(cid:75)(cid:85)(cid:69)(cid:87)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80) (cid:67)(cid:80)(cid:70) A(cid:80)(cid:67)(cid:78)(cid:91)(cid:85)(cid:75)(cid:85) (cid:72)(cid:81)(cid:84) FFO (cid:67)(cid:80)(cid:70) AFFO (cid:70)(cid:71)(cid:386)(cid:80)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80) (cid:67)(cid:80)(cid:70) (cid:84)(cid:71)(cid:69)(cid:81)(cid:80)(cid:69)(cid:75)(cid:78)(cid:75)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80) (cid:86)(cid:81) (cid:80)(cid:71)(cid:86) (cid:75)(cid:80)(cid:69)(cid:81)(cid:79)(cid:71) (cid:67)(cid:88)(cid:67)(cid:75)(cid:78)(cid:67)(cid:68)(cid:78)(cid:71) (cid:86)(cid:81) (cid:69)(cid:81)(cid:79)(cid:79)(cid:81)(cid:80) (cid:85)(cid:86)(cid:81)(cid:69)(cid:77)(cid:74)(cid:81)(cid:78)(cid:70)(cid:71)(cid:84)(cid:85)
(cid:75)(cid:80) (cid:86)(cid:74)(cid:71) 2(cid:18)1(cid:24) F(cid:81)(cid:84)(cid:79) 1(cid:18)-(cid:45) (cid:85)(cid:71)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:16) F(cid:81)(cid:84) 2(cid:18)12 (cid:67)(cid:80)(cid:70) 2(cid:18)1(cid:21)(cid:14) FFO (cid:74)(cid:67)(cid:85) (cid:68)(cid:71)(cid:71)(cid:80) (cid:67)(cid:70)(cid:76)(cid:87)(cid:85)(cid:86)(cid:71)(cid:70) (cid:86)(cid:81) (cid:67)(cid:70)(cid:70) (cid:68)(cid:67)(cid:69)(cid:77) A(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:80) R(cid:71)(cid:67)(cid:78)(cid:86)(cid:91) C(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78) T(cid:84)(cid:87)(cid:85)(cid:86) (cid:79)(cid:71)(cid:84)(cid:73)(cid:71)(cid:84)-(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70) (cid:69)(cid:81)(cid:85)(cid:86)(cid:85)
((cid:21)) D(cid:81)(cid:71)(cid:85) (cid:80)(cid:81)(cid:86) (cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71) (cid:82)(cid:84)(cid:81)(cid:82)(cid:71)(cid:84)(cid:86)(cid:75)(cid:71)(cid:85) (cid:74)(cid:71)(cid:78)(cid:70) (cid:72)(cid:81)(cid:84) (cid:85)(cid:67)(cid:78)(cid:71)
(4) I(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85) (cid:80)(cid:71)(cid:89) (cid:82)(cid:84)(cid:81)(cid:82)(cid:71)(cid:84)(cid:86)(cid:75)(cid:71)(cid:85) (cid:67)(cid:69)(cid:83)(cid:87)(cid:75)(cid:84)(cid:71)(cid:70) (cid:68)(cid:91) R(cid:71)(cid:67)(cid:78)(cid:86)(cid:91) I(cid:80)(cid:69)(cid:81)(cid:79)(cid:71) (cid:67)(cid:80)(cid:70) C(cid:84)(cid:71)(cid:85)(cid:86) N(cid:71)(cid:86) L(cid:71)(cid:67)(cid:85)(cid:71) (cid:67)(cid:80)(cid:70) (cid:82)(cid:84)(cid:81)(cid:82)(cid:71)(cid:84)(cid:86)(cid:75)(cid:71)(cid:85) (cid:87)(cid:80)(cid:70)(cid:71)(cid:84) (cid:70)(cid:71)(cid:88)(cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86) (cid:81)(cid:84) (cid:71)(cid:90)(cid:82)(cid:67)(cid:80)(cid:85)(cid:75)(cid:81)(cid:80)
(5) C(cid:81)(cid:79)(cid:79)(cid:71)(cid:84)(cid:69)(cid:75)(cid:67)(cid:78) (cid:86)(cid:71)(cid:80)(cid:67)(cid:80)(cid:86)(cid:85) (cid:67)(cid:84)(cid:71) (cid:70)(cid:71)(cid:386)(cid:80)(cid:71)(cid:70) (cid:67)(cid:85) (cid:84)(cid:71)(cid:86)(cid:67)(cid:75)(cid:78)(cid:71)(cid:84)(cid:85) (cid:89)(cid:75)(cid:86)(cid:74) (cid:81)(cid:88)(cid:71)(cid:84) 5(cid:18) (cid:78)(cid:81)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85) (cid:67)(cid:80)(cid:70) (cid:80)(cid:81)(cid:80)-(cid:84)(cid:71)(cid:86)(cid:67)(cid:75)(cid:78)(cid:71)(cid:84)(cid:85) (cid:89)(cid:75)(cid:86)(cid:74) (cid:81)(cid:88)(cid:71)(cid:84) (cid:6)5(cid:18)(cid:18) (cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:75)(cid:80) (cid:67)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78) (cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)
2 REALTY INCOME 2016 ANNUAL REPORT
REALTY INCOME 2016 ANNUAL REPORT 2
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
$331
$296
$241
$198
$178
$150
$138
$121
$116
$105
$108
$116
$99
$90
$90
$77
$186
$190
$156
$130
$121
$105
$192
$193
$159
$131
$126
$107
$170
$158
$130
$109
$97
$84
$69
$95
$96
$78
$58
$78
$79
$65
$45
$67
$68
$58
$41
$66
$66
$56
$85
$41
$63
$62
$52
$68
$35
$52
$52
$44
$57
$32
$48
$47
$43
$52
$26
$40
$40
$37
$49
$15
$39
$39
$39
$3,409 $3,239 $2,744 $2,096 $1,691 $1,533 $1,286 $1,178 $1,074 $1,017
$890
$700
$565
$515
$451
2,348
2,270
1,955
1,646
1,533
1,404
1,197
1,124
1,068
1,076
970
826
740
685
630
19
19
17
13
12
11
10
10
108
357
378
156
194
302
111
117
9
22
9
8
110
149
6
96
5
62
5
58
$190
$534
$770
$487
$215
$372
$139
$156
$99
$181
$193
$142
$56
$65
29
$28
119
30
49
10
$7
115
30
49
13
$11
103
29
48
23
$23
101
29
48
43
35
35
35
21
$35
$23
$20
$40
$45
93
30
48
85
28
48
79
26
48
78
25
48
72
24
46
3
$9
72
24
45
5
$3
65
22
45
10
$4
40
14
43
7
$4
24
8
42
3
$1
22
7
42
4
4
$3
5
$4
23
5
41
97.0%
97.9%
98.7%
98.5%
97.9%
98.1%
97.7%
98.2%
97.7%
98.4%
99.5%
99.2%
99.1%
99.3%
99.4%
11.9
13.0
12.9
12.4
12.0
11.8
10.9
10.4
9.8
10.7
10.2
9.8
9.5
9.2
9.5
$1.06
$1.16
$1.11
$1.12
$1.15
$1.08
$1.01
$0.99
$0.84
$0.76
$0.78
$0.74
$0.70
$0.63
$0.39
$1.83
$1.89
$1.73
$1.62
$1.53
$1.47
$1.40
$1.33
$1.26
$1.23
$1.18
$1.11
$1.04
$1.00
$0.98
$1.90
$1.92
$1.77
$1.63
$1.61
$1.50
$1.41
$1.34
$1.27
$1.24
$1.17
$1.10
$1.03
$0.98
$0.98
$1.662 $1.560 $1.437 $1.346 $1.241 $1.181 $1.151 $1.121 $1.091 $1.043 $0.983 $0.946 $0.931 $0.913 $0.300
$1.70
$1.64
$1.52
$1.40
$1.32
$1.20
$1.17
$1.14
$1.11
$1.08
$1.02
$0.96
$0.95
$0.93
$0.90
104
101
101
84
79
76
70
66
53
54
54
51
46
46
39
$23.15 $27.02 $27.70 $21.62 $25.29 $20.00 $17.50 $14.70 $12.44 $10.31 $12.44 $12.72 $11.94 $11.25
$8.56
6.1%
5.6%
6.7%
5.3%
6.2%
6.7%
7.8%
9.0%
10.6%
8.4%
7.7%
7.9%
8.3%
10.7%
9.9%
(8.2%)
3.2%
34.8%
(9.2%)
32.7%
21.0%
26.9%
27.2%
31.2%
(8.7%)
5.5%
14.5%
15.4%
42.0%
28.5%
(6) A(cid:78)(cid:78) (cid:85)(cid:74)(cid:67)(cid:84)(cid:71) (cid:67)(cid:80)(cid:70) (cid:82)(cid:71)(cid:84) (cid:85)(cid:74)(cid:67)(cid:84)(cid:71) (cid:67)(cid:79)(cid:81)(cid:87)(cid:80)(cid:86)(cid:85) (cid:84)(cid:71)(cid:387)(cid:71)(cid:69)(cid:86) (cid:86)(cid:74)(cid:71) 2-(cid:72)(cid:81)(cid:84)-1 (cid:85)(cid:86)(cid:81)(cid:69)(cid:77) (cid:85)(cid:82)(cid:78)(cid:75)(cid:86) (cid:81)(cid:80) D(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84) (cid:21)1(cid:14) 2(cid:18)(cid:18)4
(7) A(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:75)(cid:92)(cid:71)(cid:70) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:67)(cid:79)(cid:81)(cid:87)(cid:80)(cid:86) (cid:84)(cid:71)(cid:387)(cid:71)(cid:69)(cid:86)(cid:85) (cid:86)(cid:74)(cid:71) D(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84) (cid:70)(cid:71)(cid:69)(cid:78)(cid:67)(cid:84)(cid:71)(cid:70) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:84)(cid:67)(cid:86)(cid:71) (cid:82)(cid:71)(cid:84) (cid:85)(cid:74)(cid:67)(cid:84)(cid:71) (cid:79)(cid:87)(cid:78)(cid:86)(cid:75)(cid:82)(cid:78)(cid:75)(cid:71)(cid:70) (cid:68)(cid:91) 12
(8) D(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:91)(cid:75)(cid:71)(cid:78)(cid:70) (cid:89)(cid:67)(cid:85) (cid:69)(cid:67)(cid:78)(cid:69)(cid:87)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70) (cid:68)(cid:91) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:75)(cid:80)(cid:73) (cid:86)(cid:74)(cid:71) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:82)(cid:67)(cid:75)(cid:70) (cid:82)(cid:71)(cid:84) (cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:14) (cid:70)(cid:87)(cid:84)(cid:75)(cid:80)(cid:73) (cid:86)(cid:74)(cid:71) (cid:91)(cid:71)(cid:67)(cid:84)(cid:14) (cid:68)(cid:91) (cid:86)(cid:74)(cid:71) (cid:69)(cid:78)(cid:81)(cid:85)(cid:75)(cid:80)(cid:73) (cid:85)(cid:74)(cid:67)(cid:84)(cid:71) (cid:82)(cid:84)(cid:75)(cid:69)(cid:71) (cid:81)(cid:80) D(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84) (cid:21)1 (cid:81)(cid:84) (cid:86)(cid:74)(cid:71) (cid:78)(cid:67)(cid:85)(cid:86)
(cid:86)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73) (cid:70)(cid:67)(cid:91) (cid:81)(cid:72) (cid:86)(cid:74)(cid:71) (cid:82)(cid:84)(cid:71)(cid:69)(cid:71)(cid:70)(cid:75)(cid:80)(cid:73) (cid:91)(cid:71)(cid:67)(cid:84)(cid:16) D(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:91)(cid:75)(cid:71)(cid:78)(cid:70) (cid:71)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85) (cid:85)(cid:82)(cid:71)(cid:69)(cid:75)(cid:67)(cid:78) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:85)
(9) T(cid:74)(cid:71) 1994 (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:91)(cid:75)(cid:71)(cid:78)(cid:70) (cid:75)(cid:85) (cid:68)(cid:67)(cid:85)(cid:71)(cid:70) (cid:81)(cid:80) (cid:86)(cid:74)(cid:71) (cid:67)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:75)(cid:92)(cid:71)(cid:70) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:85) (cid:72)(cid:81)(cid:84) (cid:86)(cid:74)(cid:71) (cid:82)(cid:71)(cid:84)(cid:75)(cid:81)(cid:70) (cid:72)(cid:84)(cid:81)(cid:79) A(cid:87)(cid:73)(cid:87)(cid:85)(cid:86) 15(cid:14) 1994 ((cid:86)(cid:74)(cid:71) (cid:70)(cid:67)(cid:86)(cid:71) (cid:81)(cid:72) (cid:86)(cid:74)(cid:71) (cid:69)(cid:81)(cid:80)(cid:85)(cid:81)(cid:78)(cid:75)(cid:70)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80) (cid:81)(cid:72) (cid:86)(cid:74)(cid:71)
(cid:82)(cid:84)(cid:71)(cid:70)(cid:71)(cid:69)(cid:71)(cid:85)(cid:85)(cid:81)(cid:84)(cid:85) (cid:86)(cid:81) (cid:86)(cid:74)(cid:71) C(cid:81)(cid:79)(cid:82)(cid:67)(cid:80)(cid:91)) (cid:86)(cid:81) D(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84) (cid:21)1(cid:14) 1994(cid:16) T(cid:74)(cid:71) 1994 (cid:86)(cid:81)(cid:86)(cid:67)(cid:78) (cid:84)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80) (cid:75)(cid:85) (cid:68)(cid:67)(cid:85)(cid:71)(cid:70) (cid:81)(cid:80) (cid:86)(cid:74)(cid:71) (cid:82)(cid:84)(cid:75)(cid:69)(cid:71) (cid:69)(cid:74)(cid:67)(cid:80)(cid:73)(cid:71) (cid:72)(cid:84)(cid:81)(cid:79) (cid:86)(cid:74)(cid:71) (cid:81)(cid:82)(cid:71)(cid:80)(cid:75)(cid:80)(cid:73) (cid:81)(cid:80) O(cid:69)(cid:86)(cid:81)(cid:68)(cid:71)(cid:84) 18(cid:14) 1994
((cid:86)(cid:74)(cid:71) C(cid:81)(cid:79)(cid:82)(cid:67)(cid:80)(cid:91)(cid:111)(cid:85) (cid:386)(cid:84)(cid:85)(cid:86) (cid:70)(cid:67)(cid:91) (cid:81)(cid:72) (cid:86)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)) (cid:86)(cid:81) D(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84) (cid:21)1(cid:14) 1994 (cid:82)(cid:78)(cid:87)(cid:85) (cid:86)(cid:74)(cid:71) (cid:67)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:75)(cid:92)(cid:71)(cid:70) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:91)(cid:75)(cid:71)(cid:78)(cid:70)
(10) T(cid:81)(cid:86)(cid:67)(cid:78) (cid:84)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80) (cid:89)(cid:67)(cid:85) (cid:69)(cid:67)(cid:78)(cid:69)(cid:87)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70) (cid:68)(cid:91) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:75)(cid:80)(cid:73) (cid:86)(cid:74)(cid:71) (cid:80)(cid:71)(cid:86) (cid:69)(cid:74)(cid:67)(cid:80)(cid:73)(cid:71) (cid:75)(cid:80) (cid:86)(cid:74)(cid:71) (cid:85)(cid:74)(cid:67)(cid:84)(cid:71) (cid:82)(cid:84)(cid:75)(cid:69)(cid:71)(cid:14) (cid:70)(cid:87)(cid:84)(cid:75)(cid:80)(cid:73) (cid:86)(cid:74)(cid:71) (cid:91)(cid:71)(cid:67)(cid:84)(cid:14) (cid:82)(cid:78)(cid:87)(cid:85) (cid:86)(cid:74)(cid:71) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:85) (cid:82)(cid:67)(cid:75)(cid:70) (cid:82)(cid:71)(cid:84) (cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:14) (cid:70)(cid:87)(cid:84)(cid:75)(cid:80)(cid:73) (cid:86)(cid:74)(cid:71) (cid:91)(cid:71)(cid:67)(cid:84)(cid:14) (cid:68)(cid:91)
(cid:86)(cid:74)(cid:71) (cid:69)(cid:78)(cid:81)(cid:85)(cid:75)(cid:80)(cid:73) (cid:85)(cid:74)(cid:67)(cid:84)(cid:71) (cid:82)(cid:84)(cid:75)(cid:69)(cid:71) (cid:81)(cid:80) D(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84) (cid:21)1 (cid:81)(cid:84) (cid:86)(cid:74)(cid:71) (cid:78)(cid:67)(cid:85)(cid:86) (cid:86)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73) (cid:70)(cid:67)(cid:91) (cid:81)(cid:72) (cid:86)(cid:74)(cid:71) (cid:82)(cid:84)(cid:71)(cid:69)(cid:71)(cid:70)(cid:75)(cid:80)(cid:73) (cid:91)(cid:71)(cid:67)(cid:84)
REALTY INCOME 2016 ANNUAL REPORT 3
DEAR
FELLOW
SHAREHOLDERS,
Since our founding in 1969, we have remained
dedicated to our mission of providing our
shareholders with dependable monthly dividends
that increase over time. Accomplishing this mission is
made possible by our unwavering focus on quality,
which is reflected by the composition of our real
estate portfolio, the strength of our balance sheet,
and the talents of our team members. By operating
our company in this manner, we strive to achieve
consistent, positive performance year after year.
4 REALTY INCOME 2016 ANNUAL REPORT
2016 was another year of high-
• Acquire additional properties according
our common stock for the full calendar
quality growth for our company.
to our selective investment strategy
year realized a total return of 16.0%,
We surpassed the milestone of $1 billion in
• Maintain high occupancy through active
which reflects the 11.3% increase in our
rental revenues. Our efficient operations
portfolio management
stock price as well as the dividends paid
continued to allow us to deliver more of this
• Maintain a conservative balance sheet
throughout the year.
revenue to our shareholders in the form of
earnings and dividends. In 2016, earnings
per share, as measured by Adjusted Funds
from Operations (AFFO), grew by 5.1% to
$2.88. We paid 12 monthly dividends,
increased the dividend six times and grew it
by 5.3%, which contributed to a total annual
return to our shareholders of 16.0%.
MISSION
Our mission of providing dependable
• Continue to grow investor interest in The
Monthly Dividend Company®
We always like to remind our shareholders
that our company’s total return results
During 2016, we successfully executed on
do not always move in parallel with its
all aspects of this plan. We completed the
operating performance in any given year.
highest volume of property acquisitions
Other factors beyond our company’s
in the company’s history, maintained
operating performance can impact the price
consistently high portfolio occupancy, and
of our shares including, but not limited to,
accessed the public capital markets at
macroeconomic events, interest rate trends,
favorable terms to position our balance
and conditions in the broader stock market.
sheet for future growth. This business plan
monthly dividends to our shareholders has
has served us well throughout our history
remained constant throughout our 48-year
and provides us with the flexibility to react
operating history and consistently positions
to ongoing changes in the economy and
us for favorable results.
real estate markets which is crucial to our
continued successful operations.
Over the long term, however, our positive and
consistent operating performance has led to
advances in our stock price and dividends,
resulting in a compound average annual
total shareholder return of 16.9% since our
public listing in 1994, as shown in the table
Achieving our mission involves effectively
executing our business plan. That plan is to:
• Pay 12 monthly dividends
• Raise the dividend
• Remain disciplined in our acquisitions
underwriting approach
SHAREHOLDER RETURN
Our focus on providing dependable monthly
on page 6. Additionally, our stock price has
experienced lower market volatility than the
dividends that increase over time helps
major stock indices over this time period.
drive attractive total shareholder returns.
We are pleased by these results and our
In 2016, the shareholders who owned
goal is to continue managing the company
T O TA L R E V E N U E (1)
(IN MILLIONS)
$1,060
$49
94
95
96
97
98
99
00
01
02
0(cid:21)
04
05
06
07
08
09
10
11
12
1(cid:21)
14
15
16
(1) See page 2 for the definition of total revenue
REALTY INCOME 2016 ANNUAL REPORT 5
R E A LT Y I N C O M E P E R F O R M A N C E V S . M A J O R S T O C K I N D I C E S
Realty
Income
E(cid:83)(cid:87)(cid:75)ty REIT
In(cid:70)e(cid:90)(1)
Do(cid:89) (cid:44)one(cid:85)
Industrial
A(cid:88)era(cid:73)e
S&P 500
NASDAQ
Composite
DIVIDEND
YIELD
TOTAL
RETURN (2)
DIVIDEND
YIELD
TO TAL
RETUR N (3)
DI VID EN D
Y IE LD
TO TAL
R ET UR N (3)
DI VI DE ND
Y IE LD
T OTAL
R ET URN (3)
DI VI DE ND
Y IE LD
TOTAL
R ETURN (4 )
10(cid:17)18(cid:115)12(cid:17)(cid:21)1
1994
1995
1996
1997
1998
1999
2000
2001
2002
200(cid:21)
2004
2005
2006
2007
2008
2009
2010
2011
2012
201(cid:21)
2014
2015
2016
10(cid:16)5(cid:7)
10(cid:16)8(cid:7)
7(cid:16)7(cid:7)
0(cid:16)0(cid:7)
2(cid:16)9(cid:7)
(1(cid:16)6(cid:7))
2(cid:16)9(cid:7)
(1(cid:16)2(cid:7))
0(cid:16)5(cid:7)
(1(cid:16)7(cid:7))
8(cid:16)(cid:21)(cid:7)
42(cid:16)0(cid:7)
7(cid:16)4(cid:7)
15(cid:16)(cid:21)(cid:7)
2(cid:16)4(cid:7)
(cid:21)6(cid:16)9(cid:7)
2(cid:16)(cid:21)(cid:7)
(cid:21)7(cid:16)6(cid:7)
0(cid:16)6(cid:7)
(cid:21)9(cid:16)9(cid:7)
7(cid:16)9(cid:7)
15(cid:16)4(cid:7)
6(cid:16)1(cid:7)
(cid:21)5(cid:16)(cid:21)(cid:7)
2(cid:16)2(cid:7)
28(cid:16)9(cid:7)
2(cid:16)0(cid:7)
2(cid:21)(cid:16)0(cid:7)
0(cid:16)2(cid:7)
22(cid:16)7(cid:7)
7(cid:16)5(cid:7)
14(cid:16)5(cid:7)
5(cid:16)5(cid:7)
20(cid:16)(cid:21)(cid:7)
1(cid:16)8(cid:7)
24(cid:16)9(cid:7)
1(cid:16)6(cid:7)
(cid:21)(cid:21)(cid:16)4(cid:7)
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21(cid:16)6(cid:7)
8(cid:16)2(cid:7)
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7(cid:16)5(cid:7)
(17(cid:16)5(cid:7))
1(cid:16)7(cid:7)
18(cid:16)1(cid:7)
1(cid:16)(cid:21)(cid:7)
28(cid:16)6(cid:7)
0(cid:16)(cid:21)(cid:7)
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10(cid:16)5(cid:7)
(8(cid:16)7(cid:7))
8(cid:16)7(cid:7)
(4(cid:16)6(cid:7))
1(cid:16)(cid:21)(cid:7)
27(cid:16)2(cid:7)
1(cid:16)1(cid:7)
21(cid:16)0(cid:7)
0(cid:16)2(cid:7)
85(cid:16)6(cid:7)
8(cid:16)9(cid:7)
(cid:21)1(cid:16)2(cid:7)
7(cid:16)5(cid:7)
26(cid:16)4(cid:7)
1(cid:16)5(cid:7)
(4(cid:16)7(cid:7))
1(cid:16)2(cid:7)
(9(cid:16)1(cid:7))
0(cid:16)(cid:21)(cid:7)
((cid:21)9(cid:16)(cid:21)(cid:7))
7(cid:16)8(cid:7)
27(cid:16)2(cid:7)
7(cid:16)1(cid:7)
1(cid:21)(cid:16)9(cid:7)
1(cid:16)9(cid:7)
(5(cid:16)5(cid:7))
1(cid:16)4(cid:7)
(11(cid:16)9(cid:7))
0(cid:16)(cid:21)(cid:7)
(21(cid:16)1(cid:7))
6(cid:16)7(cid:7)
26(cid:16)9(cid:7)
7(cid:16)1(cid:7)
(cid:21)(cid:16)8(cid:7)
2(cid:16)6(cid:7)
(15(cid:16)0(cid:7))
1(cid:16)9(cid:7)
(22(cid:16)1(cid:7))
0(cid:16)5(cid:7)
((cid:21)1(cid:16)5(cid:7))
6(cid:16)0(cid:7)
21(cid:16)0(cid:7)
5(cid:16)5(cid:7)
(cid:21)7(cid:16)1(cid:7)
2(cid:16)(cid:21)(cid:7)
28(cid:16)(cid:21)(cid:7)
1(cid:16)8(cid:7)
28(cid:16)7(cid:7)
0(cid:16)6(cid:7)
50(cid:16)0(cid:7)
5(cid:16)2(cid:7)
(cid:21)2(cid:16)7(cid:7)
4(cid:16)7(cid:7)
(cid:21)1(cid:16)6(cid:7)
2(cid:16)2(cid:7)
5(cid:16)6(cid:7)
1(cid:16)8(cid:7)
10(cid:16)9(cid:7)
0(cid:16)6(cid:7)
8(cid:16)6(cid:7)
6(cid:16)5(cid:7)
(9(cid:16)2(cid:7))
4(cid:16)6(cid:7)
12(cid:16)2(cid:7)
2(cid:16)6(cid:7)
1(cid:16)7(cid:7)
1(cid:16)9(cid:7)
4(cid:16)9(cid:7)
0(cid:16)9(cid:7)
1(cid:16)4(cid:7)
5(cid:16)5(cid:7)
(cid:21)4(cid:16)8(cid:7)
(cid:21)(cid:16)7(cid:7)
(cid:21)5(cid:16)1(cid:7)
2(cid:16)5(cid:7)
19(cid:16)0(cid:7)
1(cid:16)9(cid:7)
15(cid:16)8(cid:7)
0(cid:16)8(cid:7)
9(cid:16)5(cid:7)
6(cid:16)1(cid:7)
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4(cid:16)9(cid:7)
(15(cid:16)7(cid:7))
2(cid:16)7(cid:7)
8(cid:16)8(cid:7)
2(cid:16)1(cid:7)
5(cid:16)5(cid:7)
0(cid:16)8(cid:7)
9(cid:16)8(cid:7)
7(cid:16)(cid:21)(cid:7)
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7(cid:16)6(cid:7)
((cid:21)7(cid:16)7(cid:7))
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((cid:21)7(cid:16)0(cid:7))
1(cid:16)(cid:21)(cid:7)
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6(cid:16)6(cid:7)
19(cid:16)(cid:21)(cid:7)
(cid:21)(cid:16)7(cid:7)
28(cid:16)0(cid:7)
2(cid:16)6(cid:7)
22(cid:16)6(cid:7)
2(cid:16)0(cid:7)
26(cid:16)5(cid:7)
1(cid:16)0(cid:7)
4(cid:21)(cid:16)9(cid:7)
5(cid:16)1(cid:7)
(cid:21)8(cid:16)6(cid:7)
(cid:21)(cid:16)5(cid:7)
27(cid:16)9(cid:7)
2(cid:16)6(cid:7)
14(cid:16)0(cid:7)
1(cid:16)9(cid:7)
15(cid:16)1(cid:7)
1(cid:16)2(cid:7)
16(cid:16)9(cid:7)
5(cid:16)0(cid:7)
7(cid:16)(cid:21)(cid:7)
(cid:21)(cid:16)8(cid:7)
8(cid:16)(cid:21)(cid:7)
2(cid:16)8(cid:7)
8(cid:16)(cid:21)(cid:7)
2(cid:16)(cid:21)(cid:7)
2(cid:16)1(cid:7)
1(cid:16)(cid:21)(cid:7)
(1(cid:16)8(cid:7))
4(cid:16)5(cid:7)
20(cid:16)1(cid:7)
(cid:21)(cid:16)5(cid:7)
19(cid:16)7(cid:7)
(cid:21)(cid:16)0(cid:7)
10(cid:16)2(cid:7)
2(cid:16)5(cid:7)
16(cid:16)0(cid:7)
2(cid:16)6(cid:7)
15(cid:16)9(cid:7)
5(cid:16)8(cid:7)
(1(cid:16)8(cid:7))
(cid:21)(cid:16)9(cid:7)
2(cid:16)9(cid:7)
2(cid:16)(cid:21)(cid:7)
29(cid:16)6(cid:7)
2(cid:16)0(cid:7)
(cid:21)2(cid:16)4(cid:7)
1(cid:16)4(cid:7)
(cid:21)8(cid:16)(cid:21)(cid:7)
4(cid:16)6(cid:7)
(cid:21)(cid:21)(cid:16)7(cid:7)
(cid:21)(cid:16)6(cid:7)
28(cid:16)0(cid:7)
2(cid:16)(cid:21)(cid:7)
10(cid:16)0(cid:7)
2(cid:16)0(cid:7)
1(cid:21)(cid:16)7(cid:7)
1(cid:16)(cid:21)(cid:7)
1(cid:21)(cid:16)4(cid:7)
4(cid:16)4(cid:7)
1(cid:21)(cid:16)0(cid:7)
(cid:21)(cid:16)9(cid:7)
2(cid:16)8(cid:7)
2(cid:16)6(cid:7)
0(cid:16)2(cid:7)
2(cid:16)2(cid:7)
1(cid:16)4(cid:7)
1(cid:16)4(cid:7)
5(cid:16)7(cid:7)
4(cid:16)2(cid:7)
16(cid:16)0(cid:7)
4(cid:16)0(cid:7)
8(cid:16)6(cid:7)
2(cid:16)5(cid:7)
16(cid:16)5(cid:7)
2(cid:16)1(cid:7)
12(cid:16)0(cid:7)
1(cid:16)4(cid:7)
7(cid:16)5(cid:7)
COMPOUND
AVERAGE ANNUAL
TOTAL RETURN(5)
16(cid:16)9(cid:7)
10(cid:16)9(cid:7)
10(cid:16)1(cid:7)
9(cid:16)4(cid:7)
9(cid:16)2(cid:7)
N(cid:81)(cid:86)(cid:71)(cid:28) A(cid:78)(cid:78) (cid:81)(cid:72) (cid:86)(cid:74)(cid:71)(cid:85)(cid:71) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:91)(cid:75)(cid:71)(cid:78)(cid:70)(cid:85) (cid:67)(cid:84)(cid:71) (cid:69)(cid:67)(cid:78)(cid:69)(cid:87)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70) (cid:67)(cid:85) (cid:67)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:75)(cid:92)(cid:71)(cid:70) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:85) (cid:68)(cid:67)(cid:85)(cid:71)(cid:70) (cid:81)(cid:80) (cid:86)(cid:74)(cid:71) (cid:78)(cid:67)(cid:85)(cid:86) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:82)(cid:67)(cid:75)(cid:70) (cid:75)(cid:80) (cid:67)(cid:82)(cid:82)(cid:78)(cid:75)(cid:69)(cid:67)(cid:68)(cid:78)(cid:71) (cid:86)(cid:75)(cid:79)(cid:71) (cid:82)(cid:71)(cid:84)(cid:75)(cid:81)(cid:70)
(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:70) (cid:68)(cid:91) (cid:86)(cid:74)(cid:71) (cid:69)(cid:78)(cid:81)(cid:85)(cid:75)(cid:80)(cid:73) (cid:82)(cid:84)(cid:75)(cid:69)(cid:71) (cid:67)(cid:85) (cid:81)(cid:72) (cid:82)(cid:71)(cid:84)(cid:75)(cid:81)(cid:70) (cid:71)(cid:80)(cid:70)(cid:16) D(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:91)(cid:75)(cid:71)(cid:78)(cid:70) (cid:85)(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:85)(cid:28) NAREIT (cid:89)(cid:71)(cid:68)(cid:85)(cid:75)(cid:86)(cid:71) (cid:67)(cid:80)(cid:70) (cid:36)(cid:78)(cid:81)(cid:81)(cid:79)(cid:68)(cid:71)(cid:84)(cid:73),(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86) (cid:72)(cid:81)(cid:84) (cid:86)(cid:74)(cid:71) 1994 NASDAQ
(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70) (cid:91)(cid:75)(cid:71)(cid:78)(cid:70) (cid:89)(cid:74)(cid:75)(cid:69)(cid:74) (cid:89)(cid:67)(cid:85) (cid:85)(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:70) (cid:72)(cid:84)(cid:81)(cid:79) D(cid:67)(cid:86)(cid:67)(cid:85)(cid:86)(cid:84)(cid:71)(cid:67)(cid:79) (cid:17) T(cid:74)(cid:81)(cid:79)(cid:85)(cid:81)(cid:80) F(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:16)
(1) FTSE NAREIT US E(cid:83)(cid:87)(cid:75)(cid:86)(cid:91) REIT I(cid:80)(cid:70)(cid:71)(cid:90), (cid:67)(cid:85) (cid:82)(cid:71)(cid:84) NAREIT (cid:89)(cid:71)(cid:68)(cid:85)(cid:75)(cid:86)(cid:71)(cid:16)
(2) C(cid:67)(cid:78)(cid:69)(cid:87)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70) (cid:67)(cid:85) (cid:86)(cid:74)(cid:71) (cid:70)(cid:75)(cid:72)(cid:72)(cid:71)(cid:84)(cid:71)(cid:80)(cid:69)(cid:71) (cid:68)(cid:71)(cid:86)(cid:89)(cid:71)(cid:71)(cid:80) (cid:86)(cid:74)(cid:71) (cid:69)(cid:78)(cid:81)(cid:85)(cid:75)(cid:80)(cid:73) (cid:85)(cid:86)(cid:81)(cid:69)(cid:77) (cid:82)(cid:84)(cid:75)(cid:69)(cid:71) (cid:67)(cid:85) (cid:81)(cid:72) (cid:82)(cid:71)(cid:84)(cid:75)(cid:81)(cid:70) (cid:71)(cid:80)(cid:70) (cid:78)(cid:71)(cid:85)(cid:85) (cid:86)(cid:74)(cid:71) (cid:69)(cid:78)(cid:81)(cid:85)(cid:75)(cid:80)(cid:73) (cid:85)(cid:86)(cid:81)(cid:69)(cid:77) (cid:82)(cid:84)(cid:75)(cid:69)(cid:71) (cid:67)(cid:85) (cid:81)(cid:72) (cid:82)(cid:84)(cid:71)(cid:88)(cid:75)(cid:81)(cid:87)(cid:85) (cid:82)(cid:71)(cid:84)(cid:75)(cid:81)(cid:70),
(cid:82)(cid:78)(cid:87)(cid:85) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:85) (cid:82)(cid:67)(cid:75)(cid:70) (cid:75)(cid:80) (cid:82)(cid:71)(cid:84)(cid:75)(cid:81)(cid:70), (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:70) (cid:68)(cid:91) (cid:69)(cid:78)(cid:81)(cid:85)(cid:75)(cid:80)(cid:73) (cid:85)(cid:86)(cid:81)(cid:69)(cid:77) (cid:82)(cid:84)(cid:75)(cid:69)(cid:71) (cid:67)(cid:85) (cid:81)(cid:72) (cid:71)(cid:80)(cid:70) (cid:81)(cid:72) (cid:82)(cid:84)(cid:71)(cid:88)(cid:75)(cid:81)(cid:87)(cid:85) (cid:82)(cid:71)(cid:84)(cid:75)(cid:81)(cid:70)(cid:16) D(cid:81)(cid:71)(cid:85) (cid:80)(cid:81)(cid:86) (cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71) (cid:84)(cid:71)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86) (cid:81)(cid:72)
(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:85) (cid:72)(cid:81)(cid:84) (cid:86)(cid:74)(cid:71) (cid:67)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78) (cid:82)(cid:71)(cid:84)(cid:69)(cid:71)(cid:80)(cid:86)(cid:67)(cid:73)(cid:71)(cid:85)(cid:16)
((cid:21)) I(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85) (cid:84)(cid:71)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86) (cid:81)(cid:72) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:85)(cid:16) S(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:28) NAREIT (cid:89)(cid:71)(cid:68)(cid:85)(cid:75)(cid:86)(cid:71) (cid:67)(cid:80)(cid:70) F(cid:67)(cid:69)(cid:86)(cid:85)(cid:71)(cid:86)(cid:16)
(4) P(cid:84)(cid:75)(cid:69)(cid:71) (cid:81)(cid:80)(cid:78)(cid:91) (cid:75)(cid:80)(cid:70)(cid:71)(cid:90), (cid:70)(cid:81)(cid:71)(cid:85) (cid:80)(cid:81)(cid:86) (cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:85)(cid:16) S(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:28) F(cid:67)(cid:69)(cid:86)(cid:85)(cid:71)(cid:86)(cid:16)
(5) A(cid:78)(cid:78) (cid:81)(cid:72) (cid:86)(cid:74)(cid:71)(cid:85)(cid:71) C(cid:81)(cid:79)(cid:82)(cid:81)(cid:87)(cid:80)(cid:70) A(cid:88)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71) A(cid:80)(cid:80)(cid:87)(cid:67)(cid:78) T(cid:81)(cid:86)(cid:67)(cid:78) R(cid:71)(cid:86)(cid:87)(cid:84)(cid:80) (cid:84)(cid:67)(cid:86)(cid:71)(cid:85) (cid:67)(cid:84)(cid:71) (cid:69)(cid:67)(cid:78)(cid:69)(cid:87)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70) (cid:75)(cid:80) (cid:86)(cid:74)(cid:71) (cid:85)(cid:67)(cid:79)(cid:71) (cid:79)(cid:67)(cid:80)(cid:80)(cid:71)(cid:84)(cid:28) (cid:72)(cid:84)(cid:81)(cid:79) R(cid:71)(cid:67)(cid:78)(cid:86)(cid:91) I(cid:80)(cid:69)(cid:81)(cid:79)(cid:71)(cid:111)(cid:85) NYSE (cid:78)(cid:75)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)
(cid:81)(cid:80) O(cid:69)(cid:86)(cid:81)(cid:68)(cid:71)(cid:84) 18, 1994 (cid:86)(cid:74)(cid:84)(cid:81)(cid:87)(cid:73)(cid:74) D(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84) (cid:21)1, 2016, (cid:67)(cid:80)(cid:70) ((cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86) (cid:72)(cid:81)(cid:84) NASDAQ) (cid:67)(cid:85)(cid:85)(cid:87)(cid:79)(cid:75)(cid:80)(cid:73) (cid:84)(cid:71)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86) (cid:81)(cid:72) (cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:85)(cid:16) P(cid:67)(cid:85)(cid:86) (cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)
(cid:70)(cid:81)(cid:71)(cid:85) (cid:80)(cid:81)(cid:86) (cid:73)(cid:87)(cid:67)(cid:84)(cid:67)(cid:80)(cid:86)(cid:71)(cid:71) (cid:72)(cid:87)(cid:86)(cid:87)(cid:84)(cid:71) (cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:16) R(cid:71)(cid:67)(cid:78)(cid:86)(cid:91) I(cid:80)(cid:69)(cid:81)(cid:79)(cid:71) (cid:82)(cid:84)(cid:71)(cid:85)(cid:71)(cid:80)(cid:86)(cid:85) (cid:86)(cid:74)(cid:75)(cid:85) (cid:70)(cid:67)(cid:86)(cid:67) (cid:72)(cid:81)(cid:84) (cid:75)(cid:80)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78) (cid:82)(cid:87)(cid:84)(cid:82)(cid:81)(cid:85)(cid:71)(cid:85) (cid:81)(cid:80)(cid:78)(cid:91) (cid:67)(cid:80)(cid:70) (cid:79)(cid:67)(cid:77)(cid:71)(cid:85) (cid:80)(cid:81)
(cid:84)(cid:71)(cid:82)(cid:84)(cid:71)(cid:85)(cid:71)(cid:80)(cid:86)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80) (cid:67)(cid:68)(cid:81)(cid:87)(cid:86) (cid:75)(cid:86)(cid:85) (cid:72)(cid:87)(cid:86)(cid:87)(cid:84)(cid:71) (cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71) (cid:81)(cid:84) (cid:74)(cid:81)(cid:89) (cid:75)(cid:86) (cid:89)(cid:75)(cid:78)(cid:78) (cid:69)(cid:81)(cid:79)(cid:82)(cid:67)(cid:84)(cid:71) (cid:75)(cid:80) (cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71) (cid:86)(cid:81) (cid:81)(cid:86)(cid:74)(cid:71)(cid:84) (cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:71)(cid:85) (cid:75)(cid:80) (cid:86)(cid:74)(cid:71) (cid:72)(cid:87)(cid:86)(cid:87)(cid:84)(cid:71)(cid:16)
6 REALTY INCOME 2016 ANNUAL REPORT
REALTY INCOME 2016 ANNUAL REPORT 6
in a manner that supports sustainable,
properties that preserve the stability and
acquisitions as a percentage of rental
long-term value creation for our
growth of the dividend.
revenue with the balance represented
shareholders.
ACQUISITIONS
Our high-quality real estate acquisitions
The $1.86 billion in property acquisitions
were purchased at an average initial yield
of 6.3%, which resulted in very attractive
continue to be the primary driver of
investment spreads relative to our first-
our earnings growth. During 2016, we
year weighted average cost of capital.
completed $1.86 billion in acquisitions
We continue to maintain investment
which represented our most active year
spreads well above our historical average
by industrial properties. Additionally,
approximately 64% of the rental revenue
from our acquisitions was from tenants with
investment-grade credit ratings.
PORTFOLIO AND ASSET
MANAGEMENT
The quality of our real estate portfolio as
for property-level acquisitions in our
while acquiring high-quality real estate
well as the caliber and experience of our
company’s history. We remained quite
properties.
selective in what we pursued, acquiring
just 6.5% of the $29 billion in real
estate acquisition opportunities that
were generated and reviewed.
Beyond increasing earnings, our
acquisitions activity strengthened the
company by further diversifying the portfolio
and improving our tenant credit quality.
team led to another successful year for our
portfolio and asset management activities.
Our portfolio of 4,944 properties performed
well with high occupancy and positive re-
leasing results.
While the flow of opportunities
Diversification continues to be central to
We ended 2016 with occupancy of 98.3%
continued to be abundant, we remained
our investment strategy as it enhances
which continues to remain at a high level.
committed to our investment strategy,
the stability of our revenues by limiting
We re-leased 186 properties to either
targeting only those opportunities
the amount of rent we receive from any
existing or new tenants, achieving rental
with attractive real estate locations,
single tenant, industry, or market. The 505
rates that were approximately 105% of the
high-quality tenants, and favorably
properties acquired in 2016 are leased
expiring rent. We are pleased to grow the
structured lease terms. We believe this
to tenants that operate in 28 different
cash flow generated from our properties
measured approach is a prudent one.
industries located in 40 states. Retail
that we re-leased, and believe our positive
As fiduciaries of your investment, we
properties continue to be our principal
2016 results reflect our proven, disciplined,
are committed to responsibly acquiring
property type and comprised 86% of the
and selective underwriting approach based
P O R T F O L I O O C C U P A N C Y (1)
%
4
9
9
.
%
3
9
9
.
%
1
9
9
.
%
2
9
9
.
%
5
9
9
.
%
4
8
9
.
%
7
7
9
.
%
2
8
9
.
%
7
7
9
.
%
1
8
9
.
%
9
7
9
.
%
5
8
9
.
%
7
8
9
.
%
9
7
9
.
%
0
7
9
.
%
8
6
9
.
%
6
6
9
.
%
7
6
9
.
%
2
7
9
.
%
2
8
9
.
%
4
8
9
.
%
4
8
9
.
%
3
8
9
.
94
95
96
97
98
99
00
01
02
0(cid:21)
04
05
06
07
08
09
10
11
12
1(cid:21)
14
15
16
(1) Calculated at the end of each year by the number of properties
REALTY INCOME 2016 ANNUAL REPORT 7
on many years of investing in net lease
properties. This experience has enabled
us to assemble a high-quality real estate
CAPITAL MARKETS
ACTIVITY
We continue to enjoy excellent access
Since the beginning of 2015, we have
raised over $2.6 billion of permanent and
long-term capital. Approximately 70% of
portfolio that has produced favorable
to attractively priced capital to fund our
this capital has been equity, allowing us to
long-term, risk-adjusted returns for our
business. Within the net lease sector, we
grow our business while maintaining a high-
shareholders.
We continue to strive for additional
value creation opportunities through
our asset management efforts. In 2016,
we selectively invested $23 million
in properties with expiring leases,
view our low cost of capital as a distinct
quality and conservative balance sheet. By
competitive advantage as it allows us to
primarily utilizing equity to fund our liquidity
grow earnings while acquiring the highest-
needs, and by borrowing capital with long-
quality real estate properties in the
marketplace.
term maturity dates, we have preserved
our financial flexibility and limited future
In 2016, we took advantage of the
refinancing risks.
generating a 13.0% yield on this invested
favorable demand for our shares to raise
As we entered 2017, common equity
capital. Additionally, we identified and
$573 million in common equity capital at
represented 70% of our total market
sold properties that no longer met our
an average price of $60.61, higher than
capitalization and our fixed charge coverage
investment criteria, further enhancing the
any price achieved in a prior year.
ratio was a healthy 4.2x. While these levels
value of our portfolio. In 2016, we sold
Additionally, with one of the highest credit
will fluctuate from year-to-year, we remain
77 properties for $91 million and realized
ratings in the REIT industry, we raised
committed to managing our balance sheet
attractive returns on these investments.
$600 million in 10-year unsecured,
in a conservative manner with approximately
These activities collectively ensure the
fixed-rate debt at a yield of 3.15%, the
two-thirds equity and one-third long-term,
quality of our portfolio and support the
lowest yield for debt we have issued with
primarily fixed-rate debt.
stability and growth of the dividend.
this term in our company’s history.
8 REALTY INCOME 2016 ANNUAL REPORT
The strength of our balance sheet and track
we have the right people, processes, and
record of financial discipline is reflected
systems in place. In 2016, our general and
by our investment-grade credit ratings of
administrative expenses as a percentage
Baa1/BBB+/BBB+. In 2016, Moody’s and
of revenue were 4.9%, the lowest in our
S&P raised their outlook on our ratings
history and the lowest amongst our peers
to “Positive,” recognizing the continued
in the net lease sector. We continue to
strengthening of our credit profile. Our
capitalize on the scalability and efficiency
improved credit rating has further widened
of our business platform, delivering the
our cost-of-capital advantage relative to our
highest percentage of our revenue to
peers in the net lease sector, allowing us
our earnings of any publicly-traded net
to continue growing our earnings with the
lease company.
highest-quality real estate acquisitions.
An extension of our mission as The Monthly
RESOURCES
The continued success of our company is
Dividend Company® is to take an active
role in the betterment of our community.
made possible by the quality of our team
As part of our Corporate Responsibility
members. The breadth and depth of our
Program, this past year we devoted over
team includes an experienced leadership
700 employee volunteer hours to charitable
team that has guided the company
organizations including partnering with
throughout a variety of market conditions.
San Diego Habitat for Humanity. Our team
The average tenure of our officers exceeds
members helped paint, landscape, and
11 years, and I am confident that this
install roofing for several local homes. We
collective experience will continue to serve
also made a corporate donation to the
G E N E R A L A N D
A D M I N I S T R AT I V E
E X P E N S E S
AS % OF TOTAL REVENUE
7.9%
4.9%
12
1(cid:21)
14
15
16
us well into the future.
organization. We have had a significant
important for us to continue to impact our
Our goal is always to maximize our
operational efficiency by ensuring that
presence in San Diego County since our
local community positively as a responsible
founding in 1969 and we believe it is
corporate citizen.
San Diego Habitat for Humanity Day of Service - July 2016
REALTY INCOME 2016 ANNUAL REPORT 9
EARNINGS AND
DIVIDENDS
Our activities collectively contributed to
our healthy 2016 earnings growth. We
E A R N I N G S A N D D I V I D E N D S
$2.88
AFFO PER SHARE
COMPOUND AVERAGE ANNUAL GROWTH
COMPOUND AVERAGE ANNUAL GROWTH
SINCE 1994 NYSE LISTING
SINCE 1994 NYSE LISTING
continued to grow our AFFO, or the cash
5.0% AFFO PER SHARE GROWTH
earnings available to pay the dividend,
4.6% DIVIDEND PER SHARE GROWTH
$2.43
ANNUALIZED
DIVIDEND PER
SHARE
while remaining committed to our
conservative balance sheet. In 2016,
we grew our AFFO per share by 5.1% to
$2.88, which exceeds our 22-year annual
average as a public company. This growth
allowed us to increase the dividend six
times throughout the year, and again in
February 2017, growing the dividend by
6% as compared to February 2016. We
are pleased that the continued strength
in our operations allowed us to increase
the dividend while maintaining a payout
ratio of approximately 83%, providing
a comfortable margin of safety for our
shareholders.
MACROECONOMIC
ENVIRONMENT AND
OUR POSITION
As I write this letter, we are operating in
a domestic economy characterized by
continued modest GDP growth, a relatively
low but increasingly volatile interest rate
environment, and the prospect of new
economic policies as a result of changes
in the political landscape. While we cannot
control these external macroeconomic
factors or predict how they might change in
the future, we believe our continued focus
on quality has created a strong real estate
portfolio and well-capitalized balance sheet
that should, by design, perform in virtually
any economic environment.
10 REALTY INCOME 2016 ANNUAL REPORT
94 95 96 97 98 99 00 01 02 0(cid:21) 04 05 06 07 08 09 10 11 12 1(cid:21) 14 15 16
Over our 48-year operating history, we
of our revenue that supports the monthly
have taken deliberate steps to position
dividend.
our portfolio to be diversified by tenant,
industry, geography, and to a certain extent,
property type, enhancing the stability of
our revenue. Our tenant credit profile
remains strong with 47% of our revenue
today derived from investment-grade rated
tenants. We have also conservatively
underwritten non-investment grade retail
tenants who have demonstrated resiliency
throughout varying economic environments
during our company’s history.
Prioritizing quality in all facets of our
business helps ensure that the decisions
we make today protect our dividend in the
future. Specifically, we continue to monitor
the impact of disruptive technologies and
changing demographics on our business
and strive to make adjustments to our
investment strategy well in advance of
emerging trends. In 2016, we completed
an in-depth strategic review of each facet
of our business with our Board of Directors,
Over 90% of our rental revenue from our
focusing on the long-term vision for our
retail properties is generated from tenants
company. We remain confident in our
with a service, non-discretionary, and/
strategy and believe our business plan
or low price point component to their
positions us to continue to perform well in
business. We believe these characteristics
the future.
better position our tenants to operate in a
variety of economic environments and to
compete effectively with e-commerce. Our
track record of maintaining high occupancy,
which has never been below 96% in our
company’s history, reflects the overall
health of our tenant base and the reliability
OUTLOOK
We are proud to have surpassed $1 billion
in annual rental revenues in 2016 and
are committed to continuing to grow your
company responsibly. As we enter 2017, we
remain positive regarding our outlook.
We continue to source ample acquisition
activities. These aforementioned activities
While we remain confident in our ability
opportunities and remain disciplined and
collectively contribute to what we believe
to operate the company in a manner that
selective in our underwriting approach.
will be another year of favorable operating
supports our mission, we cannot guarantee
Given the opportunities we are seeing
results for the company.
that we will be as successful in 2017 as we
that meet our investment parameters,
we anticipate completing approximately
$1 billion in high-quality acquisitions in
2017 at attractive investment spreads and
favorable risk-adjusted returns.
CONCLUSION
We are pleased with our accomplishments
in 2016. We had another successful year
of operating performance that led to solid
earnings and dividend growth, as well as
To fund our acquisition activities, we maintain
attractive shareholder returns. As we move
a $2 billion line of credit and continue to
into 2017 and beyond, we will continue
have been in the past. Therefore, we always
remind our shareholders how important it is
to rely on Realty Income for only a portion
of their income needs. We thank you for
your continued support of our company
and will keep you apprised of our progress
throughout the year.
enjoy excellent access to favorably-priced
to manage the business for the long term
Sincerely,
permanent and long-term capital. Our
with the same degree of discipline and
leverage metrics remain within our target
dedication to the dividend.
range, providing us with the flexibility to fund
the growth of our portfolio while maintaining
a conservative balance sheet.
Our mission as The Monthly Dividend
Company® is to provide our shareholders
with dependable monthly dividends that
John P. Case
Chief Executive Officer
We are optimistic that our existing portfolio
increase over time. This mission has served
will continue to perform well. We expect
us well throughout our 48-year operating
occupancy in 2017 to remain around
history, and will continue to drive the
98%, with same store rent growing by
quality of properties we acquire, the types
1.0%–1.2%, consistent with our 2016
of capital we raise, and the talents required
results. Additionally, we are committed to
of our team. As your CEO, I am committed
maximizing the revenue generated from
to continuing to guide our company towards
our existing real estate properties through
the execution of our business plan and the
our active portfolio and asset management
achievement of our mission.
COMPARISON OF $100 INVESTED IN REALTY INCOME
IN 1994 VS. MAJOR STOCK INDICES
Realty Income
Equity REIT Index
Dow Jones Industrial Average
S&P 500
NASDAQ Composite
$2,613
$989
$856
$745
$715
94
95
96
97
98
99
00
01
02
0(cid:21)
04
05
06
07
08
09
10
11
12
1(cid:21)
14
15
16
REALTY INCOME 2016 ANNUAL REPORT 11
HIGH-QUALITY
PORTFOLIO
Our real estate portfolio consists of 4,944 freestanding, single-tenant
commercial properties that are diversified by tenant, industry, geography, and to
a certain extent, property type. At the end of 2016, our properties were leased
to 248 commercial tenants operating across 47 industries and located in 49
states and Puerto Rico. The majority of our properties continue to be retail, with
the largest component outside of retail being industrial properties representing
13.2% of revenue. Our tenant base remains healthy, with approximately 47%
of the revenue generated from properties leased to tenants with investment-
grade credit ratings. Maintaining a diversified portfolio leased to strong tenants
helps ensure the stability of our revenue that supports the payment of monthly
dividends.
The strength of our portfolio is further enhanced by the experience of our
portfolio and asset management teams in maximizing the revenue generated
from our properties. As one of the most seasoned net lease companies, we
have re-leased or sold over 2,300 properties with expiring leases throughout our
history as a public company. This is unprecedented in our industry, and through
our active re-leasing activities and selective property sales, we have achieved
stable occupancy that has never been below 96% in our company’s history.
12 REALTY INCOME 2016 ANNUAL REPORT
T E N A N T
D I V E R S I F I C AT I O N
% of
Revenue(1)
Number
of Properties
Tenant
7(cid:16)0(cid:7)
5(cid:16)5(cid:7)
4(cid:16)2(cid:7)
4(cid:16)0(cid:7)
(cid:21)(cid:16)8(cid:7)
2(cid:16)6(cid:7)
2(cid:16)6(cid:7)
2(cid:16)4(cid:7)
2(cid:16)2(cid:7)
2(cid:16)0(cid:7)
2(cid:16)0(cid:7)
1(cid:16)9(cid:7)
1(cid:16)9(cid:7)
1(cid:16)9(cid:7)
1(cid:16)9(cid:7)
1(cid:16)8(cid:7)
1(cid:16)8(cid:7)
1(cid:16)6(cid:7)
1(cid:16)2(cid:7)
1(cid:16)1(cid:7)
20(cid:21)
4(cid:21)
524
48
457
299
22
15
17
70
1(cid:21)4
(cid:21)1
22
216
69
111
9
149
18
10
Wal(cid:73)reens(cid:12)
FedE(cid:90)(cid:12)
Dollar General(cid:12)
LA Fitness
Dollar Tree (cid:17) Family Dollar
Circle (cid:45) (Couc(cid:74)e-Tard)(cid:12)
A(cid:47)C T(cid:74)eatres
(cid:36)(cid:44)(cid:9)s W(cid:74)olesale Clu(cid:68)s
Dia(cid:73)eo(cid:12)
CVS P(cid:74)armacy(cid:12)
Super America (cid:17) Western Re(cid:386)nin(cid:73)
Walmart (cid:17) Sam(cid:9)s Clu(cid:68)(cid:12)
Re(cid:73)al Cinemas
GP(cid:47) In(cid:88)estments (cid:17) Fas (cid:47)art
Rite Aid
7-Ele(cid:88)en(cid:12)
Li(cid:72)e Time Fitness
T(cid:36)C Corporation (Sumitomo)(cid:12)
FreedomRoads (cid:17) Campin(cid:73) World
Home Depot(cid:12)
(1) (cid:36)ased on annuali(cid:92)ed rental re(cid:88)enue as o(cid:72) 12(cid:17)(cid:21)1(cid:17)16
(cid:12)In(cid:88)estment-(cid:73)rade rated
P R O P E R T Y T Y P E
D I V E R S I F I C AT I O N
Property Type
Number of
Properties
% of
Revenue(1)
Retail
Industrial
O(cid:72)(cid:386)ce
A(cid:73)riculture
4,774
111
44
15
78(cid:16)9(cid:7)
1(cid:21)(cid:16)2(cid:7)
5(cid:16)5(cid:7)
2(cid:16)4(cid:7)
(1) (cid:36)ased on rental re(cid:88)enue (cid:72)or t(cid:74)e (cid:83)uarter
ended 12(cid:17)(cid:21)1(cid:17)16
REALTY INCOME 2016 ANNUAL REPORT 13
I N D U S T R Y D I V E R S I F I C AT I O N
% of
Revenue(1)
Industry
11(cid:16)4(cid:7) Dru(cid:73) Stores
8(cid:16)5(cid:7) Convenience Stores
8(cid:16)(cid:21)(cid:7) Dollar Stores
7(cid:16)9(cid:7) Healt(cid:74) & Fitness
5(cid:16)7(cid:7) Transportation Services
5(cid:16)2(cid:7) Restaurants - (cid:83)uic(cid:77) service
4(cid:16)7(cid:7) T(cid:74)eaters
(cid:21)(cid:16)9(cid:7) Restaurants - casual dinin(cid:73)
(cid:21)(cid:16)4(cid:7) W(cid:74)olesale Clu(cid:68)s
(cid:21)(cid:16)4(cid:7) Grocery Stores
(1) (cid:36)ased on rental revenue (cid:72)or
t(cid:74)e (cid:83)uarter ended 12(cid:17)(cid:21)1(cid:17)16
14 REALTY INCOME 2016 ANNUAL REPORT
G E O G R A P H I C D I V E R S I F I C AT I O N
AS A % OF REVENUE(1)
CALIFORNIA 9.6%
FLORIDA 5.4%
ILLINOIS 5.3%
<1%
1–2%
2–3%
3–4%
TEXAS 9.4%
OHIO 5.4%
NEW YORK 4.5%
4–5%
5–6%
6–10%
(1) (cid:36)ased on rental revenue (cid:72)or t(cid:74)e (cid:83)uarter ended 12(cid:17)(cid:21)1(cid:17)16
ALASKA AND PUERTO RICO NOT TO SCALE
REALTY INCOME 2016 ANNUAL REPORT 15
DISCIPLINED
INVEST(cid:47)ENT
PROCESS
FOCUSED ON HIGH-QUALITY GROWTH
We focus on acquiring freestanding, single-tenant
the tenant’s highest-performing locations. Our team
commercial properties leased to high-quality tenants
stays abreast of trends in the various industries relative
under long-term, net lease agreements, typically
to the economic environment and frequently meets with
in excess of 10 years. During 2016, we reviewed
management representatives within these industries to
approximately $29 billion of investment opportunities
better understand the tenant’s operations.
that generally satisfied one or more of these criteria.
These opportunities went through a rigorous, multi-step
internal underwriting process, resulting in the selection of
$1.86 billion in properties that were ultimately acquired.
The information gathered on the real estate, tenant,
and industry determines the appropriate price for an
investment. Our cost of capital remains the lowest
in the net lease sector, so we have the advantage of
The process begins with a review of the real estate.
achieving the widest investment spreads while offering
We target properties located in significant markets or
competitive pricing for high-quality properties. However,
strategic locations critical to generating revenue for the
we ensure the real estate is appropriately priced relative
tenant. We examine the property-level attributes such as
to replacement cost, and leased at rental rates that are
access and signage, demographic trends relative
generally in-line with market rent in order to support
to the property’s intended use, and overall viability
strong long-term investment returns generated by each
of the market.
In addition to the real estate, we also carefully review
the characteristics and financial strength of the tenant
and its industry. Our team of research professionals
conducts a thorough financial review and analysis of
the tenant, including an assessment of the store-level
performance of the retail operations to ensure we own
asset. Our Investment Committee collectively reviews
these characteristics and metrics to decide which
properties to acquire. This rigorous selection process
maintains the quality of our investment portfolio and
supports the stability of our cash flow over time.
16 REALTY INCOME 2016 ANNUAL REPORT
A C Q U I S I T I O N S S E L E C T I V I T Y
FOR THE YEARS (DOLLARS IN BILLIONS)
Amount
Sourced
Amount
Acquired
Selectivity(1)
2016
(cid:6)28(cid:16)5
2015
(cid:6)(cid:21)1(cid:16)7
2014
(cid:6)24(cid:16)(cid:21)
201(cid:21)
(cid:6)(cid:21)9(cid:16)4
2012
(cid:6)17(cid:16)0
2011
(cid:6)1(cid:21)(cid:16)(cid:21)
2010
(cid:6)5(cid:16)7
(cid:6)1(cid:16)86
(cid:6)1(cid:16)26
(cid:6)1(cid:16)40
(cid:6)4(cid:16)67
(cid:6)1(cid:16)16
(cid:6)1(cid:16)02
(cid:6)0(cid:16)71
7(cid:7)
4(cid:7)
6(cid:7)
12(cid:7)
7(cid:7)
8(cid:7)
12(cid:7)
(1) Selectivity is calculated as t(cid:74)e amount o(cid:72) ac(cid:83)uisitions ac(cid:83)uired
divided (cid:68)y t(cid:74)e amount o(cid:72) ac(cid:83)uisitions sourced
REALTY INCOME 2016 ANNUAL REPORT 17
CONSERVATIVE
CAPITAL
STRUCTURE
HIGH-QUALITY BALANCE SHEET
Our commitment to the dividend is demonstrated by the way we manage our
balance sheet. We believe it is important to maintain a conservative capital
structure that is primarily equity-focused in order to protect the dividend. At
the end of 2016, our total market capitalization was $21.3 billion, of which
$15.0 billion, or 70%, was common equity.
When we use debt to fund our growth, we structure it in a conservative manner.
Over the life of the company, over 92% of the bond volume we have issued has
been for terms of 10 years or longer, and 100% of our outstanding bonds are
fixed-rate and unsecured. As of December 31, 2016, our debt-to-EBITDA ratio
was a healthy 5.7x. We maintain a $2.0 billion line of credit, which provides us
flexibility to close on acquisitions quickly and then opportunistically raise
equity and/or long-term debt when capital market dynamics are most
advantageous to us. Our investment-grade credit ratings of Baa1/BBB+/BBB+
(Moody’s/S&P/Fitch), with “Positive” outlooks by both Moody’s and S&P,
continue to provide us with a low cost of public unsecured debt.
C O N S E R V AT I V E C A P I TA L S T R U C T U R E ( 1 )
(DOLLARS IN BILLIONS)
Common
Equity
Amount in (cid:36)illions
(cid:6)15(cid:16)0
(cid:7) o(cid:72) Total
70(cid:7)
(1) At 12(cid:17)(cid:21)1(cid:17)16
Debt
(cid:6)5(cid:16)9
28(cid:7)
Preferred
Stock
Total
Capitalization
(cid:6)0(cid:16)4
2(cid:7)
(cid:6)21(cid:16)(cid:21)
100(cid:7)
Debt +
Preferred
Equity
to Total
Market
Capitalization
Fixed
Charge
Coverage
Ratio
2016
2015
2014
201(cid:21)
2012
(cid:21)0(cid:7)
29(cid:7)
(cid:21)(cid:21)(cid:7)
(cid:21)8(cid:7)
40(cid:7)
4(cid:16)2(cid:90)
4(cid:16)0(cid:90)
(cid:21)(cid:16)4(cid:90)
(cid:21)(cid:16)0(cid:90)
2(cid:16)7(cid:90)
18 REALTY INCOME 2016 ANNUAL REPORT
(cid:47)ONTHLY
DIVIDENDS
SUPPORTED BY HIGH-QUALITY CASH FLOW
As The Monthly Dividend Company®, we remain committed to operating our
company in a manner that provides our shareholders with dependable monthly
dividends that increase over time. At the core of every business decision we
make is the focus on protecting and growing the dividend. Our commitment is
evidenced by our track record of dividend performance. Since our company’s
listing on the NYSE in 1994, we have increased the dividend every year at a
compound average annual growth rate of approximately 5% and have never
cut the dividend. We are one of only five REITs in the S&P High Yield Dividend
Aristocrats® index, which includes companies that have increased their
dividend every year for at least 20 years.
To quantify the benefit to our shareholders of what we often refer to as the
“magic” of rising dividends over time, we consider a shareholder’s hypothetical
investment in 1,000 Realty Income shares 10 years ago. As a result of the
dividends received and the dividend increases on these shares over time, the
shareholder’s yield on cost grows. Today, that shareholder would receive:
8.8%
Dividend yield on
69%
60%
of the original investment
Increase in the amount of
the original investment
received in dividends
annual dividends paid
(vs. original yield of 5.5%)
REALTY INCOME 2016 ANNUAL REPORT 19
2016
FOR(cid:47) 10-(cid:45)
Certain e(cid:90)(cid:74)i(cid:68)its and sc(cid:74)edules to t(cid:74)e Form 10-(cid:45) are not reproduced
(cid:74)ere, (cid:68)ut can (cid:68)e o(cid:68)tained (cid:72)rom our (cid:89)e(cid:68)site at (cid:89)(cid:89)(cid:89)(cid:16)realtyincome(cid:16)com(cid:16)
T(cid:74)e Form 10-(cid:45) includes t(cid:74)e section (cid:21)02 certi(cid:386)cations (cid:386)led (cid:89)it(cid:74) t(cid:74)e SEC(cid:16)
20 REALTY INCOME 2016 ANNUAL REPORT
REALTY INCOME 2016 ANNUAL REPORT 20
REALTY INCOME CORPORATION AND SUBSIDIARIES
Financial Information
Consolidated Balance Sheets ............................................................................................................... 22
Consolidated Statements of Income ..................................................................................................... 23
Consolidated Statements of Equity ....................................................................................................... 24
Consolidated Statements of Cash Flows .............................................................................................. 25
Notes to Consolidated Financial Statements ........................................................................................ 26
Consolidated Quarterly Financial Data ................................................................................................. 47
Reports of Independent Registered Public Accounting Firm ................................................................ 48
Business Description ............................................................................................................................ 50
Property Portfolio Information ............................................................................................................... 60
Forward-Looking Statements ................................................................................................................ 67
Management’s Discussion and Analysis of Financial Condition and Results of Operations ................ 68
General .............................................................................................................................................................. 68
Liquidity and Capital Resources ........................................................................................................................ 68
Results of Operations ........................................................................................................................................ 74
Funds from Operations Available to Common Stockholders (FFO) .................................................................. 80
Adjusted Funds from Operations Available to Common Stockholders (AFFO) ........................................... 81
Impact of Inflation .............................................................................................................................................. 83
Impact of Recent Accounting Pronouncements ................................................................................................ 83
Quantitative and Qualitative Disclosures About Market Risk ............................................................................ 83
Selected Financial Data ........................................................................................................................ 85
Controls and Procedures ...................................................................................................................... 86
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities ................................................................................................ 87
21
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
At December 31, 2016 and 2015
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Real estate, at cost:
Land
Buildings and improvements
Total real estate, at cost
Less accumulated depreciation and amortization
Net real estate held for investment
Real estate held for sale, net
Net real estate
Cash and cash equivalents
Accounts receivable, net
Acquired lease intangible assets, net
Goodwill
Other assets, net
Total assets
LIABILITIES AND EQUITY
Distributions payable
Accounts payable and accrued expenses
Acquired lease intangible liabilities, net
Other liabilities
Line of credit payable
Term loans, net
Mortgages payable, net
Notes payable, net
Total liabilities
Commitments and contingencies
Stockholders' equity:
Preferred stock and paid in capital, par value $0.01 per share,
69,900,000 shares authorized, 16,350,000 shares issued and
outstanding as of December 31, 2016 and December 31, 2015,
liquidation preference $25.00 per share
Common stock and paid in capital, par value $0.01 per share,
370,100,000 shares authorized, 260,168,259 shares issued and
outstanding as of December 31, 2016 and 250,416,757 shares issued
and outstanding as of December 31, 2015
Distributions in excess of net income
Total stockholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
$
$
$
2016
2015
3,752,204 $
10,112,212
13,864,416
(1,987,200)
11,877,216
26,575
11,903,791
9,420
104,584
1,082,320
15,067
37,689
13,152,871 $
3,286,004
9,010,778
12,296,782
(1,687,665 )
10,609,117
9,767
10,618,884
40,294
81,678
1,034,417
15,321
54,785
11,845,379
55,235 $
121,156
264,206
85,616
1,120,000
319,127
466,045
3,934,433
6,365,818
50,344
115,826
250,916
53,965
238,000
318,835
646,187
3,617,973
5,292,046
395,378
395,378
8,228,594
(1,857,168)
6,766,804
20,249
6,787,053
13,152,871 $
7,666,428
(1,530,210 )
6,531,596
21,737
6,553,333
11,845,379
$
The accompanying notes to consolidated financial statements are an integral part of these statements.
22
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2016, 2015 and 2014
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE
Rental
Tenant reimbursements
Other
Total revenue
EXPENSES
Depreciation and amortization
Interest
General and administrative
Property (including reimbursable)
Income taxes
Provisions for impairment
Total expenses
Gain on sales of real estate
Income from continuing operations
Income from discontinued operations
Net income
2016
2015
2014
$
1,057,413 $
43,104
2,655
1,103,172
976,865 $
42,015
4,405
1,023,285
893,457
37,118
2,930
933,505
449,943
219,974
51,966
62,865
3,262
20,664
808,674
409,215
233,079
49,298
55,352
3,169
10,560
760,673
374,661
216,366
51,085
53,871
3,461
4,126
703,570
21,979
22,243
39,205
316,477
284,855
269,140
-
-
2,800
316,477
284,855
271,940
Net income attributable to noncontrolling interests
(906 )
(1,089 )
(1,305 )
Net income attributable to the Company
Preferred stock dividends
Excess of redemption value over carrying value of
preferred shares redeemed
315,571
(27,080 )
283,766
(27,080 )
270,635
(37,062 )
-
-
(6,015 )
Net income available to common stockholders
$
288,491 $
256,686 $
227,558
Amounts available to common stockholders per common share:
Income from continuing operations, basic and diluted
Net income, basic and diluted
$
$
1.13 $
1.13 $
1.09 $
1.09 $
1.03
1.04
Weighted average common shares outstanding:
Basic
Diluted
255,066,500
235,767,932 218,390,885
255,624,250
236,208,390 218,767,885
The accompanying notes to consolidated financial statements are an integral part of these statements.
23
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Equity
Years ended December 31, 2016, 2015, and 2014
(DOLLARS IN THOUSANDS)
Balance, December 31, 2013
Net income
Distributions paid and payable
Share issuances, net of costs
Redemption of common units
Reallocation of equity
Preferred shares redeemed
Share-based compensation, net
Balance, December 31, 2014
Net income
Distributions paid and payable
Share issuances, net of costs
Redemption of common units
Reallocation of equity
Share-based compensation, net
Balance, December 31, 2015
Net income
Distributions paid and payable
Share issuances, net of costs
Contributions by noncontrolling
interests
Redemption of common units
Reallocation of equity
Share-based compensation, net
Shares of
preferred
stock
25,150,000
-
-
-
-
-
(8,800,000 )
-
16,350,000
-
-
-
-
-
-
16,350,000
-
-
-
-
-
-
-
Shares of
common
stock
Preferred
stock and
paid in
capital
Common
stock and Distributions
Total
paid in
capital
in excess of stockholders' Noncontrolling
interests
net income
equity
Total
equity
207,485,073 $
609,363 $
5,767,878 $
-
-
17,327,166
35,000
-
-
33,953
-
-
-
-
-
(213,985 )
-
-
-
685,877
1,032
6,647
-
3,553
(991,794 ) $
270,635
(519,790 )
-
-
-
(6,015)
-
5,385,447 $
270,635
(519,790)
685,877
1,032
6,647
(220,000)
3,553
35,911 $ 5,421,358
271,940
(521,629 )
685,877
-
-
(220,000 )
3,553
1,305
(1,839)
-
(1,032)
(6,647)
-
-
224,881,192 $
395,378 $
6,464,987 $ (1,246,964) $
-
-
25,322,655
168,182
-
44,728
-
-
-
-
-
-
-
-
1,190,006
4,347
1,051
6,037
283,766
(567,012 )
-
-
-
-
250,416,757 $
395,378 $
7,666,428 $ (1,530,210) $
-
-
557,636
315,571
(642,529 )
-
5,613,401 $
283,766
(567,012)
1,190,006
4,347
1,051
6,037
6,531,596 $
315,571
(642,529)
557,636
1,089
(1,652)
27,698 $ 5,641,099
284,855
(568,664 )
1,190,006
-
-
6,037
(4,347)
(1,051)
-
-
906
(12,682 )
21,737 $ 6,553,333
316,477
(655,211 )
557,636
-
-
(2,865)
(543)
7,938
-
-
-
-
-
(2,865)
(543)
7,938
15,906
(6,161)
543
-
15,906
(9,026 )
-
7,938
-
-
9,449,167
-
103,182
-
199,153
-
-
-
-
-
-
-
Balance, December 31, 2016
16,350,000
260,168,259 $
395,378 $
8,228,594 $ (1,857,168) $
6,766,804 $
20,249
$ 6,787,053
The accompanying notes to consolidated financial statements are an integral part of these statements.
24
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2016, 2015 and 2014
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to net income:
Depreciation and amortization
Income from discontinued operations
Amortization of share-based compensation
Non-cash rental adjustments
Amortization of net premiums on mortgages payable
Amortization of deferred financing costs
(Gain) loss on interest rate swaps
Gain on sales of real estate
Provisions for impairment on real estate
Change in assets and liabilities
Accounts receivable and other assets
Accounts payable, accrued expenses and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in real estate
Improvements to real estate, including leasing costs
Proceeds from sales of real estate
Continuing operations
Discontinued operations
Collection of loans receivable
Restricted escrow deposits for Section 1031 tax-deferred exchanges
and pending acquisitions
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions to common stockholders
Cash dividends to preferred stockholders
Borrowings on line of credit
Payments on line of credit
Proceeds from notes and bonds payable issued
Principal payment on notes payable
Proceeds from mortgages payable
Principal payments on mortgages payable
Proceeds from term loans
Proceeds from common stock offerings, net
Proceeds from dividend reinvestment and stock purchase plan
Proceeds from At-the-Market (ATM) program
Redemption of preferred stock
Redemption of preferred units
Redemption of common units
Distributions to noncontrolling interests
Debt issuance costs
Other items, including shares withheld upon vesting
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
2016
2015
2014
$
316,477 $
284,855 $
271,940
449,943
-
12,007
(10,154 )
(3,414 )
8,904
(1,639 )
(21,979 )
20,664
(1,232 )
34,468
804,045
409,215
-
10,391
(8,607 )
(7,482 )
9,044
3,043
(22,243 )
10,560
(2,641 )
6,168
692,303
374,661
(2,800 )
11,959
(6,848 )
(12,891 )
8,335
1,349
(39,205 )
4,126
(3,064 )
20,130
627,692
(1,798,892 )
(13,426 )
(1,266,885 )
(11,541 )
(1,228,243 )
(6,032 )
99,096
-
12,515
65,817
-
-
88,688
6,918
350
(404 )
(1,701,111 )
33,554
(1,179,055 )
(36,540 )
(1,174,859 )
(610,516 )
(27,080 )
3,879,000
(2,997,000 )
592,026
(275,000 )
9,963
(231,743 )
-
383,572
10,252
166,781
-
-
(9,026 )
(12,725 )
(5,274 )
(7,038 )
866,192
(30,874 )
40,294
(533,238 )
(27,080 )
1,448,000
(1,433,000 )
-
(150,000 )
-
(198,353 )
250,000
793,559
363,029
36,348
-
(6,750 )
-
(1,679 )
(10,259 )
(7,383 )
523,194
36,442
3,852
(479,256 )
(38,300 )
1,672,321
(1,577,321 )
598,594
-
-
(85,208 )
-
528,615
158,462
-
(220,000 )
-
(1,844 )
(5,505 )
(9,796 )
540,762
(6,405 )
10,257
$
9,420 $
40,294 $
3,852
For supplemental disclosures, see note 15.
The accompanying notes to consolidated financial statements are an integral part of these statements.
25
REALTY INCOME CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016, 2015 and 2014
1.
Organization and Operation
Realty Income Corporation ("Realty Income," the "Company," "we," "our" or "us") is organized as a Maryland
corporation. We invest in commercial real estate and have elected to be taxed as a real estate investment trust,
or REIT.
At December 31, 2016, we owned 4,944 properties, located in 49 states and Puerto Rico, containing over
83.0 million leasable square feet.
Information with respect to number of properties, square feet, average initial lease term and weighted average
contractual lease rate is unaudited.
2.
Summary of Significant Accounting Policies
Federal Income Taxes. We have elected to be taxed as a REIT, as defined above, under the Internal Revenue
Code of 1986, as amended, or the Code. We believe we have qualified and continue to qualify as a REIT. Under
the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our
taxable income. Assuming our dividends equal or exceed our taxable net income, we generally will not be
required to pay federal corporate income taxes on such income. Accordingly, no provision has been made for
federal income taxes in the accompanying consolidated financial statements, except for federal income taxes of
our taxable REIT subsidiaries. The income taxes recorded on our consolidated statements of income represent
amounts paid by Realty Income and its subsidiaries for city and state income and franchise taxes.
Earnings and profits that determine the taxability of distributions to stockholders differ from net income reported
for financial reporting purposes due to differences in the estimated useful lives and methods used to compute
depreciation and the carrying value (basis) of the investments in properties for tax purposes, among other
things.
We regularly analyze our various federal and state filing positions and only recognize the income tax effect in
our financial statements when certain criteria regarding uncertain income tax positions have been met. We
believe that our income tax positions would more likely than not be sustained upon examination by all relevant
taxing authorities. Therefore, no provisions for uncertain income tax positions have been recorded in our
financial statements.
Net Income per Common Share. Basic net income per common share is computed by dividing net income
available to common stockholders by the weighted average number of common shares outstanding during each
period. Diluted net income per common share is computed by dividing net income available to common
stockholders, plus income attributable to dilutive shares and convertible common units, for the period by the
weighted average number of common shares that would have been outstanding assuming the issuance of
common shares for all potentially dilutive common shares outstanding during the reporting period.
The following is a reconciliation of the denominator of the basic net income per common share computation to
the denominator of the diluted net income per common share computation.
Weighted average shares used for the basic net income
per share computation
Incremental shares from share-based compensation
Weighted average partnership common units convertible
to common shares that were dilutive
Weighted average shares used for diluted net
2016
2015
2014
255,066,500 235,767,932
123,436
240,728
218,390,885
59,978
317,022
317,022
317,022
income per share computation
255,624,250 236,208,390
218,767,885
Unvested shares from share-based compensation that
were anti-dilutive
Weighted average partnership common units convertible
475
106,103
51,749
to common shares that were anti-dilutive
198,429
417,060
523,847
26
Discontinued Operations. During the first quarter of 2014, the Financial Accounting Standards Board issued
guidance that changed the definition of discontinued operations by limiting discontinued operations reporting to
disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an
entity’s operations and financial results. We early adopted the requirements of this accounting pronouncement
in the first quarter of 2014.
Starting with the first quarter of 2014, the results of operations for all qualifying disposals and properties
classified as held for sale that were not previously reported in discontinued operations in our 2013 Annual
Report on Form 10-K are presented within income from continuing operations on our consolidated statements of
income. Prior to the date of adoption of Accounting Standards Update 2014-08 (ASU 2014-08), which amends
Topic 205, Presentation of Financial Statements, and Topic 360, Property, Plant, and Equipment, we reported,
in discontinued operations, the results of operations of properties that had either been disposed of or classified
as held for sale in financial statements issued.
Operations from 15 properties were classified as held for sale at December 31, 2016, and are included in
income from continuing operations. We do not depreciate properties that are classified as held for sale.
If the property was previously reclassified as held for sale but the applicable criteria for this classification are no
longer met, the property is reclassified to real estate held for investment. A property that is reclassified to held
for investment is measured and recorded at the lower of (i) its carrying amount before the property was
classified as held for sale, adjusted for any depreciation expense that would have been recognized had the
property been continuously classified as held for investment, or (ii) the fair value at the date of the subsequent
decision not to sell.
No debt was assumed by buyers of our properties, or repaid as a result of our property sales.
For the year ended December 31, 2014, we recorded income from discontinued operations of $2.8 million, or
$0.01 per common share, basic and diluted.
Revenue Recognition and Accounts Receivable. All leases are accounted for as operating leases. Under this
method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the
lease term. Any rental revenue contingent upon a tenant's sales is recognized only after the tenant exceeds
their sales breakpoint. Rental increases based upon changes in the consumer price indexes are recognized only
after the changes in the indexes have occurred and are then applied according to the lease agreements.
Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses
are included in tenant reimbursements in the period when such costs are incurred.
We recognize an allowance for doubtful accounts relating to accounts receivable for amounts deemed
uncollectible. We consider tenant specific issues, such as financial stability and ability to pay, when determining
collectability of accounts receivable and appropriate allowances to record. The allowance for doubtful accounts
was $74,000 at December 31, 2016 and $429,000 at December 31, 2015.
Other revenue, which comprises property-related revenue not included in rental revenue or tenant
reimbursements, was $2.7 million in 2016, $4.4 million in 2015 and $2.9 million in 2014
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of
Realty Income and other subsidiaries for which we make operating and financial decisions (i.e. control), after
elimination of all material intercompany balances and transactions. We consolidate entities that we control and
record a noncontrolling interest for the portion that we do not own. Noncontrolling interest that was created or
assumed as part of a business combination was recognized at fair value as of the date of the transaction (see
note 10). We have no unconsolidated investments.
Cash Equivalents. We consider all short-term, highly liquid investments that are readily convertible to cash and
have an original maturity of three months or less at the time of purchase to be cash equivalents. Our cash
equivalents are primarily investments in United States government money market funds.
Gain on Sales of Properties. When real estate is sold, the related net book value of the applicable assets is
removed and a gain from the sale is recognized in our consolidated statements of income. We record a gain
27
from the sale of real estate provided that various criteria, relating to the terms of the sale and any subsequent
involvement by us with the real estate, have been met.
Allocation of the Purchase Price of Real Estate Acquisitions. When acquiring a property for investment
purposes, we typically allocate the fair value of real estate acquired to: (1) land, (2) building and improvements,
and (3) identified intangible assets and liabilities, based in each case on their estimated fair values. Intangible
assets and liabilities consist of above-market or below-market lease value of in-place leases, the value of in-
place leases, and tenant relationships, as applicable. 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 markets where the property is located. In addition, any assumed mortgages
receivable or payable and any assumed or issued noncontrolling interests 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 initial allocation of the
purchase price is based on management’s preliminary assessment, which may differ when final information
becomes available. Subsequent adjustments made to the initial purchase price allocation are made within the
allocation period, which does not exceed one year. 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.
Our estimated fair value determinations are based on management’s judgment, utilizing various factors,
including: (1) market conditions, (2) industry that the tenant operates in, (3) characteristics of the real estate, i.e.:
location, size, demographics, value and comparative rental rates, (4) tenant credit profile, (5) store profitability
and the importance of the location of the real estate to the operations of the tenant’s business, and/or (6) real
estate valuations, prepared either internally or by an independent valuation firm. Our methodologies for
measuring fair value related to the allocation of the purchase price of real estate acquisitions include both
observable market data (and thus should be categorized as level 2 on the Financial Accounting Standards
Board, or FASB’s, three-level valuation hierarchy) and unobservable inputs that reflect our own internal
assumptions and calculations (and thus should be categorized as level 3 on FASB’s three-level valuation
hierarchy).
The fair value of the tangible assets of an acquired property with an in-place operating lease (which includes
land and buildings/improvements) is determined by valuing the property as if it were vacant, and the "as-if-
vacant" value is then allocated to land and buildings/improvements based on our determination of the fair value
of these assets. Our fair value determinations are based primarily on internally prepared real estate valuations
for each property, and consider estimates of carrying costs during the expected lease-up periods, current
market conditions, as well as costs to execute similar leases. In allocating the fair value to identified intangibles
for above-market or below-market leases, an amount is recorded based on the present value of the difference
between (i) the contractual amount to be paid pursuant to the in-place lease and (ii) our estimate of fair market
lease rate for the corresponding in-place lease, measured over the remaining term of the lease.
The values of the above-market and below-market leases are amortized over the term of the respective leases,
including any bargain renewal options, as an adjustment to rental revenue on our consolidated statements of
income.
The aggregate value of other acquired intangible assets consists of the fair value of in-place leases and tenant
relationships, as applicable. The value of in-place leases, exclusive of the value of above-market and below-
market in-place leases, is amortized to depreciation and amortization expense over the remaining periods of the
respective leases.
If a lease was terminated prior to its stated expiration, all unamortized amounts relating to that lease would be
recorded to revenue or expense as appropriate.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based
on the present value of the estimated cash flows, which is calculated to account for either above or below-
market interest rates. Our assumed net debt premiums are amortized as a reduction to interest expense over
the remaining term of the respective mortgages.
28
In allocating noncontrolling interests, amounts are recorded based on the fair value of units issued or
contributions made at the date of acquisition, as determined by the terms of the applicable agreement.
Depreciation and Amortization. Land, buildings and improvements are recorded and stated at cost. Major
replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated
over their estimated useful lives, while ordinary repairs and maintenance are expensed as incurred. Buildings
and improvements that are under redevelopment, or are being developed, are carried at cost and no
depreciation is recorded on these assets. Additionally, amounts essential to the development of the property,
such as pre-construction, development, construction, interest and other costs incurred during the period of
development are capitalized. We cease capitalization when the property is available for occupancy upon
substantial completion of tenant improvements, but in any event no later than one year from the completion of
major construction activity.
Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The
estimated useful lives are as follows:
Buildings
Building improvements
Tenant improvements and lease commissions The shorter of the term of the related lease or useful life
Acquired in-place leases
25 years or 35 years
4 to 20 years
Remaining terms of the respective leases
Provision for Impairment. We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. A provision is made for
impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated
disposition proceeds (undiscounted) are less than the current book value of the property. Key factors that we
utilize in this analysis include projected rental rates, estimated holding periods, historical sales and releases,
capital expenditures and property sales capitalization rates. If a property is classified as held for sale, it is
carried at the lower of carrying cost or estimated fair value, less estimated cost to sell, and depreciation of the
property ceases.
In 2016, we recorded total provisions for impairment of $20.7 million on six properties classified as held for sale,
two properties classified as held for investment, and 31 sold properties in the following industries: one in the
automotive parts industry, two in the automotive services industry, one in the automotive tire services industry,
one in the convenience stores industry, one in the financial services industry, one in the general merchandise
industry, one in the health and fitness industry, two in the home furnishings industry, 24 in the restaurant-casual
dining industry, two in the restaurant-quick service industry, and three among the industry we classify as “other.”
These properties were not previously classified as held for sale in financial statements issued prior to the date of
adoption of ASU 2014-08; accordingly, the provisions for impairment are included in income from continuing
operations on our consolidated statement of income.
In 2015, we recorded total provisions for impairment of $10.6 million on three properties classified as held for
investment, 11 sold properties, and one property disposed of other than by sale in the following industries: one
in the convenience stores industry, one in the health and fitness industry, one in the pet supplies and services
industry, 11 in the restaurant-casual dining industry, and one among the industry we classify as “other.” These
properties were not previously classified as held for sale in financial statements issued prior to the date of
adoption of ASU 2014-08; accordingly, the provisions for impairment are included in income from continuing
operations on our consolidated statement of income.
In 2014, we recorded total provisions for impairment of $4.6 million. Provisions for impairment of $4.1 million
are included in income from continuing operations on 10 sold properties and one property classified as held for
sale in the following industries: one in the consumer electronics industry, one in the convenience stores industry,
one in the home furnishings industry, two in the home improvement industry, and six in the restaurant-casual
dining industry. These properties were not previously classified as held for sale in financial statements issued
prior to the date of adoption of ASU 2014-08; accordingly, these provisions for impairment are included in
income from continuing operations on our consolidated statements of income. Additionally, a provision for
impairment of $510,000 is included in income from discontinued operations on one sold property that was
classified as held for sale as of December 31, 2013.
29
Asset Retirement Obligations. We analyze our future legal obligations associated with the other-than-
temporary removal of tangible long-lived assets, also referred to as asset retirement obligations. When we
determine that we have a legal obligation to provide services upon the retirement of a tangible long-lived asset,
we record a liability for this obligation based on the estimated fair value of this obligation and adjust the carrying
amount of the related long-lived asset by the same amount. This asset is amortized over its estimated useful
life. The estimated fair value of the asset retirement obligation is calculated by discounting the future cash flows
using a credit-adjusted risk-free interest rate.
Goodwill. Goodwill is tested for impairment during the second quarter of each year as well as when events or
circumstances occur indicating that our goodwill might be impaired. Under the amendments issued in
conjunction with ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350), an entity, through an
assessment of qualitative factors, is not required to calculate the estimated fair value of a reporting unit, in
connection with the two-step goodwill impairment test, unless the entity determines that it is more likely than not
that its fair value is less than its carrying amount. During our tests for impairment of goodwill during the second
quarters of 2016, 2015 and 2014, we determined that the fair values of our reporting units are not more likely
than not to be less than their respective carrying amounts and that no impairment was recorded on our goodwill
during 2016, 2015 or 2014.
Equity Offering Costs. Underwriting commissions and offering costs have been reflected as a reduction of
additional paid-in-capital on our consolidated balance sheets.
Noncontrolling Interests. Noncontrolling interests are reflected on our consolidated balance sheets as a
component of equity. Noncontrolling interests are recorded initially at fair value based on the price of the
applicable units issued or contributions made, and subsequently adjusted each period for distributions,
additional contributions and the allocation of net income attributable to the noncontrolling interests.
As consideration for two separate acquisitions during 2013, partnership units of Tau Operating Partnership, L.P.
and Realty Income, L.P. were issued to third parties. These common units (discussed in footnote 10) do not
have voting rights, are entitled to monthly distributions equal to the amount paid to our common stockholders,
and are redeemable in cash or our common stock, at our option and at a conversion ratio of one to one, subject
to certain exceptions. As the general partner for each of these partnerships, we have operating and financial
control over these entities, consolidate them in our financial statements, and record the partnership units held by
third parties as noncontrolling interests.
Use of Estimates. The consolidated financial statements were prepared in conformity with U.S. generally
accepted accounting principles, or GAAP, which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Recent Accounting Pronouncements. In May 2014, FASB issued ASU 2014-09, Revenue from Contracts
with Customers. This ASU outlines a comprehensive model for companies to use in accounting for revenue
arising from contracts with customers, and will apply to transactions such as the sale of real estate. This ASU is
effective for interim and annual periods beginning after December 15, 2017. The standard permits the use of
either the retrospective or cumulative effect transition method. We plan to use the cumulative effect transition
method upon adoption of the standard on January 1, 2018, and do not expect this topic to have a material
impact on our consolidated financial statements or the related notes.
In February 2015, FASB issued ASU 2015-02, which amends Topic 810, Consolidation. This ASU amended the
criteria used to evaluate whether an entity is a variable interest entity, or VIE, resulting in the conclusion that all
limited partnerships are considered VIEs, unless substantive kick-out rights or participating rights exist. We
adopted this ASU during the quarter ended March 31, 2016 and evaluated our applicable entities. The
evaluation did not result in changes to our conclusions regarding consolidation of these entities (see note 10).
In April 2015, FASB issued ASU 2015-03, which amends Topic 835, Other Presentation Matters. The
amendments in this ASU require that debt issuance costs be reported on the balance sheet as a direct reduction
of the face amount of the debt instrument they relate to, and should not be classified as a deferred charge, as
was previously required under the Accounting Standards Codification. We adopted this ASU during the quarter
30
ended March 31, 2016 and, as a result, reclassified deferred financing costs from other assets, net, to the
applicable debt caption on the December 31, 2015 balance sheet.
In February 2016, FASB issued Topic 842, Leases, which amended Topic 840, Leases. Under this amended
topic, the accounting applied by a lessor is largely unchanged from that applied under Topic 840, Leases. The
large majority of operating leases should remain classified as operating leases, and lessors should continue to
recognize lease income for those leases on a generally straight-line basis over the lease term. The amendments
included in this topic are effective, on a retrospective or modified retrospective basis, for interim and annual
periods beginning after December 15, 2018. We have not yet adopted this topic and are currently evaluating
the impact this amendment will have on our consolidated financial statements.
In March 2016, FASB issued ASU 2016-09, which amends Topic 718, Compensation – Stock Compensation.
FASB issued this ASU to simplify several aspects of the accounting for share-based payment transactions,
including classification of awards as either equity or liabilities, estimation of forfeitures, and classification on the
statement of cash flows. The ASU is effective for interim and annual periods beginning after December 15,
2016, and early adoption is permitted. We early adopted this ASU during the quarter ended March 31, 2016 and
it did not have a material impact on our consolidated financial statements.
In January 2017, FASB issued ASU 2017-01, which amends Topic 805, Business Combinations. FASB issued
this ASU to clarify the definition of a business with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
The ASU is effective for interim and annual periods beginning after December 15, 2017. We have not yet
adopted this topic and are currently evaluating the impact this amendment will have on our consolidated
financial statements.
3.
Supplemental Detail for Certain Components of Consolidated Balance Sheets
A. Acquired lease intangible assets, net, consist of the following
(dollars in thousands) at:
Acquired in-place leases
Accumulated amortization of acquired in-place leases
Acquired above-market leases
Accumulated amortization of acquired above-market leases
B. Other assets, net, consist of the following (dollars in thousands) at:
Prepaid expenses
Credit facility origination costs, net
Notes receivable issued in connection with property sales
Restricted escrow deposits
Corporate assets, net
Impounds related to mortgages payable
Other items
C. Distributions payable consist of the following declared
distributions (dollars in thousands) at:
Common stock distributions
Preferred stock dividends
Noncontrolling interests distributions
$
December 31,
2016
1,164,075
(358,040 )
365,005
(88,720 )
December 31,
2015
$ 1,056,715
(264,399 )
304,548
(62,447 )
$
1,082,320
$ 1,034,417
December 31,
2016
14,406
7,303
5,390
4,246
3,585
2,015
744
37,689
December 31,
2016
52,896
2,257
82
$
$
December 31,
2015
14,258
10,226
17,905
4,179
2,313
5,860
44
54,785
$
December 31,
2015
47,963
2,257
124
$
$
55,235
$
50,344
31
D. Accounts payable and accrued expenses consist of the
following (dollars in thousands) at:
Notes payable - interest payable
Property taxes payable
Accrued costs on properties under development
Mortgages, term loans, credit line - interest payable and interest rate swaps
Other items
December 31,
December 31,
2016
60,668
16,949
9,049
5,432
29,058
121,156
2015
61,486
$
13,354
9,976
6,813
24,197
$
115,826
$
$
E. Acquired lease intangible liabilities, net, consist of the
following (dollars in thousands) at:
Acquired below-market leases
Accumulated amortization of acquired below-market leases
F. Other liabilities consist of the following
(dollars in thousands) at:
Rent received in advance and other deferred revenue (1)
Security deposits
Capital lease obligations
4.
Investments in Real Estate
December 31,
2016
318,926
(54,720 )
264,206
December 31,
2016
74,098
6,502
5,016
85,616
$
$
$
$
$
December 31,
2015
288,412
(37,496 )
250,916
$
$
December 31,
2015
42,840
6,418
4,707
53,965
$
We acquire land, buildings and improvements necessary for the successful operations of commercial tenants.
A. Acquisitions during 2016 and 2015
During 2016, we invested $1.86 billion in 505 new properties and properties under development or expansion
with an initial weighted average contractual lease rate of 6.3%. The 505 new properties and properties under
development or expansion are located in 40 states, will contain approximately 8.2 million leasable square feet,
and are 100% leased with a weighted average lease term of 14.7 years. The tenants occupying the new
properties operate in 28 industries and the property types consist of 86.4% retail and 13.6% industrial, based on
rental revenue. None of our investments during 2016 caused any one tenant to be 10% or more of our total
assets at December 31, 2016.
The $1.86 billion invested during 2016 was allocated as follows: $515.5 million to land, $1.21 billion to buildings
and improvements, $168.0 million to intangible assets related to leases, and $30.6 million to intangible liabilities
related to leases and other assumed liabilities. There was no contingent consideration associated with these
acquisitions.
The properties acquired during 2016 generated total revenues of $44.6 million and income from continuing
operations of $22.0 million during the year ended December 31, 2016.
Of the $1.86 billion we invested during 2016, $761.8 million of the purchase price allocation is based on a
preliminary measurement of fair value that is subject to change. The allocation for these properties represents
our current best estimate of fair value, and we expect to finalize the valuations and complete the purchase price
allocations in 2017. During 2016, we finalized the purchase price allocations for $195.4 million invested in the
fourth quarter of 2015. There were no material changes to our consolidated balance sheets or income
statements as a result of these purchase price allocations being finalized.
In comparison, during 2015, we invested $1.26 billion in 286 new properties and properties under development
or expansion with an initial weighted average contractual lease rate of 6.6%. The 286 new properties and
properties under development or expansion are located in 40 states, contain approximately 6.2 million leasable
square feet, and are 100% leased with a weighted average lease term of 16.5 years. The tenants occupying the
new properties operate in 21 industries and the property types consist of 87.3% retail and 12.7% industrial,
based on rental revenue.
The $1.26 billion invested during 2015 was allocated as follows: $257.1 million to land, $937.1 million to
buildings and improvements, $105.8 million to intangible assets related to leases, and $40.9 million to intangible
32
liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with
these acquisitions.
The properties acquired during 2015 generated total revenues of $43.4 million and income from continuing
operations of $21.1 million during the year ended December 31, 2015.
The estimated initial weighted average contractual lease rate for a property is generally computed as estimated
contractual net operating income, which, in the case of a net leased property, is equal to the aggregate base
rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that a tenant
could default on the payment of contractual rent, we cannot provide assurance that the actual return on the
funds invested will remain at the percentages listed above.
In the case of a property under development or expansion, the contractual lease rate is generally fixed such that
rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does
not provide for a fixed rate of return on a property under development or expansion, the estimated initial
weighted average contractual lease rate is computed as follows: estimated net operating income (determined by
the lease) for the first full year of each lease, divided by our projected total investment in the property, including
land, construction and capitalized interest costs. Of the $1.86 billion we invested during 2016, $103.8 million
was invested in 33 properties under development or expansion with an estimated initial weighted average
contractual lease rate of 7.1%. Of the $1.26 billion we invested during 2015, $45.8 million was invested in 35
properties under development or expansion with an estimated initial weighted average contractual lease rate of
9.7%.
B. Acquisition Transaction Costs
Acquisition transaction costs of $346,000 and $913,000 were recorded to general and administrative expense
on our consolidated statements of income during 2016 and 2015, respectively.
C. Investments in Existing Properties
During 2016, we capitalized costs of $16.3 million on existing properties in our portfolio, consisting of $797,000
for re-leasing costs, $679,000 for recurring capital expenditures and $14.9 million for non-recurring building
improvements. In comparison, during 2015, we capitalized costs of $11.5 million on existing properties in our
portfolio, consisting of $748,000 for re-leasing costs, $7.6 million for recurring capital expenditures and
$3.2 million for non-recurring building improvements.
D. Properties with Existing Leases
Of the $1.86 billion we invested during 2016, approximately $741.2 million was used to acquire 90 properties
with existing leases. In comparison, of the $1.26 billion we invested during 2015, approximately $391.4 million
was used to acquire 86 properties with existing leases. The value of the in-place and above-market leases is
recorded to acquired lease intangible assets, net on our consolidated balance sheets, and the value of the
below-market leases is recorded to acquired lease intangible liabilities, net on our consolidated balance sheets.
The values of the in-place leases are amortized as depreciation and amortization expense. The amounts
amortized to expense for all of our in-place leases, for 2016, 2015, and 2014 were $94.0 million, $87.9 million,
and $83.6 million, respectively.
The values of the above-market and below-market leases are amortized over the term of the respective leases,
including any bargain renewal options, as an adjustment to rental revenue on our consolidated statements of
income. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-
market leases for 2016, 2015, and 2014 were $9.3 million, $7.9 million, and $8.0 million, respectively. If a lease
were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be
recorded to revenue or expense as appropriate.
33
The following table presents the estimated impact during the next five years and thereafter related to the
amortization of the acquired above-market and below-market lease intangibles and the amortization of the in-
place lease intangibles for properties held for investment at December 31, 2016 (in thousands):
2017
2018
2019
2020
2021
Thereafter
Totals
5.
Credit Facility
Net increase
(decrease) to
rental revenue
$
$
(10,076 )
(9,834 )
(8,880 )
(8,119 )
(6,842 )
31,672
Increase to
amortization
expense
97,299
94,801
84,477
78,972
70,783
379,703
$
(12,079 )
$
806,035
In June 2015, we entered into a $2.0 billion unsecured revolving credit facility, or our credit facility, which
replaced our $1.5 billion credit facility that was scheduled to expire in May 2016. The initial term of our credit
facility expires in June 2019 and includes, at our option, two six-month extensions. Our credit facility has a
$1.0 billion accordion expansion option. Under our credit facility, our investment grade credit ratings as of
December 31, 2016 provide for financing at the London Interbank Offered Rate, commonly referred to as
LIBOR, plus 0.90% with a facility commitment fee of 0.15%, for all-in drawn pricing of 1.05% 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 December 31, 2016, credit facility origination costs of $7.3 million are included in other assets, net on our
consolidated balance sheet. This balance includes $9.1 million of credit facility origination costs incurred during
2015 as a result of entering into our credit facility. These costs, as well as a portion of the costs incurred as a
result of entering into our previous credit facilities, are being amortized over the remaining term of our credit
facility.
At December 31, 2016, we had a borrowing capacity of $880.0 million available on our credit facility (subject to
customary conditions to borrowing) and an outstanding balance of $1.12 billion, as compared to an outstanding
balance of $238.0 million at December 31, 2015.
The weighted average interest rate on outstanding borrowings under our credit facility was 1.4% during 2016
and 1.2% during 2015. At December 31, 2016, the weighted average interest rate on borrowings outstanding
was 1.7%. Our credit facility is subject to various leverage and interest coverage ratio limitations, and at
December 31, 2016, we remain in compliance with the covenants on our credit facility.
6.
Term Loans
In June 2015, in conjunction with entering into our credit facility, we entered into a $250 million senior unsecured
term loan maturing on June 30, 2020. Borrowing under this term loan bears interest at the current one-month
LIBOR, plus 0.95%. 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 2.67%.
In January 2013, in conjunction with our acquisition of American Realty Capital Trust, Inc., or ARCT, we entered
into a $70 million senior unsecured term loan maturing January 2018. Borrowing under this term loan bears
interest at the current one-month LIBOR, plus 1.20%. 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 2.15%.
Deferred financing costs of $1.2 million incurred in conjunction with the $250 million term loan and $303,000
incurred in conjunction with the $70 million term loan are being amortized over the remaining terms of each
respective term loan. The net balance of these deferred financing costs, which was $873,000 at
December 31, 2016, and $1.2 million at December 31, 2015, is included within term loans, net on our
consolidated balance sheets.
34
7. Mortgages Payable
During 2016, we made $231.7 million in principal payments, including the repayment of 11 mortgages in full for
$201.8 million, and we assumed mortgages totaling $44.1 million, excluding net premiums. During 2016, we
refinanced one of these assumed mortgages and received an additional $10.0 million in proceeds. The
assumed mortgages are secured by the properties on which the debt was placed and are considered non-
recourse debt with limited customary exceptions for items such as solvency, bankruptcy, misrepresentation,
fraud, misapplication of payments, environmental liabilities, failure to pay taxes, insurance premiums, liens on
the property, violations of the single purpose entity requirements, and uninsured losses. We expect to pay off
our mortgages as soon as prepayment penalties make it economically feasible to do so.
During 2016, a premium of $692,000 was recorded upon the assumption of one mortgage with an above-market
interest rate. The interest rates on the remaining mortgages assumed were at market. Amortization of our net
premiums is recorded as a reduction to interest expense over the remaining term of the respective mortgages,
using a method that approximates the effective-interest method. These mortgages contain customary
covenants, such as limiting our ability to further mortgage each applicable property or to discontinue insurance
coverage without the prior consent of the lender. At December 31, 2016, we remain in compliance with these
covenants.
During 2015, we made $198.4 million in principal payments, including the repayment of 13 mortgages in full for
$191.0 million. No mortgages were assumed during 2015.
We did not incur any deferred financing costs on our mortgages assumed in 2016. The balance of our deferred
financing costs, which are classified as part of mortgages payable, net, on our consolidated balance sheets, was
$324,000 at December 31, 2016 and $553,000 at December 31, 2015. These costs are being amortized over
the remaining term of each mortgage.
The following is a summary of all our mortgages payable as of December 31, 2016 and 2015, respectively
(dollars in thousands):
As Of
12/31/16
12/31/15
Number of
Properties(1)
127
183
Weighted
Weighted Weighted
Average
Average
Effective Remaining
Interest Years Until
Unamortized
Premium
and Deferred
Finance Costs
Remaining
Principal
Balance Balance, net
Maturity
Rate(3)
4.3%
4.1%
4.0
3.6
$ 460,008
$ 637,658
$
$
6,037
8,529
Average
Stated
Interest
Rate(2)
4.9%
4.9%
Mortgage
Payable
Balance
466,045
646,187
$
$
(1) At December 31, 2016, there were 36 mortgages on 127 properties, while at December 31, 2015, there were 44 mortgages on 183
properties. The mortgages require monthly payments, with principal payments due at maturity. The mortgages are at fixed interest rates,
except for six mortgages on 15 properties totaling $74.0 million at December 31, 2016, including net unamortized discounts. At
December 31, 2015, four mortgages on 13 properties totaling $51.1 million, including net unamortized discounts, were at variable interest
rates. After factoring in arrangements which limit our exposure to interest rate risk and effectively fix our per annum interest rates, our
variable rate mortgage debt includes four mortgages totaling $38.2 million at December 31, 2016, and two mortgages totaling $15.5
million at December 31, 2015.
(2) Stated interest rates ranged from 2.4% to 6.9% at December 31, 2016, while stated interest rates ranged from 2.0% to 6.9% at
December 31, 2015.
(3) Effective interest rates ranged from 2.5% to 8.8% at December 31, 2016, while effective interest rates ranged from 2.2% to 8.9% at
December 31, 2015.
The following table summarizes the maturity of mortgages payable, excluding net premiums of $6.4 million and
deferred finance costs of $324,000, as of December 31, 2016 (dollars in millions):
Year of Maturity
2017
2018
2019
2020
2021
Thereafter
Totals
$
Principal
103.2
21.9
42.3
82.4
66.9
143.3
$
460.0
35
8.
Notes Payable
A. General
Our senior unsecured notes and bonds consisted of the following, sorted by maturity date (dollars in millions):
5.950% notes, issued in September 2006 and due in September 2016
5.375% notes, issued in September 2005 and due in September 2017
2.000% notes, issued in October 2012 and due in January 2018
6.750% notes, issued in September 2007 and due in August 2019
5.750% notes, issued in June 2010 and due in January 2021
3.250% notes, issued in October 2012 and due in October 2022
4.650% notes, issued in July 2013 and due in August 2023
3.875% notes, issued in June 2014 and due in July 2024
4.125% notes, issued in September 2014 and due in October 2026
3.000% notes, issued in October 2016 and due in January 2027
5.875% bonds, $100 issued in March 2005 and $150 issued in
June 2011, both due in March 2035
Total principal amount
Unamortized original issuance discounts and deferred financing costs
$
$
December 31,
2016
-
175
350
550
250
450
750
350
250
600
250
3,975
(41 )
$
3,934
$
December 31,
2015
275
175
350
550
250
450
750
350
250
-
250
3,650
(32 )
3,618
The following table summarizes the maturity of our notes and bonds payable as of December 31, 2016,
excluding unamortized original issuance discounts and deferred financing costs (dollars in millions):
Year of Maturity
Principal
2017
2018
2019
2020
2021
Thereafter
Totals
$
$
175
350
550
-
250
2,650
3,975
As of December 31, 2016, the weighted average interest rate on our notes and bonds payable was 4.4% and
the weighted average remaining years until maturity was 6.6 years.
Interest incurred on all of the notes and bonds was $171.5 million for 2016, $179.5 million for 2015 and
$166.5 million for 2014. The interest rate on each of these notes and bonds is fixed.
Our outstanding notes and bonds are unsecured; accordingly, we have not pledged any assets as collateral for
these or any other obligations. Interest on all of the senior note and bond obligations is paid semiannually.
All of these notes and bonds contain various covenants, including: (i) a limitation on incurrence of any debt
which would cause our debt to total adjusted assets ratio to exceed 60%; (ii) a limitation on incurrence of any
secured debt which would cause our secured debt to total adjusted assets ratio to exceed 40%; (iii) a limitation
on incurrence of any debt which would cause our debt service coverage ratio to be less than 1.5 times; and (iv)
the maintenance at all times of total unencumbered assets not less than 150% of our outstanding unsecured
debt. At December 31, 2016, we remain in compliance with these covenants.
B. Note Issuances
In October 2016, we issued $600 million of 3.000% senior unsecured notes due January 2027. The public
offering price for the notes was 98.671% of the principal amount for an effective yield to maturity of 3.153%. The
net proceeds of approximately $586.7 million from the offering were used to repay borrowings outstanding under
our credit facility.
In September 2014, we issued $250 million of 4.125% senior unsecured notes due October 2026, or the 2026
Notes. The price to the investors for the 2026 Notes was 99.499% of the principal amount for an effective yield
of 4.178% per annum. A portion of the total net proceeds of $246.4 million from this offering were used to repay
36
all outstanding borrowings under our credit facility, and the remaining proceeds were used for other general
corporate purposes, including additional property acquisitions.
In June 2014, we issued $350 million of 3.875% senior unsecured notes due July 2024, or the 2024 Notes. The
price to the investors for the 2024 Notes was 99.956% of the principal amount for an effective yield of 3.88% per
annum. The total net proceeds of $346.7 million from these offerings were used to repay a portion of the
outstanding borrowings under our credit facility.
C. Note Repayment
In September 2016, we repaid all $275 million of outstanding 5.950% notes, plus accrued and unpaid interest.
In November 2015, we repaid $150 million of outstanding 5.500% notes, plus accrued and unpaid interest, using
proceeds from our October 2015 common stock offering and our credit facility
9. Equity
A. Issuance of Common Stock
In May 2016, we issued 6,500,000 shares of common stock. After underwriting discounts and other offering
costs of $12.1 million, the net proceeds of $383.6 million were used to repay borrowings under our credit facility.
In October 2015, we issued 11,500,000 shares of common stock. After underwriting discounts and other offering
costs of $22.0 million, a portion of the net proceeds of $517.1 million was used to repay borrowings under our
credit facility and the remaining portion was used for other general corporate purposes, including acquisitions.
In April 2015, we issued 5,500,000 shares of common stock. After underwriting discounts and other offering
costs of $1.4 million, the net proceeds of $276.4 million were used to repay borrowings under our credit facility.
In April 2014, we issued 13,800,000 shares of common stock. After underwriting discounts and other offering
costs of $22.8 million, the net proceeds of $528.6 million were used to repay borrowings under our previous
credit facility.
B. Redemption of Preferred Stock
In September 2014, we issued an irrevocable notice of redemption for all 8.8 million shares of our 6.75%
Monthly Income Class E Preferred Stock for $25 per share, plus accrued dividends. The redemption occurred
in October 2014. We incurred a charge of $6.0 million, representing the Class E preferred stock original
issuance costs that we paid in 2006.
C. Dividend Reinvestment and Stock Purchase Plan
Our Dividend Reinvestment and Stock Purchase Plan, or our DRSPP, provides our common stockholders, as
well as new investors, with a convenient and economical method of purchasing our common stock and
reinvesting their distributions. Our DRSPP also allows our current stockholders to buy additional shares of
common stock by reinvesting all or a portion of their distributions. Our DRSPP authorizes up to 26,000,000
common shares to be issued. During 2016, we issued 170,027 shares and raised approximately $10.3 million
under our DRSPP. During 2015, we issued 7,608,354 shares and raised approximately $363.0 million under
our DRSPP. From the inception of our DRSPP through December 31, 2016, we have issued 12,869,889 shares
and raised $591.9 million.
Our DRSPP includes a waiver approval process, allowing larger investors or institutions, per a formal approval
process, to purchase shares at a small discount, if approved by us. During 2016, we did not issue shares under
the waiver approval process. During 2015, we issued 7,413,207 shares and raised $353.7 million under the
waiver approval process. These shares are included in the total activity for 2015 noted in the preceding
paragraph.
D. At-the-Market (ATM) Program
In September 2015, we established an “at-the-market” equity distribution program, or our ATM program,
pursuant to which we can offer and sell up to 12,000,000 shares of common stock. The shares of common stock
may be sold to, or through, a consortium of banks acting as our sales agents either by means of ordinary
brokers’ transactions on the NYSE at prevailing market prices or at negotiated prices. During 2016, we issued
37
2,779,140 shares and raised $166.8 million under the ATM program. During 2015, we issued 714,301 shares
and raised $36.3 million under the ATM program. From the inception of our ATM program through December
31, 2016, we have issued 3,493,441 shares and raised $203.1 million.
10. Noncontrolling Interests
In January 2013, we completed our acquisition of ARCT. Equity issued as consideration for this transaction
included common and preferred partnership units issued by Tau Operating Partnership, L.P., or Tau Operating
Partnership, the consolidated subsidiary which owns properties acquired through the ARCT acquisition. We and
our subsidiaries hold a 99.4% interest in Tau Operating Partnership, and consolidate the entity.
In June 2013, we completed the acquisition of a portfolio of properties by issuing common partnership units in
Realty Income, L.P. The units were issued as consideration for the acquisition. At December 31, 2016, the
remaining units from this issuance represent a 0.4% ownership in Realty Income, L.P. We hold the remaining
99.6% interests in this entity and consolidate the entity.
Neither of the common partnership units have voting rights. Both common partnership units are entitled to
monthly distributions equal to the amount paid to common stockholders of Realty Income, and are redeemable
in cash or Realty Income common stock, at our option, and at a conversion ratio of one to one, subject to certain
exceptions. Noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or
common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent equity
classification on the balance sheet was appropriate. We determined that the units meet the requirements to
qualify for presentation as permanent equity.
In 2016, we completed the acquisition of two properties by acquiring a controlling interest in two separate joint
ventures. We are the managing member of each of these joint ventures, and possess the ability to control the
business and manage the affairs of these entities. At December 31, 2016, we and our subsidiaries held 90.5%
and 74% interests, and fully consolidated these entities in our consolidated financial statements.
The following table represents the change in the carrying value of all noncontrolling interests through
December 31, 2016 (dollars in thousands):
Carrying value at December 31, 2015
Reallocation of equity
Redemptions
Contributions
Distributions
Allocation of net income
Carrying value at December 31, 2016
Carrying value at December 31, 2014
Reallocation of equity
Redemptions
Distributions
Allocation of net income
Carrying value at December 31, 2015
Tau Operating
Partnership units(1)
13,410
$
491
-
-
(762 )
266
13,405
$
Tau Operating
Partnership units(1)
13,067
$
836
-
(722 )
229
13,410
$
Realty Income, L.P.
$
$
$
units(2)
8,327
52
(6,161 )
-
(459 )
457
2,216
Other
Noncontrolling
Interests
- $
-
-
15,906
(11,461)
183
4,628 $
Total
21,737
543
(6,161 )
15,906
(12,682 )
906
20,249
Realty Income, L.P.
$
$
units(2)
14,631
(1,887 )
(4,347 )
(930 )
860
8,327
$
$
Total
27,698
(1,051 )
(4,347 )
(1,652 )
1,089
21,737
(1) 317,022 Tau Operating Partnership units were issued on January 22, 2013 and remained outstanding as of December 31, 2016 and
December 31, 2015.
(2) 534,546 Realty Income, L.P. units were issued on June 27, 2013, 331,364 units were outstanding as of December 31, 2015, and 88,182
remain outstanding as of December 31, 2016.
The Tau Operating Partnership preferred units were recorded at fair value as of the date of acquisition. Since
they were redeemable at a fixed price on a determinable date, we initially classified them in other liabilities on
38
our consolidated balance sheets. Payments on these preferred units were made monthly at a rate of 2% per
annum and were included in interest expense. In January 2015, we redeemed all 6,750 Tau Operating
Partnership preferred units for $1,000 per unit, plus accrued and unpaid distributions.
During the first quarter of 2016, we adopted ASU 2015-02, which amends Topic 810, Consolidation. This ASU
amended the criteria used to evaluate whether an entity is a variable interest entity, or VIE, resulting in the
conclusion that all limited partnerships are considered VIEs, unless substantive kick-out rights or participating
rights exist. Accordingly, we determined that both Tau Operating Partnership and Realty Income, L.P. are VIEs.
We have also concluded that we are the primary beneficiary of these VIEs, based on our controlling financial
interests. We evaluated the minority unitholder rights noting that they do not hold substantive kick-out rights or
participating rights. These conclusions did not result in changes to our historical accounting for these
partnerships. Below is a summary of selected financial data of consolidated VIEs, including the joint ventures
acquired during 2016, for which we are the primary beneficiary included in the consolidated balance sheets
at December 31, 2016 and 2015 (in thousands):
Net real estate
Total assets
Total debt
Total liabilities
$
$
2016
3,040,903
3,499,481
251,047
364,797
2015
3,082,025
3,586,239
393,812
511,476
11.
Distributions Paid and Payable
Common Stock
A.
We pay monthly distributions to our common stockholders. The following is a summary of monthly distributions
paid per common share for 2016, 2015 and 2014:
Month
2014
2016
2015
January
February
March
April
May
June
July
August
September
October
November
December
Total
$
0.1910000
0.1985000
0.1985000
0.1990000
0.1990000
0.1990000
0.1995000
0.1995000
0.2015000
0.2020000
0.2020000
0.2020000
$
0.1834167
0.1890000
0.1890000
0.1895000
0.1895000
0.1895000
0.1900000
0.1900000
0.1900000
0.1905000
0.1905000
0.1905000
$
0.1821667
0.1821667
0.1821667
0.1824792
0.1824792
0.1824792
0.1827917
0.1827917
0.1827917
0.1831042
0.1831042
0.1831042
$
2.3915000
$
2.2714167
$
2.1916254
The following presents the federal income tax characterization of distributions paid or deemed to be paid per
common share for the years:
Ordinary income
Nontaxable distributions
Totals
2016
1.8771975
0.5143025
2.3915000
$
$
2015
1.7307023
0.5407144
2.2714167
$
$
2014
1.6483522
0.5432732
2.1916254
$
$
At December 31, 2016, a distribution of $0.2025 per common share was payable and was paid in January 2017.
At December 31, 2015, a distribution of $0.191 per common share was payable and was paid in January 2016.
Class E Preferred Stock
B.
Prior to the redemption of the Class E preferred stock in October 2014, dividends of $0.140625 per share were
paid monthly in arrears on the Class E preferred stock. We paid distributions to holders of our Class E preferred
stock totaling $12.7 million in 2014. For 2014, dividends paid per share in the amount of $1.4484375 were
characterized as ordinary income for federal income tax purposes.
39
Class F Preferred Stock
C.
Dividends of $0.138021 per share are paid monthly in arrears on the Class F preferred stock. We declared
dividends to holders of our Class F preferred stock totaling $27.1 million in 2016, 2015 and 2014. For 2016, 2015
and 2014, dividends paid per share of $1.656252 were characterized as ordinary income for federal income tax
purposes. At December 31, 2016, a monthly dividend of $0.138021 per share was payable and was paid in
January 2017. We are current in our obligations to pay dividends on our Class F preferred stock.
12.
Operating Leases
At December 31, 2016, we owned 4,944 properties in 49 states and Puerto Rico. Of the 4,944
A.
properties, 4,920, or 99.5%, are single-tenant properties, and the remaining are multi-tenant properties. At
December 31, 2016, 84 properties were available for lease or sale.
Substantially all leases are net leases where the tenant pays or reimburses us for property taxes and
assessments, maintains the interior and exterior of the building and leased premises, and carries insurance
coverage for public liability, property damage, fire and extended coverage.
Rent based on a percentage of a tenants' gross sales (percentage rents) was $5.3 million for 2016,
$4.5 million for 2015 and $3.6 million for 2014.
At December 31, 2016, minimum future annual rents to be received on the operating leases for the next five
years and thereafter are as follows (dollars in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
$
1,146,053
1,092,071
1,042,068
992,192
940,379
6,043,472
$
11,256,235
B.
than 10% of our total revenue for each of the years ended December 31, 2016, 2015 or 2014.
Major Tenants - No individual tenant's rental revenue, including percentage rents, represented more
13.
Gain on Sales of Real Estate
During 2016, we sold 77 properties for $90.5 million, which resulted in a gain of $22.0 million.
During 2015, we sold 38 properties for $65.8 million, which resulted in a gain of $22.2 million.
These property sales in 2016 and 2015 do not represent a strategic shift that will have a major effect on our
operations and financial results, and therefore do not require presentation as discontinued operations.
During 2014, we sold 47 properties for $108.1 million, which resulted in a gain of $42.1 million. Only the results
of operations specifically related to the properties classified as held for sale at December 31, 2013 and sold
during the year were reclassified as discontinued operations.
Additionally, during 2016 we sold our former corporate headquarters building for $8.6 million.
14.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. The disclosure for assets and
liabilities measured at fair value requires allocation to a three-level valuation hierarchy. This valuation hierarchy
is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate the fair
values for cash and cash equivalents, accounts receivable, escrow deposits, loans receivable, line of credit
40
payable, term loans and all other liabilities, due to their short-term nature or interest rates and terms that are
consistent with market, except for our notes receivable issued in connection with property sales, mortgages
payable and our senior notes and bonds payable, which are disclosed as follows (dollars in millions):
At December 31, 2016
Notes receivable issued in connection with property sales
Mortgages payable assumed in connection with acquisitions, net
Notes and bonds payable, net
At December 31, 2015
Notes receivable issued in connection with property sales
Mortgages payable assumed in connection with acquisitions, net
Notes and bonds payable, net
$
$
Carrying value per
balance sheet
5.4
466.0
3,934.4
Carrying value per
balance sheet
17.9
646.2
3,618.0
$
$
Estimated fair
value
5.5
468.7
4,143.3
Estimated fair
value
19.4
651.5
3,828.1
The estimated fair values of our notes receivable issued in connection with property sales and our mortgages
payable have been calculated by discounting the future cash flows using an interest rate based upon the
relevant Treasury yield curve, plus an applicable credit-adjusted spread. Because this methodology includes
unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated
fair values related to our notes receivable and mortgages payable is categorized as level three on the three-
level valuation hierarchy.
The estimated fair values of our senior notes and bonds payable are based upon indicative market prices and
recent trading activity of our senior notes and bonds payable. Because this methodology includes inputs that are
less observable by the public and are not necessarily reflected in active markets, the measurement of the
estimated fair values, related to our notes and bonds payable, is categorized as level two on the three-level
valuation hierarchy.
We record interest rate swaps on the consolidated balance sheet at fair value. At December 31, 2016, interest
rate swaps in a liability position valued at $2.3 million were included in accounts payable and accrued expenses
and interest rate swaps in an asset position valued at $66,000 were included in other assets, net on the
consolidated balance sheet. The fair value of our interest rate swaps are based on valuation techniques
including discounted cash flow analysis on the expected cash flows of each swap, using both observable and
unobservable market-based inputs, including interest rate curves. Because this methodology uses observable
and unobservable inputs, and the unobservable inputs are not significant to the fair value measurement, the
measurement of interest rate swaps is categorized as level two on the three-level valuation hierarchy.
15.
Supplemental Disclosures of Cash Flow Information
Cash paid for interest was $214.3 million in 2016, $229.5 million in 2015, and $207.3 million in 2014.
Interest capitalized to properties under development was $469,000 in 2016, $594,000 in 2015, and $444,000 in
2014.
Cash paid for income taxes was $3.6 million in 2016, $3.1 million in 2015, and $3.7 million in 2014.
The following non-cash activities are included in the accompanying consolidated financial statements:
A. During 2016, we assumed mortgages payable to third-party lenders of $44.1 million and recorded a premium
of $692,000. During 2014, we assumed mortgages payable to third-party lenders of $166.7 million, recorded
$604,000 of net premiums, and recorded $901,000 of interest rate swap value to other assets, net, related to
property acquisitions.
B. During 2016, consolidated joint venture members made real estate contributions of $15.9 million, net of
contributed mortgages payable included in the figures disclosed above in 15.A.
C. See note 9 for a discussion of the $6.0 million excess of redemption value over carrying value of preferred
shares subject to redemption charge recorded during 2014.
D. During 2014, we applied $48.9 million of loans receivable to the purchase price of five acquired properties.
41
E. During 2014, we acquired real estate for $11.6 million via exchanges of our properties.
F. Accrued costs on properties under development resulted in an increase in buildings and improvements and
accounts payable of $2.6 million and $4.0 million at December 31, 2016 and 2014, respectively.
16.
Employee Benefit Plan
We have a 401(k) plan covering substantially all of our employees. Under our 401(k) plan, employees may elect
to make contributions to the plan up to a maximum of 60% of their compensation, subject to limits under the
Code. We match 50% of each of our employee's salary deferrals up to the first 6% of the employee's eligible
compensation. Our aggregate matching contributions each year have been immaterial to our results of
operations.
17.
Common Stock Incentive Plan
In 2012, our Board of Directors adopted and stockholders approved the Realty Income Corporation 2012
Incentive Award Plan, or the 2012 Plan, to enable us to motivate, attract and retain the services of directors and
employees considered essential to our long-term success. The 2012 Plan offers our directors and employees an
opportunity to own our stock or rights that will reflect our growth, development and financial success. Under the
terms of the 2012 plan, the aggregate number of shares of our common stock subject to options, restricted
stock, stock appreciation rights, restricted stock units and other awards, will be no more than 3,985,734
shares. The 2012 Plan has a term of ten years from the date it was adopted by our Board of Directors.
The amount of share-based compensation costs recognized in general and administrative expense on our
consolidated statements of income was $12.0 million during 2016, $10.4 million during 2015, and $12.0 million
during 2014.
A. Restricted Stock
The following table summarizes our common stock grant activity under our 2012 Plan. Our outstanding
restricted stock vests over periods ranging from immediately to five years.
2016
2015
2014
Outstanding nonvested
shares, beginning of year
Shares granted
Shares vested
Shares forfeited
Outstanding nonvested
Number of
shares
456,282
260,171
(200,066 )
(2,864 )
Weighted
average
price(1)
Number of
shares
$
$
$
$
30.46
54.14
43.26
48.15
527,176
161,949
(205,248 )
(27,595 )
shares, end of each period
513,523
$
48.33
456,282
(1) Grant date fair value.
Weighted
average
price(1)
Number of
shares
$
$
$
$
$
29.02
50.87
37.70
45.58
722,263
262,655
(440,348 )
(17,394 )
30.46
527,176
Weighted
average
price(1)
$
$
$
$
$
23.37
39.87
36.88
39.07
29.02
The vesting schedule for shares granted to non-employee directors is as follows:
(cid:2)(cid:3) For directors with less than six years of service at the date of grant, shares vest in 33.33% increments on
each of the first three anniversaries of the date the shares of stock are granted;
(cid:2)(cid:3) For directors with six years of service at the date of grant, shares vest in 50% increments on each of the first
two anniversaries of the date the shares of stock are granted;
(cid:2)(cid:3) For directors with seven years of service at the date of grant, shares are 100% vested on the first
anniversary of the date the shares of stock are granted; and
(cid:2)(cid:3) For directors with eight or more years of service at the date of grant, there is immediate vesting as of the
date the shares of stock are granted.
During 2016, 28,000 shares were granted to our Board of Directors, of which 20,000 vested immediately and
8,000 shares vest annually in equal parts over a three-year service period.
42
For shares granted on or after January 1, 2015, shares granted to employees typically vest in 20% increments
on each of the first five anniversaries of the grant date. For shares granted prior to December 2014, the typical
vesting schedule for shares granted to employees was as follows:
(cid:2)(cid:3) For employees age 55 and below at the grant date, shares vest in 20% increments on each of the first five
anniversaries of the grant date;
(cid:2)(cid:3) For employees age 56 at the grant date, shares vest in 25% increments on each of the first four
anniversaries of the grant date;
(cid:2)(cid:3) For employees age 57 at the grant date, shares vest in 33.33% increments on each of the first three
anniversaries of the grant date;
(cid:2)(cid:3) For employees age 58 at the grant date, shares vest in 50% increments on each of the first two
anniversaries of the grant date;
(cid:2)(cid:3) For employees age 59 at the grant date, shares are 100% vested on the first anniversary of the grant date;
and
(cid:2)(cid:3) For employees age 60 and above at the grant date, shares vest immediately on the grant date.
Of the 232,171 shares granted to employees during 2016, 143,739 will vest over a five-year service period and
88,432 will vest over a four-year service period.
As of December 31, 2016, the remaining unamortized share-based compensation expense related to restricted
stock totaled $18.7 million, which is being amortized on a straight-line basis over the service period of each
applicable award. The amount of share-based compensation is based on the fair value of the stock at the grant
date. We define the grant date as the date the recipient and Realty Income have a mutual understanding of the
key terms and condition of the award, and the recipient of the grant begins to benefit from, or be adversely
affected by, subsequent changes in the price of the shares.
As of December 31, 2016, 2015 and 2014, there were no common stock options outstanding for any of the
periods presented.
B. Performance Shares
During 2016, 2015 and 2014, we granted performance share awards, as well as dividend equivalent rights, to
our executive officers. The number of performance shares that vest is based on the achievement of the
following performance goals:
2016 & 2015 Performance Awards
Metrics
Total shareholder return ("TSR") relative to MSCI US REIT Index
TSR relative to NAREIT Freestanding Index
Dividend per share growth rate
Debt-to-EBITDA ratio
2014 Performance Awards
Metrics
TSR relative to MSCI US REIT Index
TSR relative to NAREIT Freestanding Index
Debt-to-EBITDA ratio
Weighting
50%
20%
20%
10%
Weighting
60%
20%
20%
The performance shares are earned based on our performance, and vest 50% on the first and second
January 1 after the end of the three year performance period, subject to continued service. The performance
period for the 2014 performance awards began on January 1, 2014 and ended on December 31, 2016. The
performance period for the 2015 performance awards began on January 1, 2015 and will end on December 31,
2017. The performance period for the 2016 performance awards began on January 1, 2016 and will end on
December 31, 2018.
43
The fair value of the performance shares was estimated on the date of grant using a Monte Carlo Simulation
model. The following table summarizes our performance share grant activity:
2016
2015
2014
Number of
performance
shares
Weighted
average
price(1)
Number of Weighted
average
price(1)
performance
shares
Number of Weighted
average
price(1)
performance
shares
Outstanding nonvested
shares, beginning of year
Shares granted
Shares vested
Shares forfeited
Outstanding nonvested
115,121 $
58,575 $
(10,454 ) $
(3,491 ) $
46.94
55.07
44.54
52.55
59,405 $
55,716 $
- $
- $
41.46
52.78
-
-
- $
71,705 $
(4,067 ) $
(8,233 ) $
-
41.46
41.46
41.46
shares, end of each period
159,751 $
49.95
115,121 $
46.94
59,405 $
41.46
(1) Grant date fair value.
As of December 31, 2016, the remaining share-based compensation expense related to the performance shares
totaled $3.7 million and is being recognized on a tranche-by-tranche basis over the service period.
C. Restricted Stock Units
During 2016 and 2015 we also granted restricted stock units that vest over a five-year service period and have
the same economic rights as shares of restricted stock.
2016
2015
Number of Weighted
restricted stock average
price(1)
units
Number of Weighted
restricted stock average
price(1)
units
10,136 $
14,783 $
(6,459 ) $
- $
52.21
52.76
52.21
-
- $
10,136 $
- $
- $
-
52.21
-
-
Outstanding nonvested
shares, beginning of year
Shares granted
Shares vested
Shares forfeited
Outstanding nonvested
shares, end of each period
18,460 $
52.65
10,136 $
52.21
(1) Grant date fair value.
As of December 31, 2016, the remaining share-based compensation expense related to the restricted stock
units totaled $752,000 and is being recognized on a straight-line basis over the service period.
44
18.
Segment Information
We evaluate performance and make resource allocation decisions on an industry by industry basis. For financial
reporting purposes, we have grouped our tenants into 47 activity segments. All of the properties are
incorporated into one of the applicable segments. Because almost all of our leases require the tenant to pay
operating expenses, rental revenue is the only component of segment profit and loss we measure.
Assets, as of December 31:
Segment net real estate:
2016
2015
Apparel
Automotive service
Automotive tire services
Beverages
Child care
Convenience stores
Dollar stores
Drug stores
Financial services
General merchandise
Grocery stores
Health and fitness
Health care
Home improvement
Motor vehicle dealerships
Restaurants-casual dining
Restaurants-quick service
Theaters
Transportation services
Wholesale club
27 other non-reportable segments
Total segment net real estate
Intangible assets:
Apparel
Automotive service
Automotive tire services
Beverages
Convenience stores
Dollar stores
Drug stores
Financial services
General merchandise
Grocery stores
Health and fitness
Health care
Home improvement
Motor vehicle dealerships
Restaurants-casual dining
Restaurants-quick service
Theaters
Transportation services
Wholesale club
Other non-reportable segments
Goodwill:
Automotive service
Automotive tire services
Child care
Convenience stores
Restaurants-casual dining
Restaurants-quick service
Other non-reportable segments
Other corporate assets
Total assets
$
$
175,418
152,220
238,151
293,447
49,584
1,050,285
1,120,896
1,541,846
408,228
248,040
464,359
823,697
214,971
311,459
197,713
511,863
574,532
370,732
796,717
439,557
1,920,076
11,903,791
43,786
33,160
11,533
2,280
14,372
51,249
182,981
29,749
43,248
65,412
63,574
25,039
49,932
25,032
22,058
43,356
13,822
101,664
32,723
227,350
440
862
4,945
2,008
2,107
1,068
3,637
151,693
180,175
129,328
247,200
297,724
52,392
724,972
1,158,948
1,384,506
254,022
195,030
331,565
839,872
220,018
268,974
137,315
419,455
467,643
371,617
686,041
452,563
1,799,524
10,618,884
48,116
19,131
13,202
2,538
16,040
56,420
189,433
34,626
41,301
42,823
65,037
29,950
42,630
13,182
9,392
32,612
17,673
92,602
36,215
231,494
448
865
5,034
2,009
2,215
1,082
3,668
176,757
$ 13,152,871
$
11,845,379
45
Revenue for the years ended December 31,
Segment rental revenue:
2016
2015
2014
Apparel
Automotive service
Automotive tire services
Beverages
Child care
Convenience stores
Dollar stores
Drug stores
Financial services
General merchandise
Grocery stores
Health and fitness
Health care
Home improvement
Motor vehicle dealerships
Restaurants-casual dining
Restaurants-quick service
Theaters
Transportation services
Wholesale club
27 other non-reportable segments
Total rental revenue
Tenant reimbursements
Other revenue
Total revenue
$
19,975
20,212
28,754
27,587
19,712
91,784
90,746
117,758
18,769
18,976
32,815
85,901
16,168
25,695
20,329
42,312
52,674
51,926
57,694
37,531
180,095
1,057,413
43,104
2,655
$ 1,103,172
$
19,819
18,632
28,627
25,451
19,949
90,093
88,126
103,324
17,044
16,411
29,506
75,881
16,057
23,112
15,332
37,645
41,407
49,456
51,745
37,391
171,857
976,865
42,015
4,405
$ 1,023,285
$
$
17,674
16,548
28,222
25,147
20,022
89,754
85,049
84,625
16,828
13,550
27,270
62,086
16,039
15,593
13,909
38,473
33,388
47,102
46,287
36,588
159,303
893,457
37,118
2,930
933,505
19.
Commitments and Contingencies
In the ordinary course of business, we are party to various legal actions which we believe are routine in nature
and incidental to the operation of our business. We believe that the outcome of the proceedings will not have a
material adverse effect upon our consolidated financial position or results of operations.
At December 31, 2016, we had commitments of $7.0 million for re-leasing costs, recurring capital expenditures,
and non-recurring building improvements. In addition, as of December 31, 2016, we had committed
$21.9 million under construction contracts, which is expected to be paid in the next twelve months.
We have certain properties that are subject to ground leases which are accounted for as operating leases. At
December 31, 2016, minimum future rental payment for the next five years and thereafter are as follows (dollars
in millions):
Ground Leases
Paid by
Realty Income (1)
Ground Leases
Paid by
Our Tenants (2)
2017
2018
2019
2020
2021
Thereafter
Total
$
$
$
1.6
1.6
1.5
1.4
1.2
22.1
$
13.4
13.5
13.3
13.1
12.8
106.6
29.4
$
172.7
$
Total
15.0
15.1
14.8
14.5
14.0
128.7
202.1
(1) Realty Income currently pays the ground lessors directly for the rent under the ground leases.
(2) Our tenants, who are generally sub-tenants under the 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.
46
20.
Subsequent Events
In January and February 2017, we declared the following dividends, which will be paid in February 2017 and
March 2017, respectively:
(cid:4) $0.2105 per share to our common stockholders and
(cid:4) $0.138021 per share to our Class F preferred stockholders.
REALTY INCOME CORPORATION AND SUBSIDIARIES
Consolidated Quarterly Financial Data
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
2016
Total revenue
Depreciation and amortization expense
Interest expense
Other expenses
Net income
Net income available to common stockholders
Net income per common share
First
Second
Third
Fourth
Quarter Quarter Quarter Quarter
Year (1)
$ 267,116
107,933
60,678
30,310
70,484
63,473
$ 271,039
110,342
57,409
35,878
76,068
69,045
$ 277,174
113,917
52,952
37,438
77,202
70,302
$ 287,843
117,752
48,935
35,128
92,724
85,671
$ 1,103,172
449,943
219,974
138,757
316,477
288,491
Basic
Diluted
Dividends paid per common share
0.25
0.25
0.5880000
0.27
0.27
0.5970000
0.27
0.27
0.6005000
0.33
0.33
0.6060000
1.13
1.13
2.3915000
2015
Total revenue
Depreciation and amortization expense
Interest expense
Other expenses
Net income
Net income available to common stockholders
Net income per common share
$ 246,867
98,037
58,468
29,999
67,581
60,494
$ 253,860
101,101
58,680
31,404
66,350
59,317
$ 258,889
104,338
63,950
29,012
67,813
60,705
$ 263,668
105,739
51,982
27,962
83,111
76,171
$ 1,023,285
409,215
233,079
118,379
284,855
256,686
Basic
Diluted
0.27
0.27
0.26
0.25
0.26
0.26
0.31
0.31
1.09
1.09
Dividends paid per common share
0.5614167
0.5685000
0.5700000
0.5715000
2.2714167
(1) Amounts for each period are calculated independently. The sum of the quarters may differ from the annual amount.
47
REALTY INCOME CORPORATION AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Realty Income Corporation:
We have audited the accompanying consolidated balance sheets of Realty Income Corporation and subsidiaries
as of December 31, 2016 and 2015, and the related consolidated statements of income, equity, and cash flows
for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements
and financial statement schedule are the responsibility of Realty Income Corporation’s management. Our
responsibility is to express an opinion on these consolidated financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Realty Income Corporation and subsidiaries as of December 31, 2016 and 2015, and the
results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Realty Income Corporation’s internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2017
expressed an unqualified opinion on the effectiveness of Realty Income Corporation’s internal control over
financial reporting.
San Diego, California
February 23, 2017
48
REALTY INCOME CORPORATION AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm, Continued
The Board of Directors and Stockholders
Realty Income Corporation:
We have audited Realty Income Corporation’s internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Realty Income Corporation’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on Realty Income
Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Realty Income Corporation maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Realty Income Corporation and subsidiaries as of December
31, 2016 and 2015, and the related consolidated statements of income, equity, and cash flows for each of the
years in the three-year period ended December 31, 2016, and our report dated February 23, 2017 expressed an
unqualified opinion on those consolidated financial statements.
San Diego, California
February 23, 2017
49
REALTY INCOME CORPORATION AND SUBSIDIARIES
Business Description
THE COMPANY
Realty Income, The Monthly Dividend Company®, is an S&P 500 company dedicated to providing stockholders
with dependable monthly dividends that increase over time. The company is structured as a real estate
investment trust, or REIT, requiring it annually to distribute at least 90% of its taxable income (excluding net
capital gains) in the form of dividends to its stockholders. The monthly dividends are supported by the cash flow
generated from real estate owned under long-term, net lease agreements with regional and national commercial
tenants. The company has in-house acquisition, portfolio management, asset management, real estate
research, credit research, legal, finance and accounting, information technology, and capital markets
capabilities.
Realty Income was founded in 1969, and listed on the New York Stock Exchange (NYSE: O) in 1994. Over the
past 48 years, Realty Income has been acquiring and managing freestanding commercial properties that
generate rental revenue under long-term net lease agreements. The company is a member of the S&P High
Yield Dividend Aristocrats® index for having increased its dividend every year for more than 20 consecutive
years.
At December 31, 2016, we owned a diversified portfolio:
(cid:4) Of 4,944 properties;
(cid:4) With an occupancy rate of 98.3%, or 4,860 properties leased and 84 properties available for lease;
(cid:4) Leased to 248 different commercial tenants doing business in 47 separate industries;
(cid:4) Located in 49 states and Puerto Rico;
(cid:4) With over 83.0 million square feet of leasable space; and
(cid:4) With an average leasable space per property of approximately 16,800 square feet; approximately 11,520
square feet per retail property and 220,290 square feet per industrial property.
Of the 4,944 properties in the portfolio, 4,920, or 99.5%, are single-tenant properties, and the remaining are
multi-tenant properties. At December 31, 2016, of the 4,920 single-tenant properties, 4,836 were leased with a
weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of
approximately 9.8 years.
Our 11 senior officers owned 0.2% of our outstanding common stock with a market value of $24.6 million at
January 31, 2017. Our directors and 11 senior officers, as a group, owned 0.3% of our outstanding common
stock with a market value of $42.4 million at January 31, 2017.
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.
Our 6.625% Monthly Income Class F Cumulative Redeemable Preferred Stock, or the Class F preferred stock,
is listed on the NYSE under the ticker symbol “OprF” with a CUSIP number of 756109-807.
In January 2017, we had 146 employees, as compared to 132 employees in January 2016.
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.
RECENT DEVELOPMENTS
Increases in Monthly Dividends to Common Stockholders
We have continued our 48-year policy of paying monthly dividends. In addition, we increased the dividend six
times during 2016 and twice during 2017. As of February 2017, we have paid 77 consecutive quarterly dividend
increases and increased the dividend 90 times since our listing on the NYSE in 1994.
50
2016 Dividend increases
1st increase
2nd increase
3rd increase
4th increase
5th increase
6th increase
2017 Dividend increases
1st increase
2nd increase
Month
Declared
Dec 2015
Jan 2016
Mar 2016
Jun 2016
Jul 2016
Sep 2016
Month
Paid
Jan 2016
Feb 2016
Apr 2016
Jul 2016
Sep 2016
Oct 2016
Dividend
per share
$ 0.1910
$ 0.1985
$ 0.1990
$ 0.1995
$ 0.2015
$ 0.2020
Increase
per share
$ 0.0005
$ 0.0075
$ 0.0005
$ 0.0005
$ 0.0020
$ 0.0005
Dec 2016
Jan 2017
Jan 2017
Feb 2017
$ 0.2025
$ 0.2105
$ 0.0005
$ 0.0080
The dividends paid per share during 2016 totaled approximately $2.392, as compared to approximately $2.271
during 2015, an increase of $0.121, or 5.3%.
The monthly dividend of $0.2105 per share represents a current annualized dividend of $2.526 per share, and
an annualized dividend yield of approximately 4.2% based on the last reported sale price of our common stock
on the NYSE of $59.63 on January 31, 2017. Although we expect to continue our policy of paying monthly
dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our
pattern of increasing dividends per share, or what our actual dividend yield will be in any future period.
Acquisitions During 2016
During 2016, we invested $1.86 billion in 505 new properties and properties under development or expansion,
with an initial weighted average contractual lease rate of 6.3%. The 505 new properties and properties under
development or expansion are located in 40 states, will contain approximately 8.2 million leasable square feet,
and are 100% leased with a weighted average lease term of 14.7 years. The tenants occupying the new
properties operate in 28 industries and the property types are 86.4% retail and 13.6% industrial, based on rental
revenue. During 2016, none of our real estate investments caused any one tenant to be 10% or more of our
total assets at December 31, 2016.
The estimated initial weighted average contractual lease rate for a property is generally computed as estimated
contractual net operating income, which, in the case of a net leased property, is equal to the aggregate base
rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that a tenant
could default on the payment of contractual rent, we cannot provide assurance that the actual return on the
funds invested will remain at the percentages listed above.
In the case of a property under development or expansion, the contractual lease rate is generally fixed such that
rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does
not provide for a fixed rate of return on a property under development or expansion, the estimated initial
weighted average contractual lease rate is computed as follows: estimated net operating income (determined by
the lease) for the first full year of each lease, divided by our projected total investment in the property, including
land, construction and capitalized interest costs. Of the $1.86 billion we invested during 2016, $103.8 million
was invested in 33 properties under development or expansion with an estimated initial weighted average
contractual lease rate of 7.1%. We may continue to pursue development or expansion opportunities under
similar arrangements in the future.
51
PORTFOLIO DISCUSSION
Leasing Results
At December 31, 2016, we had 84 properties available for lease out of 4,944 properties in our portfolio, which
represents a 98.3% occupancy rate based on the number of properties in our portfolio. Since December 31,
2015, when we reported 71 properties available for lease out of 4,538 and a 98.4% occupancy rate, we:
(cid:4) Had 256 lease expirations (including leases rejected in bankruptcy);
(cid:4) Re-leased 186 properties; and
(cid:4) Sold 57 vacant properties.
Of the 186 properties re-leased during 2016, 144 properties were re-leased to existing tenants, 21 were re-
leased to the same tenants without vacancy, and 21 were re-leased to new tenants after a period of vacancy.
The annual rent on these 186 leases was $28.57 million, as compared to the previous rent on these same
properties of $27.33 million, which represents a rent recapture rate of 104.5% on the properties re-leased during
2016.
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 December 31, 2016, our average annualized rental revenue was approximately $13.64 per square foot on the
4,860 leased properties in our portfolio. At December 31, 2016, we classified 15 properties with a carrying
amount of $26.6 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.
Investments in Existing Properties
In 2016, we capitalized costs of $16.3 million on existing properties in our portfolio, consisting of $797,000 for
re-leasing costs, $679,000 for recurring capital expenditures, and $14.9 million for non-recurring building
improvements. In 2015, we capitalized costs of $11.5 million on existing properties in our portfolio, consisting of
$748,000 for re-leasing costs, $7.6 million for recurring capital expenditures and $3.2 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 lease.
Note Issuance
In October 2016, we issued $600 million of 3.000% senior unsecured notes due January 2027. The public
offering price for the notes was 98.671% of the principal amount for an effective yield to maturity of 3.153%.
The net proceeds of approximately $586.7 million from the offering were used to repay borrowings outstanding
under our credit facility.
Capital Raising
During 2016, Realty Income issued 9,449,167 common shares at a weighted average price of $60.61, receiving
gross proceeds of $572.7 million.
Net Income Available to Common Stockholders
Net income available to common stockholders was $288.5 million in 2016, as compared to $256.7 million in
2015, an increase of $31.8 million. On a diluted per common share basis, net income was $1.13 in 2016, as
compared to $1.09 in 2015, an increase of $0.04, or 3.7%.
The calculation to determine net income available to common stockholders includes impairments, gains from the
sale of properties and/or fair value adjustments on our interest rate swaps. These items vary from period to
period based on the timing of property sales and the interest rate environment, and can significantly impact net
income available to common stockholders.
52
Gains from the sale of properties during 2016 were $22.0 million, as compared to gains from the sale of
properties of $22.2 million during 2015.
Funds from Operations Available to Common Stockholders (FFO)
In 2016, our FFO increased by $83.0 million, or 12.7%, to $735.4 million, as compared to $652.4 million in 2015.
On a diluted per common share basis, FFO was $2.88 in 2016, compared to $2.77 in 2015, an increase of
$0.11, or 4.0%.
Adjusted Funds from Operations Available to Common Stockholders (AFFO)
In 2016, our AFFO increased by $89.4 million, or 13.8%, to $736.4 million versus $647.0 million in 2015. On a
diluted per common share basis, our AFFO was $2.88 in 2016, compared to $2.74 in 2015, an increase of
$0.14, or 5.1%.
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 annual report, which includes a reconciliation of net income available to
common stockholders to FFO and AFFO.
DIVIDEND POLICY
Distributions are paid monthly to holders of shares of our common stock and Class F preferred stock if, and
when, declared by our Board of Directors.
Distributions are paid monthly to the limited partners holding common units of Tau Operating Partnership, L.P.
and 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 2016, our cash distributions to preferred and common stockholders totaled
$637.6 million, or approximately 129.2% of our estimated taxable income of $493.4 million. Our estimated
taxable income reflects non-cash deductions for depreciation and amortization. Our estimated taxable income is
presented to show our compliance with REIT dividend requirements and is not a measure of our liquidity or
operating performance. We intend to continue to make distributions to our stockholders that are sufficient to
meet this dividend requirement and that will reduce or eliminate our exposure to income taxes. Furthermore, we
believe our funds from operations are sufficient to support our current level of cash distributions to our
stockholders. Our cash distributions to common stockholders in 2016 totaled $610.5 million, representing 82.9%
of our adjusted funds from operations available to common stockholders of $736.4 million. In comparison, our
2015 cash distributions to common stockholders totaled $533.2 million, representing 82.4% of our adjusted
funds from operations available to common stockholders of $647.0 million.
The Class F preferred stockholders receive cumulative distributions at a rate of 6.625% per annum on the
$25.00 per share liquidation preference (equivalent to $1.65625 per annum per share).
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,
53
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).
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 21.5% of the
distributions to our common stockholders, made or deemed to have been made in 2016, were classified as a
return of capital for federal income tax purposes. We estimate that in 2017, between 15% and 25% of the
distributions may be classified as a return of capital.
BUSINESS PHILOSOPHY AND STRATEGY
We believe that owning an actively managed, diversified portfolio of commercial properties under long-term, net
lease agreements produces consistent and predictable income. 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, tenants of our properties typically pay rent increases based on: (1) increases in the
consumer price index (typically subject to ceilings), (2) fixed increases, or (3) additional rent calculated as a
percentage of the tenants' gross sales above a specified level. We believe that a portfolio of properties under
long-term, net lease agreements generally produces a more predictable income stream than many other types
of real estate portfolios, while continuing to offer the potential for growth in rental income.
Diversification is also a key component of our business philosophy. We believe that diversification of the
portfolio by tenant, industry, geography, and, to a certain extent, property type leads to more consistent and
predictable income for our stockholders by reducing vulnerability that can come with any single concentration.
Our investment activities have led to a diversified property portfolio that, as of December 31, 2016, consisted of
4,944 properties located in 49 states and Puerto Rico, leased to 248 different commercial tenants doing
business in 47 industries. Each of the 47 industries represented in our property portfolio individually accounted
for no more than 11.4% of our rental revenue for the quarter ended December 31, 2016.
Investment Strategy
Our investment strategy is to acquire real estate leased to regional and national tenants. When identifying new
properties for investment, we generally focus on acquiring high-quality real estate that tenants consider
important to the successful operation of their business. We generally seek to acquire real estate that has the
following characteristics:
(cid:4) Properties that are freestanding, commercially-zoned with a single tenant;
(cid:4) Properties that are in significant markets or strategic locations critical to generating revenue for regional and
national tenants (i.e. they need the property in which they operate in order to conduct their business);
(cid:4) Properties that we deem to be profitable for the tenants and/or can generally be characterized as important
to the successful operations of the company’s business;
(cid:4) Properties that are located within attractive demographic areas relative to the business of our tenants,
generally fungible, and have good visibility and easy access to major thoroughfares;
(cid:4) Properties with real estate valuations that approximate replacement costs;
(cid:4) Properties with rental or lease payments that approximate market rents; and
(cid:4) Properties that can be purchased with the simultaneous execution or assumption of long-term, net lease
agreements, offering both current income and the potential for future rent increases.
We seek to invest in industries in which several, well-organized, regional and national tenants are capturing
market share through the selection of prime real estate locations supported by superior service, quality control,
economies of scale, consumer branding, and advertising. In addition, we frequently acquire large portfolios of
single-tenant properties net leased to different tenants operating in a variety of industries. We have an internal
team dedicated to sourcing such opportunities, often using our relationships with various tenants,
owners/developers, and advisers to uncover and secure transactions. We also undertake thorough research
and analysis to identify what we consider to be appropriate property locations, tenants, and industries for
investment. This research expertise is instrumental to uncovering net lease opportunities in markets where we
believe we can add value.
54
In selecting potential investments, we look for tenants with the following attributes:
(cid:4) Tenants with reliable and sustainable cash flow;
(cid:4) Tenants with revenue and cash flow from multiple sources;
(cid:4) Tenants that are willing to sign a long-term lease (10 or more years); and
(cid:4) Tenants that are large owners and users of real estate.
From a retail perspective, our investment strategy is to target tenants that have a service, non-discretionary,
and/or low-price-point component to their business. We believe these characteristics better position tenants to
operate in a variety of economic conditions and to compete more effectively with internet retailers. As a result of
the execution of this strategy, over 90% of our annualized retail rental revenue is derived from tenants with a
service, non-discretionary, and/or low price point component to their business. From a non-retail perspective,
we target industrial properties leased to Fortune 1000, primarily investment grade rated companies. We believe
these characteristics enhance the stability of the rental revenue generated from these properties.
After applying this investment strategy, we pursue those transactions where we can achieve an attractive
investment spread over our cost of capital and favorable risk-adjusted returns.
Underwriting Strategy
In order to be considered for acquisition, properties must meet stringent underwriting requirements. We have
established a four-part analysis that examines each potential investment based on:
(cid:4) The aforementioned overall real estate characteristics, including demographics, replacement cost and
comparative rental rates;
(cid:4)
Industry, tenant (including credit profile), and market conditions;
(cid:4) Store profitability for retail locations if profitability data is available; and
(cid:4) The importance of the real estate location to the operations of the tenants’ business.
We believe the principal financial obligations for most of our tenants typically include their bank and other debt,
payment obligations to suppliers, and real estate lease obligations. Because we typically own the land and
building in which a tenant conducts its business or which are critical to the tenant’s ability to generate revenue,
we believe the risk of default on a tenant’s lease obligation is less than the tenant’s unsecured general
obligations. It has been our experience that tenants must retain their profitable and critical locations in order to
survive. Therefore, in the event of reorganization, they are less likely to reject a lease of a profitable or critical
location because this would terminate their right to use the property.
Thus, as the property owner, we believe that we will fare better than unsecured creditors of the same tenant in
the event of reorganization. If a property is rejected by the tenant during reorganization, we own the property
and can either lease it to a new tenant or sell the property. In addition, we believe that the risk of default on real
estate leases can be further mitigated by monitoring the performance of the tenants' individual locations and
considering whether to proactively sell locations that meet our criteria for disposition.
Prior to entering into any transaction, our research department conducts a review of a tenant’s credit quality.
The information reviewed may include reports and filings, including any public credit ratings, financial
statements, debt and equity analyst reports, and reviews of corporate credit spreads, stock prices, market
capitalization, and other financial metrics. We conduct additional due diligence, including additional financial
reviews of the tenant and a more comprehensive review of the business segment and industry in which the
tenant operates. We continue to monitor our tenants’ credit quality on an ongoing basis by reviewing the
available information previously discussed, and providing summaries of these findings to management. We
estimate that approximately 47% of our annualized rental revenue comes from properties leased to investment
grade rated companies or their subsidiaries. At December 31, 2016, our top 20 tenants represent approximately
53% of our annualized revenue and ten of these tenants have investment grade credit ratings or are
subsidiaries of investment grade companies.
Portfolio and Asset Management Strategy
In addition to pursuing new properties for investment, we seek to increase earnings and distributions to
stockholders through active portfolio and asset management.
55
Generally, our portfolio and asset management efforts seek to achieve:
(cid:4) Rent increases at the expiration of existing leases, when market conditions permit;
(cid:4) Optimum exposure to certain tenants, industries, and markets through re-leasing vacant properties and
selectively selling properties;
(cid:4) Maximum asset-level returns on properties that are re-leased or sold;
(cid:4) Additional value creation from the existing portfolio by enhancing individual properties, pursuing alternative
uses, and deriving ancillary revenue; and
Investment opportunities in new asset classes for the portfolio.
(cid:4)
We continually monitor our portfolio for any changes that could affect the performance of our tenants, our
tenants’ industries, and the real estate locations in which we have invested. We also regularly analyze our
portfolio with a view towards optimizing its returns and enhancing its overall credit quality. Our active portfolio
and asset management strategy pursues asset sales when we believe the reinvestment of the sale proceeds
will:
(cid:4) Generate higher returns;
(cid:4) Enhance the credit quality of our real estate portfolio;
(cid:4) Extend our average remaining lease term; and/or
(cid:4) Decrease tenant, industry, or geographic concentration.
At December 31, 2016, we classified 15 properties with a carrying amount of $26.6 million as held for sale on
our balance sheet. For 2017, we intend to continue our active disposition efforts to further enhance our real
estate portfolio and anticipate $75 to $100 million in property sales. We plan to invest these proceeds into new
property acquisitions, if there are attractive opportunities available. However, we cannot guarantee that we will
sell properties during 2017 at our estimated values or be able to invest the property sale proceeds in new
properties.
The active management of the portfolio is an essential component of our long-term strategy of maintaining high
occupancy. Since 1970, our occupancy rate at the end of each year has never been below 96%. However, we
cannot assure you that our future occupancy levels will continue to equal or exceed 96%.
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
December 31, 2016, our total outstanding borrowings of senior unsecured notes and bonds, term loans,
mortgages payable and credit facility borrowings were $5.875 billion, or approximately 27.6% of our total market
capitalization of $21.26 billion.
We define our total market capitalization at December 31, 2016 as the sum of:
(cid:4) Shares of our common stock outstanding of 260,168,259, plus total common units outstanding of 405,204,
multiplied by the last reported sales price of our common stock on the NYSE of $57.48 per share on
December 31, 2016, or $14.98 billion;
(cid:4) Aggregate liquidation value (par value of $25.00 per share) of the Class F preferred stock of $408.8 million;
56
(cid:4) Outstanding borrowings of $1.12 billion on our credit facility;
(cid:4) Outstanding mortgages payable of $460.0 million, excluding net mortgage premiums of $6.4 million and
deferred financing costs of $324,000;
(cid:4) Outstanding borrowings of $320.0 million on our term loans, excluding deferred financing costs of $873,000;
and
(cid:4) Outstanding senior unsecured notes and bonds of $3.98 billion, excluding unamortized original issuance
discounts of $19.8 million and deferred financing costs of $20.8 million.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain
periods, the U.S. credit markets have experienced significant price volatility, dislocations, and liquidity
disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real
estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy
accordingly.
Universal Shelf Registration
In December 2015, we filed a shelf registration statement with the SEC, which is effective for a term of three
years and will expire in December 2018. 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.
$2.0 Billion Revolving Credit Facility
In June 2015, we entered into a $2.0 billion unsecured revolving credit facility, or our credit facility, that expires
in June 2019 and includes, at our option, two six-month extensions. Our credit facility has a $1.0 billion
accordion expansion option. Under our credit facility, our investment grade credit ratings as of December 31,
2016 provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 0.90%,
with a facility commitment fee of 0.15%, for all-in drawn pricing of 1.05% 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 December 31, 2016, we had a borrowing capacity of $880.0 million available on our credit facility and an
outstanding balance of $1.12 billion. The weighted average interest rate on borrowings outstanding under our
credit facility, at December 31, 2016, was 1.7% per annum. We must comply with various financial and other
covenants in our credit facility. At December 31, 2016, we remain 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.
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
December 31, 2016, we had cash and cash equivalents totaling $9.4 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
57
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 credit facility are based upon our ratings assigned by credit rating
agencies. As of December 31, 2016, 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 Baa1 with a
“positive” outlook, Standard & Poor’s Ratings Group has assigned a rating of BBB+ with a “positive” outlook, and
Fitch Ratings has assigned a rating of BBB+ with a “stable” outlook.
Based on our ratings as of December 31, 2016, the facility interest rate as of December 31, 2016 was LIBOR
plus 0.90% with a facility commitment fee of 0.15%, for all-in drawn pricing of 1.05% over LIBOR. Our credit
facility provides that the interest rate can range between: (i) LIBOR plus 1.55% if our credit rating is lower than
BBB-/Baa3 or unrated and (ii) LIBOR plus 0.85% if our credit rating is A-/A3 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) 0.125% for a credit rating of A-/A3 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.
Term Loans
In June 2015, in conjunction with entering into our credit facility, we entered into a $250 million senior unsecured
term loan maturing June 30, 2020. Borrowing under this term loan bears interest at LIBOR, plus 0.95%. 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 2.67%.
In January 2013, in conjunction with our acquisition of American Realty Capital Trust, ARCT, we entered into a
$70 million senior unsecured term loan maturing in January 2018. Borrowing under the term loan bears interest
at LIBOR, plus 1.20%. In conjunction with this term loan, we also acquired an interest rate swap which
effectively fixes our per annum interest rate on this term loan at 2.15%.
Mortgage Debt
As of December 31, 2016, we had $460.0 million of mortgages payable, all of which were assumed in
connection with our property acquisitions. Additionally, at December 31, 2016, we had net premiums totaling
$6.4 million on these mortgages and deferred financing costs of $324,000. 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 2016, we made $231.7 million of principal payments, including the repayment of 11 mortgages in
full for $201.8 million, and refinanced one of our assumed mortgages whereby we received an additional
$10.0 million in proceeds.
Notes Outstanding
As of December 31, 2016, we had $3.98 billion of senior unsecured note and bond obligations, excluding
unamortized original issuance discounts of $19.8 million and deferred financing costs of $20.8 million. All of our
outstanding notes and bonds have fixed interest rates. Interest on all of our senior note and bond obligations is
paid semiannually.
No Unconsolidated Investments
We have no unconsolidated investments, nor do we engage in trading activities involving energy or commodity
contracts.
Corporate Responsibility
We are committed to providing an engaging, diverse, and safe work environment for our employees, to
upholding our corporate responsibilities as a public company operating for the benefit of our stockholders, and
58
to operating our company in an environmentally conscious manner. 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.
Social Responsibility and Ethics. An extension of our mission is our commitment to being socially responsible
and conducting our business according to the highest ethical standards. Our employees are awarded
compensation that is in line with those of our peers and competitors, including generous healthcare benefits for
employees and their families; participation in a 401(k) plan with a matching contribution by Realty Income;
competitive paid time-off benefits; and an infant-at-work program for new parents. 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. We also have a longstanding commitment to equal
employment opportunity and adhere to all Equal Employer Opportunity Policy guidelines. We apply the
principles of full and fair disclosure in all of our business dealings, as outlined in our Corporate Code of
Business Ethics. We are also committed to dealing fairly with all of our customers, suppliers, and competitors.
Realty Income and our employees have taken an active role in supporting our communities through civic
involvement with charitable organizations, including our partnership with San Diego Habitat for Humanity, and
corporate donations. Focusing our impact on social and environmentally sustainable areas our non-profit
partnerships have resulted in approximately 700 employee volunteer hours during 2016, employee and
corporate donations to fund local affordable housing, educational services to at-risk youth, funding local
foodbanks, and toys for under-served children. Our dedication to being a responsible corporate citizen has a
direct and positive impact in the communities in which we operate and contributes to the strength of our
reputation and our financial performance.
Corporate Governance. We believe that a company’s reputation for integrity and serving its stockholders
responsibly is of utmost importance. 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:
(cid:4) Our Board of Directors is comprised of eight directors, seven of which are independent, non-employee
directors;
(cid:4) Our Board of Directors is elected on an annual basis;
(cid:4) We employ a majority vote standard for uncontested elections;
(cid:4) Our Compensation Committee of the Board of Directors works with independent consultants in conducting
annual compensation reviews for our key executives, and compensates each individual primarily based on
reaching certain performance metrics that determine the success of our company; and
(cid:4) We adhere to all other corporate governance principles outlined in our “Corporate Governance Guidelines”
document on our website.
Environmental Practices. Our focus on conservationism 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 an electronic approval system, carpooling to our
headquarters, and recycling paper waste. In 2016, we sent more than 29,500 pounds of paper to our off-site
partner for recycling.
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 addition, our headquarters was retrofitted 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, LED lighting, and drought-tolerant landscaping with recycled materials.
59
The properties in our portfolio are 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 remain active in working
with our tenants to promote environmental responsibility at the properties we own and to promote the
importance of energy efficient facilities.
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, bringing our properties into compliance to qualify for city and county programs.
REALTY INCOME CORPORATION AND SUBSIDIARIES
Property Portfolio Information
At December 31, 2016, we owned a diversified portfolio:
(cid:4) Of 4,944 properties;
(cid:4) With an occupancy rate of 98.3%, or 4,860 properties leased and 84 properties available for lease;
(cid:4) Leased to 248 different commercial tenants doing business in 47 separate industries;
(cid:4) Located in 49 states and Puerto Rico;
(cid:4) With over 83.0 million square feet of leasable space; and
(cid:4) With an average leasable space per property of approximately 16,800 square feet; approximately 11,520
square feet per retail property and 220,290 square feet per industrial property.
At December 31, 2016, of our 4,944 properties, 4,860 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 December 31, 2016, our 248 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 277 additional tenants, representing approximately 5% of our annualized revenue at
December 31, 2016, which brings our total tenant count to 525 tenants.
60
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(1)
For the
Quarter Ended
For the Years Ended
December 31, Dec 31,
Dec 31,
Dec 31,
Dec 31,
Dec 31,
2016
2016
2015
2014
2013
2012
1.9 %
2.0%
2.0%
1.9 %
1.7%
Retail industries
Apparel stores
Automotive collision services
Automotive parts
Automotive service
Automotive tire services
Book stores
Child care
Consumer electronics
Convenience stores
Crafts and novelties
Dollar stores
Drug stores
Education
Entertainment
Equipment services
Financial services
General merchandise
Grocery stores
Health and fitness
Health care
Home furnishings
Home improvement
Jewelry
Motor vehicle dealerships
Office supplies
Pet supplies and services
Restaurants - casual dining
Restaurants - quick service
Shoe stores
Sporting goods
Telecommunications
Theaters
Transportation services
Wholesale clubs
Other
1.8 %
1.0
1.4
1.9
2.6
*
1.8
0.3
8.5
0.5
8.3
1.0
1.3
1.9
2.7
*
1.9
0.3
8.7
0.5
8.6
1.0
1.4
1.9
2.9
*
2.0
0.3
9.2
0.5
8.9
11.4
11.2
10.6
0.3
0.5
*
1.8
1.7
3.4
7.9
0.9
0.8
2.5
0.1
1.9
0.3
0.6
3.9
5.2
0.5
1.3
*
4.7
0.1
3.4
0.3
0.5
0.1
1.4
1.5
3.1
8.1
0.9
0.7
2.5
0.1
1.9
0.3
0.6
3.9
4.9
0.5
1.6
*
4.9
0.1
3.6
0.3
0.5
0.1
1.3
1.4
3.0
7.7
1.0
0.7
2.4
0.1
1.6
0.3
0.7
3.8
4.2
0.5
1.8
-
5.1
0.1
3.8
0.8
1.3
1.8
3.2
*
2.2
0.3
0.8
1.2
2.1
3.6
*
2.8
0.3
1.1
1.0
3.1
4.7
0.1
4.5
0.5
10.1
11.2
16.3
0.5
9.6
9.5
0.4
0.5
0.1
1.4
1.2
3.0
7.0
1.1
0.7
1.7
0.1
1.6
0.4
0.7
4.3
3.7
0.1
1.6
-
5.3
0.1
4.1
0.5
6.2
8.1
0.4
0.6
0.1
1.5
1.1
2.9
6.3
1.1
0.9
1.6
0.1
1.6
0.5
0.8
5.1
4.4
0.1
1.7
-
6.2
0.1
3.9
0.3
2.2
3.5
0.7
0.9
0.1
0.2
0.6
3.7
6.8
-
1.0
1.5
-
2.1
0.8
0.6
7.3
5.9
0.1
2.5
-
9.4
0.2
3.2
0.1
*
*
*
*
0.1
Retail industries
81.3 %
81.5 %
81.1%
80.4%
79.8 %
86.7%
61
Industry Diversification (continued)
Percentage of Rental Revenue(1)
For the
Quarter Ended
For the Years Ended
December 31, Dec 31,
Dec 31,
Dec 31,
Dec 31,
Dec 31,
2016
2016
2015
2014
2013
2012
1.0
2.8
0.4
0.9
0.1
0.9
0.1
0.4
0.4
1.1
0.3
1.0
0.6
0.1
0.1
0.1
0.7
0.9
0.1
0.2
0.7
5.6
0.2
1.0
2.6
0.5
0.9
0.1
0.9
0.1
0.5
0.4
1.1
0.3
1.1
0.6
0.1
0.1
0.1
0.8
0.8
0.1
0.2
0.6
5.4
1.1
2.7
0.6
0.9
0.1
0.8
0.1
0.4
0.4
1.2
0.3
1.2
0.7
0.2
0.1
0.1
0.7
0.8
0.1
0.2
0.7
5.3
1.2
2.8
0.5
0.9
0.1
0.5
0.1
0.5
0.4
1.4
0.3
1.3
0.7
0.2
0.1
0.2
0.7
0.8
0.1
0.8
0.7
5.1
1.2
3.3
0.6
1.0
0.1
0.2
*
0.4
0.5
1.5
-
1.4
0.8
0.2
0.1
0.2
0.6
0.9
0.2
0.9
0.7
5.3
0.2
0.2
0.2
0.1
0.9
5.1
0.1
0.1
-
0.1
-
0.3
0.4
1.3
-
0.1
*
-
*
0.1
-
0.7
0.1
-
0.8
2.2
1.0
Non-retail industries
Aerospace
Beverages
Consumer appliances
Consumer goods
Crafts and novelties
Diversified industrial
Electric utilities
Equipment services
Financial services
Food processing
General merchandise
Government services
Health care
Home furnishings
Insurance
Machinery
Other manufacturing
Packaging
Paper
Shoe stores
Telecommunications
Transportation services
Other
Non-retail industries
18.7 %
18.5%
18.9 %
19.6%
20.2%
13.3 %
Totals
100.0 %
100.0%
100.0 %
100.0%
100.0%
100.0 %
* Less than 0.1%
(1)
Includes rental revenue for all properties owned at the end of each period presented, including revenue from properties reclassified as
discontinued operations.
62
Property Type Composition
The following table sets forth certain property type information regarding our property portfolio as of
December 31, 2016 (dollars in thousands):
Property Type
Retail
Industrial
Office
Agriculture
Totals
Number of
Properties
4,774
111
44
15
Approximate
Leasable
Square Feet
55,005,900
24,452,100
3,403,200
184,500
Rental Revenue for
the Quarter Ended
December 31, 2016(1)
$
216,904
36,383
15,111
6,503
Percentage of
Rental
Revenue
78.9%
13.2
5.5
2.4
4,944
83,045,700
$
274,901
100.0 %
(1) Includes rental revenue for all properties owned at December 31, 2016. Excludes revenue of $323 from sold properties.
Tenant Diversification
The following table sets forth the largest tenants in our property portfolio, expressed as a percentage of total
rental revenue at December 31, 2016:
Tenant
Number of Properties
% of Rental Revenue
Walgreens
FedEx
Dollar General
LA Fitness
Dollar Tree / Family Dollar
Circle K (Couche-Tard)
AMC Theatres
BJ's Wholesale Club
Diageo
CVS Pharmacy
Super America / Western Refining
Walmart / Sam's Club
Regal Cinemas
GPM Investments / Fas Mart
Rite Aid
7-Eleven
Life Time Fitness
TBC Corporation (Sumitomo)
FreedomRoads / Camping World
Home Depot
203
43
524
48
457
299
22
15
17
70
134
31
22
216
69
111
9
149
18
10
7.0 %
5.5 %
4.2 %
4.0 %
3.8 %
2.6 %
2.6 %
2.4 %
2.2 %
2.0 %
2.0 %
1.9 %
1.9 %
1.9 %
1.9 %
1.8 %
1.8 %
1.6 %
1.2 %
1.1 %
63
Service Category Diversification for our Retail Properties
The following table sets forth certain information regarding the 4,774 retail properties included in our 4,944 total
properties owned at December 31, 2016, classified according to the business types and the level of services
they provide at the property level (dollars in thousands):
Number of
Retail
Properties
Retail Rental Revenue
for the Quarter Ended
December 31, 2016 (1)
Percentage of
Retail Rental
Revenue
Tenants Providing Services
Automotive collision services
Automotive service
Child care
Education
Entertainment
Equipment services
Financial services
Health and fitness
Health care
Telecommunications
Theaters
Transportation services
Other
Tenants Selling Goods and Services
Automotive parts (with installation)
Automotive tire services
Convenience stores
Motor vehicle dealerships
Pet supplies and services
Restaurants - casual dining
Restaurants - quick service
Tenants Selling Goods
Apparel stores
Automotive parts
Book stores
Consumer electronics
Crafts and novelties
Dollar stores
Drug stores
General merchandise
Grocery stores
Home furnishings
Home improvement
Jewelry
Office supplies
Shoe stores
Sporting goods
Wholesale clubs
Total Retail Properties
* Less than 0.1%
54
241
199
14
11
2
227
87
27
1
45
2
7
917
68
184
866
28
12
323
566
2,047
29
83
1
9
13
981
335
76
84
58
58
4
9
2
36
32
1,810
4,774
$
$
2,705
5,342
4,862
824
1,310
111
4,930
21,608
1,133
-
13,080
229
82
56,216
1,589
7,136
23,253
5,304
722
10,128
14,330
62,462
5,147
2,363
104
916
1,274
22,770
29,922
4,223
9,291
2,065
6,142
175
724
182
3,503
9,425
98,226
216,904
1.2 %
2.5
2.2
0.4
0.6
0.1
2.3
10.0
0.5
*
6.0
0.1
*
25.9
0.7
3.3
10.7
2.5
0.3
4.7
6.6
28.8
2.4
1.1
*
0.4
0.6
10.5
13.8
2.0
4.3
1.0
2.8
0.1
0.3
0.1
1.6
4.3
45.3
100.0 %
(1)
Includes rental revenue for all retail properties owned at December 31, 2016. Excludes revenue of $57,997 from non-retail properties and $323
from sold properties.
64
Lease Expirations
The following table sets forth certain information regarding our property portfolio regarding the timing of the
lease term expirations in our portfolio (excluding rights to extend a lease at the option of the tenant) on our
4,836 net leased, single-tenant properties and their contribution to rental revenue for the quarter ended
December 31, 2016 (dollars in thousands):
Year
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032 - 2043
Total Portfolio(1)
Expiring
Leases
Retail
Non-Retail
Approx.
Leasable
Sq. Feet
Rental
Revenue (2)
156
279
264
198
295
280
378
198
326
317
504
289
400
80
269
434
2
9
10
11
13
17
20
12
14
5
3
6
5
13
25
4
1,752,600
$
3,661,200
3,912,700
4,345,800
5,355,200
7,843,300
6,640,300
4,360,000
5,227,100
4,451,500
5,698,000
6,296,600
6,986,800
2,439,100
5,110,000
6,869,300
4,239
11,542
13,556
12,688
15,227
16,939
22,434
12,533
20,452
14,598
20,861
16,426
20,650
14,568
18,527
% of
Rental
Revenue
1.6%
4.3
5.0
4.7
5.6
6.3
8.3
4.6
7.5
5.4
7.7
6.1
7.7
5.3
6.8
35,456
13.1
Totals
4,667
169
80,949,500
$
270,696
100.0%
* Less than 0.1%
(1)
Excludes 24 multi-tenant properties and 84 vacant properties. The lease expirations for properties under construction are based on the
estimated date of completion of those properties.
(2) Excludes revenue of $4,205 from 24 multi-tenant properties and from 84 vacant properties at December 31, 2016, and $323 from sold
properties.
65
Geographic Diversification
The following table sets forth certain state-by-state information regarding our property portfolio as of
December 31, 2016 (dollars in thousands):
State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Puerto Rico
Totals\Average
* Less than 0.1%
Number of
Properties
159
3
109
55
178
81
24
18
367
250
12
229
171
40
93
62
99
16
36
80
163
158
134
140
11
38
22
19
71
30
94
173
8
247
133
28
148
3
148
14
224
490
22
5
153
43
15
118
6
4
4,944
Percent
Leased
Approximate Rental Revenue for
Leasable the Quarter Ended
Square Feet December 31, 2016 (1)
Percentage of
Rental
Revenue
97 %
67
99
100
99
100
92
100
99
98
100
99
99
95
98
98
97
94
94
98
98
99
95
97
100
100
100
100
99
100
100
98
88
98
99
100
99
100
99
100
97
99
100
100
97
98
100
100
100
100
98 %
1,367,700 $
275,900
1,626,300
816,500
5,292,400
1,097,400
535,300
93,000
4,039,500
4,154,400
87,000
5,144,000
2,105,400
2,970,600
1,846,400
1,368,400
1,353,200
178,500
864,400
751,600
1,651,900
1,951,100
1,623,600
2,851,300
87,000
806,500
413,000
315,800
834,400
293,200
2,505,300
2,258,100
123,000
6,247,100
1,652,200
593,300
1,855,000
153,300
1,105,100
170,700
3,174,400
9,176,400
956,400
98,000
2,991,200
687,200
284,300
2,136,000
54,700
28,300
5,112
475
6,422
1,828
26,423
4,375
2,571
717
14,950
12,150
419
14,597
8,406
4,089
4,834
4,026
3,863
928
4,412
3,498
6,398
9,772
4,552
8,846
483
2,255
1,309
1,481
4,388
887
12,331
7,387
206
14,936
4,549
2,378
7,528
809
5,157
416
8,781
25,756
2,170
484
7,597
2,941
1,098
5,473
289
149
1.9 %
0.2
2.3
0.7
9.6
1.6
0.9
0.3
5.4
4.4
0.1
5.3
3.1
1.5
1.8
1.5
1.4
0.3
1.6
1.3
2.3
3.5
1.7
3.2
0.2
0.8
0.5
0.5
1.6
0.3
4.5
2.7
0.1
5.4
1.6
0.9
2.7
0.3
1.9
0.1
3.2
9.4
0.8
0.2
2.8
1.1
0.4
2.0
0.1
*
83,045,700
$
274,901
100.0 %
(1) Includes rental revenue for all properties owned at December 31, 2016. Excludes revenue of $323 from sold properties.
66
REALTY INCOME CORPORATION AND SUBSIDIARIES
Forward-Looking Statements
This Annual Report on Form 10-K, including the documents incorporated by reference, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. When used in
this annual report, the words “estimated”, “anticipated”, “expect”, “believe”, “intend” and similar expressions are
intended to identify forward-looking statements. Forward-looking statements include discussions of strategy,
plans, or intentions of management. Forward-looking statements are subject to risks, uncertainties, and
assumptions about Realty Income Corporation, including, among other things:
(cid:4)(cid:3) Our anticipated growth strategies;
(cid:4)(cid:3) Our intention to acquire additional properties and the timing of these acquisitions;
(cid:4)(cid:3) Our intention to sell properties and the timing of these property sales;
(cid:4)(cid:3) Our intention to re-lease vacant properties;
(cid:4)(cid:3) Anticipated trends in our business, including trends in the market for long-term, net leases of freestanding,
single-tenant properties; and
(cid:4)(cid:3) Future expenditures for development projects.
Future events and actual results, financial and otherwise, may differ materially from the results discussed in the
forward-looking statements. In particular, some of the factors that could cause actual results to differ materially
are:
(cid:4)(cid:3) Our continued qualification as a real estate investment trust;
(cid:4)(cid:3) General business and economic conditions;
(cid:4)(cid:3) Competition;
(cid:4)(cid:3) Fluctuating interest rates;
(cid:4)(cid:3) Access to debt and equity capital markets;
(cid:4) Continued volatility and uncertainty in the credit markets and broader financial markets;
(cid:4)(cid:3) Other risks inherent in the real estate business including tenant defaults, potential liability relating to
environmental matters, illiquidity of real estate investments, and potential damages from natural disasters;
(cid:4)(cid:3)
Impairments in the value of our real estate assets;
(cid:4)(cid:3) Changes in the tax laws of the United States of America;
(cid:4)(cid:3) The outcome of any legal proceedings to which we are a party or which may occur in the future; and
(cid:4)(cid:3) Acts of terrorism and war.
Additional factors that may cause risks and uncertainties include those discussed in the sections entitled
“Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in this Annual Report.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the
date that this annual report was filed with the Securities and Exchange Commission, or SEC. While forward-
looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake
no obligation to publicly release the results of any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date of this annual report or to reflect the occurrence of
unanticipated events. In light of these risks and uncertainties, the forward-looking events discussed in this annual
report might not occur
67
REALTY INCOME CORPORATION AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
Realty Income, The Monthly Dividend Company®, is an S&P 500 company dedicated to providing stockholders
with dependable monthly dividends that increase over time. The company is structured as a real estate
investment trust, or REIT, requiring it annually to distribute at least 90% of its taxable income (excluding net
capital gains) in the form of dividends to its stockholders. The monthly dividends are supported by the cash flow
generated from real estate owned under long-term, net lease agreements with regional and national commercial
tenants. The company has in-house acquisition, portfolio management, asset management, real estate
research, credit research, legal, finance and accounting, information technology and capital markets capabilities.
Realty Income was founded in 1969, and listed on the New York Stock Exchange (NYSE: O) in 1994. Over the
past 48 years, Realty Income has been acquiring and managing freestanding commercial properties that
generate rental revenue under long-term net lease agreements. The company is a member of the S&P High
Yield Dividend Aristocrats® index for having increased its dividend every year for more than 20 consecutive
years.
At December 31, 2016, we owned a diversified portfolio:
(cid:4) Of 4,944 properties;
(cid:4) With an occupancy rate of 98.3%, or 4,860 properties leased and 84 properties available for lease;
(cid:4) Leased to 248 different commercial tenants doing business in 47 separate industries;
(cid:4) Located in 49 states and Puerto Rico;
(cid:4) With over 83.0 million square feet of leasable space; and
(cid:4) With an average leasable space per property of approximately 16,800 square feet; approximately 11,520
square feet per retail property and 220,290 square feet per industrial property.
Of the 4,944 properties in the portfolio, 4,920, or 99.5%, are single-tenant properties, and the remaining are
multi-tenant properties. At December 31, 2016, of the 4,920 single-tenant properties, 4,836 were leased with a
weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of
approximately 9.8 years.
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
December 31, 2016, our total outstanding borrowings of senior unsecured notes and bonds, term loans,
mortgages payable and credit facility borrowings were $5.875 billion, or approximately 27.6% of our total market
capitalization of $21.26 billion.
68
We define our total market capitalization at December 31, 2016 as the sum of:
(cid:4) Shares of our common stock outstanding of 260,168,259, plus total common units outstanding of 405,204,
multiplied by the last reported sales price of our common stock on the NYSE of $57.48 per share on
December 31, 2016, or $14.98 billion;
(cid:4) Aggregate liquidation value (par value of $25.00 per share) of the Class F preferred stock of $408.8 million;
(cid:4) Outstanding borrowings of $1.12 billion on our credit facility;
(cid:4) Outstanding mortgages payable of $460.0 million, excluding net mortgage premiums of $6.4 million and
deferred financing costs of $324,000;
(cid:4) Outstanding borrowings of $320.0 million on our term loans, excluding deferred financing costs of
$873,000; and
(cid:4) Outstanding senior unsecured notes and bonds of $3.98 billion, excluding unamortized original issuance
discounts of $19.8 million and deferred financing costs of $20.8 million.
Universal Shelf Registration
In December 2015, we filed a shelf registration statement with the SEC, which is effective for a term of three
years and will expire in December 2018. 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
In September 2015, we established an “at-the-market” equity distribution program, or our ATM program,
pursuant to which we can offer and sell up to 12,000,000 shares of common stock to, or through, a consortium
of banks acting as our sales agents by means of ordinary brokers’ transactions on the NYSE at prevailing
market prices or at negotiated prices. During 2016, we issued 2,779,140 shares and raised gross proceeds of
$166.8 million under the ATM program.
Issuance of Common Stock
In May 2016, we issued 6,500,000 shares of common stock. After underwriting discounts and other offering
costs of $12.1 million, the net proceeds of $383.6 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. In 2013, we revised our DRSPP so that we would pay for a majority of the plan-
related fees, which were previously paid by investors, and to institute 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. During 2016, we issued 170,027 shares and raised approximately $10.3 million under our DRSPP. During
2016, we did not issue shares under the waiver approval process.
Preferred Stock
In February 2012, we issued 14,950,000 shares of our Class F preferred stock at $25.00 per share. In April
2012, we issued an additional 1,400,000 shares of Class F preferred stock at $25.2863 per share. Beginning
February 15, 2017, shares of our Class F preferred stock are redeemable at our option for $25.00 per share,
plus any accrued and unpaid dividends. Dividends on the shares of our Class F preferred stock are paid
monthly in arrears. We are current on our obligations to pay dividends on our Class F preferred stock.
$2.0 Billion Revolving Credit Facility
In June 2015, we entered into a $2.0 billion unsecured revolving credit facility, or our credit facility, that expires
in June 2019 and includes, at our option, two six-month extensions. Our credit facility has a $1.0 billion
accordion expansion option. Under our credit facility, our investment grade credit ratings as of
69
December 31, 2016 provide for financing at the London Interbank Offered Rate, commonly referred to as
LIBOR, plus 0.90%, with a facility commitment fee of 0.15%, for all-in drawn pricing of 1.05% over LIBOR. The
borrowing rate is subject to an interest rate floor and may change if our investment grade credit ratings were to
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 December 31, 2016, we had a borrowing capacity of $880.0 million available on our credit facility and an
outstanding balance of $1.12 billion. The weighted average interest rate on borrowings outstanding under our
credit facility, at December 31, 2016, was 1.7% per annum. We must comply with various financial and other
covenants in our credit facility. At December 31, 2016, 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 June 2015, in conjunction with entering into our credit facility, we entered into a $250 million senior unsecured
term loan maturing June 30, 2020. Borrowing under this term loan bears interest at LIBOR, plus 0.95%. 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 2.67%.
In January 2013, in conjunction with our acquisition of American Realty Capital Trust, or ARCT, we entered into
a $70 million senior unsecured term loan maturing in January 2018. Borrowing under the term loan bears
interest at LIBOR, plus 1.20%. In conjunction with this term loan, we also acquired an interest rate swap which
effectively fixes our per annum interest rate on this term loan at 2.15%.
Mortgage Debt
As of December 31, 2016, we had $460.0 million of mortgages payable, all of which were assumed in
connection with our property acquisitions. Additionally, at December 31, 2016, we had net premiums totaling
$6.4 million on these mortgages and deferred financing costs of $324,000. 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 2016, we made $231.7 million of principal payments, including the repayment of 11 mortgages in
full for $201.8 million, and refinanced one of our assumed mortgages whereby we received an additional $10.0
million in proceeds.
Notes Outstanding
Our senior unsecured note and bond obligations consist of the following as of December 31, 2016, sorted by
maturity date (dollars in millions):
5.375% notes, issued in September 2005 and due in September 2017
2.000% notes, issued in October 2012 and due in January 2018
6.750% notes, issued in September 2007 and due in August 2019
5.750% notes, issued in June 2010 and due in January 2021
3.250% notes, issued in October 2012 and due in October 2022
4.650% notes, issued in July 2013 and due in August 2023
3.875% notes, issued in June 2014 and due in July 2024
4.125% notes, issued in September 2014 and due in October 2026
3.000% notes, issued in October 2016 and due in January 2027
5.875% bonds, $100 issued in March 2005 and $150 issued in
June 2011, both due in March 2035
Total principal amount
Unamortized original issuance discounts and deferred financing costs
$
$
$
175
350
550
250
450
750
350
250
600
250
3,975
(41)
3,934
70
In October 2016, we issued $600 million of 3.000% senior unsecured notes due January 2027. The public
offering price for the notes was 98.671% of the principal amount for an effective yield to maturity of 3.153%.
The net proceeds of approximately $586.7 million from the offering were used to repay borrowings outstanding
under our credit facility.
In September 2016, we repaid $275 million of outstanding 5.950% notes, plus accrued and unpaid interest.
All of our outstanding notes and bonds have fixed interest rates and contain various covenants, with which we
remained in compliance as of December 31, 2016. 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 December 31, 2016 are:
Note Covenants
Limitation on incurrence of total debt
Limitation on incurrence of secured debt
Debt service coverage (trailing 12 months)(1)
Maintenance of total unencumbered assets
Required
≤ 60% of adjusted assets
≤ 40% of adjusted assets
≥ 1.5 x
≥ 150% of unsecured debt
Actual
41.9%
3.4%
4.8 x
243.7%
(1) This covenant 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 January 1, 2016, 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 January 1, 2016, nor does it purport to reflect our debt service
coverage ratio for any future period. The following is our calculation of debt service coverage at December 31, 2016 (in thousands, for
trailing twelve months):
Net income attributable to the Company
$
315,571
Plus: interest expense
Plus: provision for taxes
Plus: depreciation and amortization
Plus: provisions for impairment
Plus: pro forma adjustments
Less: gain on sales of real estate
211,379
3,262
449,943
20,664
71,979
(21,979 )
Income available for debt service, as defined
Total pro forma debt service charge
Debt service coverage ratio
$
$
1,050,819
220,921
4.8
Fixed Charge Coverage Ratio
Fixed charge coverage ratio is calculated in exactly the same manner as the debt service coverage ratio, except
that preferred stock dividends are also added to the denominator. Similar to debt service coverage ratio, we
consider fixed charge coverage ratio to be an appropriate supplemental measure of a company’s ability to make
its interest and preferred stock dividend payments. Our calculations of both debt service and fixed charge
coverage ratios may be different from the calculations used by other companies and, therefore, comparability
may be limited. The presentation of debt service and fixed charge coverage ratios should not be considered as
alternatives to any U.S. GAAP operating performance measures. Below is our calculation of fixed charges at
December 31, 2016 (in thousands, for the trailing twelve months):
Income available for debt service, as defined
Pro forma debt service charge plus preferred stock dividends
Fixed charge coverage ratio
$
$
1,050,819
248,001
4.2
71
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
December 31, 2016, we had cash and cash equivalents totaling $9.4 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 credit facility are based upon our ratings assigned by credit rating
agencies. As of December 31, 2016, 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 Baa1 with a
“positive” outlook, Standard & Poor’s Ratings Group has assigned a rating of BBB+ with a “positive” outlook, and
Fitch Ratings has assigned a rating of BBB+ with a “stable” outlook.
Based on our ratings as of December 31, 2016, the facility interest rate as of December 31, 2016 was LIBOR
plus 0.90% with a facility commitment fee of 0.15%, for all-in drawn pricing of 1.05% over LIBOR. Our credit
facility provides that the interest rate can range between: (i) LIBOR plus 1.55% if our credit rating is lower than
BBB-/Baa3 or unrated and (ii) LIBOR plus 0.85% if our credit rating is A-/A3 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) 0.125% for a credit rating of A-/A3 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 December 31, 2016 (dollars in
millions):
Ground
Leases
Paid by
Realty
Ground
Leases
Paid by
Our
Mortgages
Year of
Maturity
2017
2018
2019
2020
2021
Thereafter
Totals
$
$
$
Term
Credit
Facility (1)
Notes
and
Bonds (2)
175.0
350.0
550.0
-
250.0
2,650.0
$ 1,120.0 $ 3,975.0 $ 320.0 $
Loan(3)
$
-
70.0
-
250.0
-
-
-
-
1,120.0
-
-
-
$
$
Payable (4)
$
103.2
1.6
21.9
1.6
42.3
1.5
82.4
1.4
66.9
1.2
22.1
143.3
460.0 $ 1,286.1 $ 29.4 $ 172.7 $ 28.9 $
Interest (5) Income (6) Tenants (7) Other(8)
$
218.6
197.2
172.6
136.7
115.2
445.8
$ 28.9
-
-
-
-
-
13.4
13.5
13.3
13.1
12.8
106.6
Totals
540.7
654.2
1,899.7
483.6
446.1
3,367.8
7,392.1
(1) The initial term of the credit facility expires in June 2019 and includes, at our option, two six-month extensions.
(2) Excludes non-cash original issuance discounts recorded on notes payable. The unamortized balance of the original issuance discounts
at December 31, 2016 is $19.8 million. Also excludes deferred financing costs of $20.8 million.
(3) Excludes deferred financing costs of $873,000.
(4) Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums at
December 31, 2016, is $6.4 million. Also excludes deferred financing costs of $324,000.
(5) Interest on the term loans, notes, bonds, mortgages payable, and credit facility has been calculated based on outstanding balances as
of December 31, 2016 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 $21.9 million of commitments under construction contracts and $7.0 million of commitments for tenant improvements
and leasing costs.
72
Our 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.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain
periods, the U.S. credit markets have experienced significant price volatility, dislocations, and liquidity
disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real
estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy
accordingly.
Acquisitions During 2016
During 2016, we invested $1.86 billion in 505 new properties and properties under development or expansion,
with an initial weighted average contractual lease rate of 6.3%. The 505 new properties and properties under
development or expansion are located in 40 states, will contain approximately 8.2 million leasable square feet,
and are 100% leased with a weighted average lease term of 14.7 years. The tenants occupying the new
properties operate in 28 industries and the property types are 86.4% retail and 13.6% industrial, based on rental
revenue. During 2016, none of our real estate investments caused any one tenant to be 10% or more of our
total assets at December 31, 2016.
The estimated initial weighted average contractual lease rate for a property is generally computed as estimated
contractual net operating income, which, in the case of a net leased property, is equal to the aggregate base
rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that a tenant
could default on the payment of contractual rent, we cannot provide assurance that the actual return on the
funds invested will remain at the percentages listed above.
In the case of a property under development or expansion, the contractual lease rate is generally fixed such that
rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does
not provide for a fixed rate of return on a property under development or expansion, the estimated initial
weighted average contractual lease rate is computed as follows: estimated net operating income (determined by
the lease) for the first full year of each lease, divided by our projected total investment in the property, including
land, construction and capitalized interest costs. Of the $1.86 billion we invested during 2016, $103.8 million
was invested in 33 properties under development or expansion with an estimated initial weighted average
contractual lease rate of 7.1%. We may continue to pursue development or expansion opportunities under
similar arrangements in the future.
Portfolio Discussion
Leasing Results
At December 31, 2016, we had 84 properties available for lease out of 4,944 properties in our portfolio, which
represents a 98.3% occupancy rate based on the number of properties in our portfolio. Since December 31,
2015, when we reported 71 properties available for lease out of 4,538 and a 98.4% occupancy rate, we:
(cid:4) Had 256 lease expirations (including leases rejected in bankruptcy);
(cid:4) Re-leased 186 properties; and
(cid:4) Sold 57 vacant properties.
Of the 186 properties re-leased during 2016, 144 properties were re-leased to existing tenants, 21 were re-
leased to new tenants without vacancy, and 21 were re-leased to new tenants after a period of vacancy. The
annual rent on these 186 leases was $28.57 million, as compared to the previous rent on these same properties
of $27.33 million, which represents a rent recapture rate of 104.5% on the properties re-leased during 2016.
As part of our re-leasing costs, we pay leasing commissions to unrelated, 3rd 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.
73
At December 31, 2016, our average annualized rental revenue was approximately $13.64 per square foot on the
4,860 leased properties in our portfolio. At December 31, 2016, we classified 15 properties with a carrying
amount of $26.6 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. The expected sale
of these properties is consistent with our active disposition efforts to further enhance our real estate portfolio and
maximize portfolio returns
Investments in Existing Properties
In 2016, we capitalized costs of $16.3 million on existing properties in our portfolio, consisting of $797,000 for
re-leasing costs, $679,000 for recurring capital expenditures and $14.9 million for non-recurring building
improvements. In 2015, we capitalized costs of $11.5 million on existing properties in our portfolio, consisting of
$748,000 for re-leasing costs, $7.6 million for recurring capital expenditures and $3.2 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.
With the increasing size and aging of our portfolio, overall investments in existing properties increased in 2016
and we refined our definition of recurring versus non-recurring capital expenditures. We define recurring capital
expenditures as mandatory and repetitive landlord capital expenditure obligations that have a limited useful life.
We define non-recurring capital expenditures as property improvements where we invest additional capital that
extend the useful life of the property.
Increases in Monthly Dividends to Common Stockholders
We have continued our 48-year policy of paying monthly dividends. In addition, we increased the dividend six
times during 2016 and twice in 2017. As of February 2017, we have paid 77 consecutive quarterly dividend
increases and increased the dividend 90 times since our listing on the NYSE in 1994.
Increase
per share
$ 0.0005
$ 0.0075
$ 0.0005
$ 0.0005
$ 0.0020
$ 0.0005
2016 Dividend increases
1st increase
2nd increase
3rd increase
4th increase
5th increase
6th increase
Dividend
per share
$ 0.1910
$ 0.1985
$ 0.1990
$ 0.1995
$ 0.2015
$ 0.2020
Month
Declared
Dec 2015
Jan 2016
Mar 2016
Jun 2016
Jul 2016
Sep 2016
Month
Paid
Jan 2016
Feb 2016
Apr 2016
Jul 2016
Sep 2016
Oct 2016
2017 Dividend increases
1st increase
2nd increase
Dec 2016
Jan 2017
Jan 2017
Feb 2017
$ 0.2025
$ 0.2105
$ 0.0005
$ 0.0080
The dividends paid per share during 2016 totaled approximately $2.392, as compared to approximately $2.271
during 2015, an increase of $0.121, or 5.3%.
The monthly dividend of $0.2105 per share represents a current annualized dividend of $2.526 per share, and
an annualized dividend yield of approximately 4.2% based on the last reported sale price of our common stock
on the NYSE of $59.63 on January 31, 2017. Although we expect to continue our policy of paying monthly
dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our
pattern of increasing dividends per share, or what our actual dividend yield will be in any future period.
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.
74
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 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. One of these
judgments is our estimate for useful lives in determining depreciation expense for our properties. Depreciation
on a majority of our buildings and improvements is computed using the straight-line method over an estimated
useful life of 25 to 35 years for buildings and 4 to 20 years for improvements, which we believe are appropriate
estimates of useful life. If we use a shorter or longer estimated useful life, it could have a material impact on our
results of operations.
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 fair value of real estate
acquired to: (1) land, (2) building and improvements, and (3) identified intangible assets and liabilities, based in
each case on their estimated fair values. Intangible assets and liabilities consist of above-market or below-
market lease value of in-place leases, the value of in-place leases, and tenant relationships, as applicable. 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 and any assumed or issued noncontrolling
interests 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 initial allocation of the purchase price is based on management’s preliminary assessment, which
may differ when final information becomes available. Subsequent adjustments made to the initial purchase
price allocation are made within the allocation period, which does not exceed one year. 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 releases, 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 years ended December 31, 2015, 2014
and 2013.
Rental Revenue
Rental revenue was $1.057 billion for 2016, as compared to $976.9 million for 2015, an increase of
$80.5 million, or 8.2%. Rental revenue was $893.5 million for 2014. The increase in rental revenue in 2016
compared to 2015 is primarily attributable to:
(cid:4) The 475 properties (7.6 million square feet) we acquired in 2016, which generated $39.7 million of rent
in 2016;
(cid:4) The 254 properties (5.6 million square feet) we acquired in 2015, which generated $80.3 million of rent
in 2016, compared to $41.9 million in 2015, an increase of $38.4 million;
(cid:4) Same store rents generated on 4,045 properties (66.5 million square feet) during 2016 and 2015,
75
increased by $10.15 million, or 1.2%, to $888.51 million from $878.36 million; and
(cid:4) A net increase in straight-line rent and other non-cash adjustments to rent of $959,000 in 2016 as
compared to 2015; partially offset by
(cid:4) A net decrease of $7.1 million relating to properties sold in 2016 and during 2015; and
(cid:4) A net decrease of $1.6 million relating to the aggregate of (i) rental revenue from properties (131
properties comprising 1.5 million square feet) that were available for lease during part of 2016 or 2015,
(ii) rental revenue for 24 properties under development, and (iii) lease termination settlements. In
aggregate, the revenues for these items totaled $33.3 million in 2016, compared to $34.9 million in
2015.
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, and (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 4,944 properties in the portfolio at December 31, 2016, 4,920, or 99.5%, are single-tenant properties and
the remaining are multi-tenant properties. Of the 4,920 single-tenant properties, 4,836, or 98.3%, were net
leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the
tenant) of approximately 9.8 years at December 31, 2016. Of our 4,836 leased single-tenant properties, 4,310 or
89.1% were under leases that provide for increases in rents through:
(cid:4) Base rent increases tied to a consumer price index (typically subject to ceilings);
(cid:4) Percentage rent based on a percentage of the tenants' gross sales;
(cid:4) Fixed increases; or
(cid:4) A combination of two or more of the above rent provisions.
Percentage rent, which is included in rental revenue, was $5.3 million in 2016, $4.5 million in 2015, and
$3.6 million in 2014. Percentage rent in 2016 was less than 1% of rental revenue and we anticipate percentage
rent to be less than 1% of rental revenue in 2017.
Our portfolio of real estate, leased primarily to regional and national tenants under net leases, continues to
perform well and provides dependable lease revenue supporting the payment of monthly dividends to our
stockholders. At December 31, 2016, our portfolio of 4,944 properties was 98.3% leased with 84 properties
available for lease, as compared to 98.4% leased, with 71 properties available for lease at December 31, 2015.
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.
Tenant Reimbursements
Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses
were $43.1 million in 2016, compared to $42.0 million in 2015 and $37.1 million in 2014. The increase in tenant
reimbursements is primarily due to our increase in acquisitions.
Other Revenue
Other revenue, which comprises property-related revenue not included in rental revenue or tenant
reimbursements, was $2.7 million in 2016, compared to $4.4 million in 2015 and $2.9 million in 2014.
Depreciation and Amortization
Depreciation and amortization was $449.9 million for 2016, compared to $409.2 million for 2015 and
$374.7 million for 2014. The increase in depreciation and amortization in 2016 and 2015 was primarily due to
the acquisition of properties in 2015 and 2016, 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.
76
Interest Expense
The following is a summary of the components of our interest expense (dollars in thousands):
Interest on our credit facility, term loans, notes, mortgages
and interest rate swaps
Credit facility commitment fees
Amortization of credit facility origination costs and
deferred financing costs
(Gain) loss on interest rate swaps
Dividend on preferred shares subject to redemption
Amortization of net mortgage premiums
Capital lease obligation
Interest capitalized
2016
2015
2014
$
213,540 $
3,050
226,207
2,854
$
215,830
2,661
8,596
(1,639 )
-
(3,414 )
310
(469 )
8,741
3,043
-
(7,482 )
310
(594 )
8,219
1,349
1,526
(12,891 )
116
(444 )
Interest expense
$
219,974 $
233,079
$
216,366
Credit facility, term loans, mortgages and notes
Average outstanding balances (dollars in thousands)
Average interest rates
$
5,081,663 $
4.11%
5,030,532
$
4,628,438
4.43 %
4.62 %
The decrease in interest expense from 2015 to 2016 was primarily due to lower outstanding debt balances on
our notes payable and mortgages payable, resulting from the payoff of $150.0 million of notes during November
2015 and $275.0 million of notes during September 2016, as well as the payoff of mortgages throughout 2015
and 2016. This decrease was slightly offset by an increase in interest expense related to the issuance of a $600
million note in October 2016.
The increase in interest expense from 2014 to 2015 was primarily due to the June 2014 issuance of our 3.88%
senior unsecured notes due July 2024, the September 2014 issuance of our 4.125% senior unsecured notes
due October 2026, the interest expense on the $250 million term loan that was entered into during June 2015,
and the payoff of mortgages during 2015 which reduced the amortization of net mortgage premiums.
Additionally, each quarter we adjust the carrying value of our interest rate swaps to fair value. Changes in the
fair value of our interest rate swaps are recorded directly to interest expense. We recorded a gain on interest
rate swaps of $1.6 million during 2016 and a loss on interest rate swaps of $3.0 million and $1.3 million during
2015 and 2014, respectively.
At December 31, 2016, the weighted average interest rate on our:
(cid:4) Credit facility outstanding borrowings of $1.12 billion was 1.7%;
(cid:4) Term loans outstanding of $320.0 million (excluding deferred financing costs of $873,000) was 1.7%;
(cid:4) Mortgages payable of $460.0 million (excluding net premiums totaling $6.4 million and deferred
financing costs of $324,000 on these mortgages) was 4.9%;
(cid:4) Notes and bonds payable of $3.98 billion (excluding unamortized original issue discounts of
$19.8 million and deferred financing costs of $20.8 million) was 4.4%; and
(cid:4) Combined outstanding notes, bonds, mortgages, term loan and credit facility borrowings of $5.88 billion
was 3.8%.
General and Administrative Expenses
General and administrative expenses increased by $2.7 million to $52.0 million for 2016, compared to
$49.3 million in 2015 and $51.1 million in 2014. Included in general and administrative expenses are acquisition
transaction costs of $346,000 for 2016, $913,000 for 2015, and $453,000 for 2014. General and administrative
costs increased during 2016 primarily due to higher compensation costs. General and administrative expenses
decreased during 2015 primarily due to lower compensation costs, lower corporate insurance premiums, and
lower proxy costs. In January 2017, we had 146 employees, as compared to 132 employees in January 2016
and 125 employees in January 2015.
77
Dollars in thousands
General and administrative expenses
Total revenue(1)
General and administrative expenses as a
percentage of total revenue
$
2016
51,966
1,060,068
$
2015
49,298 $
981,270
2014
51,085
896,499
4.9 %
5.0 %
5.7 %
(1) Excludes tenant reimbursements revenue, as well as revenue included in discontinued operations and gain on sales.
Property Expenses (including tenant reimbursable expenses)
Property expenses consist of costs associated with unleased properties, non-net-leased properties and general
portfolio expenses, as well as contractually obligated reimbursable costs from tenants for recoverable real
estate taxes and operating expenses. Expenses related to unleased properties and non-net-leased properties
include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections, bad debt
expense and legal fees. General portfolio costs include, but are not limited to, insurance, legal, property
inspections, and title search fees. At December 31, 2016, 84 properties were available for lease, as compared
to 71 at December 31, 2015 and 70 at December 31, 2014.
Property expenses were $62.9 million (including $43.1 million in reimbursable expenses) in 2016,
$55.4 million (including $42.0 million in reimbursable expenses) in 2015 and $53.9 million (including
$37.1 million in reimbursable expenses) in 2014. The increase in gross property expenses in 2016 is primarily
attributable to the increased portfolio size, which contributed to higher contractually obligated reimbursements
primarily due to our acquisitions during 2015 and 2016. We also incurred higher gross property expenses as a
result of maintenance and utilities, property taxes, ground rent expenses, legal costs, and bad debt expense on
vacant properties.
Dollars in thousands
Property expenses net of tenant reimbursements
Total revenue(1)
Property expenses net of tenant reimbursements as a
percentage of total revenue
$
2016
19,761
1,060,068
$
2015
13,337
981,270
$
2014
16,753
896,499
1.9 %
1.4 %
1.9 %
(1) Excludes tenant reimbursements revenue, as well as revenue included in discontinued operations and gain on sales.
Income Taxes
Income taxes were $3.3 million in 2016, compared to $3.2 million in 2015 and $3.5 million in 2014. These
amounts are for city and state income and franchise taxes paid by us and our subsidiaries.
Provisions for Impairment
In 2016, we recorded total provisions for impairment of $20.7 million on six properties classified as held for sale,
two properties classified as held for investment, and 31 sold properties. These properties were not previously
classified as held for sale in financial statements issued prior to the date of adoption of ASU 2014-08;
accordingly, these provisions for impairment are included in income from continuing operations on our
consolidated statements of income.
In 2015, we recorded total provisions for impairment of $10.6 million on three properties classified as held for
investment, 11 sold properties, and one property disposed of other than by sale. These properties were not
previously classified as held for sale in financial statements issued prior to the date of adoption of ASU 2014-08;
accordingly, these provisions for impairment are included in income from continuing operations on our
consolidated statements of income.
In 2014, we recorded total provisions for impairment of $4.6 million. Provisions for impairment of $4.1 million
are included in income from continuing operations on 10 sold properties and one property classified as held for
sale. These properties were not previously classified as held for sale in financial statements issued prior to the
date of adoption of Accounting Standards Update (ASU) 2014-08 which amends Topic 205, Presentation of
Financial Statements, and Topic 360, Property, Plant, and Equipment; accordingly, these provisions for
impairment are included in income from continuing operations on our consolidated statements of income.
Additionally, a provision for impairment of $510,000 is included in income from discontinued operations on one
sold property that was classified as held for sale as of December 31, 2013.
78
Gain on Sales of Real Estate
During 2016, we sold 77 properties for $90.5 million, which resulted in a gain of $22.0 million. Additionally,
during 2016 we sold our former corporate headquarters building for $8.6 million.
During 2015, we sold 38 properties for $65.8 million, which resulted in a gain of $22.2 million.
These property sales in 2016 and 2015 do not represent a strategic shift that will have a major effect on our
operations and financial results, and therefore do not require presentation as discontinued operations.
During 2014, we sold 47 properties for $108.1 million, which resulted in a gain of $42.1 million. Only the results
of operations specifically related to the properties classified as held for sale at December 31, 2013 and sold
during 2014 were reclassified as discontinued operations.
At December 31, 2016, we classified real estate with a carrying amount of $26.6 million as held for sale on our
balance sheet. In 2017, we intend to continue our active disposition efforts to further enhance our real estate
portfolio and anticipate approximately $75 to $100 million in yet to be identified property sales for all of
2017. We intend to invest these proceeds into new property acquisitions, if there are attractive opportunities
available. However, we cannot guarantee that we will sell properties during the next 12 months at our estimated
values or be able to invest the property sale proceeds in new properties.
Preferred Stock Dividends
Preferred stock dividends totaled $27.1 million in 2016 and 2015, and $37.1 million in 2014.
Excess of Redemption Value over Carrying Value of Preferred Shares Redeemed
In October 2014, we redeemed all 8,800,000 shares of our 6.75% Monthly Income Class E Cumulative
Redeemable Preferred Stock, or the Class E preferred stock, for $25.00 per share, plus accrued dividends. We
incurred a non-cash charge of $6.0 million. This charge is for the excess of redemption value over the carrying
value of the Class E preferred stock and represents the original issuance cost that was paid in 2006.
Net Income Available to Common Stockholders
Net income available to common stockholders was $288.5 million in 2016, compared to $256.7 million in 2015,
an increase of $31.8 million. On a diluted per common share basis, net income was $1.13 in 2016, as compared
to $1.09 in 2015, an increase of $0.04, or 3.7%. Net income available to common stockholders was
$227.6 million in 2014, or $1.04 on a diluted per common share basis. Net income available to common
stockholders for 2014 includes a non-cash redemption charge of $6.0 million on the shares of Class E preferred
stock that were redeemed in October 2014, which represents $0.03 on a diluted per common share basis. This
charge is for the excess of redemption value over the carrying value of the Class E preferred stock and
represents the original issuance cost that was paid in 2006.
The calculation to determine net income available to common stockholders includes impairments, gains from the
sale of properties and/or fair value adjustments on our interest rate swaps. These items vary from period to
period based on the timing of property sales and the interest rate environment, and can significantly impact net
income available to common stockholders.
Gains from the sale of properties during 2016 were $22.0 million, as compared to gains from the sale of
properties of $22.2 million during 2015, and $42.1 million during 2014.
Discontinued Operations
During the first quarter of 2014, the Financial Accounting Standards Board issued guidance that changed the
definition of discontinued operations by limiting discontinued operations reporting to disposals of components of
an entity that represent strategic shifts that have, or will have, a major effect on an entity’s operations and
financial results. We early adopted the requirements of this accounting pronouncement in the first quarter of
2014. Starting with the first quarter of 2014, the results of operations for all qualifying disposals and properties
classified as held for sale that were not previously reported in discontinued operations in our 2013 Annual
Report on Form 10-K are presented within income from continuing operations on our consolidated statements of
income. For 2014, we recorded income from discontinued operations of $2.8 million, or $0.01 per common
share, basic and diluted.
79
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA, a non-GAAP financial measure, means, for the most recent quarter, 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, and (v) gain on sales of real estate. Our EBITDA may not
be comparable to EBITDA reported by other companies that interpret the definitions of EBITDA differently than
we do. Management believes EBITDA to be a meaningful measure of a REIT’s performance because it is widely
followed by industry analysts, lenders and investors. The ratio of our total debt to EBITDA is also used to
determine vesting of performance share awards granted to our executive officers. EBITDA 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 EBITDA, which is used by management as a measure of leverage, is calculated by annualizing quarterly
EBITDA and then dividing by our total debt per the consolidated balance sheet.
Three months ended December 31,
Dollars in thousands
Net income
Interest
Income taxes
Depreciation and amortization
Impairment loss
Gain on sales of real estate
Discontinued Operations (EBITDA component)
Quarterly EBITDA
Annualized EBITDA (1)
Total Debt (2)
Debt/EBITDA
$
$
$
$
$
2016
92,724
48,935
449
117,752
3,709
(6,696)
-
$
2015
83,111
51,982
721
105,739
1,378
(5,126)
-
256,873
$
237,805
$
2014
78,077
59,120
1,103
96,537
1,450
(24,994)
234
211,527
1,027,492
$
951,220
$
846,108
5,839,605
$
4,820,995
$
4,907,673
5.7
5.1
5.8
(1) We calculate Annualized EBITDA by multiplying the Quarterly EBITDA by four.
(2) Total debt is consistent with its definition under market capitalization as described in “Liquidity and Capital Resources –
Conservative Capital Structure” earlier in this “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (FFO)
In 2016, our FFO increased by $83.0 million, or 12.7%, to $735.4 million, compared to $652.4 million in 2015.
On a diluted per common share basis, FFO was $2.88 in 2016, compared to $2.77 in 2015, an increase of
$0.11, or 4.0%. In 2014, FFO was $562.9 million, or $2.58 on a diluted per common share basis. Our FFO in
2014 included a non-cash redemption charge of $6.0 million on the shares of Class E preferred stock that were
redeemed in October 2014, which represents $0.03 on a diluted per common share basis. This charge is for the
excess of redemption value over the carrying value of the Class E preferred stock and represents the original
issuance cost that was paid in 2006.
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):
80
Net income available to common stockholders
$
288,491 $
256,686
$
227,558
Depreciation and amortization
449,943
409,215
374,661
Depreciation of furniture, fixtures and equipment
(747 )
(811 )
(482 )
2016
2015
2014
Provisions for impairment:
Continuing operations
Discontinued operations
Gain on sales of real estate:
Continuing operations
Discontinued operations
20,664
10,560
-
-
(21,979 )
-
(22,243 )
-
FFO adjustments allocable to noncontrolling interests
(977 )
(970 )
4,126
510
(39,205 )
(2,883 )
(1,396 )
FFO available to common stockholders (1)
$
735,395 $
652,437 $
562,889
FFO allocable to dilutive noncontrolling interests
1,435
-
-
Diluted FFO
$
736,830 $
652,437 $
562,889
FFO per common share, basic and diluted (2)
$
2.88 $
2.77
$
2.58
Distributions paid to common stockholders
$
610,516 $
533,238
$
479,256
FFO available to common stockholders in
excess of distributions paid to common stockholders $
124,879 $
119,199
$
83,633
Weighted average number of common shares
used for computation per share:
Basic
Diluted (2)
255,066,500
235,767,932
218,390,885
255,822,679
235,891,368
218,450,863
(1) FFO available to common stockholders and dilutive noncontrolling interests for 2016 is $736,830 after the
inclusion of $1,435 of FFO allocable to dilutive noncontrolling interests. Noncontrolling interests were antidilutive
for all other periods presented.
(2) The computation of diluted FFO does not assume conversion of securities that are exchangeable for common
shares if the conversion of those securities would increase diluted FFO per share in a given period.
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)
In 2016, our AFFO increased by $89.4 million, or 13.8%, to $736.4 million, compared to $647.0 million in 2015. On a diluted per common
share basis, AFFO was $2.88 in 2016, compared to $2.74 in 2015, an increase of $0.14, or 5.1%. In 2014, AFFO was $561.7 million, or
$2.57 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
81
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):
Net income available to common stockholders
Cumulative adjustments to calculate FFO (1)
FFO available to common stockholders
Amortization of share-based compensation
Amortization of deferred financing costs (2)
Amortization of net mortgage premiums
Gain on early extinguishment of debt
(Gain) loss on interest rate swaps
Leasing costs and commissions
Recurring capital expenditures
Straight-line rent
Amortization of above and below-market leases
Excess of redemption value over carrying value
of preferred share redemptions
Other adjustments (3)
2016
2015
$ 288,491
$ 256,686
$
446,904
395,751
735,395
652,437
12,007
5,352
(3,414 )
-
(1,639 )
(797 )
(679 )
10,391
5,294
(6,978 )
(504 )
3,043
(748 )
(7,606 )
(19,451 )
(16,468 )
9,297
7,861
2014
227,558
335,331
562,889
11,959
4,804
(9,208 )
(3,428 )
1,349
(821 )
(5,210 )
(14,872 )
8,024
-
303
-
306
6,015
160
Total AFFO available to common stockholders (4)
$ 736,374
$ 647,028
$ 561,661
AFFO allocable to dilutive noncontrolling interests
1,455
-
-
Diluted AFFO
$
737,829
$
647,028
$
561,661
AFFO per common share:
Basic
Diluted (5)
$
$
2.89
2.88
$
$
2.74
2.74
$
$
2.57
2.57
Distributions paid to common stockholders
$ 610,516
$ 533,238
$ 479,256
AFFO available to common stockholders
in excess of distributions paid to common stockholders
$ 125,858
$ 113,790
$
82,405
Weighted average number of common shares
used for computation per share:
Basic
Diluted (5)
255,066,500
235,767,932
218,390,885
255,822,679
235,891,368
218,450,863
(1) See reconciling items for FFO presented under "Funds from Operations Available to Common
(2)
Stockholders (FFO)."
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.
Includes adjustments allocable to both non-controlling interests and capital lease obligations.
(3)
(4) AFFO available to common stockholders and dilutive noncontrolling interests for 2016 is
$737,829 after the inclusion of $1,455 of AFFO allocable to dilutive noncontrolling interests.
(5) The computation of diluted AFFO does not assume conversion of securities that are convertible to
common shares if the conversion of those securities would increase diluted AFFO per share in a given
period.
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
82
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.
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.
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 December 31, 2016. This information is presented
to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in millions):
83
Expected Maturity Data
Year of maturity
2017
2018
2019
2020
2021
Thereafter
Totals (1)
$
Fixed rate
debt
268.3
365.3
554.4
82.2
310.1
2,778.4
$ 4,358.7
Fair Value (2)
$ 4,538.8
Weighted average
rate on fixed rate
debt
5.51 %
2.15
6.74
4.99
5.72
4.05
4.46 %
$
$
$
Variable rate
debt
9.9
76.6
1,157.9
250.2
6.8
14.9
1,516.3
1,513.3
Weighted average
rate on variable rate
debt
2.73 %
1.95
1.70
1.72
2.88
2.68
1.73 %
(1) Excludes net premiums recorded on mortgages payable, original issuance discounts recorded on notes
payable and deferred financing costs on mortgages payable, notes payable, and term loans. At
December 31, 2016, the unamortized balance of net premiums on mortgages payable is $6.4 million, the
unamortized balance of original issue discounts on notes payable is $19.8 million, and the balance of
deferred financing costs on mortgages payable is $324,000, on notes payable is $20.8 million, and on term
loans is $873,000.
(2) We base the estimated fair value of the fixed rate senior notes and bonds at December 31, 2016 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 at December 31, 2016 on the relevant
Treasury yield 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
December 31, 2016.
The table incorporates only those exposures that exist as of December 31, 2016. 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. All of our mortgages payable, except six
mortgages totaling $74.0 million at December 31, 2016, including net unamortized discounts, have fixed interest
rates. After factoring in arrangements that limit our exposure to interest rate risk and effectively fix our per
annum interest rates, our variable rate mortgage debt includes four mortgages totaling $38.2 million at
December 31, 2016. 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. Based on our
credit facility balance of $1.12 billion at December 31, 2016, a 1% change in interest rates would change our
interest costs by $11.2 million per year.
84
REALTY INCOME CORPORATION AND SUBSIDIARIES
Selected Financial Data
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
As of or for the years ended December 31,
Total assets (book value)
Cash and cash equivalents
Total debt
Total liabilities
Total equity
Net cash provided by operating activities
Net change in cash and cash equivalents
Total revenue
Income from continuing operations
Income from discontinued operations
Net income
Preferred stock dividends
Excess of redemption value over carrying value
of preferred shares redeemed
Net income available to common stockholders
Cash distributions paid to common stockholders
Basic and diluted net income per common share
Cash distributions paid per common share
Cash distributions declared per common share
Basic weighted average number of common
2016
2015
2014
$
13,152,871 $
9,420
5,839,605
6,365,818
6,787,053
804,045
(30,874 )
1,103,172
316,477
-
316,477
(27,080 )
-
288,491
610,516
1.13
2.391500
2.403000
11,845,379 $
40,294
4,820,995
5,292,046
6,553,333
692,303
36,442
1,023,285
284,855
-
284,855
(27,080 )
-
256,686
533,238
1.09
2.271417
2.279000
10,989,349 $
3,852
4,907,673
5,348,249
5,641,099
627,692
(6,405)
933,505
269,140
2,800
271,940
(37,062)
(6,015)
227,558
479,256
1.04
2.191625
2.192875
2013
2012
9,903,118 $ 5,412,135
5,248
2,852,640
2,999,340
2,412,794
326,469
1,083
484,581
141,895
17,257
159,152
(40,918 )
10,257
4,145,517
4,481,760
5,421,358
518,906
5,009
780,209
180,613
65,670
246,283
(41,930 )
-
203,634
409,222
1.06
2.147459
2.177875
(3,696 )
114,538
236,348
0.86
1.771625
1.777875
shares outstanding
255,066,500
235,767,932
218,390,885
191,754,857
132,817,472
Diluted weighted average number of common
shares outstanding
255,624,250
236,208,390
218,767,885
191,781,622
132,884,933
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
We have had no disagreements with our independent registered public accounting firm on accounting matters or
financial disclosure, nor have we changed accountants in the two most recent fiscal years.
85
REALTY INCOME CORPORATION AND SUBSIDIARIES
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 year ended December 31, 2016, 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.
Management's Report on Internal Control Over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and
directors of the Company; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company's assets that could have a material effect on the financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting
for the Company.
Management has used the framework set forth in the report entitled "Internal Control--Integrated Framework
(2013)" published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the
effectiveness of the Company's internal control over financial reporting. Management has concluded that the
Company's internal control over financial reporting was effective as of the end of the most recent fiscal year.
KPMG LLP has issued an attestation report on the effectiveness of the Company's internal control over financial
reporting.
Submitted on February 23, 2017 by,
John P. Case, Chief Executive Officer
Paul M. Meurer, Executive Vice President, Chief Financial Officer, and Treasurer
86
Changes in Internal Controls
There were no changes to our internal control over financial reporting that occurred during the quarter ended
December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting. As of December 31, 2016, there were no material weaknesses in our internal controls,
and therefore, no corrective actions were taken.
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.
Certifications
John Case, Realty Income’s Chief Executive Officer, certified to the NYSE in 2016, pursuant to Section
303A.12(a) of the NYSE’s Listing Standards, that he was not aware of any violation of the NYSE corporate
governance listing standards by Realty Income. Furthermore, Realty Income filed with the SEC as exhibits to its
Annual Report on Form 10-K for the year ended December 31, 2016, the certifications by John Case and
Paul M. Meurer, Realty Income’s Chief Executive Officer and Chief Financial Officer, respectively, required
under Section 302 of the Sarbanes-Oxley Act.
REALTY INCOME CORPORATION AND SUBSIDIARIES
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
A. Our common stock is traded on the NYSE under the ticker symbol “O.” The following table shows the high
and low sales prices per share for our common stock as reported by the NYSE, and distributions declared per
share of common stock for the periods indicated.
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Price Per Share
of Common Stock
High
Low
$
$
62.89
69.36
72.30
66.75
55.54
52.66
48.88
52.41
$
$
50.47
58.30
63.33
52.72
47.95
44.23
43.15
45.65
Distributions
Declared (1)
$
0.5960000
0.5975000
0.6030000
0.6065000
$
2.4030000
$
0.5675000
0.5690000
0.5705000
0.5720000
$
2.2790000
(1) Common stock cash distributions are declared monthly by us based on financial results for the prior months. At December 31, 2016, a
distribution of $0.2025 per common share had been declared and was paid in January 2017.
B. There were 9,896 registered holders of record of our common stock as of December 31, 2016. We estimate
that our total number of stockholders is over 421,000 when we include both registered and beneficial holders of
our common stock.
87
C. During the fourth quarter of 2016, the following shares of stock were withheld for state and federal payroll
taxes on the vesting of employee stock awards, as permitted under the 2012 Incentive Award Plan of Realty
Income Corporation:
(cid:4) 17 shares of stock, at a weighted average price of $66.93, in October 2016;
(cid:4) 69 shares of stock, at a weighted average price of $57.74, in November 2016; and
(cid:4) 16,922 shares of stock, at a weighted average price of $57.45, in December 2016
Total Return Performance
Realty Income Corporation
Russell 2000
S&P 500
Realty Income Peer Group index*
220
200
180
160
140
120
l
e
u
a
V
x
e
d
n
I
Period Ending
Index
Realty Income Corporation
100
12/31/11
Russell 2000
12/31/12
12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16
207.29
196.45
100.00
12/31/13
100.00
157.90
169.43
179.04
161.95
117.54
161.52
120.32
116.35
12/31/14
12/31/15
12/31/16
Index
Realty Income Corporation
Russell 2000
S&P 500
Realty Income Peer Group index*
12/31/11
100.00
100.00
100.00
100.00
12/31/12 12/31/13
117.54
161.52
153.57
114.99
120.32
116.35
116.00
115.61
12/31/14 12/31/15
179.04
161.95
177.01
155.79
157.90
169.43
174.60
155.98
12/31/16
207.29
196.45
198.18
164.26
Period Ending
* Realty Income Peer Group index consists of 17 companies with an implied market capitalization between $2.3 billion and
$24.3 billion as of December 31, 2016.
88
COMPANY INFORMATION
EXECUTIVE OFFICERS
ADDITIONAL OFFICERS
Benjamin N. Fox
Senior Vice President,
Asset and Portfolio
Management
Robert J. Israel
Senior Vice President,
Research
Dawn Nguyen
Senior Vice President,
Portfolio Management
Sean P. Nugent
Senior Vice President,
Controller
Joel Tomlinson
Senior Vice President,
Acquisitions
Cary J. Wenthur
Senior Vice President,
Acquisitions
Janeen S. Bedard
Vice President,
Administration
Stephen D. Burchett
Vice President,
Senior Legal Counsel
Kyle B. Campbell
Vice President,
Senior Legal Counsel,
Risk Management
Nicole A. Carr
Vice President,
Assistant Controller,
Financial Reporting
Theresa M. Casey
Vice President,
IT Enterprise Software
Elizabeth Cate
Vice President,
Portfolio Management
T.J. Chun
Vice President,
Investments
Jill M. Cossaboom
Vice President,
Assistant Controller,
Systems
Ross Edwards
Vice President,
Portfolio Management
Kristin K. Ferrell
Vice President,
Head of Lease Administration
Shannon C. Jensen
Vice President,
Associate General Counsel
and Assistant Secretary
Shannon Kehle
Vice President,
Human Resources
Scott A. Kohnen
Vice President,
Research
Jenette S. O’Brien
Vice President,
Asset Management
Jonathan Pong
Vice President,
Head of Capital Markets
and Investor Relations
Lori Satterfield
Vice President,
Associate General Counsel,
Portfolio Management
Clint Schmucker
Vice President,
Information Technology
Ashley N. Wells
Vice President,
Research
Contact your financial advisor, or contact Realty Income at:
Telephone: 858-284-5000, Email: ir@realtyincome.com
Copies of Realty Income’s Annual Report on
Form 10-K are available upon written request to:
REALTY INCOME CORPORATION
Attention: Investor Relations
11995 El Camino Real
San Diego, CA 92130
REALTY INCOME 2016 ANNUAL REPORT 89
Top row left to right: Neil Abraham, John Case, Michael Pfeiffer | Bottom row left to right:
Sumit Roy, Paul Meurer
Neil Abraham
Executive Vice President,
Chief Investment Officer
John P. Case
Chief Executive Officer
Sumit Roy
President and Chief Operating
Officer
Paul M. Meurer
Executive Vice President,
Chief Financial Officer
and Treasurer
Michael R. Pfeiffer
Executive Vice President,
General Counsel and
Secretary
DIRECTORS
Top row left to right: Gregory McLaughlin, Kathleen Allen, Ronald Merriman, Priya Cherian Huskins,
Larry Chapman | Bottom row left to right: Michael McKee, John Case, Stephen Sterrett
Michael D. McKee
Non-Executive Chairman,
Executive Chairman,
HCP, Inc.
John P. Case
Chief Executive Officer
Kathleen R. Allen, Ph.D.
Founding Director,
Center for Technology
Commercialization,
University of Southern
California
A. Larry Chapman
Retired, Executive
Vice President,
Head of Commercial Real
Estate, Wells Fargo Bank
Transfer Agent
Wells Fargo Shareowner Services
P.O. Box 64873
St. Paul, MN 55164
For shareholder administration and account
information please visit Wells Fargo’s website
at www.shareowneronline.com, call toll-free
at 1-877-218-2434, or email your questions
to stocktransfer@wellsfargo.com
Priya Cherian Huskins
Partner, Woodruff-Sawyer & Co.
Gregory T. McLaughlin
President, PGA TOUR Champions
Ronald L. Merriman
Retired Vice Chair, KPMG LLP
Stephen E. Sterrett
Retired, Senior Executive
Vice President,
Chief Financial Officer,
Simon Property Group, Inc.
Independent Registered
Public Accounting Firm
KPMG LLP
San Diego, CA
For Additional Corporate Information
Visit the Realty Income corporate
website at www.realtyincome.com
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