Realty Income
Annual Report 2018

Plain-text annual report

POSITIONED PREPARED 2018 ANNUAL REPORTCOMPANY PERFORMANCE COMPOUND AVERAGE ANNUAL TOTAL SHAREHOLDER RETURN SINCE 1994 NYSE LISTING (AS OF DECEMBER 31, 2018) REALTY INCOME DOW JONES INDUSTRIAL AVERAGE EQUITY REIT INDEX NASDAQ COMPOSITE S&P 500 16.3% 10.2% 10.1% 9.3% 9.3% SUPPORTED BY CONSISTENT DIVIDEND GROWTH ANNUALIZED DIVIDENDS AND DIVIDEND INCREASES(1) 4.6% COMPOUND AVERAGE ANNUAL GROWTH RATE 85 CONSECUTIVE QUARTERLY INCREASES 99 DIVIDEND INCREASES SINCE 1994 NYSE LISTING $2.65 $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 17 18 (1) Annualized dividend amount reflects the December declared dividend rate per share multiplied by 12. All information as of December 31, 2018. TABLE OF CONTENTS HISTORICAL FINANCIAL PERFORMANCE LETTER TO SHAREHOLDERS WELL-POSITIONED PORTFOLIO DISCIPLINED INVESTMENT PROCESS CONSERVATIVE CAPITAL STRUCTURE 2 4 14 16 18 POSITIONED FOR DEPENDABLE MONTHLY DIVIDENDS 20 CORPORATE RESPONSIBILITY SELECT FINANCIAL DATA COMPANY INFORMATION 22 24 29 2018 PERFORMANCE HIGHLIGHTS 4.2% AFFO PER SHARE GROWTH 4.1% DIVIDEND PER SHARE GROWTH 15.9% TOTAL SHAREHOLDER RETURN $1.28 BILLION RENTAL REVENUE $1.80 BILLION INVESTMENT VOLUME $1.89 BILLION ATTRACTIVELY PRICED CAPITAL RAISED 98.6% PORTFOLIO OCCUPANCY 103.3% RECAPTURE RATE ON EXPIRING LEASES R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 1 HISTORICAL FINANCIAL PERFORMANCE (UNAUDITED; DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) For the Years Ended December 31, 2018 2017 2016 2015 2014 2013 2012 2011 2010 Total revenue(1) $1,281 $1,170 $1,060 $980 $895 $760 $484 $422 $346 Net income available to common stockholders $364 $302 $288 $257 $228 $204 $115 $133 $107 Funds from operations (“FFO”)(2) $903 $773 $735 $652 $563 $462 $269 $249 $194 Adjusted funds from operations (“AFFO”)(2) $925 $839 $736 $647 $562 $463 $274 $253 $197 Dividends paid to common stockholders $762 $689 $611 $533 $479 $409 $236 $219 $183 AT YEAR END Real estate at cost, before accumulated depreciation(3) $16,541 $15,016 $13,864 $12,297 $11,154 $9,899 $5,921 $4,972 $4,113 Number of properties 5,797 5,172 4,944 4,538 4,327 3,896 3,013 2,634 2,496 Gross leasable square feet (millions) Properties acquired(4) 93 764 90 303 83 505 76 286 71 506 63 974 38 423 27 164 21 186 Cost of properties acquired(4) $1,797 $1,519 $1,859 $1,259 $1,402 $4,670 $1,165 $1,016 $714 Property dispositions Net proceeds from property dispositions Number of commercial tenants(5) Number of industries Number of states Portfolio occupancy rate 128 59 $142 $167 262 249 48 49 47 49 77 $91 248 47 49 38 $66 240 47 49 46 75 $107 $134 234 205 47 49 47 49 44 $51 150 44 49 26 $24 136 38 49 28 $27 122 32 49 98.6% 98.4% 98.3% 98.4% 98.4% 98.2% 97.2% 96.7% 96.6% Remaining weighted average lease term (years) 9.2 9.5 9.8 10.0 10.2 10.8 11.0 11.3 11.4 PER COMMON SHARE DATA(6) Net income (diluted) $1.26 $1.10 $1.13 $1.09 $1.04 $1.06 $0.86 $1.05 $1.01 Funds from operations (“FFO”)(2) $3.12 $2.82 $2.88 $2.77 $2.58 $2.41 $2.02 $1.98 $1.83 Adjusted funds from operations (“AFFO”)(2) $3.19 $3.06 $2.88 $2.74 $2.57 $2.41 $2.06 $2.01 $1.86 Dividends paid $2.631 $2.527 $2.392 $2.271 $2.192 $2.147 $1.772 $1.737 $1.722 Annualized dividend amount(7) $2.65 $2.55 $2.43 $2.29 $2.20 $2.19 $1.82 $1.75 $1.73 Common shares outstanding (millions) 304 284 260 250 225 207 133 133 118 INVESTMENT RESULTS Closing price on December 31, Dividend yield(8)(9) $63.04 $57.02 $57.48 $51.63 $47.71 $37.33 $40.21 $34.96 $34.20 4.2% 4.5% 4.6% 4.4% 5.9% 5.3% 5.1% 5.1% 6.6% Total return to stockholders(10) 15.2% 3.6% 16.0% 13.0% 33.7% (1.8%) 20.1% 7.3% 38.6% (1) For years prior to 2016, total revenue includes amounts reclassified to income from discontinued operations, but excludes gain on sales, tenant reimbursements, and revenue from Crest Net Lease, a subsidiary of Realty Income. Consistent with Realty Income’s financial reporting methodology changes, total revenue for 2016 and later includes revenue from Crest Net Lease (2) Refer to Management’s Discussion and Analysis for FFO and AFFO definition and reconciliation to net income available to common stockholders in the 2018 Form 10-K. For 2012 and 2013, FFO has been adjusted to add back American Realty Capital Trust merger-related costs (3) Does not include properties held for sale (4) Includes new properties acquired by Realty Income and Crest Net Lease and properties under development, redevelopment, or expansion (5) Commercial tenants are defined as retailers with over 50 locations and non-retailers with over $500 million in annual revenues 2 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 $329 $331 $296 $241 $198 $178 $150 $138 $121 $116 $105 $107 $108 $116 $99 $90 $90 $77 $191 $186 $190 $156 $130 $121 $105 $193 $192 $193 $159 $131 $126 $107 $178 $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 $3,439 $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 2,339 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 16 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 $58 $190 $534 $770 $487 $215 $372 $139 $156 $99 $181 $193 $142 $56 $65 25 $20 118 30 49 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 96.8% 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% 11.2 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 $1.03 $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 $1.84 $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 $1.86 $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 $1.707 $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 $1.72 $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 $0.90 104 104 101 101 84 79 76 70 66 53 54 54 51 46 46 39 $25.91 $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 7.4% 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% 19.3% (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) All share and per share amounts reflect the 2-for-1 stock split that occurred on December 31, 2004 (7) Annualized dividend amount reflects the December declared dividend rate per share multiplied by 12 (8) Dividend yield was calculated by dividing the dividend paid per share, during the year, by the closing share price on December 31 or the last trading day of the preceding year. Dividend yield excludes special dividends (9) The 1994 dividend yield is based on the annualized dividends for the period from August 15, 1994 (the date of the consolidation of the predecessors to the Company) to December 31, 1994. The 1994 total return is based on the price change from the opening on October 18, 1994 (the Company’s first day of trading) to December 31, 1994 plus the annualized dividend yield (10) Total return calculated as the difference between the closing stock price as of period end less the closing stock price as of previous period, plus dividends paid in period, divided by closing stock price as of end of previous period. Does not include reinvestment of dividends R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 3 DEAR FELLOW SHAREHOLDERS, I am humbled and privileged to write to you for the first time as Realty Income’s Chief Executive Officer and am proud of our team’s many accomplishments in 2018. We are confident that we have never been better positioned and prepared to drive favorable risk-adjusted returns during the company’s next chapter. This year was transformative in many ways. our credit rating to ‘A-,’ making us one of only We remain committed to the quality of our a handful of REITs with two ‘A’ credit ratings. real estate portfolio, the safety of our balance We realized the benefits of our credit rating sheet, and providing our shareholders with upgrade in 2018, as we recast and expanded dependable monthly dividends that increase our unsecured credit facility to $3.25 billion over time. The breadth, depth, and experience at favorable pricing. These milestones, in of our team are essential to the realization concurrence with robust investment activities, of our mission and execution of our strategy. strong portfolio metrics, and a conservative I have witnessed firsthand the strength of balance sheet, position the company well our team throughout my eight-year tenure for 2019 and beyond. with the company, serving most recently as President and Chief Operating Officer. I would like to thank our Board of Directors for providing me with the opportunity to lead our well-established team, and I look forward to continuing to work with the Board to execute and evolve the company’s strategy. I would also like to take this opportunity to thank John Case, our former CEO, for his contributions toward the success of the company. Our team looks forward to continuing to build upon our positive momentum. We were pleased to welcome Gerardo Lopez and Reginald Gilyard to our Board of Directors in 2018. Gerry and Reggie together bring over 50 years of leadership experience in retail, real estate and consulting, and their skills and expertise have further enhanced the existing 2018 RESULTS Shareholder Returns Our focus on providing dependable monthly dividends that increase over time helps drive total shareholder returns. In 2018, the shareholders who owned our common stock for the full calendar year realized a total return of 15.9%, which captures changes to our stock price as well as the dividends paid throughout the year, assuming reinvestment of dividends. These results compared favorably to broader market indices, including the MSCI US REIT Index and S&P 500, which recorded negative 2018 total shareholder returns of 4.6% and 4.4%, respectively. Accordingly, we were pleased that our 2018 total shareholder return was the highest among S&P 500 REITs and ranked in the 96th percentile among REITs in the capabilities of our Board. During the year, S&P MSCI US REIT Index. Global, a major credit rating agency, upgraded 4 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T “ We are One Team, and the strength of our team fundamentally enables us to successfully execute our mission of maintaining and growing a real estate portfolio that supports stability and growth in earnings and dividends Sumit Roy President & Chief Executive Officer ” R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 5 REALTY INCOME PERFORMANCE VS. MAJOR STOCK INDICES Realty Income Equity REIT Index(1) Dow Jones Industrial Average S&P 500 NASDAQ Composite DIVIDEND YIELD TOTAL RETURN (2) DIVIDE ND YIELD TOTA L R ET URN ( 3) D I VI D EN D YI E LD TOTA L RE TU RN ( 3) D I VI D EN D YI E LD TOTA L RE TU RN ( 3) D I VI D EN D YI E LD TOTAL RETURN (4) 10/18–12/31 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 10.5% 8.3% 10.8% 42.0% 7.7% 7.4% 0.0% 15.3% 2.9% 2.4% (1.6%) 36.9% 2.9% 2.3% (1.2%) 37.6% 0.5% 0.6% (1.7%) 39.9% 7.9% 15.4% 6.1% 35.3% 2.2% 28.9% 2.0% 23.0% 0.2% 22.7% 7.5% 14.5% 5.5% 20.3% 1.8% 24.9% 1.6% 33.4% 0.5% 21.6% 8.2% 5.5% 7.5% (17.5%) 1.7% 18.1% 1.3% 28.6% 0.3% 39.6% 10.5% (8.7%) 8.7% (4.6%) 1.3% 27.2% 1.1% 21.0% 0.2% 85.6% 8.9% 31.2% 7.5% 26.4% 1.5% (4.7%) 1.2% (9.1%) 0.3% (39.3%) 7.8% 27.2% 7.1% 13.9% 1.9% (5.5%) 1.4% (11.9%) 0.3% (21.1%) 6.7% 26.9% 7.1% 3.8% 2.6% (15.0%) 1.9% (22.1%) 0.5% (31.5%) 6.0% 21.0% 5.5% 37.1% 2.3% 28.3% 1.8% 28.7% 0.6% 50.0% 5.2% 32.7% 4.7% 31.6% 2.2% 5.6% 1.8% 10.9% 0.6% 8.6% 6.5% (9.2%) 4.6% 12.2% 2.6% 1.7% 1.9% 4.9% 0.9% 1.4% 5.5% 34.8% 3.7% 35.1% 2.5% 19.0% 1.9% 15.8% 0.8% 9.5% 6.1% 3.2% 4.9% (15.7%) 2.7% 8.8% 2.1% 5.5% 0.8% 9.8% 7.3% (8.2%) 7.6% (37.7%) 3.6% (31.8%) 3.2% (37.0%) 1.3% (40.5%) 6.6% 19.3% 3.7% 28.0% 2.6% 22.6% 2.0% 26.5% 1.0% 43.9% 5.1% 38.6% 3.5% 27.9% 2.6% 14.0% 1.9% 15.1% 1.2% 16.9% 5.0% 7.3% 3.8% 8.3% 2.8% 8.3% 2.3% 2.1% 1.3% (1.8%) 4.5% 20.1% 3.5% 19.7% 3.0% 10.2% 2.5% 16.0% 2.6% 15.9% 5.8% (1.8%) 3.9% 2.9% 2.3% 29.6% 2.0% 32.4% 1.4% 38.3% 4.6% 33.7% 3.6% 28.0% 2.3% 10.0% 2.0% 13.7% 1.3% 13.4% 4.4% 13.0% 3.9% 2.8% 2.6% 0.2% 2.2% 1.4% 1.4% 5.7% 4.2% 16.0% 4.0% 8.6% 2.5% 16.5% 2.1% 12.0% 1.4% 7.5% 4.5% 3.6% 3.9% 8.7% 2.2% 28.1% 1.9% 21.8% 1.1% 28.2% 4.2% 15.2% 4.4% (4.0%) 2.6% (3.5%) 2.2% (4.4%) 1.4% (3.9%) COMPOUND AVERAGE ANNUAL TOTAL RETURN(5) 16.3% 10.1% 10.2% 9.3% 9.3% Note: All of these dividend yields are calculated as annualized dividends based on the last dividend paid in applicable time period divided by the closing price as of period end. Dividend yield sources: NAREIT website and Bloomberg, except for the 1994 NASDAQ dividend yield which was sourced from Datastream / Thomson Financial. (1) FTSE NAREIT US Equity REIT Index, as per NAREIT website (2) Calculated as the difference between the closing stock price as of period end less the closing stock price as of previous period, plus dividends paid in period, divided by closing stock price as of end of previous period. Does not include reinvestment of dividends for the annual percentages (3) Includes reinvestment of dividends. Source: NAREIT website and Factset (4) Price only index, does not include dividends as NASDAQ did not report total return metrics for the entirety of the measurement period. Source: Factset (5) All of these Compound Average Annual Total Return rates are calculated in the same manner: from Realty Income’s NYSE listing on October 18, 1994 through December 31, 2018, and (except for NASDAQ) assuming reinvestment of dividends. Past performance does not guarantee future performance. Realty Income presents this data for informational purposes only and makes no representation about its future performance or how it will compare in performance to other indices in the future 6 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T We always like to remind our shareholders that our company’s total return results do not always move in parallel with our operating performance in any given year. Other factors beyond our operating performance can impact the price of our shares including, but not limited to, macroeconomic events, interest rate trends, and conditions in the broader stock market. Investment Activity Conservatively underwritten investments position our real estate portfolio to generate consistent earnings regardless of macroeconomic conditions. During 2018, we invested $1.8 billion in high-quality real estate, acquiring only 5.6% of the $32 billion in potential real estate transactions generated and reviewed. The average initial yield of our acquisitions was 6.4%, which resulted in investment spreads relative to our first-year nominal weighted average cost of capital greater than our historical averages. These investment spreads reflect our favorable funding costs, as well as the quality of the TOTAL REVENUE(1) (DOLLARS IN MILLIONS) $1,281 $49 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 (1) See page 2, footnote 1, for the definition of total revenue R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 7 properties acquired during the year. The 764 since 2006. During the year we re-leased 228 properties acquired in 2018 are located in 39 properties to existing or new tenants, achieving states and are leased to tenants that operate in rental rates that were approximately 103.3% of 21 different industries. Retail acquisitions and the expiring rent. development were our principal investment type and comprised 96% of total 2018 investment activity as a percentage of rental revenue, with the balance represented by industrial properties. Asset Management and Real Estate Operations The company continues to generate We believe that anticipating future risks in our portfolio and divesting of certain assets also help drive favorable long-term value. In 2018, we sold 127 properties for net proceeds of $139.5 million and realized an unlevered internal rate of return of 8.1% on these investments. By selectively selling non- strategic assets at attractive returns, we can additional portfolio value through active redeploy the proceeds into properties that asset management. By proactively addressing better meet our investment strategy. Active operational risks and executing on organic capital recycling through the sale of non-core growth opportunities, we position the portfolio properties enables us to maintain the quality for consistent performance through all of our portfolio and supports the stability and economic conditions. We believe that high growth in earnings and dividends. occupancy, positive re-leasing results, and the sale of non-strategic assets at attractive returns are essential to maintaining healthy internal earnings growth. At year-end 2018, our portfolio of 5,797 properties was 98.6% occupied, our highest year-end occupancy rate Capital Markets Given the extensive capital requirements associated with our business, efficient capital raising and prudent balance sheet management are essential to the company’s success. As previously mentioned, during 2018 we received PORTFOLIO OCCUPANCY(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 % 4 . 8 9 % 6 8 9 . 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 (1) Calculated at the end of each year by the number of properties 8 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T EARNINGS AND DIVIDENDS COMPOUND AVERAGE ANNUAL GROWTH SINCE 1994 NYSE LISTING 5.1% AFFO PER SHARE GROWTH 4.6% DIVIDEND PER SHARE GROWTH $3.19 2018 AFFO PER SHARE $2.65 2018 ANNUALIZED DIVIDEND PER SHARE 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 our second ‘A’ credit rating, and we recast and earnings and dividend growth. In 2018, we expanded our credit facility to $3.25 billion, grew our AFFO per share, or the cash earnings which provides ample liquidity and flexibility available to pay dividends to our shareholders, to grow our portfolio while maintaining a by 4.2% to $3.19. This allowed us to increase conservative leverage profile. the dividend five times throughout the year, We ended 2018 with a Debt-to-Adjusted EBITDAre ratio of 5.3x and a fixed charge coverage ratio of 4.4x. We continue to be conservatively capitalized with 74.6% of our total market capitalization represented by common equity. During the year, we raised increasing dividends paid in 2018 by 4.1% over the prior year. The continued strength of our operations allowed us to increase the dividend while achieving an AFFO payout ratio of 82.5% in 2018, providing a comfortable margin of safety for our shareholders. over $1.1 billion in common equity capital at an average price of approximately $59 per share OUR TEAM Realty Income’s most valuable assets are and issued $750 million of fixed-rate unsecured its people, who perennially position our debt at favorable pricing. At year-end, the company to excel and drive the company’s company’s outstanding notes and bonds had a strong corporate culture. Our team consists weighted average remaining term to maturity of 165 dedicated team members across 11 of 8.7 years and a weighted average yield of departments whose talent and commitment 4.0%. We continue to manage our balance drive the company’s success. We are proud to sheet in a conservative manner, and our capital have a team that is world-class across every activity throughout 2018 has positioned us well aspect of our business; and as CEO, I intend to to effectively pursue additional growth moving maintain close connectivity with each function. forward. Earnings and Dividends The culmination of our disciplined execution across all areas of our business is healthy Our collective achievements are made possible through the guidance of the independent members of our Board of Directors, who provide deep experience, diverse perspectives, and strong engagement. R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 9 One of our primary advantages as a company to operating our business in a socially and is the scalability of our business model. environmentally responsible manner, and we Accordingly, our goal is always to maximize are constantly evaluating new initiatives to our operational efficiency by ensuring that we further these efforts. An important component have the right people, processes, and systems of our social initiatives is continuing to promote in place. In anticipation of continued scalability a culture of communication and collaboration and growth, we completed the implementation among our entire team through emphasizing of our new ERP software system this diversity, inclusion, and employee development. year, which has advanced and developed Additional information on our social and efficiencies. In 2018, our normalized general environmental initiatives can be found on pages and administrative expenses as a percentage 22–23 of this report. of revenue were the lowest among our peers in the net lease REIT sector. The efficiency and scalability of our business are further illustrated through our AFFO per employee, which has increased 124% since 2010 from $2.5 million to $5.6 million, while maintaining a conservative balance sheet. MACROECONOMIC ENVIRONMENT AND OUR POSITION Our business is designed to deliver favorable risk-adjusted returns in a variety of economic environments. Although we believe our portfolio and investment strategies are well- We have maintained a significant presence in positioned for favorable operating performance San Diego County since our founding in 1969 across any economic backdrop, our team and believe it is important for us to continue diligently monitors and analyzes to positively impact our local community as a macroeconomic factors and their potential responsible corporate citizen. As part of our impact on our business. Considerations that Corporate Responsibility Program, we devoted affect market sentiment, among other factors, 810 employee volunteer hours and issued include interest rate trends, the geopolitical corporate donations to various charitable climate, global trade, and evolving consumer organizations. We also remain dedicated behavior. As macroeconomic uncertainty 1 0 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T increased in 2018, we believe we benefited from sheets of top financial institutions appear to the “flight-to-quality” trade as investors rotated be well-capitalized, and enhanced banking their capital into predictable business models regulations appear to have mitigated the that carry lower inherent cash flow volatility. credit risks that contributed to the 2008 We believe the premium the market has mortgage crisis. generally placed on our stock throughout these periods of uncertainty is a testament to our core operating principles, which demonstrate the significant value we place on being prudent stewards of your capital. The defensive nature of our business has been illustrated through multiple economic cycles, as we were one of only a handful of REITs that continued raising the dividend throughout the Great Recession. At year-end 2018, we had paid Although we manage our business to be 581 consecutive monthly dividends, and we prepared for an economic downturn, we do not remain a proud member of the S&P High Yield subscribe to the notion that a severe recession Dividend Aristocrats® index for having raised is imminent. Rather, we expect stable but slow our dividend every year for 24 consecutive economic growth and modest inflation to keep years. While we are pleased with our current interest rates mostly range-bound throughout positioning, we seek to avoid complacency by 2019. Our base-case economic forecast continuing to refine both our portfolio and our contemplates a deceleration of U.S. GDP overall strategies, including investments, to growth as the tailwinds from the government’s grow and further enhance the stability of our fiscal stimulus package in 2018 fade. As of cash flows. At year-end 2018, over half of our this writing, the U.S. trade war with China, rental revenue was generated from tenants with tepid global growth, and slowing gains in the an investment-grade credit rating. Additionally, domestic housing market all present ongoing 95% of our retail rental revenue was generated challenges to economic growth in 2019, which from tenants with a service, non-discretionary, could impact consumer sentiment. However, we and/or low price point component to their believe that the systemic risks that materialized business. We believe these characteristics allow during the prior recession are largely absent our tenants to operate effectively in a variety from current economic conditions. Contrary of economic environments and to compete to the prior cycle, consumer balance sheets effectively with e-commerce. generally appear to be healthy, the balance R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 1 1 OUTLOOK We are excited about the current trajectory of large-scale sale-leaseback transactions without creating tenant or industry concentration the company. As we enter 2019, we are well- issues. Our cost of capital, developed through positioned with a conservatively capitalized our track record of performance and loyal balance sheet with strong liquidity, a propitious shareholder support, affords us the ability investment pipeline of opportunities that meet to pursue high-quality transactions while our investment parameters, and an experienced generating meaningful earnings growth. Finally, team prepared to execute on opportunistic our relationships provide the company with growth initiatives. Though we believe we have distinct investment opportunities unavailable to sufficient runway to continue growing our competitors in our industry. These advantages business through our current verticals, we also are evidenced through our high-quality believe expanding the addressable market will investment activity in 2018, as we were able be essential to the long-term success of the to complete approximately $870 million in company. Several of our inherent advantages as a company include our size and scale, cost of capital, and relationships. Our size and scale provide us both significant access to well- priced capital as well as the ability to execute sale-leaseback transactions with 7-Eleven, a leading investment-grade rated convenience store operator, at pricing that helped drive meaningful earnings accretion. We intend to continue to capitalize on these competitive advantages to seek to create long-term value for shareholders and minimize risk. 1 2 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T CONCLUSION Our team has the fundamental responsibility cannot guarantee that we will be as successful in 2019 as we have been in the past. Therefore, to ensure the company is positioned and we always remind our shareholders how prepared to create shareholder value, as well important it is to rely on Realty Income for only as to continue providing shareholders with a portion of their income needs. dependable monthly dividends that grow over time. While the strategy and tactics may evolve, the commitment to our mission is steadfast. We are proud that 2019 marks the 50th anniversary of our company’s founding and the 25th anniversary of our public listing, and we remain cognizant of the values which have dictated our prior successes. We are pleased to have successfully executed on all aspects of our strategy in 2018, and we remain committed to managing the business with a long-term and disciplined approach as I am truly honored to lead this very storied company through the next chapter of its evolution, and we will be sure to keep you apprised of our progress throughout the year. Thank you for your continued support. Sincerely, we enter 2019 and beyond. While we remain Sumit Roy confident in our ability to operate the company President & in a manner that supports our mission, we Chief Executive Officer COMPARISON OF $100 INVESTED IN REALTY INCOME IN 1994 VS. MAJOR STOCK INDICES REALTY INCOME DOW JONES INDUSTRIAL AVERAGE EQUITY REIT INDEX NASDAQ COMPOSITE S&P 500 $3,119 $1,058 $1,032 $881 $867 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 1 3 WELL-POSITIONED PORTFOLIO Our Asset Management and Real Estate Operations team generates long-term value in the portfolio through active asset management, driving internal growth and positioning the portfolio for stability through any economic environment. Benjamin Fox Executive Vice President, Asset Management & Real Estate Operations ” “ Our real estate portfolio of 5,797 properties primarily consists of freestanding, single-tenant commercial properties that are diversified by tenant, industry, geography, and to a certain extent, property type. At the end of 2018, our properties were leased to 262 commercial tenants operating across 48 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. Our tenant base remains healthy with approximately 51% of the revenue generated from properties leased to tenants with investment-grade credit ratings. Maintaining a diversified portfolio of quality real estate leased to strong tenants helps ensure the stability of our revenue that supports the payment of monthly dividends. PROPERTY TYPE DIVERSIFICATION Property Type Number of Properties % of Revenue(1) Retail Industrial Office Agriculture 5,623 117 42 15 81.7% 12.1% 4.2% 2.0% (1) Based on rental revenue for the quarter ended 12/31/18 The strength of our portfolio is further enhanced by the experience of our Asset Management and Real Estate Operations team in maximizing the revenue generated from our properties. As one of the most seasoned net lease companies, we have re-leased or sold over 2,800 properties with expiring leases throughout our history as a public company. This is unprecedented in our industry and, as a result, we have achieved stable occupancy that has never been below 96% at year-end while achieving a long-term average rent recapture rate above 100% on re-leasing activity. 1 4 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T GEOGRAPHIC DIVERSIFICATION <1% 1–2% 2–3% 3–4% 4–5% 5–6% 6–12% AS A % OF REVENUE(1) TEXAS 11.5% CALIFORNIA 8.8% ILLINOIS 6.0% FLORIDA 5.7% OHIO 5.3% NEW YORK 4.8% (1) Based on rental revenue for the quarter ended 12/31/18 INDUSTRY DIVERSIFICATION % of Revenue(1) Industry 12.4% Convenience Stores 9.8% 7.4% 7.2% 6.2% 5.4% 4.9% 4.8% 3.4% 2.9% Drug Stores Dollar Stores Health & Fitness Restaurants - Quick Service Theaters Grocery Stores Transportation Services Restaurants - Casual Dining Home Improvement (1) Based on rental revenue for the quarter ended 12/31/18 ALASKA AND PUERTO RICO NOT TO SCALE TENANT DIVERSIFICATION % of Revenue(1) Number of Leases 6.3% 5.5% 4.8% 3.9% 3.7% 3.4% 3.3% 2.8% 2.3% 2.0% 1.9% 1.9% 1.9% 1.7% 1.6% 1.6% 1.4% 1.4% 1.2% 1.2% 219 398 42 576 54 468 32 51 297 15 17 85 11 24 210 132 159 17 51 15 Tenant Walgreens* 7-Eleven* FedEx* Dollar General* LA Fitness Dollar Tree / Family Dollar* AMC Theatres Walmart / Sam’s Club* Circle K (Couche-Tard)* BJ’s Wholesale Clubs Treasury Wine Estates CVS Pharmacy* Life Time Fitness Regal Cinemas GPM Investments / Fas Mart Super America (Marathon)* TBC Corp (Sumitomo)* Kroger* Rite Aid Home Depot* (1) Based on annualized rental revenue as of 12/31/18 *Investment-grade rated R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 1 5 DISCIPLINED INVESTMENT PROCESS In addition to the real estate, we also carefully review the characteristics, credit, and overall 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 the tenant’s highest-performing locations. Our team stays abreast of trends in the various industries and frequently meets with management representatives within these industries to better understand our tenants’ operations. Our Acquisitions Department establishes and maintains strong relationships with tenants, property owners, developers, brokers, and advisors. Our stringent underwriting guidelines consistently position us to achieve favorable risk-adjusted investment returns. Mark Hagan Executive Vice President, Chief Investment Officer ” We focus on acquiring freestanding, single- tenant commercial properties leased to high- quality tenants under long-term, net lease agreements, typically in excess of 10 years. During 2018, we reviewed approximately $32 billion of investment opportunities that generally satisfied one or more of these criteria. These opportunities underwent a rigorous, multi-step internal underwriting and legal diligence process, resulting in the selection of $1.8 billion of real estate investments completed during the year. The process begins with a review of the real estate. We target properties located in significant markets or strategic locations critical to generating revenue for the tenant. We examine the property-level attributes such as access and signage, demographic trends relative to the property’s intended use, potential alternative uses, and overall viability of the market. “ 1 6 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T “ The information gathered on the real estate, tenant, and industry determines the appropriate price for an investment. We ensure the real estate is appropriately priced relative to replacement cost and leased at rental rates that are generally in line with market rent in order to support strong long-term investment returns generated by each asset. Our Investment Committee collectively reviews these characteristics and metrics to make investment decisions. This rigorous selection process maintains the quality of our investment portfolio and supports the stability of our cash flow over time. Our Research and Strategy Department contributes to the stability and growth in earnings and dividends through ensuring rigorous underwriting standards are met, completing extensive industry and tenant research, and exploring strategic growth initiatives. ” Neil Abraham Executive Vice President, Chief Strategy Officer ACQUISITIONS SELECTIVITY (DOLLARS IN BILLIONS) Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 Amount Sourced Amount Acquired Selectivity(1) $5.7 $13.3 $17.0 $39.4 $24.3 $31.7 $28.5 $30.4 $32.1 $0.71 $1.02 $1.16 $4.67 $1.40 $1.26 $1.86 $1.52 $1.80 12% 8% 7% 12% 6% 4% 7% 5% 6% (1) Selectivity is calculated as the amount of acquisitions acquired divided by the amount of acquisitions sourced R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 1 7 CONSERVATIVE CAPITAL STRUCTURE CONSERVATIVE CAPITAL STRUCTURE AT 12/31/18 74.6% COMMON EQUITY 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 2018, our total market capitalization was $25.7 billion, of which $19.2 billion, or 74.6%, was common equity. When we use debt to fund our growth, we structure it in a conservative manner. Currently, 100% of our outstanding bonds are fixed rate and unsecured with a weighted average term to maturity of 8.7 years. As of December 31, 2018, our Debt-to-Adjusted EBITDAre ratio was a healthy 5.3x. We maintain a $3.25 billion unsecured credit facility, 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 favorable to us. Our investment-grade credit ratings of A3/A-/BBB+ (Moody’s/S&P/ Fitch) continue to provide us with a low cost of public unsecured debt. 1 8 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T DEBT25.4%“ We have always believed a conservative capital structure protects us during difficult economic climates, yet also positions us well to fund growth opportunities when they arise. Paul Meurer Executive Vice President, Chief Financial Officer and Treasurer ” R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 1 9 POSITIONED FOR DEPENDABLE MONTHLY DIVIDENDS “ The culmination of the team’s collective discipline and conservatism is reflected by our dividend track record. We are proud that our predictable cash flow stream has made our stock a core holding in yield-oriented investor portfolios for 25 years. Jonathan Pong Senior Vice President, Capital Markets and Investor Relations ” 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 positioning and preparing our portfolio and balance sheet to continue generating predictable cash flow. 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 4.6% 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. 2 0 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T CONSECUTIVE MONTHLY DIVIDENDS DECLARED BILLION IN DIVIDENDS PAID 581 $5.8 99 0 DIVIDEND REDUCTIONS DIVIDEND INCREASES SINCE 1994 NYSE LISTING DATA AS OF 12/31/18 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 2 1 CORPORATE RESPONSIBILITY Our company is committed to being socially and environmentally responsible, and to conducting our business according to the highest ethical standards. Our employees are our most important asset and having a good corporate culture drives the decisions we make. 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. We play an active role in supporting the community through civic involvement with charitable organizations and through corporate donations. In addition to having our employees participate in a service day with San Diego Habitat for Humanity, we make a financial commitment to Habitat and incentivize our employees to make both financial and time commitments to charitable causes through our corporate donation matching program. Managing our business with an emphasis on social responsibility is essential to our continued success. Our values reflect a commitment to maintaining a diverse workforce and encouraging a culture of inclusion, collaboration, transparency, humility, integrity, 2 2 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T “ Realty Income is committed to our company culture and social responsibility. We are dedicated to increased community volunteerism as one of many ways to give back to our community and promote our core values. Shannon Kehle Senior Vice President, Human Resources ” and respect. Our commitment to these values helps ensure Realty Income remains a safe, welcoming, and productive workplace. In addition, we focus on environmentally conscious and sustainable practices 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, adopting an electronic approval system, carpooling to our headquarters, and recycling disposable waste. Our employees created a Green Team that encourages environmentally smart choices at our headquarters to further reduce our environ- mental impact as a company and to support sustainability initiatives in our surrounding community. Given the net lease nature of our leases, we also encourage our tenants to institute environmentally conscious practices in their day-to-day operations at our properties. “ We manage and operate the company with an emphasis on environmental responsibility, particularly as it pertains to our day-to-day activities at our headquarters. We want to be a leader in the net lease sector relating to sustainability and environmental considerations. Mike Pfeiffer Executive Vice President, Chief Administrative Officer, General Counsel and Secretary ” 2018 ACHIEVEMENTS DONATED TO 44 CHARITIES CONTRIBUTED 810+ VOLUNTEER WORK HOURS RECYCLED 28,500 POUNDS OF PAPER R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 2 3 REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets At December 31, 2018 and 2017 (Dollars in thousands, except 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 Lease intangible assets, net Goodwill Other assets, net Total assets LIABILITIES AND EQUITY Distributions payable Accounts payable and accrued expenses 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: Common stock and paid in capital, par value $0.01 per share, 370,100,000 shares authorized, 303,742,090 shares issued and outstanding as of December 31, 2018 and 284,213,685 shares issued and outstanding as of December 31, 2017 Distributions in excess of net income Accumulated other comprehensive loss Total stockholders’ equity Noncontrolling interests Total equity Total liabilities and equity 2018 2017 $ 4,682,660 $ 4,080,400 11,858,806 16,541,466 10,936,069 15,016,469 (2,714,534) (2,346,644) 13,826,932 12,669,825 16,585 6,674 13,843,517 12,676,499 10,387 144,991 6,898 119,533 1,199,597 1,194,930 14,630 47,361 14,970 45,336 $ 15,260,483 $ 14,058,166 $ 67,789 $ 60,799 133,765 310,866 127,109 252,000 568,610 302,569 5,376,797 7,139,505 109,523 268,796 116,869 110,000 445,286 325,941 5,230,244 6,667,458 10,754,495 9,624,264 (2,657,655) (2,252,763) (8,098) — 8,088,742 7,371,501 32,236 19,207 8,120,978 7,390,708 $15,260,483 $ 14,058,166 The accompanying notes to consolidated financial statements are an integral part of these audited statements and may be found in the company’s 2018 Form 10-K. 24 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income Years ended December 31, 2018, 2017 and 2016 (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 Loss on extinguishment of debt Net income Net income attributable to noncontrolling interests 2018 2017 2016 $ 1,274,596 $ 1,166,224 $ 1,057,413 46,950 6,292 46,082 3,462 43,104 2,655 $ 1,327,838 $ 1,215,768 $ 1,103,172 539,780 266,020 84,148 66,326 5,340 26,269 498,788 247,413 58,446 69,480 6,044 14,751 449,943 219,974 51,966 62,865 3,262 20,664 $ 987,883 $ 894,922 $ 808,674 24,643 — 364,598 (984) 40,898 (42,426) 319,318 (520) 21,979 — 316,477 (906) Net income attributable to the Company $ 363,614 $ 318,798 $ 315,571 Preferred stock dividends Excess of redemption value over carrying value of preferred shares redeemed Net income available to common stockholders Amounts available to common stockholders per common share: Net income, basic and diluted $ $ — — (3,911) (27,080) (13,373) — 363,614 $ 301,514 $ 288,491 1.26 $ 1.10 $ 1.13 Weighted average common shares outstanding: Basic Diluted Other comprehensive income: Net income attributable to the Company Change in fair value of interest rate swaps Amortization of interest rate hedges 289,427,430 273,465,680 255,066,500 289,923,984 273,936,752 255,624,250 $ 363,614 $ 318,798 $ 315,571 (8,618) 520 — — — — Comprehensive income attributable to the Company $ 355,516 $ 318,798 $ 315,571 The accompanying notes to consolidated financial statements are an integral part of these audited statements and may be found in the company’s 2018 Form 10-K. R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 2 5 REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Statements of Equity Years ended December 31, 2018, 2017 and 2016 (Dollars in thousands) Shares of preferred stock Shares of common stock Preferred stock and paid in capital Common stock and paid in capital Distributions in excess of net income Accumulated other comprehensive loss Balance, December 31, 2015 16,350,000 250,416,757 $ 395,378 $ 7,666,428 $ (1,530,210) $ 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 — — — — — — — — — 9,449,167 — 103,182 — 199,153 — — — — — — — — — 315,571 (642,529) 557,636 — (2,865) (543) 7,938 — — — — — Balance, December 31, 2016 16,350,000 260,168,259 $ 395,378 $ 8,228,594 $ (1,857,168) $ — — 318,798 (701,020) 1,388,080 — — (485) 8,075 — — (13,373) — — $ 9,624,264 $ (2,252,763) $ 363,614 Net income Distributions paid and payable Share issuances, net of costs Contributions by noncontrolling interests — — — — Preferred shares redeemed (16,350,000) Reallocation of equity Share-based compensation, net — — — — 23,957,741 — — — 87,685 Balance, December 31, 2017 — 284,213,685 $ Net income Other comprehensive loss Distributions paid and payable Share issuances, net of costs Contributions by noncontrolling interests Redemption of common units Reallocation of equity Share-based compensation, net — — — — — — — — — — — 19,304,878 — 88,182 — 135,345 — — — — (395,378) — — — — — — — — — — — Total stockholders’ equity Noncontrolling interests Total equity $ 6,531,596 $ 21,737 $ 6,553,333 315,571 906 316,477 (642,529) (12,682) (655,211) 557,636 — 557,636 — 15,906 15,906 (2,865) (6,161) (9,026) (543) 7,938 543 — — 7,938 $ 6,766,804 $ 20,249 $ 6,787,053 318,798 520 319,318 (701,020) (2,047) (703,067) 1,388,080 — (408,751) (485) 8,075 — — — 485 — 1,388,080 — (408,751) — $8,075 $ 7,371,501 $ 19,207 $ 7,390,708 363,614 984 364,598 — — — — — — — — — — — — — — — — — — — — — 1,119,297 — 2,829 (774) 8,879 — (8,098) (8,098) — (8,098) (768,506) — — — — — — — — — — (768,506) (1,996) (770,502) 1,119,297 — 1,119,297 — 18,848 18,848 2,829 (5,581) (2,752) (774) 8,879 774 — — 8,879 Balance, December 31, 2018 — 303,742,090 $ — $ 10,754,495 $ (2,657,655) $ (8,098) $ 8,088,742 $ 32,236 $ 8,120,978 The accompanying notes to consolidated financial statements are an integral part of these audited statements and may be found in the company’s 2018 Form 10-K. 2 6 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T REALTY INCOME CORPORATION AND SUBSIDIARIES Consolidated Cash Flows Years ended December 31, 2018, 2017 and 2016 (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to net income: Depreciation and amortization Loss on extinguishment of debt Amortization of share-based compensation Non-cash revenue adjustments Amortization of net premiums on mortgages payable Amortization of net (premiums) discounts on notes payable Amortization of deferred financing costs Gain 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 Insurance and other proceeds received Collection of loans receivable Non-refundable escrow deposits for 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 Principal payment on term loan Proceeds from notes and bonds payable issued Principal payment on notes payable Proceeds from term loan Proceeds from mortgages payable Payments upon extinguishment of debt Principal payments on mortgages payable Redemption of preferred stock Proceeds from common stock offerings, net Proceeds from dividend reinvestment and stock purchase plan Proceeds from At-the-Market (ATM) program 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 increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash, beginning of period Cash, cash equivalents and restricted cash, end of period 2018 2017 2016 $364,598 $319,318 $316,477 539,780 — 27,267 (7,835) (1,520) (1,256) 9,021 (2,733) (24,643) 26,269 (6,901) 18,695 940,742 (1,769,335) (25,350) 142,286 7,648 5,267 (200) (1,639,684) (761,582) — 1,774,000 (1,632,000) (125,866) 497,500 (350,000) 250,000 — — (21,905) — — 9,114 1,125,364 (2,752) (1,930) (18,685) (33,387) 707,871 8,929 12,142 $21,071 498,788 42,426 13,946 (3,927) (466) 884 8,274 (3,250) (40,898) 14,751 (92) 26,096 875,850 (1,413,270) (15,247) 166,976 14,411 123 (7,500) (1,254,507) (689,294) (6,168) 1,465,000 (2,475,000) — 2,033,041 (725,000) — — (41,643) (139,725) (408,750) 704,938 69,931 621,697 — (2,043) (17,510) (14,356) 375,118 (3,539) 15,681 $12,142 449,943 — 12,007 (10,154) (3,414) 1,470 7,434 (1,639) (21,979) 20,664 (5,414) 34,468 799,863 (1,798,892) (13,426) 99,096 — 12,515 — (1,700,707) (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 (34,652) 50,333 $15,681 The accompanying notes to consolidated financial statements are an integral part of these audited statements and may be found in the company’s 2018 Form 10-K. R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 2 7 TOTAL RETURN PERFORMANCE REALTY INCOME CORPORATION RUSSELL 2000 S&P 500 REALTY INCOME PEER GROUP INDEX* 220 200 180 160 140 120 100 80 e u l a V x e d n I 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 Period Ending Index 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 Realty Income Corporation Russell 2000 S&P 500 100.00 100.00 100.00 Realty Income Peer Group Index* 100.00 134.34 104.89 113.69 132.53 152.32 100.26 115.26 135.42 176.36 121.63 129.05 144.38 182.86 139.44 157.22 150.99 211.99 124.09 150.33 144.88 *Realty Income Peer Group index consists of 18 companies with an implied market capitalization between $3.0 billion and $28.5 billion as of December 31, 2018. 2 8 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T COMPANY INFORMATION DIRECTORS ADDITIONAL OFFICERS Michael D. McKee Non-Executive Chairman, Principal, The Contrarian Group A. Larry Chapman Retired, Executive Vice President, Head of Commercial Real Estate, Wells Fargo Bank Kathleen R. Allen, Ph.D. Founding Director, Center for Technology Commercialization, University of Southern California Reginald H. Gilyard Senior Advisor, Boston Consulting Group, Inc. Priya Cherian Huskins Partner, Woodruff-Sawyer & Co. Gerardo I. Lopez Operating Partner, SoftBank Group Gregory T. McLaughlin Chief Executive Officer, World Golf Foundation President, The First Tee Sumit Roy President & Chief Executive Officer Ronald L. Merriman Retired Vice Chair, KPMG LLP Stephen E. Sterrett Retired, Senior Executive Vice President, Chief Financial Officer, Simon Property Group, Inc. EXECUTIVE OFFICERS Top row left to right: Neil Abraham, Sumit Roy, Michael Pfeiffer | Bottom row left to right: Mark Hagan, Paul Meurer, Benjamin Fox Sumit Roy President & Chief Executive Officer Paul M. Meurer Executive Vice President, Chief Financial Officer and Treasurer Michael R. Pfeiffer Executive Vice President, Chief Administrative Officer, General Counsel and Secretary Neil Abraham Executive Vice President, Chief Strategy Officer Mark E. Hagan Executive Vice President, Chief Investment Officer Benjamin N. Fox Executive Vice President, Asset Management & Real Estate Operations Transfer Agent For shareholder administration and account information, please visit Computershare’s website at www.computershare.com or call toll-free at 1-877-218-2434. Independent Registered Public Accounting Firm KPMG LLP San Diego, CA For Additional Corporate Information Visit the Realty Income corporate website at www.realtyincome.com Janeen S. Bedard Senior Vice President, Development Shannon Jensen Senior Vice President, Associate General Counsel and Assistant Secretary Sean Nugent Senior Vice President, Controller TJ Chun Senior Vice President, Investments & Head of Asset Management Shannon Kehle Senior Vice President, Human Resources Jonathan Pong Senior Vice President, Head of Capital Markets and Investor Relations Lori Satterfield Senior Vice President, Associate General Counsel, Asset Management and Real Estate Operations Cary Wenthur Senior Vice President, Managing Director, Acquisitions Stephen Burchett Vice President, Senior Legal Counsel Elizabeth Cate Vice President, Asset Management Ross Edwards Vice President, Leasing and Real Estate Operations Scott Kohnen Vice President, Research April Little Vice President, Acquisitions Matt Renner Vice President, Assistant Controller, Corporate Accounting Kyle Campbell Vice President, Senior Legal Counsel, Risk Management Jill Cossaboom Vice President, Assistant Controller, Systems Kristin Ferrell Vice President, Head of Lease Administration Jonathan Kresser Vice President, Head of Internal Audit Garret Pavelko Vice President, Asset Management, Office & Industrial Ashley 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 R E A LT Y I N C O M E 2 0 1 8 A N N U A L R E P O R T 2 9 1 1 9 9 5 E L C A M I N O R E A L S A N D I E G O , C A 9 2 1 3 0 W W W. R E A LT Y I N C O M E . C O M 

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