17. Common Stock Incentive Plan

In 2012, our Board of Directors adopted and stockholders approved the Realty Income Corporation 2012 Incentive Award Plan, or the 2012 Plan, to enable us to motivate, attract and retain the services of directors and employees considered essential to our long-term success. The 2012 Plan offers our directors and employees an opportunity to own our stock or rights that will reflect our growth, development and financial success. Under the terms of the 2012 plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than 3,985,734 shares. The 2012 Plan has a term of ten years from the date it was adopted by our Board of Directors.

The amount of share-based compensation costs recognized in general and administrative expense on our consolidated statements of income was $13.9 million during 2017, $12.0 million during 2016, and $10.4 million during 2015.

A. Restricted Stock

The following table summarizes our common stock grant activity under our 2012 Plan. Our outstanding restricted stock vests over periods ranging from immediately to five years.

	2017				2016				2015
			Weighted				Weighted				Weighted
	Number of		average		Number of		average		Number of		average
	shares		price(1)		shares		price(1)		shares		price(1)
Outstanding nonvested shares, beginning of year	513,523		$	48.33	456,282		$	30.46	527,176		$	29.02
Shares granted	149,264		$	59.21	260,171		$	54.14	161,949		$	50.87
Shares vested	(183,381	)	$	46.65	(200,066	)	$	43.26	(205,248	)	$	37.70
Shares forfeited	(3,638	)	$	56.57	(2,864	)	$	48.15	(27,595	)	$	45.58
Outstanding nonvested shares, end of each period	475,768		$	52.32	513,523		$	48.33	456,282		$	30.46

(1) Grant date fair value.

The vesting schedule for shares granted to non-employee directors is as follows:

· For directors with less than six years of service at the date of grant, shares vest in 33.33% increments on each of the first three anniversaries of the date the shares of stock are granted;

· For directors with six years of service at the date of grant, shares vest in 50% increments on each of the first two anniversaries of the date the shares of stock are granted;

· For directors with seven years of service at the date of grant, shares are 100% vested on the first anniversary of the date the shares of stock are granted; and

· For directors with eight or more years of service at the date of grant, there is immediate vesting as of the date the shares of stock are granted.

During 2017, 28,000 shares were granted to our Board of Directors, of which 20,000 vested immediately and 8,000 shares vest annually in equal parts over a three-year service period.

Shares granted to employees typically vest annually in equal parts over a four-year or five-year service period. During 2017, 121,264 shares were granted to our employees, of which 48,338 will vest over a five-year service period and 72,926 will vest over a four-year service period.

As of December 31, 2017, the remaining unamortized share-based compensation expense related to restricted stock totaled $18.0 million, which is being amortized on a straight-line basis over the service period of each applicable award. The amount of share-based compensation is based on the fair value of the stock at the grant date. We define the grant date as the date the recipient and Realty Income have a mutual understanding of the key terms and condition of the award, and the recipient of the grant begins to benefit from, or be adversely affected by, subsequent changes in the price of the shares.

B. Performance Shares

During 2017, 2016 and 2015, we granted performance share awards, as well as dividend equivalent rights, to our executive officers. The number of performance shares that vest is based on the achievement of the following performance goals:

2017 Performance Awards Metrics		Weighting
Total shareholder return (“TSR”) relative to RMS Index		45%
TSR relative to JP Morgan Net Lease Peers		26%
Dividend per share growth rate		16%
Debt-to-EBITDA ratio		13%

2016 & 2015 Performance Awards Metrics		Weighting
Total shareholder return (“TSR”) relative to MSCI US REIT Index		50%
TSR relative to NAREIT Freestanding Index		20%
Dividend per share growth rate		20%
Debt-to-EBITDA ratio		10%

The performance shares are earned based on our performance, and vest 50% on the first and second January 1 after the end of the three year performance period, subject to continued service. The performance period for the 2015 performance awards began on January 1, 2015 and ended on December 31, 2017. The performance period for the 2016 performance awards began on January 1, 2016 and will end on December 31, 2018. The performance period for the 2017 performance awards began on January 1, 2017 and will end on December 31, 2019.

The fair value of the performance shares was estimated on the date of grant using a Monte Carlo Simulation model. The following table summarizes our performance share grant activity:

	2017				2016				2015
	Number of		Weighted		Number of		Weighted		Number of	Weighted
	performance		average		performance		average		performance	average
	shares		price(1)		shares		price(1)		shares	price(1)
Outstanding nonvested shares, beginning of year	159,751		$	49.95	115,121		$	46.94	59,405	$	41.46
Shares granted	124,681		$	71.79	58,575		$	55.07	55,716	$	52.78
Shares vested	(39,123	)	$	41.60	(10,454	)	$	44.54	-	$	-
Shares forfeited	-		$	-	(3,491	)	$	52.55	-	$	-
Outstanding nonvested shares, end of each period	245,309		$	62.49	159,751		$	49.95	115,121	$	46.94

(1) Grant date fair value.

As of December 31, 2017, the remaining share-based compensation expense related to the performance shares totaled $7.9 million and is being recognized on a tranche-by-tranche basis over the service period.

C. Restricted Stock Units

During 2017 and 2016 we also granted restricted stock units that vest over a four-year or a five-year service period and have the same economic rights as shares of restricted stock:

	2017				2016				2015
	Number of		Weighted		Number of		Weighted		Number of	Weighted
	restricted stock		average		restricted stock		average		restricted stock	average
	units		price(1)		units		price(1)		units	price(1)
Outstanding nonvested shares, beginning of year	18,460		$	52.65	10,136		$	52.21	-	$	-
Shares granted	10,467		$	60.56	14,783		$	52.76	10,136	$	52.21
Shares vested	(4,058	)	$	52.70	(6,459	)	$	52.21	-	$	-
Outstanding nonvested shares, end of each period	24,869		$	55.97	18,460		$	52.65	10,136	$	52.21

(1) Grant date fair value.

As of December 31, 2017, the remaining share-based compensation expense related to the restricted stock units totaled $935,000 and is being recognized on a straight-line basis over the service period.