Realty Income Corp 8-K/A, filed Nov 12, 2021
Realty Income Corp (O)
About this 8-K/A
Realty Income Corp filed this 8-K/A on November 12, 2021, reporting on events of November 1, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form
(Amendment No. 1)
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Introductory Note
On November 1, 2021, Realty Income Corporation (“Realty Income”) filed with the Securities and Exchange Commission a Current Report on Form 8-K (the “Original Form 8-K”) reporting, among other events and pursuant to Items 1.01, 2.01, 2.03, 5.02 and 9.01 of Form 8-K, the consummation of the transactions contemplated by that certain Agreement and Plan of Merger, dated April 29, 2021 (as amended, the “Merger Agreement”), by and among Realty Income, Rams MD Subsidiary I, Inc. (“Merger Sub 1”), Rams Acquisition Sub II, LLC (“Merger Sub 2”), VEREIT, Inc. (“VEREIT”) and VEREIT Operating Partnership, L.P. (“VEREIT OP”). Pursuant to the Merger Agreement, upon the terms and subject to the conditions set forth in the Merger Agreement, among other things, (i) Merger Sub 2 has merged with and into VEREIT OP, with VEREIT OP continuing as the surviving entity, and (ii) immediately thereafter, VEREIT merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation as a wholly owned subsidiary of Realty Income (together, the “Mergers” and the effective time of the Mergers, the “Effective Time”). This Current Report on Form 8-K/A amends the Original Form 8-K to include an updated Item 9.01(a) Financial Statements of Business Acquired and Item 9.01(b) Pro Forma Financial Information, which Realty Income indicated would be provided no later than 71 days from the date on which the Original Form 8-K was required to be filed.
Item 9.01 of the Original Form 8-K is hereby amended and restated in its entirety as set forth below. The Original Form 8-K otherwise remains unchanged.
| Item 9.01. | Financial Statements and Exhibits. |
(a) Financial Statements of Business Acquired.
The audited consolidated financial statements of VEREIT and VEREIT OP as of December 31, 2020 and 2019 and for each of the years in the three year period ended December 31, 2020 are incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Realty Income on June 4, 2021.
The unaudited condensed consolidated interim financial statements of VEREIT and VEREIT OP as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 are filed as Exhibit 99.1 to this Current Report on Form 8-K and are incorporated by reference herein.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined financial statements of the Company as of and for the nine-month period ended September 30, 2021 and for the year ended December 31, 2020, giving effect to the Mergers and the transactions contemplated by the Merger Agreement, are filed as Exhibit 99.2 to this Current Report on Form 8-K and are incorporated by reference herein.
(d) Exhibits.
| Exhibit No | Description | |
| 99.1 | Unaudited consolidated financial statements of VEREIT, Inc. and VEREIT Operating Partnership, L.P. as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020. | |
| 99.2 | Unaudited pro forma condensed combined financial statements of the Company as of September 30, 2021 and for the nine months ended September 30, 2021 and for the year ended December 31, 2020. | |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| REALTY INCOME CORPORATION | |||
| Date: | November 12, 2021 | By: | /s/ Michelle Bushore |
| Michelle Bushore | |||
| Executive Vice President, Chief Legal Officer, General Counsel and Secretary | |||
Exhibit 99.1
VEREIT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data) (Unaudited)
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
| September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Real estate investments, at cost: | ||||||||
| Land | $ | 2,724,709 | $ | 2,699,110 | ||||
| Buildings, fixtures and improvements | 9,916,070 | 10,032,055 | ||||||
| Intangible lease assets | 1,917,251 | 1,872,461 | ||||||
| Total real estate investments, at cost | 14,558,030 | 14,603,626 | ||||||
| Less: accumulated depreciation and amortization | 4,002,377 | 3,833,084 | ||||||
| Total real estate investments, net | 10,555,653 | 10,770,542 | ||||||
| Operating lease right-of-use assets | 185,443 | 195,518 | ||||||
| Investment in unconsolidated entities | 80,363 | 81,639 | ||||||
| Cash and cash equivalents | 5,874 | 523,539 | ||||||
| Restricted cash | 10,803 | 13,842 | ||||||
| Rent and tenant receivables and other assets, net | 371,911 | 366,620 | ||||||
| Goodwill | 1,337,773 | 1,337,773 | ||||||
| Real estate assets held for sale, net | 31,073 | 65,583 | ||||||
| Total assets | $ | 12,578,893 | $ | 13,355,056 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Mortgage notes payable, net | $ | 987,704 | $ | 1,328,835 | ||||
| Corporate bonds, net | 4,590,348 | 4,584,230 | ||||||
| Credit facility | 88,000 | - | ||||||
| Below-market lease liabilities, net | 111,140 | 120,938 | ||||||
| Accounts payable and accrued expenses | 137,626 | 117,015 | ||||||
| Deferred rent and other liabilities | 58,707 | 63,204 | ||||||
| Distributions payable | 105,958 | 89,514 | ||||||
| Operating lease liabilities | 196,671 | 209,104 | ||||||
| Total liabilities | 6,276,154 | 6,512,840 | ||||||
| Commitments and contingencies (Note 10) | ||||||||
| Preferred stock, $0.01 par value, 100,000,000 shares authorized with 18,871,246 issued and outstanding as of December 31, 2020. | - | 189 | ||||||
| Common stock, $0.01 par value, 1,500,000,000 shares authorized and 229,152,001 and 228,881,547 issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 2,292 | 2,289 | ||||||
| Additional paid-in capital | 12,984,914 | 13,449,412 | ||||||
| Accumulated other comprehensive income | 831 | 536 | ||||||
| Accumulated deficit | (6,692,338 | ) | (6,617,380 | ) | ||||
| Total stockholders’ equity | 6,295,699 | 6,835,046 | ||||||
| Non-controlling interests | 7,040 | 7,170 | ||||||
| Total equity | 6,302,739 | 6,842,216 | ||||||
| Total liabilities and equity | $ | 12,578,893 | $ | 13,355,056 | ||||
The accompanying notes are an integral part of these statements.
VEREIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data) (Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Rental | $ | 289,671 | $ | 293,692 | $ | 870,547 | $ | 870,854 | ||||||||
| Fees from managed partnerships | 521 | 1,586 | 1,721 | 2,603 | ||||||||||||
| Total revenues | 290,192 | 295,278 | 872,268 | 873,457 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Acquisition-related | 1,373 | 1,050 | 4,155 | 3,742 | ||||||||||||
| Merger, litigation and non-routine costs, net | 9,445 | 105 | 16,118 | (8,577 | ) | |||||||||||
| Property operating | 28,854 | 31,400 | 88,633 | 90,988 | ||||||||||||
| General and administrative | 12,437 | 14,774 | 43,414 | 45,950 | ||||||||||||
| Depreciation and amortization | 106,668 | 108,257 | 320,582 | 341,070 | ||||||||||||
| Impairments | 13,272 | 16,397 | 59,250 | 36,871 | ||||||||||||
| Total operating expenses | 172,049 | 171,983 | 532,152 | 510,044 | ||||||||||||
| Other expenses: | ||||||||||||||||
| Interest expense | (59,768 | ) | (66,935 | ) | (179,795 | ) | (197,244 | ) | ||||||||
| (Loss) gain on extinguishment and forgiveness of debt, net | (5 | ) | 61 | (2,102 | ) | (1,419 | ) | |||||||||
| Other income, net | 346 | 73 | 7,101 | 1,026 | ||||||||||||
| Equity in income of unconsolidated entities | 463 | 663 | 1,374 | 2,406 | ||||||||||||
| Gain on disposition of real estate and real estate assets held for sale, net | 3,369 | 42,814 | 96,339 | 76,858 | ||||||||||||
| Total other expenses, net | (55,595 | ) | (23,324 | ) | (77,083 | ) | (118,373 | ) | ||||||||
| Income before taxes | 62,548 | 99,971 | 263,033 | 245,040 | ||||||||||||
| Provision for income taxes | (935 | ) | (1,054 | ) | (2,794 | ) | (3,155 | ) | ||||||||
| Net income | 61,613 | 98,917 | 260,239 | 241,885 | ||||||||||||
| Net income attributable to non-controlling interests (1) | (48 | ) | (51 | ) | (131 | ) | (137 | ) | ||||||||
| Net income attributable to the General Partner | $ | 61,565 | $ | 98,866 | $ | 260,108 | $ | 241,748 | ||||||||
| Basic and diluted net income per share attributable to common stockholders | $ | 0.25 | $ | 0.41 | $ | 1.06 | $ | 0.95 | ||||||||
(1)Represents net income attributable to limited partners and a consolidated joint venture partner.
The accompanying notes are an integral part of these statements.
VEREIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands) (Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | 61,613 | $ | 98,917 | $ | 260,239 | $ | 241,885 | ||||||||
| Total other comprehensive income (loss) | ||||||||||||||||
| Unrealized gain (loss) on interest rate derivatives | - | 3,666 | - | (81,383 | ) | |||||||||||
| Reclassification of previous unrealized loss on interest rate derivatives into net income | 99 | 5,441 | 295 | 11,995 | ||||||||||||
| Total other comprehensive income (loss) | 99 | 9,107 | 295 | (69,388 | ) | |||||||||||
| Total comprehensive income | 61,712 | 108,024 | 260,534 | 172,497 | ||||||||||||
| Comprehensive income attributable to non-controlling interests (1) | (48 | ) | (57 | ) | (131 | ) | (87 | ) | ||||||||
| Total comprehensive income attributable to the General Partner | $ | 61,664 | $ | 107,967 | $ | 260,403 | $ | 172,410 | ||||||||
(1)Represents comprehensive income attributable to limited partners and a consolidated joint venture partner.
The accompanying notes are an integral part of these statements.
VEREIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except for share data) (Unaudited)
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Number of Shares | Par Value | Additional Paid-In Capital | Accumulated
Other Comprehensive Income | Accumulated Deficit | Total Stock-holders’ Equity | Non-Controlling Interests | Total Equity | |||||||||||||||||||||||||||||||
| Balance, January 1, 2021 | 18,871,246 | $ | 189 | 228,881,547 | $ | 2,289 | $ | 13,449,412 | $ | 536 | $ | (6,617,380 | ) | $ | 6,835,046 | $ | 7,170 | $ | 6,842,216 | |||||||||||||||||||||
| Issuance of Common Stock, net | - | - | 35,710 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Redemption of Series F Preferred Stock | (4,000,000 | ) | (40 | ) | - | - | (99,960 | ) | - | - | (100,000 | ) | - | (100,000 | ) | |||||||||||||||||||||||||
| Repurchases of Common Stock to settle tax obligation | - | - | (49,237 | ) | - | (1,681 | ) | - | - | (1,681 | ) | - | (1,681 | ) | ||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | 261,934 | 2 | 2,890 | - | - | 2,892 | - | 2,892 | ||||||||||||||||||||||||||||||
| Distributions declared on Common Stock - $0.462 per common share | - | - | - | - | - | - | (105,858 | ) | (105,858 | ) | - | (105,858 | ) | |||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | - | - | - | - | - | - | - | - | (70 | ) | (70 | ) | ||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | - | (1,581 | ) | (1,581 | ) | - | (1,581 | ) | |||||||||||||||||||||||||||
| Distributions to preferred shareholders and unitholders | - | - | - | - | - | - | (6,506 | ) | (6,506 | ) | (19 | ) | (6,525 | ) | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | 120,647 | 120,647 | 76 | 120,723 | ||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 98 | - | 98 | - | 98 | ||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 14,871,246 | $ | 149 | 229,129,954 | $ | 2,291 | $ | 13,350,661 | $ | 634 | $ | (6,610,678 | ) | $ | 6,743,057 | $ | 7,157 | $ | 6,750,214 | |||||||||||||||||||||
| Redemption of Series F Preferred Stock | - | - | - | - | (41 | ) | - | - | (41 | ) | - | (41 | ) | |||||||||||||||||||||||||||
| Repurchases of Common Stock to settle tax obligation | - | - | (18,042 | ) | - | (100 | ) | - | - | (100 | ) | - | (100 | ) | ||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | 37,704 | - | 4,137 | - | - | 4,137 | - | 4,137 | ||||||||||||||||||||||||||||||
| Distributions declared on Common Stock - $0.462 per common share | - | - | - | - | - | - | (105,867 | ) | (105,867 | ) | - | (105,867 | ) | |||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | - | - | - | - | - | - | - | - | (70 | ) | (70 | ) | ||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | - | (20 | ) | (20 | ) | - | (20 | ) | |||||||||||||||||||||||||||
| Distributions to preferred shareholders and unitholders | - | - | - | - | - | - | (6,227 | ) | (6,227 | ) | (21 | ) | (6,248 | ) | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | 77,896 | 77,896 | 7 | 77,903 | ||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 98 | - | 98 | - | 98 | ||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 14,871,246 | $ | 149 | 229,149,616 | $ | 2,291 | $ | 13,354,657 | $ | 732 | $ | (6,644,896 | ) | $ | 6,712,933 | $ | 7,073 | $ | 6,720,006 | |||||||||||||||||||||
| Redemption of Series F Preferred Stock | (14,871,246 | ) | (149 | ) | - | - | (372,883 | ) | - | - | (373,032 | ) | - | (373,032 | ) | |||||||||||||||||||||||||
| Repurchases of Common Stock to settle tax obligation | - | - | (6,356 | ) | - | (47 | ) | - | - | (47 | ) | - | (47 | ) | ||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | 8,741 | 1 | 3,187 | - | - | 3,188 | - | 3,188 | ||||||||||||||||||||||||||||||
| Distributions declared on Common Stock - $0.462 per common share | - | - | - | - | - | - | (105,868 | ) | (105,868 | ) | - | (105,868 | ) | |||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | - | - | - | - | - | - | - | - | (70 | ) | (70 | ) | ||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | - | (26 | ) | (26 | ) | - | (26 | ) | |||||||||||||||||||||||||||
| Distributions to preferred shareholders and unitholders | - | - | - | - | - | - | (3,113 | ) | (3,113 | ) | (11 | ) | (3,124 | ) | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | 61,565 | 61,565 | 48 | 61,613 | ||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 99 | - | 99 | - | 99 | ||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | - | $ | - | 229,152,001 | $ | 2,292 | $ | 12,984,914 | $ | 831 | $ | (6,692,338 | ) | $ | 6,295,699 | $ | 7,040 | $ | 6,302,739 | |||||||||||||||||||||
VEREIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except for share data) (Unaudited)
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Number of Shares | Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total
Stock- holders’ Equity | Non- Controlling Interests | Total Equity | |||||||||||||||||||||||||||||||
| Balance, January 1, 2020 | 30,871,246 | $ | 309 | 215,369,197 | $ | 2,153 | $ | 13,260,577 | $ | (27,670 | ) | $ | (6,372,710 | ) | $ | 6,862,659 | $ | 7,535 | $ | 6,870,194 | ||||||||||||||||||||
| Conversion of OP Units to Common Stock | - | - | 910 | - | 45 | - | - | 45 | (45 | ) | - | |||||||||||||||||||||||||||||
| Redemption of Series F Preferred Stock | - | - | - | - | (27 | ) | - | - | (27 | ) | - | (27 | ) | |||||||||||||||||||||||||||
| Repurchases of Common Stock to settle tax obligation | - | - | (48,218 | ) | - | (2,378 | ) | - | - | (2,378 | ) | - | (2,378 | ) | ||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | 234,408 | 2 | 2,853 | - | - | 2,855 | - | 2,855 | ||||||||||||||||||||||||||||||
| Distributions declared on Common Stock - $0.6875 per common share | - | - | - | - | - | - | (148,194 | ) | (148,194 | ) | - | (148,194 | ) | |||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | - | - | - | - | - | - | - | - | (105 | ) | (105 | ) | ||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | - | (1,628 | ) | (1,628 | ) | - | (1,628 | ) | |||||||||||||||||||||||||||
| Distributions to preferred shareholders and unitholders | - | - | - | - | - | - | (12,928 | ) | (12,928 | ) | (19 | ) | (12,947 | ) | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | 86,808 | 86,808 | 55 | 86,863 | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | (76,547 | ) | - | (76,547 | ) | (55 | ) | (76,602 | ) | ||||||||||||||||||||||||||
| Balance, March 31, 2020 | 30,871,246 | $ | 309 | 215,556,297 | $ | 2,155 | $ | 13,261,070 | $ | (104,217 | ) | $ | (6,448,652 | ) | $ | 6,710,665 | $ | 7,366 | $ | 6,718,031 | ||||||||||||||||||||
| Redemption of Series F Preferred Stock | - | - | - | - | (25 | ) | - | - | (25 | ) | - | (25 | ) | |||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | 13,415 | 1 | 4,070 | - | - | 4,071 | - | 4,071 | ||||||||||||||||||||||||||||||
| Distributions declared on Common Stock - $0.385 per common share | - | - | - | - | - | - | (82,997 | ) | (82,997 | ) | - | (82,997 | ) | |||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | - | - | - | - | - | - | - | - | (61 | ) | (61 | ) | ||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | - | (18 | ) | (18 | ) | - | (18 | ) | |||||||||||||||||||||||||||
| Distributions to preferred shareholders and unitholders | - | - | - | - | - | - | (12,928 | ) | (12,928 | ) | (20 | ) | (12,948 | ) | ||||||||||||||||||||||||||
| Repurchase of convertible notes | - | - | - | - | (204 | ) | - | - | (204 | ) | - | (204 | ) | |||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | 56,074 | 56,074 | 31 | 56,105 | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | (1,892 | ) | - | (1,892 | ) | (1 | ) | (1,893 | ) | ||||||||||||||||||||||||||
| Balance, June 30, 2020 | 30,871,246 | $ | 309 | 215,569,712 | $ | 2,156 | $ | 13,264,911 | $ | (106,109 | ) | $ | (6,488,521 | ) | $ | 6,672,746 | $ | 7,315 | $ | 6,680,061 | ||||||||||||||||||||
| Issuance of Common Stock, net | - | - | 2,659,332 | 27 | 89,252 | - | - | 89,279 | - | 89,279 | ||||||||||||||||||||||||||||||
| Redemption of Limited Partners' Common OP Units | - | - | - | - | - | - | - | - | (149 | ) | (149 | ) | ||||||||||||||||||||||||||||
| Redemption of Series F Preferred Stock | (12,000,000 | ) | (120 | ) | - | - | (299,932 | ) | - | - | (300,052 | ) | - | (300,052 | ) | |||||||||||||||||||||||||
| Repurchases of Common Stock to settle tax obligation | - | - | (250 | ) | - | (8 | ) | - | - | (8 | ) | - | (8 | ) | ||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | 19,634 | - | 3,211 | - | - | 3,211 | - | 3,211 | ||||||||||||||||||||||||||||||
| Distributions declared on Common Stock - $0.385 per common share | - | - | - | - | - | - | (84,026 | ) | (84,026 | ) | - | (84,026 | ) | |||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | - | - | - | - | - | - | - | - | (59 | ) | (59 | ) | ||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | - | (24 | ) | (24 | ) | - | (24 | ) | |||||||||||||||||||||||||||
| Distributions to preferred shareholders and unitholders | - | - | - | - | - | - | (10,750 | ) | (10,750 | ) | (21 | ) | (10,771 | ) | ||||||||||||||||||||||||||
| Repurchase of convertible notes | - | - | - | - | (26 | ) | - | - | (26 | ) | - | (26 | ) | |||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | 98,866 | 98,866 | 51 | 98,917 | ||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 9,101 | - | 9,101 | 6 | 9,107 | ||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 18,871,246 | $ | 189 | 218,248,428 | $ | 2,183 | $ | 13,057,408 | $ | (97,008 | ) | $ | (6,484,455 | ) | $ | 6,478,317 | $ | 7,143 | $ | 6,485,460 | ||||||||||||||||||||
The accompanying notes are an integral part of these statements.
VEREIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 260,239 | $ | 241,885 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 334,483 | 350,600 | ||||||
| Gain on real estate assets, net | (100,320 | ) | (77,117 | ) | ||||
| Impairments | 59,250 | 36,871 | ||||||
| Equity-based compensation | 10,217 | 10,137 | ||||||
| Equity in income of unconsolidated entities | (1,374 | ) | (2,406 | ) | ||||
| Distributions from unconsolidated entities | 1,122 | 1,753 | ||||||
| (Gain) loss on other investments | (691 | ) | 607 | |||||
| Loss on extinguishment and forgiveness of debt, net | 2,102 | 1,419 | ||||||
| Changes in assets and liabilities: | ||||||||
| Investment in direct financing leases | 1,125 | 1,117 | ||||||
| Rent and tenant receivables, operating lease right-of-use and other assets, net | (1,781 | ) | (38,277 | ) | ||||
| Accounts payable and accrued expenses | 11,331 | (9,645 | ) | |||||
| Deferred rent, operating lease and other liabilities | (11,505 | ) | (2,936 | ) | ||||
| Net cash provided by operating activities | 564,198 | 514,008 | ||||||
| Cash flows from investing activities: | ||||||||
| Investments in real estate assets | (419,139 | ) | (147,121 | ) | ||||
| Capital expenditures and leasing costs | (22,722 | ) | (21,102 | ) | ||||
| Real estate developments | (14,383 | ) | (16,592 | ) | ||||
| Investments in unconsolidated entities | (2,180 | ) | (21,348 | ) | ||||
| Return of investment from unconsolidated entities | 3,706 | 1,961 | ||||||
| Proceeds from disposition of real estate | 420,171 | 346,675 | ||||||
| Investment in leasehold improvements and other assets | (80 | ) | (612 | ) | ||||
| Deposits for real estate assets | (8,661 | ) | (1,973 | ) | ||||
| Investments in mezzanine position | - | (9,959 | ) | |||||
| Uses and refunds of deposits for real estate assets | 7,060 | 4,036 | ||||||
| Proceeds from the settlement of property-related insurance claims | 1,148 | 654 | ||||||
| Net cash (used in) provided by investing activities | (35,080 | ) | 134,619 | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from mortgage notes payable | - | 1,032 | ||||||
| Payments on mortgage notes payable and other debt, including debt extinguishment costs | (344,459 | ) | (197,382 | ) | ||||
| Proceeds from credit facility | 192,000 | 902,000 | ||||||
| Payments on credit facility, including swap termination payments | (104,000 | ) | (1,052,000 | ) | ||||
| Proceeds from corporate bonds | - | 594,864 | ||||||
| Extinguishment costs related to the redemption of corporate bonds | - | (26 | ) | |||||
| Extinguishment costs related to the repurchases of convertible notes | - | (69,362 | ) | |||||
| Payments of deferred financing costs | (1,195 | ) | (7,275 | ) | ||||
| Refunds of deferred financing costs | 280 | - | ||||||
| Repurchases of Common Stock to settle tax obligations | (1,828 | ) | (2,386 | ) | ||||
| Proceeds from the issuance of Common Stock, net of underwriters’ discount and offering expenses | 1,336 | 89,279 | ||||||
| Redemption of Series F Preferred Stock | (473,073 | ) | (300,104 | ) | ||||
| Redemption of Limited Partners’ Common OP Units | - | (149 | ) | |||||
| Distributions paid | (318,883 | ) | (418,722 | ) | ||||
| Net cash used in financing activities | (1,049,822 | ) | (460,231 | ) | ||||
| Net change in cash and cash equivalents and restricted cash | (520,704 | ) | 188,396 | |||||
| Cash and cash equivalents and restricted cash, beginning of period | 537,381 | 33,880 | ||||||
| Cash and cash equivalents and restricted cash, end of period | 16,677 | 222,276 | ||||||
| Reconciliation of Cash and Cash Equivalents and Restricted Cash | ||||||||
| Cash and cash equivalents at beginning of period | $ | 523,539 | $ | 12,921 | ||||
| Restricted cash at beginning of period | 13,842 | 20,959 | ||||||
| Cash and cash equivalents and restricted cash at beginning of period | 537,381 | 33,880 | ||||||
| Cash and cash equivalents at end of period | 5,874 | 207,321 | ||||||
| Restricted cash at end of period | 10,803 | 14,955 | ||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 16,677 | $ | 222,276 | ||||
The accompanying notes are an integral part of these statements.
VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for unit data) (Unaudited)
| September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Real estate investments, at cost: | ||||||||
| Land | $ | 2,724,709 | $ | 2,699,110 | ||||
| Buildings, fixtures and improvements | 9,916,070 | 10,032,055 | ||||||
| Intangible lease assets | 1,917,251 | 1,872,461 | ||||||
| Total real estate investments, at cost | 14,558,030 | 14,603,626 | ||||||
| Less: accumulated depreciation and amortization | 4,002,377 | 3,833,084 | ||||||
| Total real estate investments, net | 10,555,653 | 10,770,542 | ||||||
| Operating lease right-of-use assets | 185,443 | 195,518 | ||||||
| Investment in unconsolidated entities | 80,363 | 81,639 | ||||||
| Cash and cash equivalents | 5,874 | 523,539 | ||||||
| Restricted cash | 10,803 | 13,842 | ||||||
| Rent and tenant receivables and other assets, net | 371,911 | 366,620 | ||||||
| Goodwill | 1,337,773 | 1,337,773 | ||||||
| Real estate assets held for sale, net | 31,073 | 65,583 | ||||||
| Total assets | $ | 12,578,893 | $ | 13,355,056 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Mortgage notes payable, net | $ | 987,704 | $ | 1,328,835 | ||||
| Corporate bonds, net | 4,590,348 | 4,584,230 | ||||||
| Credit facility | 88,000 | - | ||||||
| Below-market lease liabilities, net | 111,140 | 120,938 | ||||||
| Accounts payable and accrued expenses | 137,626 | 117,015 | ||||||
| Deferred rent and other liabilities | 58,707 | 63,204 | ||||||
| Distributions payable | 105,958 | 89,514 | ||||||
| Operating lease liabilities | 196,671 | 209,104 | ||||||
| Total liabilities | 6,276,154 | 6,512,840 | ||||||
| Commitments and contingencies (Note 10) | ||||||||
| General Partner's preferred equity, 18,871,246 General Partner Series F Preferred Units issued and outstanding as of December 31, 2020. | - | 254,294 | ||||||
| General Partner's common equity, 229,152,001 and 228,881,547 General Partner OP Units issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 6,296,943 | 6,580,752 | ||||||
| Limited Partner's preferred equity, 49,766 Limited Partner Series F Preferred Units issued and outstanding as of December 31, 2020. | - | 1,787 | ||||||
| Limited Partner's common equity, 152,033 Limited Partner OP Units issued and outstanding as of each of September 30, 2021 and December 31, 2020, respectively | 4,663 | 4,209 | ||||||
| Total partners’ equity | 6,301,606 | 6,841,042 | ||||||
| Non-controlling interests | 1,133 | 1,174 | ||||||
| Total equity | 6,302,739 | 6,842,216 | ||||||
| Total liabilities and equity | $ | 12,578,893 | $ | 13,355,056 | ||||
The accompanying notes are an integral part of these statements.
VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per unit data) (Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Rental | $ | 289,671 | $ | 293,692 | $ | 870,547 | $ | 870,854 | ||||||||
| Fees from managed partnerships | 521 | 1,586 | 1,721 | 2,603 | ||||||||||||
| Total revenues | 290,192 | 295,278 | 872,268 | 873,457 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Acquisition-related | 1,373 | 1,050 | 4,155 | 3,742 | ||||||||||||
| Merger, litigation and non-routine costs, net | 9,445 | 105 | 16,118 | (8,577 | ) | |||||||||||
| Property operating | 28,854 | 31,400 | 88,633 | 90,988 | ||||||||||||
| General and administrative | 12,437 | 14,774 | 43,414 | 45,950 | ||||||||||||
| Depreciation and amortization | 106,668 | 108,257 | 320,582 | 341,070 | ||||||||||||
| Impairments | 13,272 | 16,397 | 59,250 | 36,871 | ||||||||||||
| Total operating expenses | 172,049 | 171,983 | 532,152 | 510,044 | ||||||||||||
| Other expense: | ||||||||||||||||
| Interest expense | (59,768 | ) | (66,935 | ) | (179,795 | ) | (197,244 | ) | ||||||||
| (Loss) gain on extinguishment and forgiveness of debt, net | (5 | ) | 61 | (2,102 | ) | (1,419 | ) | |||||||||
| Other income, net | 346 | 73 | 7,101 | 1,026 | ||||||||||||
| Equity in income of unconsolidated entities | 463 | 663 | 1,374 | 2,406 | ||||||||||||
| Gain on disposition of real estate and real estate assets held for sale, net | 3,369 | 42,814 | 96,339 | 76,858 | ||||||||||||
| Total other expense, net | (55,595 | ) | (23,324 | ) | (77,083 | ) | (118,373 | ) | ||||||||
| Income before taxes | 62,548 | 99,971 | 263,033 | 245,040 | ||||||||||||
| Provision for income taxes | (935 | ) | (1,054 | ) | (2,794 | ) | (3,155 | ) | ||||||||
| Net income | 61,613 | 98,917 | 260,239 | 241,885 | ||||||||||||
| Net loss attributable to non-controlling interests (1) | 10 | 14 | 41 | 29 | ||||||||||||
| Net income attributable to the OP | $ | 61,623 | $ | 98,931 | $ | 260,280 | $ | 241,914 | ||||||||
| Basic and diluted net income per unit attributable to common unitholders | $ | 0.25 | $ | 0.41 | $ | 1.06 | $ | 0.95 | ||||||||
(1)Represents net loss attributable to a consolidated joint venture partner.
The accompanying notes are an integral part of these statements.
VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands) (Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | 61,613 | $ | 98,917 | $ | 260,239 | $ | 241,885 | ||||||||
| Total other comprehensive income (loss) | ||||||||||||||||
| Unrealized gain (loss) on interest rate derivatives | - | 3,666 | - | (81,383 | ) | |||||||||||
| Reclassification of previous unrealized loss on interest rate derivatives into net income | 99 | 5,441 | 295 | 11,995 | ||||||||||||
| Total other comprehensive income (loss) | 99 | 9,107 | 295 | (69,388 | ) | |||||||||||
| Total comprehensive income | 61,712 | 108,024 | 260,534 | 172,497 | ||||||||||||
| Comprehensive loss attributable to non-controlling interests (1) | 10 | 14 | 41 | 29 | ||||||||||||
| Total comprehensive income attributable to the OP | $ | 61,722 | $ | 108,038 | $ | 260,575 | $ | 172,526 | ||||||||
(1)Represents comprehensive loss attributable to a consolidated joint venture partner.
The accompanying notes are an integral part of these statements.
VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except for unit data) (Unaudited)
| Preferred Units | Common Units | |||||||||||||||||||||||||||||||||||||||||||
| General Partner | Limited Partner | General Partner | Limited Partner | Total | ||||||||||||||||||||||||||||||||||||||||
| Number of Units | Capital | Number of Units | Capital | Number of Units | Capital | Number of Units | Capital | Partners' Capital | Non-Controlling Interests | |||||||||||||||||||||||||||||||||||
| Balance, January 1, 2021 | 18,871,246 | $ | 254,294 | 49,766 | $ | 1,787 | 228,881,547 | $ | 6,580,752 | 152,033 | $ | 4,209 | $ | 6,841,042 | $ | 1,174 | $ | 6,842,216 | ||||||||||||||||||||||||||
| Issuance of common OP Units, net | - | - | - | - | 35,710 | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Redemption of Series F Preferred Units | (4,000,000 | ) | (100,000 | ) | - | - | - | - | - | - | (100,000 | ) | - | (100,000 | ) | |||||||||||||||||||||||||||||
| Repurchases of common OP Units to settle tax obligation | - | - | - | - | (49,237 | ) | (1,681 | ) | - | - | (1,681 | ) | - | (1,681 | ) | |||||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | - | - | 261,934 | 2,892 | - | - | 2,892 | - | 2,892 | |||||||||||||||||||||||||||||||||
| Distributions to Common OP Units and non-controlling interests -$0.462 per common unit | - | - | - | - | - | (105,858 | ) | - | (70 | ) | (105,928 | ) | - | (105,928 | ) | |||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | (1,581 | ) | - | - | (1,581 | ) | - | (1,581 | ) | ||||||||||||||||||||||||||||||
| Distributions to Series F Preferred Units | - | (6,506 | ) | - | (19 | ) | - | - | - | - | (6,525 | ) | - | (6,525 | ) | |||||||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | 120,647 | - | 79 | 120,726 | (3 | ) | 120,723 | ||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 98 | - | - | 98 | - | 98 | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 14,871,246 | $ | 147,788 | 49,766 | $ | 1,768 | 229,129,954 | $ | 6,595,269 | 152,033 | $ | 4,218 | $ | 6,749,043 | $ | 1,171 | $ | 6,750,214 | ||||||||||||||||||||||||||
| Redemption of Series F Preferred Units | - | (41 | ) | - | - | - | - | - | - | (41 | ) | - | (41 | ) | ||||||||||||||||||||||||||||||
| Repurchases of common OP Units to settle tax obligation | - | - | - | - | (18,042 | ) | (100 | ) | - | - | (100 | ) | - | (100 | ) | |||||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | - | - | 37,704 | 4,137 | - | - | 4,137 | - | 4,137 | |||||||||||||||||||||||||||||||||
| Distributions to Common OP Units and non-controlling interests -$0.462 per common unit | - | - | - | - | - | (105,867 | ) | - | (70 | ) | (105,937 | ) | - | (105,937 | ) | |||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | (20 | ) | - | - | (20 | ) | - | (20 | ) | ||||||||||||||||||||||||||||||
| Distributions to Series F Preferred Units | - | (6,227 | ) | - | (21 | ) | - | - | - | - | (6,248 | ) | - | (6,248 | ) | |||||||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | 77,896 | - | 35 | 77,931 | (28 | ) | 77,903 | ||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 98 | - | - | 98 | - | 98 | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 14,871,246 | $ | 141,520 | 49,766 | $ | 1,747 | 229,149,616 | $ | 6,571,413 | 152,033 | $ | 4,183 | $ | 6,718,863 | $ | 1,143 | $ | 6,720,006 | ||||||||||||||||||||||||||
| Redemption of Series F Preferred Units | (14,871,246 | ) | (138,407 | ) | (49,766 | ) | (1,736 | ) | - | (233,381 | ) | - | 492 | (373,032 | ) | - | (373,032 | ) | ||||||||||||||||||||||||||
| Repurchases of common OP Units to settle tax obligation | - | - | - | - | (6,356 | ) | (47 | ) | - | - | (47 | ) | - | (47 | ) | |||||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | - | - | 8,741 | 3,188 | - | - | 3,188 | - | 3,188 | |||||||||||||||||||||||||||||||||
| Distributions to Common OP Units and non-controlling interests -$0.462 per common unit | - | - | - | - | - | (105,868 | ) | - | (70 | ) | (105,938 | ) | - | (105,938 | ) | |||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | (26 | ) | - | - | (26 | ) | - | (26 | ) | ||||||||||||||||||||||||||||||
| Distributions to Series F Preferred Units | - | (3,113 | ) | - | (11 | ) | - | - | - | - | (3,124 | ) | - | (3,124 | ) | |||||||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | 61,565 | - | 58 | 61,623 | (10 | ) | 61,613 | ||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 99 | - | - | 99 | - | 99 | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | - | $ | - | - | $ | - | 229,152,001 | $ | 6,296,943 | 152,033 | $ | 4,663 | $ | 6,301,606 | $ | 1,133 | $ | 6,302,739 | ||||||||||||||||||||||||||
VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except for unit data) (Unaudited)
| Preferred Units | Common Units | |||||||||||||||||||||||||||||||||||||||||||
| General Partner | Limited Partner | General Partner | Limited Partner | Total | ||||||||||||||||||||||||||||||||||||||||
| Number of Units | Capital | Number of Units | Capital | Number of Units | Capital | Number of Units | Capital | Partners' Capital | Non-Controlling Interests | |||||||||||||||||||||||||||||||||||
| Balance, January 1, 2020 | 30,871,246 | $ | 460,504 | 49,766 | $ | 1,869 | 215,369,197 | $ | 6,402,155 | 157,343 | $ | 4,433 | $ | 6,868,961 | $ | 1,233 | $ | 6,870,194 | ||||||||||||||||||||||||||
| Conversion of Limited Partners' Common OP Units to General Partner's Common OP Units | - | - | - | - | 910 | 45 | (910 | ) | (45 | ) | - | - | - | |||||||||||||||||||||||||||||||
| Redemption of Series F Preferred Units | - | (27 | ) | - | - | - | - | - | - | (27 | ) | - | (27 | ) | ||||||||||||||||||||||||||||||
| Repurchases of common OP Units to settle tax obligation | - | - | - | - | (48,218 | ) | (2,378 | ) | - | - | (2,378 | ) | - | (2,378 | ) | |||||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | - | - | 234,408 | 2,855 | - | - | 2,855 | - | 2,855 | |||||||||||||||||||||||||||||||||
| Distributions to Common OP Units and non-controlling interests -$0.6875 per common unit | - | - | - | - | - | (148,194 | ) | - | (105 | ) | (148,299 | ) | - | (148,299 | ) | |||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | (1,628 | ) | - | - | (1,628 | ) | - | (1,628 | ) | ||||||||||||||||||||||||||||||
| Distributions to Series F Preferred Units | - | (12,928 | ) | - | (19 | ) | - | - | - | - | (12,947 | ) | - | (12,947 | ) | |||||||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | 86,808 | - | 62 | 86,870 | (7 | ) | 86,863 | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | (76,547 | ) | - | (55 | ) | (76,602 | ) | - | (76,602 | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2020 | 30,871,246 | $ | 447,549 | 49,766 | $ | 1,850 | 215,556,297 | $ | 6,263,116 | 156,433 | $ | 4,290 | $ | 6,716,805 | $ | 1,226 | $ | 6,718,031 | ||||||||||||||||||||||||||
| Redemption of Series F Preferred Units | - | (25 | ) | - | - | - | - | - | - | (25 | ) | - | (25 | ) | ||||||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | - | - | 13,415 | 4,071 | - | - | 4,071 | - | 4,071 | |||||||||||||||||||||||||||||||||
| Distributions to Common OP Units and non-controlling interests -$0.3850 per common unit | - | - | - | - | - | (82,997 | ) | - | (61 | ) | (83,058 | ) | - | (83,058 | ) | |||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | (18 | ) | - | - | (18 | ) | - | (18 | ) | ||||||||||||||||||||||||||||||
| Distributions to Series F Preferred Units | - | (12,928 | ) | - | (20 | ) | - | - | - | - | (12,948 | ) | - | (12,948 | ) | |||||||||||||||||||||||||||||
| Repurchase of convertible notes | - | - | - | - | - | (204 | ) | - | - | (204 | ) | - | (204 | ) | ||||||||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | 56,074 | - | 39 | 56,113 | (8 | ) | 56,105 | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | (1,892 | ) | - | (1 | ) | (1,893 | ) | - | (1,893 | ) | |||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 30,871,246 | $ | 434,596 | 49,766 | $ | 1,830 | 215,569,712 | $ | 6,238,150 | 156,433 | $ | 4,267 | $ | 6,678,843 | $ | 1,218 | $ | 6,680,061 | ||||||||||||||||||||||||||
| Issuance of common OP Units, net | - | - | - | - | 2,659,332 | 89,279 | - | - | 89,279 | - | 89,279 | |||||||||||||||||||||||||||||||||
| Redemption of Limited Partners' Common OP Units | - | - | - | - | - | - | (4,400 | ) | (149 | ) | (149 | ) | - | (149 | ) | |||||||||||||||||||||||||||||
| Redemption of Series F Preferred Units | (12,000,000 | ) | (300,052 | ) | - | - | - | - | - | - | (300,052 | ) | - | (300,052 | ) | |||||||||||||||||||||||||||||
| Repurchases of common OP Units to settle tax obligation | - | - | - | - | (250 | ) | (8 | ) | - | - | (8 | ) | - | (8 | ) | |||||||||||||||||||||||||||||
| Equity-based compensation, net | - | - | - | - | 19,634 | 3,211 | - | - | 3,211 | - | 3,211 | |||||||||||||||||||||||||||||||||
| Distributions to Common OP Units and non-controlling interests - $0.3850 per common unit | - | - | - | - | - | (84,026 | ) | - | (59 | ) | (84,085 | ) | - | (84,085 | ) | |||||||||||||||||||||||||||||
| Dividend equivalents on awards granted under the Equity Plan | - | - | - | - | - | (24 | ) | - | - | (24 | ) | - | (24 | ) | ||||||||||||||||||||||||||||||
| Distributions to Series F Preferred Units | - | (10,750 | ) | - | (21 | ) | - | - | - | - | (10,771 | ) | - | (10,771 | ) | |||||||||||||||||||||||||||||
| Repurchase of convertible notes | - | - | - | - | - | (26 | ) | - | - | (26 | ) | - | (26 | ) | ||||||||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | 98,866 | - | 65 | 98,931 | (14 | ) | 98,917 | ||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 9,101 | - | 6 | 9,107 | - | 9,107 | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 18,871,246 | $ | 123,794 | 49,766 | $ | 1,809 | 218,248,428 | $ | 6,354,523 | 152,033 | $ | 4,130 | $ | 6,484,256 | $ | 1,204 | $ | 6,485,460 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these statements.
VEREIT OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 260,239 | $ | 241,885 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 334,483 | 350,600 | ||||||
| Gain on real estate assets, net | (100,320 | ) | (77,117 | ) | ||||
| Impairments | 59,250 | 36,871 | ||||||
| Equity-based compensation | 10,217 | 10,137 | ||||||
| Equity in income of unconsolidated entities | (1,374 | ) | (2,406 | ) | ||||
| Distributions from unconsolidated entities | 1,122 | 1,753 | ||||||
| (Gain) loss on other investments | (691 | ) | 607 | |||||
| Loss on extinguishment and forgiveness of debt, net | 2,102 | 1,419 | ||||||
| Changes in assets and liabilities: | ||||||||
| Investment in direct financing leases | 1,125 | 1,117 | ||||||
| Rent and tenant receivables, operating lease right-of-use and other assets, net | (1,781 | ) | (38,277 | ) | ||||
| Accounts payable and accrued expenses | 11,331 | (9,645 | ) | |||||
| Deferred rent, operating lease and other liabilities | (11,505 | ) | (2,936 | ) | ||||
| Net cash provided by operating activities | 564,198 | 514,008 | ||||||
| Cash flows from investing activities: | ||||||||
| Investments in real estate assets | (419,139 | ) | (147,121 | ) | ||||
| Capital expenditures and leasing costs | (22,722 | ) | (21,102 | ) | ||||
| Real estate developments | (14,383 | ) | (16,592 | ) | ||||
| Investments in unconsolidated entities | (2,180 | ) | (21,348 | ) | ||||
| Return of investment from unconsolidated entities | 3,706 | 1,961 | ||||||
| Proceeds from disposition of real estate | 420,171 | 346,675 | ||||||
| Investment in leasehold improvements and other assets | (80 | ) | (612 | ) | ||||
| Investments in mezzanine position | - | (9,959 | ) | |||||
| Deposits for real estate assets | (8,661 | ) | (1,973 | ) | ||||
| Uses and refunds of deposits for real estate assets | 7,060 | 4,036 | ||||||
| Proceeds from the settlement of property-related insurance claims | 1,148 | 654 | ||||||
| Net cash (used in) provided by investing activities | (35,080 | ) | 134,619 | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from mortgage notes payable | - | 1,032 | ||||||
| Payments on mortgage notes payable and other debt, including debt extinguishment costs | (344,459 | ) | (197,382 | ) | ||||
| Proceeds from credit facility | 192,000 | 902,000 | ||||||
| Payments on credit facility, including swap termination payments | (104,000 | ) | (1,052,000 | ) | ||||
| Proceeds from corporate bonds | - | 594,864 | ||||||
| Extinguishment costs related to the redemption of corporate bonds | - | (26 | ) | |||||
| Extinguishment costs related to the repurchases of convertible notes | - | (69,362 | ) | |||||
| Payments of deferred financing costs | (1,195 | ) | (7,275 | ) | ||||
| Refunds of deferred financing costs | 280 | - | ||||||
| Repurchases of Common Stock to settle tax obligations | (1,828 | ) | (2,386 | ) | ||||
| Proceeds from the issuance of Common Stock, net of underwriters’ discount and offering expenses | 1,336 | 89,279 | ||||||
| Redemption of Series F Preferred Units | (473,073 | ) | (300,104 | ) | ||||
| Redemption of Limited Partners’ Common OP Units | - | (149 | ) | |||||
| Distributions paid | (318,883 | ) | (418,722 | ) | ||||
| Net cash used in financing activities | (1,049,822 | ) | (460,231 | ) | ||||
| Net change in cash and cash equivalents and restricted cash | (520,704 | ) | 188,396 | |||||
| Cash and cash equivalents and restricted cash, beginning of period | $ | 537,381 | $ | 33,880 | ||||
| Cash and cash equivalents and restricted cash, end of period | 16,677 | 222,276 | ||||||
| Reconciliation of Cash and Cash Equivalents and Restricted Cash | ||||||||
| Cash and cash equivalents at beginning of period | $ | 523,539 | $ | 12,921 | ||||
| Restricted cash at beginning of period | 13,842 | 20,959 | ||||||
| Cash and cash equivalents and restricted cash at beginning of period | 537,381 | 33,880 | ||||||
| Cash and cash equivalents at end of period | 5,874 | 207,321 | ||||||
| Restricted cash at end of period | 10,803 | 14,955 | ||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 16,677 | $ | 222,276 | ||||
The accompanying notes are an integral part of these statements.
VEREIT, INC. and VEREIT OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 (Unaudited)
Note 1 - Organization
VEREIT is a Maryland corporation, incorporated on December 2, 2010, that qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning in the taxable year ended December 31, 2011. The OP is a Delaware limited partnership of which the General Partner is the sole general partner. VEREIT’s common stock, par value $0.01 per share (“Common Stock”) trades on the New York Stock Exchange (“NYSE”) under the trading symbol “VER”. As used herein, the terms the “Company,” “we,” “our” and “us” refer to VEREIT, together with its consolidated subsidiaries, including the OP.
VEREIT is a full-service real estate operating company which owns and manages one of the largest portfolios of single-tenant commercial properties in the U.S. VEREIT’s business model provides equity capital to creditworthy corporations in return for long-term leases on their properties. The Company actively manages its portfolio considering a number of metrics including property type, concentration and key economic factors for appropriate balance and diversity.
Substantially all of the Company’s operations are conducted through the OP. VEREIT is the sole general partner and holder of 99.9% of the common equity interests in the OP as of September 30, 2021. Under the limited partnership agreement of the OP, as amended (the “LPA”), after holding common units of limited partner interests in the OP (“OP Units”) for a period of one year and meeting the other requirements in the LPA, unless we otherwise consent to an earlier redemption, holders have the right to redeem the units for the cash value of a corresponding number of shares of Common Stock, as applicable, or, at our option, a corresponding number of shares of Common Stock, subject to adjustment pursuant to the terms of the LPA. The remaining rights of the holders of OP Units are limited, however, and do not include the ability to replace the General Partner or to approve the sale, purchase or refinancing of the OP’s assets.
The actions of the OP and its relationship with the General Partner are governed by the LPA. The General Partner does not have any significant assets other than its investment in the OP. Therefore, the assets and liabilities of the General Partner and the OP are the same. Additionally, pursuant to the LPA, all administrative expenses and expenses associated with the formation, continuity, existence and operation of the General Partner incurred by the General Partner on the OP’s behalf shall be treated as expenses of the OP. Further, when the General Partner issues any equity instrument that has been approved by the General Partner’s Board of Directors, the LPA requires the OP to issue to the General Partner equity instruments with substantially similar terms, to protect the integrity of the Company’s umbrella partnership REIT structure, pursuant to which each holder of interests in the OP has a proportionate economic interest in the OP reflecting its capital contributions thereto. OP Units issued to the General Partner are referred to as “General Partner OP Units”. OP Units issued to parties other than the General Partner are referred to as “Limited Partner OP Units”. Series F Preferred Units issued to the General Partner were historically referred to as “General Partner Series F Preferred Units”. Series F Preferred Units issued to parties other than the General Partner were historically referred to as “Limited Partner Series F Preferred Units”. The LPA also provides that the OP issue debt with terms and provisions consistent with debt issued by the General Partner. The LPA will be amended to provide for the issuance of any additional class of equivalent equity instruments to the extent the General Partner’s Board of Directors authorizes the issuance of any new class of equity securities.
Merger with Realty Income Corporation
On April 29, 2021, the Company and the OP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Realty Income Corporation (“Realty Income”), Rams MD Subsidiary I, Inc., a wholly owned subsidiary of Realty Income (“Merger Sub 1”), and Rams Acquisition Sub II, LLC, a wholly owned subsidiary of Realty Income (“Merger Sub 2”) whereby Merger Sub 2 will be merged with and into the OP (the “Partnership Merger”), with the OP continuing as the surviving entity and, immediately thereafter, VEREIT will be merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation (the “Merger” and, together with the Partnership Merger, the “Mergers”).
Pursuant to the terms and subject to the conditions of the Merger Agreement, each VEREIT common stockholder will have the right to receive 0.705 of newly issued shares of Realty Income common stock (the “Realty Income Common Stock”), par value $0.01 per share. In addition, at the effective time of the Partnership Merger (i) each outstanding General Partner OP Unit will remain outstanding as a common unit of partnership interest in the surviving entity, and (ii) certain outstanding Limited Partner OP Units will be converted into 0.705 of a newly issued share of Realty Income Common Stock, subject to adjustment. Holders of the Limited Partner OP Units will receive cash in lieu of fractional shares.
In connection with the Merger, the Company and Realty Income intend to contribute some or all of their office real properties to a newly formed, wholly owned subsidiary ("Orion"), and, following the Merger, Realty Income intends to distribute the outstanding voting shares of common stock in Orion to the shareholders of the combined company on a pro rata basis (the "Spin-Off"). Following the consummation of the Spin-Off, the Company and Realty Income intend for Orion to operate as a separate, publicly-traded REIT. Subject to the terms and conditions of the Merger Agreement, the Company and Realty Income may also seek to sell some or all of the Orion business in connection with the closing of the Merger.
The Merger Agreement contains customary representations, warranties and covenants by each party. The Merger is subject to certain conditions which are set forth in the Merger Agreement. Stockholders of VEREIT and Realty Income have both approved the Merger. The boards of directors of the Company and Realty Income have also unanimously approved the Merger Agreement. The Merger is expected to close on November 1, 2021 subject to the satisfaction or waiver of other closing conditions specified in the Merger Agreement.
Series F Preferred Stock
On August 15, 2021, the Company redeemed all outstanding shares of Series F Preferred Stock. Concurrently with the redemption of the Series F Preferred Stock, VEREIT OP redeemed all outstanding Series F Preferred Units of VEREIT OP in accordance with the terms of VEREIT OP’s agreement of limited partnership. As a result, the Company’s Series F Preferred Stock was de-listed from the NYSE effective August 16, 2021.
Note 2 - Summary of Significant Accounting Policies
Basis of Accounting
The consolidated financial statements of the Company presented herein include the accounts of the General Partner and its consolidated subsidiaries, including the OP. All intercompany transactions have been eliminated upon consolidation. The financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2020 of the Company, which are included in the Company’s Annual Report on Form 10-K filed on February 24, 2021. Information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and U.S. GAAP.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture. The portion of the consolidated joint venture not owned by the Company is presented as non-controlling interest in VEREIT’s and the OP’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity. In addition, certain third parties were issued OP Units and Series F Preferred Units. Holders of OP Units are considered to be non-controlling interest holders in the OP and their ownership interest in the limited partner’s share is presented as non-controlling interests in VEREIT’s consolidated balance sheets, statements of operations, statements of comprehensive income (loss) and statements of changes in equity. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Equity is reallocated between controlling and noncontrolling interests in the OP upon a change in ownership. At the end of each annual reporting period, noncontrolling interests in the OP are adjusted to reflect their ownership percentage in the OP through a reallocation between controlling and noncontrolling interests in the OP, as applicable. As of each of September 30, 2021 and December 31, 2020, there were approximately 0.2 million Limited Partner OP Units issued and outstanding, respectively. As of December 31, 2020, there were 49,766 Limited Partner Series F Preferred Units issued and outstanding. In connection with the redemption of all shares of outstanding Series F Preferred Stock on August 15, 2021 discussed above, the OP redeemed all outstanding Series F Preferred Units.
For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a variable interest entity (“VIE”). VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. The Company consolidates entities that are not VIEs if it has a majority voting interest or other rights that result in effectively controlling the entity.
The Company then qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE, which is generally defined as the party who has a controlling financial interest in the VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE and the difference between consolidating the VIE and accounting for it using the equity method could be material to the Company’s consolidated financial statements. The Company continually evaluates the need to consolidate these VIEs based on standards set forth in U.S. GAAP.
Reverse Stock Split - Impact to Prior Period
The Company effected a one-for-five reverse stock split of Common Stock after markets closed on December 17, 2020, whereby every five shares of VEREIT's issued and outstanding shares of Common Stock, $0.01 par value per share, were converted into one share of Common Stock, $0.01 par value per share. A corresponding reverse split of the outstanding OP Units also took effect on December 17, 2020. Certain prior period amounts have been updated to reflect the reverse stock split including stock/unit and per share/unit amounts, additional paid-in capital, common stock and dividends on the consolidated statements of operations, consolidated balance sheets, consolidated statements of equity and notes to the financial statements. The reverse stock split did not affect the Company’s total stockholder’s equity, the common stock par value per share or the Company’s authorized shares of common stock. No fractional shares of common stock were issued as fractional shares were settled in cash.
Prior Period Correction
Subsequent to the issuance of the Company’s consolidated financial statements for the year ended December 31, 2020, the Company identified an overstatement in amounts recorded to depreciation expense. As a result, the Company revised the accompanying consolidated balance sheets as of December 31, 2020 to reduce accumulated depreciation and amortization and accumulated deficit and increase the General Partner's common equity by $30.6 million. The Company also revised the accompanying consolidated statements of operations to reduce depreciation and amortization by $0.9 million for the three months ended September 30, 2020 and by $2.8 million for the nine months ended September 30, 2020, which impacted total operating expenses, income before taxes, net income and net income attributable to the OP/General Partner. Basic and diluted net income per share attributable to common stockholders/unitholders (adjusted for the one-for-five stock split) for the three months ended September 30, 2020 changed from $0.40 to $0.41 and for the nine months ended September 30, 2020 remained constant at $0.95. The Company also revised the accompanying consolidated statements of changes in equity to reduce the accumulated deficit balances and increase the General Partner’s common equity at January 1, 2021 and 2020 by $30.6 million and $26.9 million, respectively. For the periods in which the Company revised net income, it made corresponding changes to net income in the accompanying consolidated statements of comprehensive income (loss), consolidated statements of changes in equity and consolidated statements of cash flows. There was no impact to net cash provided by operating activities in the accompanying consolidated statements of cash flows due to the revisions. The Company determined that the correction is not material to the previously issued consolidated financial statements.
Revenue Recognition
Rental Revenue
The Company continually reviews receivables related to rent, straight-line rent and property operating expense reimbursements and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The review includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term and the Company recognizes a general allowance on a portfolio-wide basis. For leases that are deemed not probable of collection, revenue is recorded as cash is received and the Company reduces rental revenue for any straight-line rent receivables. The Company recognizes all changes in the collectability assessment for an operating lease as an adjustment to rental revenue. During the three and nine months ended September 30, 2021, rental revenue increased by $1.1 million and $1.9 million, respectively, as the Company deemed certain previously reserved receivables as collectible, which exceeded amounts deemed uncollectible during the three and nine months ended September 30, 2021.
Rental revenue also includes lease termination income collected from tenants to allow for the tenant to vacate their space prior to their scheduled termination dates, as well as amortization of above and below-market leases.
Merger, litigation and non-routine costs, net
The Company incurred costs for legal, investment banking and other services associated with the Merger, as well as legal fees and settlements associated with litigations and investigations resulting from the Audit Committee Investigation (defined below) and other corporate matters which are considered non-routine.
Merger, litigation and non-routine costs, net include the following costs and recoveries (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Merger, litigation and non-routine costs, net: | ||||||||||||||||
| Merger costs | $ | 9,616 | $ | - | $ | 22,289 | $ | - | ||||||||
| Legal fees and settlements (1)(2) | (171 | ) | 105 | 174 | (6,106 | ) | ||||||||||
| Insurance recoveries | - | - | (6,345 | ) | (2,471 | ) | ||||||||||
| Total | $ | 9,445 | $ | 105 | $ | 16,118 | $ | (8,577 | ) | |||||||
(1)Includes all fees and litigation settlements associated with various corporate matters and litigations and investigations prompted by the results of the 2014 investigation conducted by the audit committee (the “Audit Committee”) of the Company’s Board of Directors (the “Audit Committee Investigation”), net of accrual reversals.
(2)Negative balances are the result of estimated costs accrued in prior periods that exceeded actual expenses incurred.
Equity-based Compensation
The Company had a 2011 equity-based incentive award plan (the “2011 Equity Plan”) for non-executive directors, officers, other employees and advisors or consultants who provided services to the Company, as applicable, and a non-executive director restricted share plan, which were accounted for under U.S. GAAP for share-based payments. On June 3, 2021, the Company’s stockholders, upon the recommendation of the Board, approved the VEREIT, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), which replaced the Company’s 2011 Equity Plan and the non-executive director restricted share plan. All officers, employees, non-employee directors and consultants of the Company and its subsidiaries are eligible to receive awards under the 2021 Plan, which is accounted for under U.S. GAAP for share-based payments. The expense for equity-based incentive awards is recognized over the vesting period or when the requirements for exercise of the award have been met.
As of June 3, 2021, the General Partner had cumulatively awarded under its 2011 Equity Plan approximately 4.0 million shares of Common Stock, which was comprised of 0.8 million restricted share awards (“Restricted Shares”), net of the forfeiture of 0.7 million Restricted Shares through that date, 1.9 million restricted stock units (“Restricted Stock Units”), net of the forfeiture/cancellation of 0.4 million Restricted Stock Units through that date, 0.2 million deferred stock units (“Deferred Stock Units”), and 1.1 million stock options (“Stock Options”), net of forfeiture/cancellation of 0.1 million Stock Options through that date. As of June 3, 2021, the General Partner had cumulatively awarded a total of 9,000 shares under the non-executive director restricted share plan. As of September 30, 2021, the General Partner had cumulatively awarded 1,173 Deferred Stock Units under its 2021 Plan.
As of September 30, 2021, approximately 9.1 million shares, including 0.3 million shares of Common Stock subject to awards granted under the 2011 Plan that may become available for issuance or reissuance, as applicable, under the 2021 Plan if such awards are forfeited, canceled or otherwise terminated (other than by exercise), were available for issuance under the 2021 Plan.
The following is a summary of equity-based compensation expense for the three and nine months ended September 30, 2021 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Time-Based Restricted Stock Units (1) | $ | 1,537 | $ | 1,412 | $ | 4,480 | $ | 4,195 | ||||||||
| Long-Term Incentive-Based Restricted Stock Units | 1,455 | 1,416 | 4,009 | 3,916 | ||||||||||||
| Deferred Stock Units | 27 | 53 | 1,138 | 1,071 | ||||||||||||
| Stock Options | 169 | 330 | 590 | 955 | ||||||||||||
| Total | $ | 3,188 | $ | 3,211 | $ | 10,217 | $ | 10,137 | ||||||||
(1)Includes stock compensation expense attributable to awards for which the requisite service period begins prior to the assumed future grant date.
As of September 30, 2021, total unrecognized compensation expense related to these awards was approximately $21.2 million, with an aggregate weighted-average remaining term of 2.3 years.
Recent Accounting Pronouncements
Reference Rate Reform
During the first quarter of 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Inter-Bank Offer Rate (“LIBOR”)-indexed cash flows to assume that the index applicable to future hedged transactions matched the index on the corresponding derivatives. During the fourth quarter of 2020, the Company terminated its interest rate swap agreements with an aggregate $900.0 million notional amount and terminated its forward starting interest rate swaps with a total notional amount of $400.0 million, both of which were designated as cash flow hedges, in connection with the early repayment of borrowings under the Credit Facility Term Loan (as defined in Note 6 - Debt), as discussed in Note 7 - Derivatives and Hedging Activities. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Note 3 - Real Estate Investments and Related Intangibles
Property Acquisitions
During the nine months ended September 30, 2021, the Company acquired controlling financial interests in 134 commercial properties for an aggregate purchase price of $419.2 million (the “2021 Acquisitions”), which includes $4.0 million of external acquisition-related expenses that were capitalized. Additionally, the Company placed in service one build-to-suit development project in which the Company invested $45.5 million, including $0.9 million of external acquisition-related expenses and interest that were capitalized and the land parcel acquired during the year ended December 31, 2020.
During the nine months ended September 30, 2020, the Company acquired controlling financial interests in 25 commercial properties for an aggregate purchase price of $147.1 million (the “2020 Acquisitions”), which includes the land parcel and capitalized external acquisition-related expenses and interest for the build-to-suit development discussed above.
The following table presents the allocation of the fair values of the assets acquired and liabilities assumed during the periods presented (in thousands):
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Real estate investments, at cost: | ||||||||
| Land | $ | 77,303 | $ | 19,953 | ||||
| Buildings, fixtures and improvements | 249,850 | 95,728 | ||||||
| Total tangible assets | 327,153 | 115,681 | ||||||
| Acquired intangible assets: | ||||||||
| In-place leases and other intangibles (1) | 40,056 | 15,739 | ||||||
| Above-market leases (2) | 54,698 | 15,701 | ||||||
| Assumed intangible liabilities: | ||||||||
| Below-market leases (3) | (2,726 | ) | - | |||||
| Total purchase price of assets acquired | $ | 419,181 | $ | 147,121 | ||||
(1)The weighted average amortization period for acquired in-place leases and other intangibles is 15.6 years and 18.1 years for 2021 Acquisitions and 2020 Acquisitions, respectively.
(2)The weighted average amortization period for acquired above-market leases is 18.2 years and 20.1 years for 2021 Acquisitions and 2020 Acquisitions, respectively.
(3)The weighted average amortization period for assumed below-market leases is 19.9 years for 2021 Acquisitions.
Property Dispositions and Real Estate Assets Held for Sale
During the nine months ended September 30, 2021, the Company disposed of 83 properties, for an aggregate sales price of $432.7 million. The dispositions resulted in proceeds of $420.2 million after closing costs. The Company recorded a gain of $96.5 million related to the dispositions, which is included in gain on disposition of real estate and real estate assets held for sale, net in the accompanying consolidated statements of operations.
During the nine months ended September 30, 2020, the Company disposed of 63 properties, including the sale of three consolidated properties to the office partnership, for an aggregate sales price of $376.2 million, of which our share was $373.4 million after the profit participation payments related to the disposition of four Red Lobster properties. The dispositions resulted in proceeds of $346.7 million after closing costs, including proceeds from the contribution of properties to the office partnership. The Company recorded a gain of $77.2 million related to the sales which is included in gain on disposition of real estate and real estate assets held for sale, net in the accompanying consolidated statements of operations.
As of September 30, 2021, there were seven properties classified as held for sale with a carrying value of $31.1 million, included in real estate assets held for sale, net, primarily comprised of land of $6.6 million and building, fixtures and improvements, net of $24.2 million, in the accompanying consolidated balance sheets, and are expected to be sold in the next 12 months as part of the Company’s portfolio management strategy. During the nine months ended September 30, 2021 and 2020, the Company recorded losses of $0.2 million and $0.3 million, respectively, related to held for sale properties.
Intangible Lease Assets and Liabilities
Intangible lease assets and liabilities of the Company consisted of the following as of September 30, 2021 and December 31, 2020 (amounts in thousands, except weighted-average useful life):
| Weighted- Average Useful Life | September 30, 2021 | December 31, 2020 | ||||||||||
| Intangible lease assets: | ||||||||||||
| In-place leases and other intangibles, net of accumulated amortization of $845,355 and $810,597, respectively | 17.4 | $ | 697,879 | $ | 745,026 | |||||||
| Leasing commissions, net of accumulated amortization of $9,352 and $7,565, respectively | 9.9 | 17,347 | 16,042 | |||||||||
| Above-market lease assets and deferred lease incentives, net of accumulated amortization of $137,033 and $125,455, respectively | 23.2 | 210,285 | 167,776 | |||||||||
| Total intangible lease assets, net | $ | 925,511 | $ | 928,844 | ||||||||
| Intangible lease liabilities: | ||||||||||||
| Below-market leases, net of accumulated amortization of $113,251 and $106,504, respectively | 20.2 | $ | 111,140 | $ | 120,938 | |||||||
The aggregate amount of amortization of above-market and below-market leases and deferred lease incentives included as a net decrease to rental revenue was $4.5 million and $1.9 million for the nine months ended September 30, 2021 and 2020, respectively. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $84.7 million and $103.5 million for the nine months ended September 30, 2021 and 2020, respectively.
The following table provides the projected amortization expense and adjustments to rental revenue related to the intangible lease assets and liabilities for the next five years as of September 30, 2021 (in thousands):
| Remainder of 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | ||||||||||||||
| In-place leases and other intangibles: | |||||||||||||||||||
| Total projected to be included in amortization expense | $ | 26,485 | $ | 94,760 | $ | 85,369 | $ | 76,406 | $ | 64,463 | $ | 58,180 | |||||||
| Leasing commissions: | |||||||||||||||||||
| Total projected to be included in amortization expense | 753 | 2,878 | 2,441 | 2,212 | 1,953 | 1,736 | |||||||||||||
| Above-market lease assets and deferred lease incentives: | |||||||||||||||||||
| Total projected to be deducted from rental revenue | 5,446 | 21,975 | 21,070 | 19,718 | 18,283 | 16,231 | |||||||||||||
| Below-market lease liabilities: | |||||||||||||||||||
| Total projected to be included in rental revenue | 3,481 | 12,924 | 12,248 | 10,494 | 9,290 | 8,766 | |||||||||||||
Consolidated Joint Venture
The Company had an interest in one consolidated joint venture that owned one property as of September 30, 2021 and December 31, 2020. As of September 30, 2021 and December 31, 2020, the consolidated joint venture had total assets of $30.7 million and $33.0 million, respectively, of which $27.8 million and $29.1 million, respectively, were real estate investments, net of accumulated depreciation and amortization at each of the respective dates. The property is secured by a mortgage note payable, which is non-recourse to the Company and had a balance of $14.8 million as of December 31, 2020. During the three months ended September 30, 2021, the Company repaid the balance in full and there were no amounts outstanding as of September 30, 2021. The Company has the ability to control operating and financing policies of the consolidated joint venture. There are restrictions on the use of these assets as the Company is generally required to obtain the approval of the joint venture partner in accordance with the joint venture agreement for any major transactions. The Company and the joint venture partner are subject to the provisions of the joint venture agreement, which includes provisions for when additional contributions may be required to fund certain cash shortfalls.
Investment in Unconsolidated Entities
The following is a summary of the Company’s investments in unconsolidated entities as of September 30, 2021 and December 31, 2020 and for the nine months ended September 30, 2021 and 2020 (dollar amounts in thousands):
| Ownership % (1) | Number of Properties | Carrying Amount of Investment | Equity in Income Nine Months Ended | |||||||||||||||||||
| Investment | September 30, 2021 | September 30, 2021 | December 31, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||||||
| Industrial Partnership | 20 | % | 7 | $ | 42,949 | $ | 45,378 | $ | 753 | $ | 584 | |||||||||||
| Office Partnership (2) | 20 | % | 5 | 14,588 | 13,435 | 621 | 380 | |||||||||||||||
| Faison JV Bethlehem GA (3) | - | % | - | - | - | - | 1,442 | |||||||||||||||
| Total unconsolidated joint ventures | $ | 57,537 | $ | 58,813 | $ | 1,374 | $ | 2,406 | ||||||||||||||
| Preferred equity (4) | 22,826 | 22,826 | - | - | ||||||||||||||||||
| Total investment in unconsolidated entities | $ | 80,363 | $ | 81,639 | $ | 1,374 | $ | 2,406 | ||||||||||||||
____________________________________
(1)The Company’s ownership interest reflects its legal ownership interest. Legal ownership may, at times, not equal the Company’s economic interest in the listed properties because of various provisions in certain joint venture agreements regarding capital contributions, distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns. As a result, the Company’s actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with its legal ownership interests.
(2)During the nine months ended September 30, 2021, the office partnership acquired one property from a third party for a purchase price of $26.4 million.
(3)During the nine months ended September 30, 2020, the Company had a 90% ownership interest in one property. On October 30, 2020, the Company closed on the purchase of the joint venture partner’s 10% ownership interest.
(4)Represents a preferred equity interest in the development of one distribution center in which the Company is entitled to receive a cumulative preferred return of 9% per year on its contributions of $22.8 million. The Company has no further obligation to make additional contributions.
The aggregate debt outstanding of unconsolidated joint ventures and for the development of one distribution center in which the Company holds a preferred equity interest was $673.8 million and $550.5 million as of September 30, 2021 and December 31, 2020, respectively, which is non-recourse to the Company, as discussed in Note 6 - Debt.
The Company and the respective unconsolidated joint venture partners are subject to the provisions of the applicable joint venture agreements, which include provisions for when additional contributions may be required to fund certain cash shortfalls.
Note 4 - Rent and Tenant Receivables and Other Assets, Net
Rent and tenant receivables and other assets, net consisted of the following as of September 30, 2021 and December 31, 2020 (in thousands):
| September 30, 2021 | December 31, 2020 | |||||||
| Straight-line rent receivable, net | $ | 289,312 | $ | 278,831 | ||||
| Accounts receivable, net | 49,328 | 53,051 | ||||||
| Deferred costs, net (1) | 2,662 | 5,185 | ||||||
| Investment in direct financing leases, net | 5,422 | 6,547 | ||||||
| Investment in Retained REITs (2) | 7,948 | 7,255 | ||||||
| Prepaid expenses | 6,223 | 3,850 | ||||||
| Leasehold improvements, property and equipment, net (3) | 3,081 | 3,991 | ||||||
| Other assets, net | 7,935 | 7,910 | ||||||
| Total | $ | 371,911 | $ | 366,620 | ||||
(1)Amortization expense for deferred costs related to the revolving credit facilities totaled $0.8 million for each of the three months ended September 30, 2021 and 2020, respectively, and $2.5 million and $2.3 million for the nine months ended September 30, 2021 and 2020, respectively. Accumulated amortization for deferred costs related to the revolving credit facilities was $55.4 million and $52.9 million as of September 30, 2021 and December 31, 2020, respectively.
(2)On February 1, 2018, the Company sold certain of its equity investments to CCA Acquisition, LLC, an affiliate of CIM Group, LLC, retaining interests in Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”), Cole Office & Industrial REIT (CCIT III), Inc. (“CCIT III”) and Cole Credit Property Trust V, Inc. (“CCPT V” and, collectively with CCIT II and CCIT III, the “Retained REITs”). On December 21, 2020, CIM Real Estate Finance Trust, Inc. acquired CCIT III and CCPT V. On March 1, 2021, Griffin Capital Essential Asset REIT, Inc. acquired CCIT II. Subsequent to the Company’s sale of Cole Capital, it carries these investments at fair value, as it does not exert significant influence over the Retained REITs, and any changes in the fair value are recognized in other income, net in the accompanying consolidated statement of operations. During the nine months ended September 30, 2021 and 2020, the Company recognized a gain of $0.7 million and a loss of $0.6 million, respectively, related to the change in fair value.
(3)Amortization expense for leasehold improvements totaled $0.1 million and $0.4 million for the three and nine months ended September 30, 2021, respectively, with no related write-offs. Amortization expense for leasehold improvements totaled $0.1 million and $0.4 million for the three and nine months ended September 30, 2020, respectively, with no related write-offs. Accumulated amortization was $3.8 million and $3.4 million as of September 30, 2021 and December 31, 2020, respectively. Depreciation expense for property and equipment totaled $0.2 million and $0.8 million for the three and nine months ended September 30, 2021, respectively, with no related write-offs. Depreciation expense for property and equipment totaled $0.3 million and $0.8 million for the three and nine months ended September 30, 2020, respectively, with no related write-offs. Accumulated depreciation was $7.3 million and $6.5 million as of September 30, 2021 and December 31, 2020, respectively.
Note 5 - Fair Value Measures
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. U.S. GAAP guidance defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. Changes in the type of inputs may result in a reclassification for certain assets. The Company does not expect that changes in classifications between levels will be frequent.
Items Measured at Fair Value on a Recurring Basis
The fair value of the Investment in Retained REITs was $7.9 million and $7.3 million as of September 30, 2021 and December 31, 2020, respectively. The fair values were estimated using the net asset value per share, as most recently disclosed by each applicable REIT. Each of the Retained REIT’s share redemption programs includes restrictions that limit the number of shares redeemed by the respective Retained REIT.
The following are reconciliations of the changes in assets and liabilities with Level 3 inputs in the fair value hierarchy for the nine months ended September 30, 2021 and 2020 (in thousands):
| Investment in Retained REITs | ||||
| Beginning balance, January 1, 2021 | $ | 7,255 | ||
| Unrealized gain included in other income, net | 693 | |||
| Ending Balance, September 30, 2021 | $ | 7,948 | ||
| Beginning balance, January 1, 2020 | $ | 7,552 | ||
| Unrealized loss included in other income, net | (609 | ) | ||
| Ending Balance, September 30, 2020 | $ | 6,943 | ||
Items Measured at Fair Value on a Non-Recurring Basis
Certain financial and nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
Real Estate and Other Investments - The Company performs quarterly impairment review procedures for real estate investments, leasehold improvements and property and equipment, right of use assets and investments in unconsolidated entities, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of these investments may not be recoverable.
As part of the Company’s quarterly impairment review procedures, net real estate assets representing 56 properties were deemed to be impaired resulting in impairment charges of $59.3 million during the nine months ended September 30, 2021 that relate to certain office, retail and restaurant properties which, during the nine months ended September 30, 2021, were identified by management for potential sale or were determined would not be re-leased by the tenant. There were no impairment charges directly attributable to the COVID-19 pandemic during the nine months ended September 30, 2021.
During the nine months ended September 30, 2020, net real estate assets related to 47 properties, were deemed to be impaired resulting in impairment charges of $36.9 million. The impairment charges relate to certain retail and restaurant properties whose tenants filed for Chapter 11 bankruptcy during the nine months ended September 30, 2020, were identified by management for potential sale or were determined would not be re-leased by the tenant.
The Company estimates fair values using Level 3 inputs and uses a combined income and market approach, specifically using discounted cash flow analysis and recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and make certain key assumptions, including, but not limited to, the following: (1) capitalization rate; (2) discount rates; (3) number of years property will be held; (4) property operating expenses; and (5) re-leasing assumptions including number of months to re-lease, market rental revenue and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of the Company’s tenants. For the Company’s impairment tests for the real estate assets during the nine months ended September 30, 2021, the Company used a range of discount rates from 7.9% to 10.5% with a weighted-average rate of 8.6% and capitalization rates from 7.4% to 10.0% with a weighted-average rate of 8.1%.
Goodwill - The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company performed the annual qualitative assessment for goodwill during the fourth quarter of 2020, which resulted in no impairments. The Company continues to monitor factors that may impact the fair value of goodwill including, but not limited to, market comparable company multiples, stock price, interest rates, and global economic conditions including the COVID-19 pandemic.
Fair Value of Financial Instruments
The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash and accounts payable approximate their carrying value in the accompanying consolidated balance sheets due to their short-term nature and are classified as Level 1 under the fair value hierarchy. The fair values of the Company’s financial instruments are reported below (dollar amounts in thousands):
| Level | Carrying Amount at September 30, 2021 | Fair Value at September 30, 2021 | Carrying Amount at December 31, 2020 | Fair Value at December 31, 2020 | |||||||||||
| Liabilities (1): | |||||||||||||||
| Mortgage notes payable and other debt, net | 2 | $ | 991,699 | $ | 1,031,324 | $ | 1,334,689 | $ | 1,384,490 | ||||||
| Corporate bonds, net | 2 | 4,625,208 | 5,044,711 | 4,622,951 | 5,123,588 | ||||||||||
| Credit facility | 2 | 88,000 | 88,000 | - | - | ||||||||||
| Total liabilities | $ | 5,704,907 | $ | 6,164,035 | $ | 5,957,640 | $ | 6,508,078 | |||||||
(1)Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs.
Debt - The fair value is estimated by an independent third party using a discounted cash flow analysis, based on management’s estimates of observable market interest rates. Corporate bonds are valued using quoted market prices in active markets with limited trading volume when available.
Note 6 - Debt
As of September 30, 2021, the Company had $5.7 billion of debt outstanding, including net premiums (discounts) and net deferred financing costs, with a weighted-average years to maturity of 5.5 years and a weighted-average interest rate of 3.86%. The following table summarizes the carrying value of debt as of September 30, 2021 and December 31, 2020, and the debt activity for the nine months ended September 30, 2021 (in thousands):
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Balance as of December 31, 2020 | Debt Issuances | Repayments, Extinguishment and Assumptions | Accretion and Amortization | Balance as of September 30, 2021 | ||||||||||||||||
| Mortgage notes payable: | ||||||||||||||||||||
| Outstanding balance | $ | 1,333,195 | $ | - | $ | (341,392 | ) | $ | - | $ | 991,803 | |||||||||
| Net premiums (discounts) (1) | 1,495 | - | (1,041 | ) | (558 | ) | (104 | ) | ||||||||||||
| Deferred costs | (5,855 | ) | - | 349 | 1,511 | (3,995 | ) | |||||||||||||
| Mortgage notes payable, net | 1,328,835 | - | (342,084 | ) | 953 | 987,704 | ||||||||||||||
| Corporate bonds: | ||||||||||||||||||||
| Outstanding balance | 4,650,000 | - | - | - | 4,650,000 | |||||||||||||||
| Discount (2) | (27,049 | ) | - | - | 2,257 | (24,792 | ) | |||||||||||||
| Deferred costs | (38,721 | ) | - | - | 3,861 | (34,860 | ) | |||||||||||||
| Corporate bonds, net | 4,584,230 | - | - | 6,118 | 4,590,348 | |||||||||||||||
| Credit facility | - | 192,000 | (104,000 | ) | - | 88,000 | ||||||||||||||
| Total debt | $ | 5,913,065 | $ | 192,000 | $ | (446,084 | ) | $ | 7,071 | $ | 5,666,052 | |||||||||
(1)Net premiums (discounts) on mortgage notes payable were recorded upon the assumption of the respective mortgage notes in relation to the various mergers and acquisitions. Amortization of these net premiums is recorded as a reduction to interest expense over the remaining term of the respective mortgage notes using the effective-interest method.
(2)Discounts on the corporate bonds were recorded based upon the fair value of the respective debt instruments as of the respective issuance dates. Amortization of these discounts is recorded as an increase to interest expense over the remaining term of the respective debt instruments using the effective-interest method.
Mortgage Notes Payable
The Company’s mortgage notes payable consisted of the following as of September 30, 2021 (dollar amounts in thousands):
| Encumbered Properties | Net
Carrying Value of Collateralized Properties (1) | Outstanding Balance | Weighted-Average Interest Rate (2) | Weighted-Average Years to Maturity (3) | ||||||||||||||||
| Fixed-rate debt | 216 | $ | 1,160,118 | $ | 991,803 | 4.88 | % | 1.9 | ||||||||||||
(1) Net carrying value is real estate assets, including investment in direct financing leases, net of real estate liabilities.
(2) Weighted average interest rate is computed using the interest rate in effect until the anticipated repayment date. Should the loan not be repaid at the anticipated repayment date, the applicable interest rate will increase as specified in the respective loan agreement until the extended maturity date.
(3) Weighted average years remaining to maturity is computed using the anticipated repayment date as specified in each loan agreement, where applicable.
The table above does not include mortgage notes associated with unconsolidated joint ventures and preferred equity investments of $673.8 million, which are non-recourse to the Company.
The Company’s mortgage loan agreements generally restrict corporate guarantees and require the maintenance of financial covenants, including maintenance of certain financial ratios (such as debt service coverage ratios and minimum net operating income). The mortgage loan agreements contain no dividend restrictions except in the event of default or when a distribution would drive liquidity below the applicable thresholds. As of September 30, 2021, the Company believes that it was in compliance with the financial covenants under the mortgage loan agreements and had no restrictions on the payment of dividends.
The following table summarizes the scheduled aggregate principal repayments due on mortgage notes subsequent to September 30, 2021 (in thousands):
| Total | |||||
| October 1, 2021 - December 31, 2021 | $ | 399 | |||
| 2022 | 239,201 | ||||
| 2023 | 124,217 | ||||
| 2024 | 621,021 | ||||
| 2025 | 1,078 | ||||
| 2026 | 1,138 | ||||
| Thereafter | 4,749 | ||||
| Total | $ | 991,803 | |||
Corporate Bonds
As of September 30, 2021, the OP had $4.65 billion aggregate principal amount of senior unsecured notes (the “Senior Notes”) outstanding comprised of the following (dollar amounts in thousands):
| Outstanding Balance September 30, 2021 | Interest Rate | Maturity Date | |||||||||
| Senior Notes due 2024 | $ | 500,000 | 4.600 | % | February 6, 2024 | ||||||
| Senior Notes due 2025 | 550,000 | 4.625 | % | November 1, 2025 | |||||||
| Senior Notes due 2026 | 600,000 | 4.875 | % | June 1, 2026 | |||||||
| Senior Notes due 2027 | 600,000 | 3.950 | % | August 15, 2027 | |||||||
| Senior Notes due January, 2028 | 600,000 | 3.400 | % | January 15, 2028 | |||||||
| Senior Notes due June, 2028 | 500,000 | 2.200 | % | June 15, 2028 | |||||||
| Senior Notes due 2029 | 600,000 | 3.100 | % | December 15, 2029 | |||||||
| Senior Notes due 2032 | 700,000 | 2.850 | % | December 15, 2032 | |||||||
| Total balance and weighted-average interest rate | $ | 4,650,000 | 3.685 | % | |||||||
The Senior Notes are guaranteed by the General Partner. The OP may redeem all or a part of any series of the Senior Notes at any time, at its option, for the redemption prices set forth in the indenture governing the Senior Notes. Generally, 60 to 90 days prior to maturity, the redemption price will be equal to 100% of the principal amount of the Senior Notes. The Senior Notes are registered under the Securities Act of 1933, as amended (the “Securities Act”) and are freely transferable.
The indenture governing our Senior Notes requires us to maintain financial ratios which include maintaining (i) a maximum limitation on incurrence of total debt less than or equal to 65% of Total Assets (as defined in the indenture), (ii) maximum limitation on incurrence of secured debt less than or equal to 40% of Total Assets (as defined in the indenture), (iii) a minimum debt service coverage ratio of at least 1.5x and (iv) a minimum unencumbered asset value of at least 150% of the aggregate principal amount of all of the outstanding Unsecured Debt (as defined in the indenture). As of September 30, 2021, the Company believes that it was in compliance with the financial covenants of our Senior Notes based on the covenant limits and calculations in place at that time.
On October 8, 2021, Realty Income announced the commencement of exchange offers and consent solicitations for all of the outstanding series of unsecured notes issued by the OP and guaranteed by the General Partner. The exchange offers and consent solicitations are being conducted in connection with, and are conditioned upon, the completion of the Merger.
Credit Facility
On May 23, 2018, the General Partner, as guarantor, and the OP, as borrower, entered into a credit agreement with Wells Fargo Bank, National Association as administrative agent and other lenders party thereto (the “Credit Agreement”). The Credit Agreement provided for maximum borrowings of $2.9 billion, originally consisting of a $2.0 billion unsecured revolving credit facility (the “Revolving Credit Facility”) and a $900.0 million unsecured term loan facility (the “Credit Facility Term Loan,” together with the Revolving Credit Facility, the “Credit Facility”). Effective December 27, 2019, the Company reduced the amount available under its Revolving Credit Facility from $2.0 billion to $1.5 billion. On May 27, 2020, the Operating Partnership and the Company, entered into Amendment No. 1 to the Credit Agreement (the “Amendment”) which, among other things, modified the measurement period for certain financial covenants (and relevant associated definitions) from either the prior quarterly period annualized or the prior six month period to the four consecutive fiscal quarter period most recently ending. During the fourth quarter of 2020, the Company repaid the outstanding balance of $900.0 million on the Credit Facility Term Loan in connection with the termination of the related interest rate swap agreements discussed in Note 7 - Derivatives and Hedging Activities.
As of September 30, 2021, $88.0 million was outstanding under the Revolving Credit Facility. The maximum aggregate dollar amount of letters of credit that may be outstanding at any one time under the Credit Facility is $50.0 million. As of September 30, 2021, there were $1.3 million of letters of credit outstanding.
The Revolving Credit Facility generally bears interest at an annual rate of LIBOR plus 0.775% to 1.55% or Base Rate plus 0.00% to 0.55% (based upon the General Partner’s then current credit rating). “Base Rate” is defined as the highest of the prime rate, the federal funds rate plus 0.50% or a floating rate based on one month LIBOR plus 1.0%, determined on a daily basis. The Credit Facility Term Loan generally bore interest at an annual rate of LIBOR plus 0.85% to 1.75%, or Base Rate plus 0.00% to 0.75% (based upon the General Partner’s then current credit rating). In addition, the Credit Agreement provides the flexibility for interest rate auctions, pursuant to which, at the Company’s election, the Company may request that lenders make competitive bids to provide revolving loans, which competitive bids may be at pricing levels that differ from the foregoing interest rates.
In the event of default, at the election of a majority of the lenders (or automatically upon a bankruptcy event of default with respect to the OP or the General Partner), the commitments of the lenders under the Credit Facility will terminate, and payment of any unpaid amounts in respect of the Credit Facility will be accelerated. The Revolving Credit Facility terminates on May 23, 2022, unless extended in accordance with the terms of the Credit Agreement. The Credit Agreement provides for two six-month extension options with respect to the Revolving Credit Facility, exercisable at the OP’s election and subject to certain customary conditions, as well as certain customary “amend and extend” provisions. At any time, upon timely notice by the OP and subject to any breakage fees, the OP may prepay borrowings under the Credit Facility (subject to certain limitations applicable to the prepayment of any loans obtained through an interest rate auction, as described above). The OP incurs a facility fee equal to 0.10% to 0.30% per annum (based upon the General Partner’s then current credit rating) multiplied by the commitments (whether or not utilized) in respect of the Revolving Credit Facility. The OP also incurs customary administrative agent, letter of credit issuance, letter of credit fronting, extension and other fees.
The Credit Facility requires restrictions on corporate guarantees, as well as the maintenance of financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios). The key financial covenants in the Credit Facility, as defined and calculated per the terms of the Credit Agreement, include maintaining (i) a maximum leverage ratio less than or equal to 60%, (ii) a minimum fixed charge coverage ratio of at least 1.5x, (iii) a secured leverage ratio less than or equal to 45%, (iv) a total unencumbered asset value ratio less than or equal to 60% and (v) a minimum unencumbered interest coverage ratio of at least 1.75x. The Company believes that it was in compliance with the financial covenants pursuant to the Credit Agreement and is not restricted from accessing any borrowing availability under the Credit Facility as of September 30, 2021.
Note 7 - Derivatives and Hedging Activities
Cash Flow Hedges of Interest Rate Risk
As of September 30, 2021 and December 31, 2020, the Company had no interest rate swaps that were designated as qualifying hedging relationships. The Company had interest rate swap agreements with an aggregate $900.0 million notional amount, which were designated as cash flow hedges, and forward starting interest rate swaps with a total notional amount of $400.0 million, which were designated as cash flow hedges, that were terminated during the fourth quarter of 2020.
During the three and nine months ended September 30, 2020, the Company recorded unrealized gains of $3.7 million and unrealized losses of $81.4 million for changes in the fair value of the cash flow hedges in accumulated other comprehensive income. There were no such gains or losses recorded during the three and nine months ended September 30, 2021.
The Company reclassified previous losses of $0.1 million and $0.3 million for the three and nine months ended September 30, 2021, respectively, and losses of $5.4 million and $12.0 million for the three and nine months ended September 30, 2020, respectively, from accumulated other comprehensive income (loss) into interest expense as a result of the hedged transactions impacting earnings.
During the next twelve months, the Company estimates that an additional $0.4 million will be reclassified from other comprehensive income (loss) as an increase to interest expense.
Note 8 - Supplemental Cash Flow Disclosures
Supplemental cash flow information was as follows for the nine months ended September 30, 2021 and 2020 (in thousands):
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Supplemental disclosures: | ||||||||
| Cash paid for interest | $ | 165,441 | $ | 176,694 | ||||
| Cash paid for income taxes | $ | 4,017 | $ | 5,601 | ||||
| Non-cash investing and financing activities: | ||||||||
| Accrued capital expenditures, tenant improvements and real estate developments | $ | 10,499 | $ | 8,831 | ||||
| Real estate contributions to office partnership | $ | - | $ | 17,240 | ||||
| Distributions declared and unpaid | $ | 105,958 | $ | 85,421 | ||||
| Real estate investments received from lease related transactions | $ | 3,982 | $ | 259 | ||||
| Note receivable for disposal of real estate investments | $ | 4,500 | $ | - | ||||
Note 9 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of September 30, 2021 and December 31, 2020 (in thousands):
| September 30, 2021 | December 31, 2020 | |||||||
| Accrued interest | $ | 49,091 | $ | 44,164 | ||||
| Accrued real estate and other taxes | 32,032 | 27,689 | ||||||
| Accrued merger costs, legal fees and litigation settlements | 12,775 | 11,245 | ||||||
| Accounts payable | 1,363 | 1,895 | ||||||
| Accrued other | 42,365 | 32,022 | ||||||
| Total | $ | 137,626 | $ | 117,015 | ||||
Note 10 - Commitments and Contingencies
The Company is party to various legal proceedings and claims which it believes are routine in nature and incidental to the operation of its business. Although we do not expect that these legal proceedings and claims will have a material adverse effect on our financial position, liquidity or results of operations, an adverse result in one or more matters could negatively affect our results in the period in which they occur, or in future periods.
As previously disclosed, on April 29, 2021, the Company entered into the Merger Agreement with Realty Income, Merger Sub 1 and Merger Sub 2. Pursuant to the terms and conditions of the Merger Agreement, upon the closing, (i) Merger Sub 2 will be merged with and into the OP, with the OP continuing as the surviving entity and, immediately following the Partnership Merger, (ii) VEREIT, Inc. will be merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation.
In connection with the proposed Mergers, Realty Income filed with the SEC a registration statement on Form S-4 containing a joint proxy statement/prospectus, as amended, and the Company filed a definitive proxy statement and Realty Income filed a definitive proxy statement/prospectus with the SEC, each dated June 29, 2021 (collectively, the “joint proxy statement/prospectus”), which the Company and Realty Income first mailed to their respective shareholders and stockholders on or about July 9, 2021.
Following the announcement of the Merger Agreement, purported stockholders of the Company filed twelve lawsuits challenging disclosures related to the Merger (the “Complaints”). The Complaints are Stein v. VEREIT, Inc., et al., Case No. 1:21-cv-01409 (D. Md. June 7, 2021) (the “Stein Complaint”); Bowles v. VEREIT, Inc., et al., Case No. 1:21-cv-00845 (D. Del. June 10, 2021) (the “Bowles Complaint”); Leach v. VEREIT, Inc., et al., Case No. 1:21-cv-05270 (S.D.N.Y. June 14, 2021) (the “Leach Complaint”); Jenkins v. VEREIT, Inc., et al., Case No. 1:21-cv-05286 (S.D.N.Y. June 15, 2021) (the “Jenkins Complaint”); Tacka v. VEREIT, Inc., et al., Case No. 1:21-cv-05357 (S.D.N.Y. June 17, 2021) (the “Tacka Complaint”); Congregation Zichron Moishe v. VEREIT, Inc., et al., Case No. 1:21-cv-01729 (D. Colo. June 24, 2021) (the “Congregation Zichron Moishe Complaint”); Mishra v. VEREIT, Inc., et al., Case No. 1:21-cv-01758 (D. Colo. June 28, 2021) (the “Mishra Complaint”); Walker v. VEREIT, Inc., et al., Case No. 1:21-cv-01791 (D. Colo. July 1, 2021) (the “Walker Complaint”); Ciccotelli v. VEREIT, Inc., et al., Case No. 2:21-cv-02983 (E.D. Pa. July 2, 2021) (the “Ciccotelli Complaint”); Upton v. VEREIT, Inc., et al., Case No. 1:21-cv-06129 (S.D.N.Y. July 16, 2021) (the “Upton Complaint”); Matten v. VEREIT, Inc., et al., Case No. 1:21-cv-06212 (S.D.N.Y. July 21, 2021) (the “Matten Complaint”); and Halberstam v. VEREIT, Inc., et al., Case No. 1:21-cv-02000 (D. Colo. July 23, 2021 (the “Halberstam Complaint”).
The Stein, Leach, Tacka, Matten and Halberstam Complaints name VEREIT, Inc. and the members of the Company’s board of directors as defendants. The Congregation Zichron Moishe, Mishra, Walker and Upton Complaints name VEREIT, Inc., the OP, and the members of the Company’s board of directors as defendants. The Bowles and Ciccotelli Complaints name VEREIT, Inc., the members of the Company’s board of directors, OP, Realty Income, Merger Sub 1 and Merger Sub 2 as defendants. The Jenkins Complaint names VEREIT, Inc., the members of the Company’s board of directors, Realty Income, Merger Sub 1 and Merger Sub 2 as defendants.
Each of the Complaints alleges that VEREIT, Inc. and the members of the Company’s board of directors violated Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 14a-9 promulgated thereunder by preparing and disseminating a registration statement that misstates or omits certain allegedly material information. Each of the Complaints also alleges that the members of the Company’s board of directors violated Section 20(a) of the Exchange Act by causing the Company to disseminate a misleading registration statement. The Bowles and Ciccotelli Complaints further allege that Realty Income and the OP violated Section 20(a) of the Exchange Act. The Mishra, Congregation Zichron Moishe, Walker and Upton Complaints further allege that Realty Income and the OP violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The Jenkins Complaint further alleges that Realty Income, Merger Sub 1 and Merger Sub 2 violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, that the members of the Company’s board of directors have violated the fiduciary duties they owe towards the Company’s stockholders by causing the Company to enter into the Merger at an unfair price and through an unfair process, and that VEREIT, Inc., Realty Income, Merger Sub 1 and Merger Sub 2 aided and abetted this alleged breach of fiduciary duty.
Each of the Complaints seeks, among other things, injunctive relief enjoining the consummation of the Merger, if the Merger is consummated, rescission or rescissory damages and an award of the plaintiff’s costs, including attorneys’ and experts’ fees.
The Company and all of the individual defendants named in the Complaints believe that the claims asserted in the Complaints are entirely without merit. While the defendants believe that the disclosures set forth in the joint proxy statement/prospectus comply fully with applicable law, to moot plaintiffs’ disclosure claims and to avoid nuisance, potential expense and delay, on July 30, 2021, the Company voluntarily supplemented the joint proxy statement/prospectus with certain disclosures. In light of these additional disclosures, counsel for the plaintiffs who filed the Complaints agreed to dismiss, or seek authority from their clients to dismiss, their respective actions. Nothing in the Company’s supplemental disclosures will be deemed an admission of the legal necessity or materiality under applicable law of any of the disclosures set forth therein or of the existence of any misrepresentations or omissions in the joint proxy statement/prospectus. To the contrary, the Company denies all allegations in the Complaints that any additional disclosure was or is required. Between August 2, 2021 and October 27, 2021, plaintiffs’ counsel in all of the cases voluntarily dismissed their respective complaints.
Purchase Commitments
In the normal course of business, the Company enters into various types of commitments to purchase real estate properties. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated to purchase the properties.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition, in each case, that it believes will have a material adverse effect on the results of operations.
Note 11 - Leases
Lessor
The Company is the lessor for its 3,882 retail, restaurant, office and industrial properties. The Company’s operating and direct financing leases have non-cancelable lease terms of 0.08 years to 25.0 years. Certain leases with tenants include options to extend or terminate the lease agreements or to purchase the underlying asset. Lease agreements may also contain rent increases that are based on an index or rate (e.g., the consumer price index (“CPI”) or LIBOR). The Company believes the residual value risk is not a primary risk because of the long-lived nature of the assets.
The components of rental revenue from the Company’s operating and direct financing leases were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Fixed: | ||||||||||||||||
| Cash rent | $ | 264,466 | $ | 255,996 | $ | 799,943 | $ | 778,697 | ||||||||
| Straight-line rent | 3,560 | 12,595 | 12,392 | 18,053 | ||||||||||||
| Lease intangible amortization | (1,164 | ) | (393 | ) | (4,541 | ) | (1,929 | ) | ||||||||
| Property operating cost reimbursements | 1,373 | 1,581 | 4,045 | 4,372 | ||||||||||||
| Sub-lease (1) | 4,898 | 5,175 | 14,623 | 15,718 | ||||||||||||
| Total fixed | 273,133 | 274,954 | 826,462 | 814,911 | ||||||||||||
| Variable (2) | 16,422 | 18,585 | 43,711 | 55,438 | ||||||||||||
| Income from direct financing leases | 116 | 153 | 374 | 505 | ||||||||||||
| Total rental revenue | $ | 289,671 | $ | 293,692 | $ | 870,547 | $ | 870,854 | ||||||||
(1) The Company’s tenants are generally sub-tenants under certain ground leases and are responsible for paying the rent under these leases.
(2) Includes costs reimbursed related to property operating expenses, common area maintenance and percentage rent, including these costs reimbursed by ground lease sub-tenants.
The following table presents future minimum operating lease payments due to the Company over the next five years and thereafter as of September 30, 2021 (in thousands). These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes.
| Future Minimum Operating Lease Payments | Future
Minimum Direct Financing Lease Payments (1) | ||||||||
| October 1, 2021 - December 31, 2021 | $ | 251,110 | $ | 501 | |||||
| 2022 | 1,009,650 | 1,925 | |||||||
| 2023 | 954,282 | 1,565 | |||||||
| 2024 | 890,154 | 510 | |||||||
| 2025 | 790,230 | 169 | |||||||
| 2026 | 730,788 | 171 | |||||||
| Thereafter | 4,532,336 | 484 | |||||||
| Total | $ | 9,158,550 | $ | 5,325 | |||||
(1) Related to 18 properties which are subject to direct financing leases and, therefore, revenue is recognized as rental income on the discounted cash flows of the lease payments. Amounts reflect undiscounted cash flows to be received by the Company under the lease agreements on these respective properties.
Lessee
The Company is the lessee under ground lease arrangements and corporate office leases. All leases for which the Company is the lessee meet the criteria of an operating lease. The Company’s leases have remaining lease terms of 0.2 years to 77.9 years, some of which include options to extend. The weighted average remaining lease term for the Company’s operating leases was 15.6 years as of September 30, 2021. Under certain ground lease arrangements, the Company pays variable costs, including property operating expenses and common area maintenance, which are generally reimbursed by the ground lease sub-tenants. The weighted average discount rate for the Company’s operating leases was 4.91% as of September 30, 2021. As the Company’s leases do not provide an implicit rate, the Company used an estimated incremental borrowing rate based on the information available at the adoption date in determining the present value of lease payments.
The Company incorporated renewal periods in the calculation of the majority of ground lease right-of-use assets and lease liabilities. Pursuant to certain leases, the Company is required to execute renewal options available under the ground lease through the building lease term. No renewals were incorporated in the calculation of the corporate lease right-of-use assets and liabilities, as it is not reasonably certain that the Company will exercise the options. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The following table presents the lease expense components for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating lease cost (1) | $ | 5,704 | $ | 5,933 | $ | 16,932 | $ | 19,643 | ||||||||
| Sublease income (2) | $ | (4,898 | ) | $ | (5,175 | ) | $ | (14,623 | ) | $ | (15,718 | ) | ||||
(1) No cash paid for operating lease liabilities was capitalized.
(2) The Company’s tenants are generally sub-tenants under certain ground leases and are responsible for paying the rent under these leases.
During the nine months ended September 30, 2021, the Company reduced the right-of-use assets and operating lease liabilities by $0.6 million and $4.1 million, respectively, for non-cash activity related to dispositions and lease modifications. The Company increased the right-of-use assets and operating lease liabilities each by $0.9 million during the nine months ended September 30, 2020.
The following table reflects the maturity analysis of payments due from the Company over the next five years and thereafter for ground lease obligations, which are substantially reimbursable by our tenants, and office lease obligations as of September 30, 2021 (in thousands).
| Future Minimum Lease Payments | |||||
| October 1, 2021 - December 31, 2021 | $ | 5,649 | |||
| 2022 | 21,069 | ||||
| 2023 | 20,571 | ||||
| 2024 | 19,942 | ||||
| 2025 | 19,644 | ||||
| 2026 | 18,247 | ||||
| Thereafter | 187,379 | ||||
| Total | 292,501 | ||||
| Less: imputed interest | 95,830 | ||||
| Total | $ | 196,671 | |||
Note 12 - Equity
Reverse Stock Split
The Company’s one-for-five reverse stock split of its Common Stock took effect after markets closed on December 17, 2020, following the filing of amendments to its charter with the Maryland State Department of Assessments and Taxation whereby every five shares of VEREIT's issued and outstanding shares of Common Stock, $0.01 par value per share, were converted into one share of Common Stock, $0.01 par value per share. VEREIT’s Common Stock began trading on the NYSE on a split-adjusted basis beginning December 18, 2020. Fractional shares resulting from the reverse stock split were paid in cash based on the trailing average closing price of VEREIT’s Common Stock on the NYSE for a period of three days prior to the effective date. The reverse stock split affected all record holders of VEREIT’s Common Stock uniformly and did not affect any record holder’s percentage ownership interest, except for de minimus changes as a result of the elimination of fractional shares. Trading in the Common Stock continued on the NYSE under the symbol “VER” but the Common Stock was assigned a new CUSIP number. The reverse stock split reduced the number of shares of Common Stock outstanding but did not affect the number of VEREIT’s authorized shares of Common Stock. A corresponding reverse split of the outstanding OP Units also took effect on December 17, 2020.
Common Stock and General Partner OP Units
The General Partner is authorized to issue up to 1.5 billion shares of Common Stock.
As of September 30, 2021, the General Partner had approximately 229.2 million shares of Common Stock issued and outstanding. Additionally, the Operating Partnership had approximately 229.2 million General Partner OP Units issued and outstanding as of September 30, 2021, corresponding to the General Partner’s outstanding shares of Common Stock.
Common Stock Continuous Offering Program
On February 25, 2021, the Company established a new continuous equity offering program pursuant to which the Company can sell shares of Common Stock having an aggregate offering price of up to $1.5 billion in “at-the-market” offerings or certain other transactions (the “New ATM Program”). Under the New ATM Program, the Company may also enter into one or more forward transactions under separate master forward sale confirmations and related supplemental confirmations for the sale of shares of its common stock on a forward basis.
The New ATM Program replaced the Company’s prior continuous equity offering program, which was effective April 15, 2019 (the “Prior ATM Program” and collectively with the New ATM Program, the “ATM Program”). The proceeds from any sale of shares under the ATM Program have been and will be used for general corporate purposes, which may include funding potential acquisitions and repurchasing or repaying outstanding indebtedness.
During the nine months ended September 30, 2021, the Company issued an aggregate of 35,710 shares under the Prior ATM Program, at a weighted average price per share of $37.90, for gross proceeds of $1.4 million. The weighted average price per share, net of commissions, was $37.42, for net proceeds of $1.3 million. As of September 30, 2021, the Company sold an aggregate of $572.2 million under the Prior ATM Program, which had an initial capacity of $750.0 million. No shares have been issued under the New ATM Program as of September 30, 2021.
Series F Preferred Stock and Series F Preferred OP Units
On August 15, 2021, the Company redeemed all outstanding shares of Series F Preferred Stock. Concurrently with the redemption of the Series F Preferred Stock, VEREIT OP redeemed all outstanding Series F Preferred Units of VEREIT OP in accordance with the terms of VEREIT OP’s agreement of limited partnership. The shares of Series F Preferred Stock were redeemed at a redemption price of $25.00 per share.
Common Stock Dividends
On August 4, 2021, the Company’s Board of Directors declared a quarterly cash dividend for the third quarter of 2021 of $0.462 per share of Common Stock. The dividend was paid on October 15, 2021 to Common Stock stockholders of record as of September 30, 2021. An equivalent distribution by the Operating Partnership is applicable per OP Unit.
Share Repurchase Program
The Company has a share repurchase program (the “Share Repurchase Program”), that permits the Company to repurchase up to $200.0 million of its outstanding Common Stock through May 6, 2022. Under the Share Repurchase Program, repurchases can be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated stock repurchase transactions, or other methods of acquiring shares in accordance with applicable securities laws and other legal requirements. The Share Repurchase Program does not obligate the Company to make any repurchases at a specific time or in a specific situation and repurchases are influenced by prevailing market conditions, the trading price of the Common Stock, the Company’s financial performance and other conditions. Shares of Common Stock repurchased by the Company under the Share Repurchase Program, if any, will be returned to the status of authorized but unissued shares of Common Stock. As of September 30, 2021, there were no share repurchases under the Share Repurchase Program.
Note 13 - Net Income (Loss) Per Share/Unit
Net Income (Loss) Per Share
The following is a summary of the basic and diluted net income per share computation for the General Partner for the three and nine months ended September 30, 2021 and 2020 (dollar amounts in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | 61,613 | $ | 98,917 | $ | 260,239 | $ | 241,885 | ||||||||
| Net income attributable to non-controlling interests | (48 | ) | (51 | ) | (131 | ) | (137 | ) | ||||||||
| Net income attributable to the General Partner | 61,565 | 98,866 | 260,108 | 241,748 | ||||||||||||
| Dividends to preferred shares and units | (3,124 | ) | (10,771 | ) | (15,897 | ) | (36,667 | ) | ||||||||
| Net income available to common stockholders used in basic net income per share | 58,441 | 88,095 | 244,211 | 205,081 | ||||||||||||
| Income attributable to limited partners | 58 | 65 | 172 | 166 | ||||||||||||
| Net income used in diluted net income per share | $ | 58,499 | $ | 88,160 | $ | 244,383 | $ | 205,247 | ||||||||
| Weighted average number of Common Stock outstanding - basic | 229,271,106 | 216,737,561 | 229,227,755 | 216,002,172 | ||||||||||||
| Effect of Limited Partner OP Units and dilutive securities | 908,334 | 290,114 | 661,115 | 285,993 | ||||||||||||
| Weighted average number of common shares - diluted | 230,179,440 | 217,027,675 | 229,888,870 | 216,288,165 | ||||||||||||
| Basic and diluted net income per share attributable to common stockholders | $ | 0.25 | $ | 0.41 | $ | 1.06 | $ | 0.95 | ||||||||
Net Income (Loss) Per Unit
The following is a summary of the basic and diluted net income per unit attributable to common unitholders, which includes all common General Partner unitholders and limited partner unitholders, for the three and nine months ended September 30, 2021 and 2020 (dollar amounts in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | 61,613 | $ | 98,917 | $ | 260,239 | $ | 241,885 | ||||||||
| Net loss attributable to non-controlling interests | 10 | 14 | 41 | 29 | ||||||||||||
| Net income attributable to the Operating Partnership | 61,623 | 98,931 | 260,280 | 241,914 | ||||||||||||
| Dividends to preferred shares and units | (3,124 | ) | (10,771 | ) | (15,897 | ) | (36,667 | ) | ||||||||
| Net income used in basic and diluted net income per unit | $ | 58,499 | $ | 88,160 | $ | 244,383 | $ | 205,247 | ||||||||
| Weighted average number of common units outstanding - basic | 229,423,140 | 216,891,891 | 229,379,789 | 216,157,976 | ||||||||||||
| Effect of dilutive securities | 756,300 | 135,784 | 509,081 | 130,189 | ||||||||||||
| Weighted average number of common units - diluted | 230,179,440 | 217,027,675 | 229,888,870 | 216,288,165 | ||||||||||||
| Basic and diluted net income per unit attributable to common unitholders | $ | 0.25 | $ | 0.41 | $ | 1.06 | $ | 0.95 | ||||||||
Note 14 - Subsequent Events
Common Stock Dividend
On October 14, 2021, the Company’s Board of Directors declared a monthly cash dividend of $0.154 per share of Common Stock for the month of October, which represents one-third of its prior quarterly dividend. The dividend will be payable on November 15, 2021 to shareholders of record on November 2, 2021, only if the Merger has not closed prior to that date.
Unsecured Notes Exchange Offers
On October 8, 2021, Realty Income commenced offers to exchange all validly tendered and accepted notes of each of the series of notes issued by VEREIT Operating Partnership listed in the table in Note 6 - Debt, for notes to be issued by Realty Income (collectively, the “Realty Notes”). A Registration Statement on Form S-4 (File No. 333-260165) (the "Registration Statement") relating to the issuance of the Realty Notes was filed with the SEC on October 8, 2021 and was declared effective by the SEC on October 22, 2021. On October 25, 2021 Realty Income announced that as of October 22, 2021, more than 95% of the aggregate principal amount of each of the series of outstanding Senior Notes were validly tendered and not validly withdrawn in connection with the previously announced exchange offers. The exchange offers will expire on November 5, 2021, and are conditioned upon, among other things, the consummation of the Merger.
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements and notes thereto present the unaudited pro forma condensed combined balance sheet as of September 30, 2021 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020. The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses”, in order to give effect to the Pro Forma Transactions (as defined and described below) and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. As used herein, the terms “Realty Income” and “Realty” mean Realty Income Corporation or Realty Income Corporation and its consolidated subsidiaries, and “VEREIT” means VEREIT, Inc. or VEREIT, Inc. and its consolidated subsidiaries (including VEREIT OP (as defined below)), as the context requires.
On April 29, 2021, Realty and VEREIT each entered into an Agreement and Plan of Merger by and among VEREIT, VEREIT Operating Partnership (“VEREIT OP”), Realty, Rams MD Subsidiary I, Inc. (“Merger Sub 1”), and Rams Acquisition Sub II, LLC (“Merger Sub 2”) (as amended, the “Merger Agreement”). Pursuant to the Merger Agreement, upon the terms and subject to the conditions set forth in the Merger Agreement, among other things, (i) Merger Sub 2 would merge with and into VEREIT OP, with VEREIT OP continuing as the surviving entity, and (ii) immediately thereafter, VEREIT would merge with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation as a wholly owned subsidiary of Realty Income (together, the “Mergers” and the effective time of the Mergers, the “Merger Effective Time”). The Mergers were consummated on November 1, 2021. In connection with the Mergers, at the Merger Effective Time, (i) each outstanding share of VEREIT common stock, par value $0.01 per share, and (ii) each outstanding common partnership unit of VEREIT OP (other than those held by VEREIT, Realty Income or any of their respective affiliates) (the “VEREIT OP common units”) was converted into 0.705 (the “Exchange Ratio”) shares of Realty common stock, par value $0.01 per share. Holders of shares of VEREIT common stock and VEREIT OP common units (other than those held by VEREIT, Realty or their respective affiliates) received cash in lieu of fractional shares. As a result of the Mergers, former VEREIT common stockholders and former VEREIT OP common unitholders, together, received approximately 162 million shares of Realty common stock for their shares of VEREIT common stock or VEREIT OP common units, as applicable. Further, immediately prior to and in conjunction with the Merger, Realty repaid the entire outstanding balance of VEREIT’s unsecured revolving credit facility (“VEREIT’s Revolving Credit Facility”) and terminated the facility. The repayment was funded using Realty’s cash on hand and proceeds from a draw on Realty’s unsecured revolving credit facility (“Realty’s Revolving Credit Facility”).
On November 12, 2021, Realty and VEREIT contributed certain of their respective office assets (the "Realty Office Assets" and "VEREIT Office Assets", respectively, and collectively the "Office Assets" or the "Orion Business") to Orion Office REIT, Inc. ("Orion"), and Realty distributed all of the outstanding shares of Orion common stock to Realty’s stockholders (including legacy VEREIT common stockholders and legacy VEREIT OP common unitholders that received Realty common stock in the Mergers and continued to hold such stock as of the close of business on the record date of the distribution) on a pro rata basis (the “Orion Divestiture”). Prior to the Orion Divestiture, Orion LP, a wholly owned subsidiary of Orion, entered into certain new financing arrangements, proceeds from which will be used to reimburse Realty for the repayment of certain existing mortgages payable of the Office Assets (including a portion of the associated repayment costs) prior to the Orion Divestiture, fund Orion’s initial cash balance, and pay fees and expenses related to the new financing arrangements. These unaudited pro forma condensed combined financial statements assume that the remainder of the proceeds from Orion LP’s new financing arrangements will be distributed by Orion LP to Realty as a dividend.
The unaudited pro forma condensed combined financial statements are based on the historical consolidated financial statements of Realty and historical consolidated financial statements of VEREIT as adjusted to give effect to the following (collectively referred to as the “Pro Forma Transactions”):
| · | the Mergers and subsequent Orion Divestiture (including the portion of the proceeds from Orion LP’s new financing arrangements that are expected to be distributed by Orion LP to Realty as a dividend); |
| · | the repayment by Realty or VEREIT, as the case may be, of certain existing mortgages payable, including mortgages payable of the Office Properties, and a portion of the associated repayment costs, prior to the Mergers and the subsequent reimbursement of such amounts by Orion; |
| · | the repayment by Realty of VEREIT’s Revolving Credit Facility that occurred contemporaneously with the Merger Effective Time, insofar as the balance outstanding under VEREIT’s Revolving Credit Facility was outstanding as of September 30, 2021 or arose as a result of transactions that are directly related to the Mergers; and |
| · | transaction costs specifically related to the Mergers and the subsequent Orion Divestiture. |
The unaudited pro forma condensed combined balance sheet as of September 30, 2021 gives effect to the Pro Forma Transactions as if they occurred on September 30, 2021. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020 give effect to the Pro Forma Transactions as if they occurred on January 1, 2020.
These unaudited pro forma condensed combined financial statements are prepared for informational purposes only and are based on assumptions and estimates considered appropriate by Realty’s management. The unaudited pro forma adjustments represent Realty’s management’s estimates based on information available as of the date of the unaudited pro forma condensed combined financial statements and are subject to change as additional information becomes available and additional analyses are performed. However, Realty’s management believes that the assumptions provide a reasonable basis for presenting the significant effects that are directly attributable to the Pro Forma Transactions, and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements do not purport to be indicative of what Realty’s financial condition or results of operations actually would have been if the Pro Forma Transactions had been consummated as of the dates indicated, nor do they purport to represent Realty’s financial position or results of operations for future periods.
Additionally, these unaudited pro forma condensed combined financial statements do not include any adjustments not otherwise described herein, including such adjustments associated with: (1) Realty or VEREIT real estate acquisitions that have closed or may close after September 30, 2021 or the related financing of those acquisitions, (2) Realty or VEREIT rental rate increases that are based on consumer price index, (3) the indebtedness associated with the new financing arrangements entered into by Orion LP in connection with the Orion Divestiture, as such indebtedness will be retained by Orion following the Orion Divestiture, (4) potential synergies that may be achieved following the Mergers, including potential overall savings in general and administrative expense, or any strategies that Realty’s management may consider in order to continue to efficiently manage Realty’s operations, (5) any integration costs (including one-time costs) that may be incurred following the consummation of the Mergers, which may be necessary to achieve the potential synergies, since the extent of such costs is not reasonably certain, and (6) any debt or equity issuances by Realty or VEREIT, which occurred subsequent to September 30, 2021, and which were not directly related to the Pro Forma Transactions.
2
REALTY INCOME CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2021
(in thousands)
| Realty Historical, As Reclassified (Note 3) | VEREIT Historical, As Reclassified (Note 3) |
Mergers (Note 4) | Item
in Note 4 | Orion Adjustments (Note 5) [1] | Item
in Note 5 |
Pro Forma Combined | ||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||
| Real estate held for investment, at cost: | ||||||||||||||||||||||||
| Land | $ | 7,308,046 | $ | 2,724,709 | $ | 460,163 | [1] | $ | (242,508 | ) | $ | 10,250,410 | ||||||||||||
| Buildings and improvements | 16,374,061 | 9,916,070 | 660,856 | [1] | (1,589,386 | ) | 25,361,601 | |||||||||||||||||
| Total real estate held for investment, at cost | 23,682,107 | 12,640,779 | 1,121,019 | (1,831,894 | ) | 35,612,011 | ||||||||||||||||||
| Less accumulated depreciation and amortization | (3,904,327 | ) | (3,010,637 | ) | 3,010,637 | [2] | 149,229 | (3,755,098 | ) | |||||||||||||||
| Real estate held for investment, net | 19,777,780 | 9,630,142 | 4,131,656 | (1,682,665 | ) | 31,856,913 | ||||||||||||||||||
| Real estate and lease intangibles held for sale, net | 44,939 | 31,073 | 13,195 | [3] | - | 89,207 | ||||||||||||||||||
| Cash and cash equivalents | 516,983 | 5,874 | - | 585,530 | [2] | 1,108,387 | ||||||||||||||||||
| Accounts receivable, net | 341,729 | 338,640 | (289,312 | ) | [4] | (14,737 | ) | 376,320 | ||||||||||||||||
| Lease intangible assets, net | 2,156,008 | 925,511 | 1,846,829 | [5] | (227,762 | ) | 4,700,586 | |||||||||||||||||
| Goodwill | 13,947 | 1,337,773 | 379,335 | [6] | (234,780 | ) | [3] | 1,496,275 | ||||||||||||||||
| Other assets, net | 859,708 | 309,880 | 19,618 | [7] | (41,949 | ) | 1,147,257 | |||||||||||||||||
| Total assets | $ | 23,711,094 | $ | 12,578,893 | $ | 6,101,321 | $ | (1,616,363 | ) | $ | 40,774,945 | |||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||||||||
| Distributions payable | $ | 96,280 | $ | 105,958 | $ | (105,958 | ) | [8] | $ | - | $ | 96,280 | ||||||||||||
| Accounts payable and accrued expenses | 269,587 | 137,626 | 40,834 | [9] | (12,182 | ) | 435,865 | |||||||||||||||||
| Lease intangible liabilities, net | 341,675 | 111,140 | 404,092 | [10] | (24,799 | ) | 832,108 | |||||||||||||||||
| Other liabilities | 385,077 | 255,378 | - | (18,850 | ) | 621,605 | ||||||||||||||||||
| Line of credit payable and commercial paper | 405,000 | 88,000 | 305,188 | [11] | - | 798,188 | ||||||||||||||||||
| Term loan, net | 249,507 | - | - | - | 249,507 | |||||||||||||||||||
| Mortgages payable, net | 285,617 | 987,704 | (115,080 | ) | [12] | (9,656 | ) | [4] | 1,148,585 | |||||||||||||||
| Notes payable, net | 8,309,238 | 4,590,348 | 356,617 | [12] | - | 13,256,203 | ||||||||||||||||||
| Total liabilities | 10,341,981 | 6,276,154 | 885,693 | (65,487 | ) | 17,438,341 | ||||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||||||||||
| Common stock and paid-in capital | 17,449,122 | 12,987,206 | (1,406,347 | ) | [13] | - | 29,029,981 | |||||||||||||||||
| Distributions in excess of net income | (4,112,953 | ) | (6,692,338 | ) | 6,628,699 | [13] | (1,549,729 | ) | [5] | (5,726,321 | ) | |||||||||||||
| Accumulated other comprehensive (loss) income | (1,076 | ) | 831 | (831 | ) | [13] | - | (1,076 | ) | |||||||||||||||
| Total stockholders’ equity | 13,335,093 | 6,295,699 | 5,221,521 | (1,549,729 | ) | 23,302,584 | ||||||||||||||||||
| Noncontrolling interests | 34,020 | 7,040 | (5,893 | ) | [14] | (1,147 | ) | 34,020 | ||||||||||||||||
| Total equity | 13,369,113 | 6,302,739 | 5,215,628 | (1,550,876 | ) | 23,336,604 | ||||||||||||||||||
| Total liabilities and equity | $ | 23,711,094 | $ | 12,578,893 | $ | 6,101,321 | $ | (1,616,363 | ) | $ | 40,774,945 | |||||||||||||
3
REALTY INCOME CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
(in thousands, except share and per share data)
| Realty Historical | VEREIT Historical, As Reclassified (Note 3) |
Mergers (Note 4) | Item
in Note 4 | Orion (Note 5) [6] | Pro
Forma Combined | |||||||||||||||||
| REVENUE | ||||||||||||||||||||||
| Rental (including reimbursable) | $ | 1,385,958 | $ | 870,547 | $ | 48,511 | [15] | $ | (159,339 | ) | $ | 2,145,677 | ||||||||||
| Other | 13,003 | 8,822 | - | (752 | ) | 21,073 | ||||||||||||||||
| Total revenue | 1,398,961 | 879,369 | 48,511 | (160,091 | ) | 2,166,750 | ||||||||||||||||
| EXPENSES | ||||||||||||||||||||||
| Depreciation and amortization | 564,606 | 320,582 | 261,729 | [16] | (62,089 | ) | 1,084,828 | |||||||||||||||
| Interest | 222,905 | 179,795 | (43,927 | ) | [17] | (6,602 | ) | 352,171 | ||||||||||||||
| Property (including reimbursable) | 89,895 | 88,633 | 660 | [18] | (35,503 | ) | 143,685 | |||||||||||||||
| General and administrative | 66,458 | 41,398 | 615 | [19] | (24 | ) | 108,447 | |||||||||||||||
| Provisions for impairment | 30,977 | 59,250 | - | (28,064 | ) | 62,163 | ||||||||||||||||
| Merger-related costs | 30,081 | 22,289 | - | - | 52,370 | |||||||||||||||||
| Total expenses | 1,004,922 | 711,947 | 219,077 | (132,282 | ) | 1,803,664 | ||||||||||||||||
| Gain on sales of real estate | 35,396 | 96,339 | - | 4 | 131,739 | |||||||||||||||||
| Foreign currency and derivative gains (losses), net | (1,170 | ) | - | - | - | (1,170 | ) | |||||||||||||||
| Equity in income of unconsolidated entities | - | 1,374 | - | (621 | ) | 753 | ||||||||||||||||
| Loss on extinguishment of debt | (50,456 | ) | (2,102 | ) | - | 3,584 | (48,974 | ) | ||||||||||||||
| Income before income taxes | 377,809 | 263,033 | (170,566 | ) | (24,842 | ) | 445,434 | |||||||||||||||
| Income taxes | (21,529 | ) | (2,794 | ) | - | - | (24,323 | ) | ||||||||||||||
| Net income | 356,280 | 260,239 | (170,566 | ) | (24,842 | ) | 421,111 | |||||||||||||||
| Net income attributable to noncontrolling interests | (865 | ) | (131 | ) | - | (41 | ) | (1,037 | ) | |||||||||||||
| Net income available to common stockholders | $ | 355,415 | $ | 260,108 | $ | (170,566 | ) | $ | (24,883 | ) | $ | 420,074 | ||||||||||
| Amounts available to common stockholders per common share: | (Note 6) | |||||||||||||||||||||
| Basic and diluted | $ | 0.94 | $ | 1.06 | $ | 0.78 | ||||||||||||||||
| Weighted average common shares outstanding: | (Note 6) | |||||||||||||||||||||
| Basic | 379,291,782 | 229,227,755 | 540,982,102 | |||||||||||||||||||
| Diluted | 379,409,427 | 229,888,870 | 541,153,796 | |||||||||||||||||||
4
REALTY INCOME CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2020
(in thousands, except share and per share data)
| Realty Historical, As Reclassified (Note 3) | VEREIT Historical, As Reclassified (Note 3) | Mergers Transaction Adjustments (Note 4) | Item in Note 4 | Orion Divestiture Transaction Adjustments (Note 5) [6] | Item in Note 5 | Pro Forma Combined | ||||||||||||||||||
| REVENUE | ||||||||||||||||||||||||
| Rental (including reimbursable) | $ | 1,639,533 | $ | 1,158,285 | $ | 50,509 | [15] | $ | (223,778 | ) | $ | 2,624,549 | ||||||||||||
| Other | 12,092 | 9,691 | - | (754 | ) | 21,029 | ||||||||||||||||||
| Total revenue | 1,651,625 | 1,167,976 | 50,509 | (224,532 | ) | 2,645,578 | ||||||||||||||||||
| EXPENSES | ||||||||||||||||||||||||
| Depreciation and amortization | 677,038 | 452,008 | 355,964 | [16] | (88,612 | ) | 1,396,398 | |||||||||||||||||
| Interest | 309,336 | 265,660 | (59,665 | ) | [17] | (12,836 | ) | 502,495 | ||||||||||||||||
| Property (including reimbursable) | 104,603 | 122,967 | 880 | [18] | (52,367 | ) | 176,083 | |||||||||||||||||
| General and administrative | 73,215 | 68,487 | 1,323 | [19] | (40 | ) | 142,985 | |||||||||||||||||
| Provisions for impairment | 147,232 | 65,075 | - | (27,977 | ) | 184,330 | ||||||||||||||||||
| Merger-related costs | - | - | 97,630 | [20] | - | 97,630 | ||||||||||||||||||
| Total expenses | 1,311,424 | 974,197 | 396,132 | (181,832 | ) | 2,499,921 | ||||||||||||||||||
| Gain on sales of real estate | 76,232 | 95,292 | - | (9,765 | ) | 161,759 | ||||||||||||||||||
| Foreign currency and derivative gains (losses), net | 4,585 | (85,392 | ) | - | - | (80,807 | ) | |||||||||||||||||
| Equity in income and gain on disposition of unconsolidated entities | - | 3,539 | - | (535 | ) | 3,004 | ||||||||||||||||||
| Loss on extinguishment of debt | (9,819 | ) | (1,486 | ) | - | 1,248 | [7] | (10,057 | ) | |||||||||||||||
| Income before income taxes | 411,199 | 205,732 | (345,623 | ) | (51,752 | ) | 219,556 | |||||||||||||||||
| Income taxes | (14,693 | ) | (4,513 | ) | - | - | (19,206 | ) | ||||||||||||||||
| Net income | 396,506 | 201,219 | (345,623 | ) | (51,752 | ) | 200,350 | |||||||||||||||||
| Net income attributable to noncontrolling interests | (1,020 | ) | (91 | ) | - | (60 | ) | (1,171 | ) | |||||||||||||||
| Net income available to common stockholders | $ | 395,486 | $ | 201,128 | $ | (345,623 | ) | $ | (51,812 | ) | $ | 199,179 | ||||||||||||
| Amounts available to common stockholders per common share: | (Note 6) | |||||||||||||||||||||||
| Basic | $ | 1.15 | $ | 0.72 | $ | 0.39 | ||||||||||||||||||
| Diluted | 1.14 | 0.72 | 0.39 | |||||||||||||||||||||
| Weighted average common shares outstanding: | (Note 6) | |||||||||||||||||||||||
| Basic | 345,280,126 | 217,548,175 | 506,970,446 | |||||||||||||||||||||
| Diluted | 345,415,258 | 217,862,005 | 507,171,067 | |||||||||||||||||||||
5
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation
The Realty Income and VEREIT historical financial information has been derived from, in the case of Realty Income, its consolidated financial statements in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, and Annual Report on Form 10-K for the year ended December 31, 2020, and, in the case of VEREIT, its consolidated financial statements included as Exhibit 99.1 to Realty Income's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 4, 2021 (the “June Form 8-K”), and Exhibit 99.1 to Realty Income's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 12, 2021 (the "November Form 8-K"), of which this Exhibit 99.2 is a part. Certain of VEREIT’s historical amounts have been reclassified to conform to Realty’s financial statement presentation, as discussed further in Note 3. The unaudited pro forma condensed combined financial statements should be read in conjunction with Realty’s and VEREIT’s historical consolidated financial statements and the notes thereto included in Realty Income's Quarterly Report on Form 10-Q for the nine months ended September 30, 2021 and Exhibit 99.1 to the November Form 8-K, respectively, and Annual Report on Form 10-K for the year ended December 31, 2020 and Exhibit 99.1 to the June Form 8-K, respectively. The unaudited pro forma condensed combined balance sheet gives effect to the Pro Forma Transactions as if they had been completed on September 30, 2021. The unaudited pro forma condensed combined statements of operations give effect to the Pro Forma Transactions as if they had been completed on January 1, 2020.
The historical financial statements of Realty and VEREIT have been adjusted in the unaudited pro forma condensed combined financial statements to give pro forma effect to the accounting for the Mergers and the Orion Divestiture under U.S. GAAP (referred to as the “Mergers Transaction Adjustments” and the “Orion Divestiture Transaction Adjustments,” respectively). The unaudited pro forma condensed combined financial statements and related notes were prepared using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with Realty as the acquiror of VEREIT. ASC 805 requires, among other things, that the assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. For purposes of the unaudited pro forma condensed combined financial statements, the estimated preliminary purchase consideration in the Mergers has been allocated to the assets acquired and liabilities assumed of VEREIT (including the assets and liabilities of VEREIT Office Assets) based upon Realty management’s preliminary estimate of their fair values as of September 30, 2021. The Orion Divestiture was accounted for at Realty’s carryover basis after adjusting the net assets of VEREIT Office Assets to fair value in connection with the Mergers. As a result, pro forma adjustments to reflect the Orion Divestiture include the historical cost carryover basis for Realty Office Assets and estimated fair value basis for VEREIT Office Assets.
The allocations of the estimated preliminary purchase price reflected in these unaudited pro forma condensed combined financial statements have not been finalized mainly due to the period of time between the Merger Effective Time and the date of this filing, and are based upon the best available information at the current time. A final determination of the fair values of the assets and liabilities will be based on the actual valuations of the tangible and intangible assets and liabilities that existed as of the date of the Mergers. The completion of the final valuations, the allocations of the purchase price and the impact of ongoing integration activities could cause material differences in the information presented.
The Pro Forma Transactions and the related adjustments are described in these accompanying notes to the unaudited pro forma condensed combined financial statements. In the opinion of Realty’s management, all material adjustments have been made that are necessary to present fairly, in accordance with Article 11 of Regulation S-X of the SEC, the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements do not purport to be indicative of the combined company’s financial position or results of operations of the combined company that would have occurred if the Pro Forma Transactions had been completed on the dates indicated, nor are they indicative of the combined company’s financial position or results of operations that may be expected for any future period or date. In addition, future results may vary significantly from those reflected in the unaudited pro forma condensed combined financial statements due to factors discussed in “Supplemental Risk Factors” in Exhibit 99.4 to the June Form 8-K.
6
Note 2 – Significant Accounting Policies
The accounting policies used in the preparation of these unaudited pro forma condensed combined financial statements are those set out in Realty’s audited consolidated financial statements as of and for the year ended December 31, 2020 and Realty’s unaudited consolidated financial statements as of and for the nine months ended September 30, 2021. Realty’s management has determined that there were no significant accounting policy differences between Realty and VEREIT and, therefore, no adjustments were made to conform VEREIT’s financial statements to the accounting policies used by Realty in the preparation of the unaudited pro forma condensed combined financial statements. This conclusion is subject to change as further assessment is performed and finalized for purchase accounting.
As part of the application of ASC 805, Realty will continue to conduct a more detailed review of VEREIT’s accounting policies in an effort to determine if differences in accounting policies require further reclassification or adjustment of VEREIT’s results of operations or reclassification or adjustment of assets or liabilities to conform to Realty’s accounting policies and classifications. Therefore, Realty may identify additional differences between the accounting policies of the two companies that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial information.
Note 3 – Reclassification Adjustments
The VEREIT and Realty historical financial statement line items include the reclassification of certain historical balances to conform to the post-combination Realty presentation of these unaudited pro forma condensed combined financial statements, as described below. These reclassifications have no effect on previously reported total assets, total liabilities, stockholders’ equity or net income available to common stockholders of Realty or VEREIT.
Balance Sheet
| ● | The carrying amount of Realty’s goodwill of $13.9 million, previously classified as a component of Other assets, net, has been reclassified into a new caption, Goodwill, on Realty’s consolidated balance sheet. |
| ● | VEREIT’s balances for Operating lease right-of-use assets, Investment in unconsolidated entities, Restricted cash, and Rent and tenant receivables and other assets, net (excluding straight-line rent receivable, net and accounts receivable, net), previously disclosed as separate components of VEREIT’s consolidated balance sheet, have been reclassified to Other assets, net as follows (in thousands): |
| September 30, 2021 | ||||
| Rent and tenant receivables and other assets, net | $ | 371,911 | ||
| Less: Straight-line rent receivable, net | (289,312 | ) | ||
| Less: Accounts receivable, net | (49,328 | ) | ||
| Operating lease right-of-use assets | 185,443 | |||
| Investment in unconsolidated entities | 80,363 | |||
| Restricted cash | 10,803 | |||
| Other assets, net, as presented | $ | 309,880 | ||
7
| ● | VEREIT’s balances for straight-line rent receivable, net and accounts receivable, net, previously disclosed as a component of Rent and tenant receivables and other assets, net, on VEREIT’s consolidated balance sheet have been reclassified to Accounts receivable, net as follows (in thousands): |
| September 30, 2021 | ||||
| Straight-line rent receivable, net | $ | 289,312 | ||
| Accounts receivable, net | 49,328 | |||
| Accounts receivable, net, as presented | $ | 338,640 | ||
| ● | VEREIT’s balances for intangible lease assets and the related accumulated amortization, which were previously reported on a gross basis as components of the Total real estate investments, net subtotal on VEREIT’s consolidated balance sheet, have been reclassified outside of Total real estate investments, net to Lease intangible assets, net, as follows (in thousands): |
| September 30, 2021 | ||||
| Intangible lease assets | $ | 1,917,251 | ||
| Less: Accumulated amortization | (991,740 | ) | ||
| Lease intangible assets, net, as presented | $ | 925,511 | ||
| ● | VEREIT’s balances for Deferred rent and other liabilities and Operating lease liabilities previously disclosed as separate components of VEREIT’s consolidated balance sheet have been reclassified to Other liabilities, as follows (in thousands): |
| September 30, 2021 | ||||
| Deferred rent and other liabilities | $ | 58,707 | ||
| Operating lease liabilities | 196,671 | |||
| Other liabilities, as presented | $ | 255,378 | ||
| ● | VEREIT’s balance for Credit facility of $88.0 million previously disclosed as a separate component of VEREIT’s consolidated balance sheet, has been reclassified to Line of credit payable and commercial paper. | |
| ● | VEREIT’s balance for Corporate bonds, net, of $4.6 billion previously disclosed as a separate component of VEREIT’s consolidated balance sheet, has been reclassified to Notes payable, net. | |
| ● | VEREIT’s balances for Common stock and Additional paid-in capital, previously disclosed as separate components of VEREIT’s consolidated balance sheet, have been reclassified to Common stock and paid-in capital, as follows (in thousands): |
| September 30, 2021 | ||||
| Common stock | $ | 2,292 | ||
| Additional paid-in capital | 12,984,914 | |||
| Common stock and paid-in capital, as presented | $ | 12,987,206 | ||
Statements of Operations
| ● | VEREIT’s Fees from managed partnerships of $1.7 million and $3.1 million for the nine months ended September 30, 2021 and year ended December 31, 2020, respectively, previously disclosed as a separate component of Total revenue on VEREIT’s consolidated statements of operations, have been reclassified under Revenue as Other. |
8
| ● | VEREIT’s Other income, net, of $7.1 million and $6.6 million for the nine months ended September 30, 2021 and year ended December 31, 2020, respectively, previously disclosed as a separate component of Other income (expenses) on VEREIT’s consolidated statements of operations, has been reclassified under Revenue as Other. Total reclassifications within Other under Revenue are as follows (in thousands): |
| For the nine months ended September 30, 2021 | For the year ended December 31, 2020 | |||||||
| Fees from managed partnerships | $ | 1,721 | $ | 3,081 | ||||
| Other income, net | 7,101 | 6,610 | ||||||
| Other, as presented | $ | 8,822 | $ | 9,691 | ||||
| ● | VEREIT’s merger costs of $22.3 million for the nine months ended September 30, 2021, previously disclosed as a component of Merger, litigation and non-routine costs, net on VEREIT’s consolidated statement of operations for the nine months ended September 30, 2021, have been reclassified to Merger-related costs. |
| ● | VEREIT’s Acquisition-related and Merger, litigation and non-routine costs, net (excluding Merger costs), previously disclosed as separate components of operating expenses on VEREIT’s consolidated statements of operations, were combined with General and administrative expense in a single line item, as follows (in thousands): |
| For the nine months ended September 30, 2021 | For the year ended December 31, 2020 | |||||||
| Acquisition-related | $ | 4,155 | $ | 4,790 | ||||
| Merger, litigation and non-routine costs, net | 16,118 | 2,348 | ||||||
| Less: Mergers costs | (22,289 | ) | - | |||||
| General and administrative | 43,414 | 61,349 | ||||||
| General and administrative, as presented | $ | 41,398 | $ | 68,487 | ||||
| ● | Realty’s income taxes of $14.7 million, previously presented as a line item within total expenses on Realty's consolidated statement of operations for the year ended December 31, 2020, were reclassified outside of the subtotal income before income taxes, to conform to the presentation of income taxes on Realty’s consolidated statement of operations for the nine months ended September 30, 2021. |
Note 4 – Mergers Transaction Adjustments
Estimated Preliminary Purchase Price
The unaudited pro forma condensed combined financial statements reflect the preliminary allocation of the purchase consideration to VEREIT’s identifiable net assets acquired. The preliminary allocation of purchase consideration in these unaudited pro forma condensed combined financial statements is based upon an estimated preliminary purchase price of approximately $17.8 billion. The calculation of the estimated preliminary purchase price related to the Mergers is as follows (in thousands, except share and per share data):
| Amount | ||||
| Shares of VEREIT common stock and VEREIT OP common units exchanged (a) | 229,224,034 | |||
| Exchange Ratio | 0.705 | |||
| Shares of Realty common stock issued | 161,602,944 | |||
| Adjusted opening price of Realty common stock on November 1, 2021 (b) | $ | 71.24 | ||
| Fair value of Realty common stock issued to former holders of VEREIT common stock and VEREIT OP common units | $ | 11,511,947 | ||
| Estimated fair value of VEREIT's equity-based compensation awards attributable to pre-combination services (c) | 43,742 | |||
| VEREIT indebtedness paid off in connection with the Mergers (d) | 393,188 | |||
| Consideration transferred | $ | 11,948,877 | ||
| Preliminary fair value of VEREIT debt assumed by Realty | 5,819,589 | |||
| Total estimated preliminary purchase price | $ | 17,768,466 | ||
9
| a) | Includes 229,152,001 shares of VEREIT common stock and 72,033 VEREIT OP common units outstanding as of the Merger Effective Time. Under the Merger Agreement, these shares and units are to be converted to Realty common stock at an Exchange Ratio of 0.705 per share of VEREIT common stock or VEREIT OP common unit, as applicable. |
| b) | The fair value of Realty common stock issued to former holders of VEREIT common stock and VEREIT OP common units is based on the per share opening price of Realty common stock of $71.24 on November 1, 2021, adjusted for the monthly dividend of $0.236 per share that former holders of VEREIT common stock and VEREIT OP common units will be eligible to receive when such dividend is paid on November 15, 2021. |
| c) | Represents the fair value of fully vested deferred stock unit awards covering shares of VEREIT common stock (“VEREIT DSU Awards”) which were converted into Realty common stock upon the Mergers, as well as the estimated fair value of the Realty replacement employee and executive stock options, restricted stock units, and performance restricted stock units that were granted at the closing date of the Mergers and which are attributable to pre-combination services. |
| d) | Represents the outstanding balance of the VEREIT Revolving Credit Facility paid off by Realty in connection with the Mergers. The amount shown in the table above represents the balance of the VEREIT Revolving Credit Facility outstanding as of September 30, 2021, after taking into consideration the impacts of Pro Forma Transactions that occurred after September 30, 2021, but prior to the Merger Effective Time. As described above, the actual amount of the VEREIT Revolving Credit Facility outstanding and paid off by Realty in connection with the Mergers was based upon the balance outstanding immediately prior to the Merger Effective Time. |
Preliminary Purchase Price Allocation
The preliminary purchase price allocation to assets acquired and liabilities assumed is provided throughout these notes to the unaudited pro forma condensed combined financial statements. The following table provides a summary of the preliminary purchase price allocation by major categories of assets acquired and liabilities assumed based on Realty management’s preliminary estimate of their respective fair values as of September 30, 2021 (in thousands):
| Amount | ||||
| Total estimated preliminary purchase price | $ | 17,768,466 | ||
| Assets: | ||||
| Real estate held for investment | $ | 13,761,798 | ||
| Real estate and lease intangibles held for sale | 44,268 | |||
| Lease intangible assets | 2,772,340 | |||
| Cash and cash equivalents | 5,874 | |||
| Accounts receivable | 49,328 | |||
| Other assets | 329,498 | |||
| Total assets acquired | $ | 16,963,106 | ||
| Liabilities: | ||||
| Accounts payable and accrued expenses (a) | $ | 139,991 | ||
| Lease intangible liabilities | 515,232 | |||
| Other liabilities | 255,378 | |||
| Mortgages payable | 872,624 | |||
| Notes payable | 4,946,965 | |||
| Total liabilities assumed | $ | 6,730,190 | ||
| Estimated preliminary fair value of net assets acquired | $ | 10,232,916 | ||
| Add: Estimated preliminary fair value of noncontrolling interests acquired | 1,147 | |||
| Goodwill | $ | 1,717,108 | ||
10
| a) | This balance includes $15.1 million of estimated transaction costs to be incurred by VEREIT as a result of the Mergers, net of the payment of $12.8 million of VEREIT's transaction-related costs included in Accounts payable and accrued expenses as of September 30, 2021, which were settled by Realty at the time of the Mergers, as described in the Preliminary Purchase Price Allocation section above. These costs are expected to be recognized as an expense in VEREIT’s pre-combination statement of operations and therefore they are reflected as a liability assumed by Realty, with no impact on pro forma combined distributions in excess of net income. An additional $41.1 million of VEREIT’s transaction costs were paid by Realty at the time of the Mergers (as part of repaying the outstanding balance of VEREIT’s Revolving Credit Facility) and are included in the determination of the estimated preliminary purchase price, as described above. |
The preliminary fair values of identifiable assets acquired and liabilities assumed are based on a valuation as of the Merger Effective Time that was prepared by Realty with assistance of a third-party valuation advisor. For the preliminary estimate of fair values of assets acquired and liabilities assumed of VEREIT, Realty used publicly available benchmarking information as well as a variety of other assumptions, including market participant assumptions. The allocation is dependent upon certain valuation and other studies that have not yet been finalized. Accordingly, the pro forma preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed, and such differences could be material. In particular, the fair values of the assets and liabilities were estimated, in part, based upon the allocation of real estate and intangible lease assets and liabilities, and adjusted to reflect reasonable estimations for above-market and below-market leases, in-place lease values, and avoided lease origination costs, and to incorporate estimates for the mark-to-market adjustments (i.e., premiums) of mortgages payable and notes payable to be assumed in the Mergers, all of which are based on Realty’s historical experience with similar assets and liabilities. In determining the estimated fair value of VEREIT’s tangible assets, Realty utilized customary methods, including the income, market, and cost approaches. Amounts allocated to land, buildings and improvements, tenant improvements, and lease intangible assets and liabilities were based on an analysis performed by third parties based on Realty’s, VEREIT’s and other portfolios with similar property characteristics.
The purchase price allocation presented above has not been finalized, mainly due to the period of time between the Merger Effective Time and the date of this filing. The final determination of the allocation of the purchase price will be completed no later than twelve months following the Merger Effective Time. These final fair values will be determined based on Realty’s management’s judgment, which is based on various factors, including (1) market conditions, (2) the industry in which the client operates, (3) the characteristics of the real estate (i.e., location, size, demographics, value and comparative rental rates), (4) the client credit profile, (5) store profitability metrics and the importance of the location of the real estate to the operations of the client’s business, and/or (6) real estate valuations. The final determination of these estimated fair values, the assets’ useful lives and the depreciation and amortization methods are dependent upon certain valuations and other analyses that have not yet been completed, and as previously stated could differ materially from the amounts presented in the unaudited pro forma condensed combined financial statements. The final determination will be completed as soon as practicable but no later than one year after the consummation of the Mergers. Any increase or decrease in the fair value of the net assets acquired, as compared to the information shown herein, could change the portion of the purchase consideration allocable to goodwill and could impact the operating results of the combined company following the Mergers due to differences in the allocation of the purchase consideration, as well as changes in the depreciation and amortization related to some of the acquired assets.
Balance Sheet
The pro forma adjustments reflect the effect of the Mergers on Realty’s and VEREIT’s historical consolidated balance sheets as if the Mergers occurred on September 30, 2021.
Assets
| 1) | The pro forma adjustments for Land and Buildings and improvements reflect: (i) the elimination of VEREIT’s historical carrying values of $2.7 billion for Land and $9.9 billion for Buildings and improvements, and (ii) the recognition of the fair value of these assets of $3.2 billion for Land and $10.6 billion for Buildings and improvements, based upon the preliminary valuation of the tangible real estate assets acquired. For information regarding the valuation methodology applied to the tangible real estate assets, refer to the Preliminary Purchase Price Allocation section of Note 4. The pro forma adjustments are presented as follows (in thousands): |
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| Estimated fair value | Less: Elimination of historical carrying value | Total pro forma adjustment | ||||||||||
| Land | $ | 3,184,872 | $ | (2,724,709 | ) | $ | 460,163 | |||||
| Buildings and improvements | 10,576,926 | (9,916,070 | ) | 660,856 | ||||||||
| 2) | Accumulated depreciation and amortization were adjusted to eliminate VEREIT’s historical accumulated depreciation balances of $3.0 billion. |
| 3) | VEREIT’s Real estate and lease intangibles held for sale, net were adjusted by $13.2 million to reflect the contract sale price, less estimated selling expenses, on those assets, totaling $44.3 million. |
| 4) | Accounts receivable, net were adjusted to eliminate VEREIT’s historical straight-line rent receivable, net, of $289.3 million, which is not treated as a separately recognized asset on the combined company’s balance sheet. |
| 5) | The pro forma adjustments for Lease intangible assets, net reflect: (i) the elimination of VEREIT’s historical carrying values for these assets, net of the associated accumulated amortization, of $925.5 million and (ii) the recognition of the fair value of these assets of $2.8 billion, based upon the preliminary valuation of the intangible real estate assets acquired. For information regarding the valuation methodology applied to the lease intangible assets, refer to the Preliminary Purchase Price Allocation section of Note 4. The following table summarizes the major classes of lease intangible assets acquired and the total pro forma adjustment to Lease intangible assets, net (in thousands): |
| Amount | ||||
| Preliminary allocation of fair value: | ||||
| In-place leases | $ | 2,116,026 | ||
| Leasing commissions and marketing costs | 279,042 | |||
| Above-market lease assets | 377,272 | |||
| Less: Elimination of historical carrying value of lease intangible assets, net | (925,511 | ) | ||
| Total pro forma adjustment | $ | 1,846,829 | ||
| 6) | The pro forma adjustments for Goodwill reflect: (i) the elimination of VEREIT’s historical goodwill balance of $1.3 billion, and (ii) the recognition of the preliminary goodwill balance associated with the Mergers of $1.7 billion based on the preliminary purchase price allocation. For additional information, refer to the Preliminary Purchase Price Allocation section of Note 4. |
| 7) | Other assets, net were adjusted to (i) eliminate deferred costs, net, of $2.7 million, which consist primarily of unamortized deferred financing costs for VEREIT’s Revolving Credit Facility, and (ii) recognize the fair value of acquired below-market ground leases of $22.3 million, based upon the preliminary valuation of these contracts. |
Liabilities
| 8) | The pro forma adjustment for Distributions payable of $106.0 million represents the payment of accrued and unpaid dividends immediately prior to the Merger Effective Time. |
| 9) | The pro forma adjustment for Accounts payable and accrued expenses represents: (i) $38.5 million of estimated transaction-related costs to be incurred by Realty Income which have not yet been reflected in the historical consolidated financial statements of Realty Income, (ii) $15.1 million of estimated transaction-related costs to be paid by VEREIT, net of (iii) the payment of $12.8 million of VEREIT's transaction-related costs included in Accounts payable and accrued expenses as of September 30, 2021, which were settled by Realty at the time of the Mergers, as described in the Preliminary Purchase Price Allocation section of Note 4. |
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| 10) | The pro forma adjustments for Lease intangible liabilities, net reflect: (i) the elimination of VEREIT’s historical carrying values for these liabilities, net of the associated accumulated amortization, of $111.1 million, and (ii) the recognition of the fair value of these intangible liabilities of $515.2 million, based upon the preliminary valuation of the intangible lease liabilities assumed. For information regarding the valuation methodology applied to the lease intangible liabilities, refer to the Preliminary Purchase Price Allocation section of Note 4. |
| 11) | The pro forma adjustments for Line of credit payable and commercial paper reflect the incremental VEREIT Revolving Credit Facility draws to: (i) repay $158.1 million of VEREIT mortgages payable, including mortgages payable associated with VEREIT Office Assets, and pay certain prepayment costs, (ii) pay $41.1 million of VEREIT transaction costs, and (iii) pay of $106.0 million of distributions payable based upon the amount accrued as of September 30, 2021. All of these payments were made in accordance with the terms of the Merger Agreement and/or consistent with the ongoing negotiations related to the Mergers and, therefore, have been reflected as a component of Mergers Transaction Adjustments in these unaudited pro forma condensed combined financial statements. The VEREIT Revolving Credit Facility balance outstanding as of the time of the Mergers was repaid by Realty, using Realty's cash on hand and proceeds from draws on the Realty Revolving Credit Facility. |
| 12) | The pro forma adjustments for Mortgages payable, net and Notes payable, net reflect: (i) the repayment of certain existing mortgages payable of VEREIT, including mortgages payable of VEREIT Office Assets, by VEREIT prior to the Merger Effective Time using proceeds from VEREIT's Revolving Credit Facility, with carrying value of $152.4 million as of September 30, 2021, (ii) the elimination of VEREIT’s historical carrying values of the remaining mortgages payable and notes payable, including the associated unamortized deferred financing costs and net discounts, of $835.3 million for mortgages payable and $4.6 billion for notes payable, and (iii) the recognition of the fair value of $872.6 million for mortgages payable and $4.9 billion for notes payable, based upon the preliminary valuation of these liabilities. The preliminary fair value of mortgages payable has been estimated by an independent third party using a discounted cash flow analysis, based on estimates of observable market interest rates. The preliminary fair value of notes payable has been estimated using quoted market prices in active markets with limited trading volume, when available. The following table summarizes the pro forma adjustments to Mortgages payable, net and Notes payable, net (in thousands): |
| Mortgages payable | Notes payable | |||||||
| Reduction of carrying value due to the repayment of certain existing mortgages payable of VEREIT prior to the Merger Effective Time | $ | (152,384 | ) | $ | - | |||
| Elimination of historical carrying value of the remaining debt instruments, including unamortized deferred financing costs and net discounts | (835,320 | ) | (4,590,348 | ) | ||||
| Estimated pro forma fair value of indebtedness assumed in the Mergers | 872,624 | 4,946,965 | ||||||
| Total pro forma adjustment | $ | (115,080 | ) | $ | 356,617 | |||
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Equity
| 13) | The following table summarizes pro forma adjustments for stockholders’ equity (in thousands): |
| Common stock and paid-in capital | Distributions in excess of net income | Accumulated other comprehensive loss | ||||||||||
| Issuance of Realty common stock (a) | $ | 11,511,947 | $ | - | $ | - | ||||||
| Settlement and exchange of VEREIT equity-based awards (b) | 43,742 | - | - | |||||||||
| Elimination of VEREIT’s historical equity balances | (12,987,206 | ) | 6,692,338 | (831 | ) | |||||||
| Realty merger related costs (c)(d) | 25,170 | (63,639 | ) | - | ||||||||
| Total pro forma adjustment | $ | (1,406,347 | ) | $ | 6,628,699 | $ | (831 | ) | ||||
| a) | The pro forma adjustment represents the issuance of Realty common stock as consideration for the Mergers, as described in the Estimated Preliminary Purchase Price section of Note 4. The fair value of Realty common stock issued to former holders of VEREIT common stock and VEREIT OP common units is based on the adjusted per share opening price of Realty common stock of $71.24 on November 1, 2021. |
| b) | Represents the fair value of fully vested VEREIT DSU Awards which were converted into Realty common stock upon the Mergers, as well as the estimated fair value of the Realty replacement employee and executive stock options, restricted stock units, and performance restricted stock units that were granted at the closing date of the Mergers and which are attributable to pre-combination services. |
| c) | The pro forma adjustment to common stock and paid in capital includes the estimated impact of one-time nonrecurring expenses related to the share settlement of certain executive stock options, restricted stock units, and performance restricted stock units upon a change in control. |
| d) | The pro forma adjustment to distributions in excess of net income excludes $34.0 million of estimated transaction costs incurred by VEREIT as a result of the Mergers, which have not yet been reflected in VEREIT’s historical consolidated financial statements as of and for the nine months ended September 30, 2021. These costs were recognized as an expense in VEREIT’s pre-combination statement of operations and therefore they are reflected as a liability assumed by Realty or, with respect to the portion of VEREIT’s transaction costs which was settled by Realty at the time of the Mergers through repayment of VEREIT’s Revolving Credit Facility, as a component of the estimated preliminary purchase price, with no impact on pro forma combined distributions in excess of net income. |
| 14) | The pro forma adjustment reflects the elimination of the VEREIT OP common units held by VEREIT OP’s minority partners, totaling $5.9 million, which were exchanged into Realty common stock upon consummation of the Mergers. |
Statements of Operations
The pro forma adjustments reflect the effect of the Mergers on Realty’s and VEREIT’s historical consolidated statements of operations as if the Mergers occurred on January 1, 2020.
Revenue
| 15) | Rental (including reimbursable) |
The historical rental revenues for Realty and VEREIT represent contractual and straight-line rents and amortization of above-market and below-market lease intangibles associated with the leases in effect during the periods presented. The adjustments included in the unaudited pro forma condensed combined statements of operations are presented to: (i) eliminate the historical straight-line rents and amortization of above-market and below-market lease intangibles for the real estate properties of VEREIT acquired as part of the Mergers (other than the properties of VEREIT Office Assets, which are separately adjusted as described in Note 5), and (ii) adjust contractual rental property revenue for the acquired properties (other than the properties of VEREIT Office Assets) to a straight-line basis and amortize above-market and below-market lease intangibles recognized as a result of the Mergers.
The pro forma adjustment for the amortization of above-market and below-market lease intangibles recognized as a result of the Mergers was estimated based on a straight-line methodology and the estimated remaining weighted average contractual, in-place lease term of 8.0 years. The lease intangible asset and liability fair values and estimated amortization expense may differ materially from the preliminary determination within these unaudited pro forma condensed combined financial statements. The pro forma adjustments to rental revenues do not purport to be indicative of the expected change in rental revenues of the combined company in any future periods.
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The following table summarizes the adjustments made to rental revenues for the nine months ended September 30, 2021 and year ended December 31, 2020 (in thousands):
| Elimination of historical amounts (a) |
Recognition of post-combination amounts (b) |
Total pro forma adjustment |
||||||||||
| For the nine months ended September 30, 2021 | ||||||||||||
| Straight-line rents | $ | (15,268) | $ | 47,057 | $ | 31,789 | ||||||
| Amortization of above-market and below-market lease intangibles and deferred lease incentives | 4,385 | 12,337 | 16,722 | |||||||||
| Total pro forma adjustment | $ | (10,883 | ) | $ | 59,394 | $ | 48,511 | |||||
| For the year ended December 31, 2020 | ||||||||||||
| Straight-line rents | $ | (24,713 | ) | $ | 54,940 | $ | 30,227 | |||||
| Amortization of above-market and below-market lease intangibles and deferred lease incentives | 3,833 | 16,449 | 20,282 | |||||||||
| Total pro forma adjustment | $ | (20,880 | ) | $ | 71,389 | $ | 50,509 | |||||
| (a) | Elimination of historical amounts excludes amounts related to VEREIT properties that were sold between January 1, 2020 and September 30, 2021, because such properties are not part of the net assets acquired in the Mergers. In addition, as noted above, elimination of historical amounts excludes amounts related to VEREIT Office Assets, which are separately adjusted as described in Note 5. |
| (b) | Recognition of post-combination amounts excludes amounts related to VEREIT Office Assets, because these assets were derecognized following the Mergers in connection with the Orion Divestiture, and the post-combination straight-line rents and amortization of above-market and below-market lease intangibles recognized as a result of the Mergers will not impact the financial statements of the combined company. |
Expense
| 16) | The adjustments included in the unaudited pro forma condensed combined statements of operations are presented to: (i) eliminate the historical depreciation and amortization of real estate properties of VEREIT acquired as part of the Mergers (other than the properties of VEREIT Office Assets, which are separately adjusted as described in Note 5), and (ii) to recognize additional depreciation and amortization expense associated with the fair value of acquired real estate tangible and intangible assets, other than the tangible and intangible assets associated with the properties of VEREIT Office Assets. |
The pro forma adjustment for the depreciation and amortization of acquired assets is calculated using a straight-line methodology and is based on estimated useful lives for building and site improvements, the remaining contractual, in-place lease term for intangible lease assets, and the lesser of the estimated useful life and the remaining contractual, in-place lease term for tenant improvements. For purposes of the unaudited pro forma condensed combined statements of operations, the weighted average useful life for buildings and site improvements is 27.2 years; the weighted average useful life for tenant improvements is 8.0 years; and the weighted average remaining contractual, in-place lease term is 8.0 years. The fair value of acquired real estate tangible and intangible assets, estimated useful lives of such assets, and estimated depreciation and amortization expense may differ materially from the preliminary determination within these unaudited pro forma condensed combined financial statements. The pro forma adjustments to depreciation and amortization expense are not necessarily indicative of the expected change in depreciation and amortization expense of the combined company in any future periods.
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The following table summarizes adjustments made to depreciation and amortization expense by asset category for the real estate properties of VEREIT acquired as part of the Mergers (other than the properties of VEREIT Office Assets) for the nine months ended September 30, 2021 and year ended December 31, 2020 (in thousands):
| For the nine months ended September 30, 2021 |
For the year ended December 31, 2020 |
|||||||
| Buildings and improvements (a) | $ | 243,332 | $ | 324,442 | ||||
| Tenant improvements (a) | 91,067 | 121,422 | ||||||
| In-place leases and leasing commissions and marketing costs (a) | 205,598 | 274,131 | ||||||
| Less: Elimination of historical depreciation and amortization (b) | (278,268 | ) | (364,031 | ) | ||||
| Total pro forma adjustment | $ | 261,729 | $ | 355,964 | ||||
| (a) | Recognition of depreciation and amortization for the fair value of real estate tangible and intangible assets excludes amounts related to VEREIT Office Assets, because these assets were derecognized following the Mergers in connection with the Orion Divestiture, and the post-combination financial statements of the combined company will not be impacted by the depreciation and amortization expense of tangible and intangible assets related to VEREIT Office Assets. |
| (b) | Elimination of historical amounts excludes amounts related to VEREIT properties that were sold between January 1, 2020 and September 30, 2021, because such properties are not part of the net assets acquired in the Mergers. In addition, as noted above, elimination of historical amounts excludes amounts related to VEREIT Office Assets, which are separately adjusted as described in Note 5. |
| 17) | The pro forma adjustments to interest expense reflect the impact of the Mergers on the amounts recognized in VEREIT’s historical consolidated statements of operations for the periods presented from: (i) the elimination of historical deferred financing cost amortization, (ii) the elimination of historical amortization on net premiums/discounts, and (iii) the amortization of the fair value adjustment on VEREIT’s mortgages and notes payable assumed in the Mergers. The pro forma adjustments presented below do not include any amounts related to VEREIT Office Assets, which are separately adjusted as described in Note 5. The following table summarizes the pro forma adjustments to interest expense for the nine months ended September 30, 2021 and year ended December 31, 2020 (in thousands): |
| For the nine months ended September 30, 2021 | For the year ended December 31, 2020 | |||||||
| Elimination of historical deferred financing costs amortization | $ | (7,884 | ) | $ | (14,896 | ) | ||
| Elimination of historical amortization of net (discounts)/premiums | (1,771 | ) | 928 | |||||
| Amortization of the fair value adjustment on mortgages and notes payable | (34,272 | ) | (45,697 | ) | ||||
| Total pro forma adjustment | $ | (43,927 | ) | $ | (59,665 | ) | ||
The pro forma adjustments for the amortization of the fair value adjustment on VEREIT’s mortgages and notes payable assumed in the Mergers were estimated based on a straight-line approach and the weighted average remaining contractual term of 3.7 years for mortgages payable and 8.1 years for notes payable. The fair value adjustment on VEREIT’s mortgages and notes payable and estimated amortization expense may differ materially from the preliminary determination within these unaudited pro forma condensed combined financial statements. The pro forma adjustments to interest expense do not purport to be indicative of the expected change in interest expense of the combined company in any future periods.
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| 18) | Represents an adjustment to increase ground leases rent expense by $0.7 million for the nine months ended September 30, 2021 and $0.9 million for the year ended December 31, 2020 as a result of the revaluation of operating lease right-of-use assets and recognition of below-market ground lease intangible assets. The adjustment is computed based on a straight-line approach and a weighted average remaining lease term of 21.8 years. The fair value adjustment on VEREIT’s ground leases may differ materially from the preliminary determination within these unaudited pro forma condensed combined financial statements. The pro forma adjustments to property (including reimbursable) expense do not purport to be indicative of the expected change in ground rent expense of the combined company in any future periods. |
| 19) | Represents an adjustment to recognize additional post-combination compensation expense of $0.6 million for the nine months ended September 30, 2021 and $1.3 million for the year ended December 31, 2020 associated with the fair value of Realty replacement awards issued to the holders of VEREIT restricted stock units, performance restricted stock units and stock options. The adjustment is based upon a straight-line vesting approach. The pro forma adjustments to general and administrative expense do not purport to be indicative of the expected change in compensation expense of the combined company in any future periods. |
| 20) | Represents the adjustment for Mergers-related costs of $97.6 million for the year ended December 31, 2020 resulting from estimated transaction-related costs that are not currently reflected in the historical consolidated financial statements of Realty and VEREIT; these estimated transaction costs consist primarily of advisor fees, legal fees, change in control payments, severance and other separation benefits, and accounting fees. It is assumed that these costs will not affect the combined statements of operations beyond twelve months after the closing date of the Mergers. |
Note 5 – Orion Divestiture Transaction Adjustments
Balance Sheet
The pro forma adjustments reflect the effect of the Orion Divestiture, the repayment by Realty and VEREIT, as the case may be, of certain existing mortgages payable of the Office Assets (including the associated repayment costs) prior to the Merger Effective Time and the subsequent reimbursement of such amounts by Orion, and the portion of the proceeds from Orion LP’s new financing arrangements that are expected to be distributed by Orion to Realty as a dividend, on Realty’s and VEREIT’s historical consolidated balance sheets as if these transactions occurred on September 30, 2021.
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| 1) | These pro forma adjustments reflect the derecognition of the assets and liabilities attributable to the Orion Business. The assets and liabilities of VEREIT Office Assets within the Orion Business have been adjusted to derecognize the fair value of such assets and liabilities established as a result of the Mergers. The assets and liabilities of Realty Office Assets within the Orion Business reflect the historical carrying value of such assets and liabilities within Realty’s consolidated financial statements. The pro forma adjustment for the derecognition of the assets and liabilities attributable to the Orion Business as of September 30, 2021, consists of the following (in thousands): |
| Realty Office Assets | VEREIT Office Assets | Total Orion Business | ||||||||||
| ASSETS | ||||||||||||
| Real estate held for investment, at cost: | ||||||||||||
| Land | $ | 71,191 | $ | 171,317 | $ | 242,508 | ||||||
| Buildings and improvements | 562,942 | 1,026,444 | 1,589,386 | |||||||||
| Total real estate held for investment, at cost | 634,133 | 1,197,761 | 1,831,894 | |||||||||
| Less accumulated depreciation and amortization | (149,229 | ) | - | (149,229 | ) | |||||||
| Real estate held for investment, net | 484,904 | 1,197,761 | 1,682,665 | |||||||||
| Cash and cash equivalents | - | 176 | 176 | |||||||||
| Accounts receivable, net | 7,840 | 6,897 | 14,737 | |||||||||
| Lease intangible assets, net | 23,496 | 204,266 | 227,762 | |||||||||
| Goodwill | - | 234,780 | 234,780 | |||||||||
| Other assets, net | 8,757 | 33,192 | 41,949 | |||||||||
| Total assets | $ | 524,997 | $ | 1,677,072 | $ | 2,202,069 | ||||||
| LIABILITIES | ||||||||||||
| Accounts payable and accrued expenses | $ | 1,896 | $ | 10,286 | $ | 12,182 | ||||||
| Lease intangible liabilities, net | 6,008 | 18,791 | 24,799 | |||||||||
| Other liabilities | 4,783 | 14,067 | 18,850 | |||||||||
| Mortgages payable, net | 9,656 | - | 9,656 | |||||||||
| Total liabilities | $ | 22,343 | $ | 43,144 | $ | 65,487 | ||||||
| 2) | Cash and cash equivalents were adjusted as follows (in thousands): |
| Amount | ||||
| Repayment of certain existing mortgages payable of Realty Office Assets, including prepayment costs | $ | (10,094 | ) | |
| Reimbursement by Orion of amounts paid by Realty or VEREIT, as the case may be, with respect to certain existing mortgages payable of the Office Assets, including a portion of the associated repayment costs | 170,800 | |||
| Proceeds from the Orion LP new financing arrangements distributed by Orion to Realty as a dividend | 425,000 | |||
| Cash and cash equivalents attributable to VEREIT Office Assets | (176 | ) | ||
| Total pro forma adjustment | $ | 585,530 | ||
| 3) | The pro forma adjustments for Goodwill represent the derecognition of Mergers-specific goodwill recorded by Realty related to the VEREIT Office Assets business of $234.8 million, which has been allocated to Orion and derecognized in connection with the Orion Divestiture. The amount of Mergers-specific goodwill allocated to Orion and derecognized in the unaudited combined pro forma balance sheet has been determined using the preliminary allocation of the estimated preliminary purchase price in the Mergers and the resulting total Mergers-specific goodwill (as described in Note 4) based on the relative fair values of the VEREIT Office Assets business and VEREIT. The value of the Mergers-specific goodwill attributed to Orion following the Orion Divestiture is preliminary and will depend on various factors, including but not limited to: the final allocation of the purchase price in the Mergers to the assets acquired and liabilities assumed of VEREIT (including the assets and liabilities of VEREIT Office Assets) and the resulting total Mergers-specific goodwill balance. As a result, the Mergers-specific goodwill attributed to Orion could differ significantly from the current estimate, which could materially impact the unaudited pro forma condensed combined financial statements. |
| 4) | The pro forma adjustment to Mortgages payable, net reflects the repayment of existing mortgages payable of Realty Office Assets with a carrying value of $9.7 million prior to the Merger Effective Time. |
| 5) | The following table presents the pro forma adjustments to Distributions in excess of net income (in thousands): |
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| Amount | ||||
| Derecognition of Orion net assets upon the Orion Divestiture | $ | (1,549,291 | ) | |
| Loss on debt extinguishment upon repayment of Realty Office Assets mortgages payable | (438 | ) | ||
| Total pro forma adjustment | $ | (1,549,729 | ) | |
Statements of Operations
The pro forma adjustments reflect the effect of the Orion Divestiture on Realty’s and VEREIT’s historical consolidated statements of operations as if the Orion Divestiture occurred on January 1, 2020.
| 6) | These pro forma adjustments reflect the elimination of the historical revenue and direct expenses of Realty Office Assets and VEREIT Office Assets. These adjustments do not reflect the allocation of any general corporate overhead costs of Realty or VEREIT to Realty Office Assets or VEREIT Office Assets, respectively. The pro forma adjustments for the elimination of revenue and direct expenses of the Orion Business consist of the following (in thousands): |
For the nine months ended September 30, 2021
| Realty Office Assets | VEREIT Office Assets | Total Orion Business | ||||||||||
| REVENUE | ||||||||||||
| Rental (including reimbursable) | $ | 38,930 | $ | 120,409 | $ | 159,339 | ||||||
| Other | - | 752 | 752 | |||||||||
| Total revenue | 38,930 | 121,161 | 160,091 | |||||||||
| EXPENSES | ||||||||||||
| Depreciation and amortization | 17,855 | 44,234 | 62,089 | |||||||||
| Interest | 1,080 | 5,522 | 6,602 | |||||||||
| Property (including reimbursable) | 4,611 | 30,892 | 35,503 | |||||||||
| General and administrative | - | 24 | 24 | |||||||||
| Provisions for impairment | - | 28,064 | 28,064 | |||||||||
| Total expenses | 23,546 | 108,736 | 132,282 | |||||||||
| Loss on sales of real estate | - | (4 | ) | (4 | ) | |||||||
| Equity in income of unconsolidated entities | - | 621 | 621 | |||||||||
| Loss on extinguishment of debt | (3,499 | ) | (85 | ) | (3,584 | ) | ||||||
| Income before income taxes | 11,885 | 12,957 | 24,842 | |||||||||
| Income taxes | - | - | - | |||||||||
| Net income | 11,885 | 12,957 | 24,842 | |||||||||
| Net income attributable to noncontrolling interests | - | 41 | 41 | |||||||||
| Net income available to common stockholders | $ | 11,885 | $ | 12,998 | $ | 24,883 | ||||||
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For the year ended December 31, 2020
| Realty Office Assets | VEREIT Office Assets | Total Orion Business | ||||||||||
| REVENUE | ||||||||||||
| Rental (including reimbursable) | $ | 53,474 | $ | 170,304 | $ | 223,778 | ||||||
| Other | - | 754 | 754 | |||||||||
| Total revenue | 53,474 | 171,058 | 224,532 | |||||||||
| EXPENSES | ||||||||||||
| Depreciation and amortization | 25,950 | 62,662 | 88,612 | |||||||||
| Interest | 2,931 | 9,905 | 12,836 | |||||||||
| Property (including reimbursable) | 5,770 | 46,597 | 52,367 | |||||||||
| General and administrative | - | 40 | 40 | |||||||||
| Provisions for impairment | 18,671 | 9,306 | 27,977 | |||||||||
| Total expenses | 53,322 | 128,510 | 181,832 | |||||||||
| Gain on sales of real estate | - | 9,765 | 9,765 | |||||||||
| Equity in income and gain on disposition of unconsolidated entities | - | 535 | 535 | |||||||||
| Loss on extinguishment of debt | - | (1,686 | ) | (1,686 | ) | |||||||
| Income before income taxes | 152 | 51,162 | 51,314 | |||||||||
| Income taxes | - | - | - | |||||||||
| Net income | 152 | 51,162 | 51,314 | |||||||||
| Net income attributable to noncontrolling interests | - | 60 | 60 | |||||||||
| Net income available to common stockholders | $ | 152 | $ | 51,222 | $ | 51,374 | ||||||
| 7) | Represents the adjustment to: (i) remove the historical loss on extinguishment of debt related to VEREIT Office Assets of $1.7 million for the year ended December 31, 2020 (as described in item 6 of Note 5), and (ii) recognize a loss on extinguishment of debt of $0.4 million for the year ended December 31, 2020 as a result of the repayment of certain existing mortgages payable of Realty Office Assets prior to the Orion Divestiture. The total loss on extinguishment of debt consists of prepayment penalties and the write-off of unamortized deferred financing fees and will not affect the statements of operations of the combined company beyond twelve months after the closing date of the Mergers and the Orion Divestiture. Any loss on extinguishment of debt related to the repayment of certain existing mortgages payable of VEREIT Office Assets prior to the Merger Effective Time does not impact the statements of operations of the combined company and has not been reflected in these unaudited pro forma condensed combined financial statements. |
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Note 6 – Pro Forma Net Income Available to Common Stockholders per Common Share
The following table summarizes the unaudited pro forma net income from continuing operations per common share for the nine months ended September 30, 2021 and the year ended December 31, 2020 as if the Pro Forma Transactions occurred on January 1, 2020 (in thousands, except share and per share data):
| For the nine months ended September 30, 2021 |
For the year ended December 31, 2020 |
|||||||
| Numerator | ||||||||
| Pro forma net income available to common stockholders | $ | 420,074 | $ | 199,179 | ||||
| Denominator | ||||||||
| Realty historical weighted average common shares outstanding | 379,291,782 | 345,280,126 | ||||||
| VEREIT common stock and VEREIT OP common units converted into Realty common stock (229,224,034 shares and units outstanding, multiplied by the Exchange Ratio of 0.705) | 161,602,944 | 161,602,944 | ||||||
| VEREIT DSU Awards converted into Realty common stock (123,938 units, multiplied by the Exchange Ratio of 0.705) | 87,376 | 87,376 | ||||||
| Pro forma weighted average common shares outstanding - basic | 540,982,102 | 506,970,446 | ||||||
| Realty historical weighted average dilutive shares | 117,645 | 135,132 | ||||||
| Dilutive effect of unvested VEREIT equity-based awards exchanged into Realty equity-based awards | 54,049 | 65,489 | ||||||
| Pro forma weighted average Realty common shares outstanding - diluted | 541,153,796 | 507,171,067 | ||||||
| Pro forma amounts of net income available to common stockholders per common share: | ||||||||
| Basic and diluted | $ | 0.78 | $ | 0.39 | ||||
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