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Common Stock Incentive Plan | 12 Months Ended
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Dec. 31, 2021
Share-based Payment Arrangement [Abstract] |
Common Stock Incentive Plan | Common Stock Incentive Plan In March 2021, our Board of Directors adopted, and in May 2021, stockholders approved, the Realty Income 2021 Incentive Award Plan, or 2021 Plan, to enable us to motivate, attract and retain the services of directors, employees and consultants, considered essential to our long-term success. The 2021 Plan offers our directors, employees and consultants an opportunity to own our stock and/or rights that will reflect our growth, development and financial success. Except as noted below, the aggregate number of shares of our common stock subject to options, stock purchase rights, or SPR, stock appreciation rights, or SAR, and other awards, will be no more 8,924,231 shares. The maximum number of shares that may be subject to options, SPR, SAR and other awards granted under the plan to any individual in any calendar year may not exceed 3,200,000, and the maximum aggregate amount of cash that may be paid in cash during any calendar year with respect to one or more shares payable in cash shall be $10.0 million. The 2021 Plan replaced the Realty Income Corporation 2012 Incentive Award Plan, or the 2012 Plan, which was set to expire in March 2022. No further awards will be granted under the 2012 Plan. The disclosures below incorporate activity for both the 2012 Plan and the 2021 Plan. In connection with the Merger, shares which remained available for issuance under the VEREIT, Inc. 2021 Equity Incentive Plan immediately prior to the closing of the merger (as adjusted by the Exchange Ratio) may be used for awards under the 2021 Plan and will not reduce the shares authorized for grant under the 2021 Plan, to the extent that awards using such shares (i) are permitted without stockholder approval under applicable stock exchange rules, (ii) are made only to VEREIT service providers or individuals who become Realty Income service providers following the date of the consummation of the merger, and (iii) are only granted under the 2021 Plan during the period commencing on the date of the consummation of the merger and ending on June 2, 2031. As a result, 6,186,101 additional shares are available for issuance under the 2021 Plan. The amount of share-based compensation costs recognized in general and administrative expense on our consolidated statements of income and comprehensive income was $16.2 million during 2021, $16.5 million during 2020 (including $1.8 million of accelerated share-based compensation costs for our former Chief Financial Officer ("CFO")) and $13.7 million during 2019. In connection with the Merger, each outstanding VEREIT, Inc. stock option and restricted stock unit that were unvested as of November 1, 2021 were converted into equivalent options and restricted stock units, in each case with respect to shares of the Company's common stock, using the equity award exchange ratio in accordance with the merger agreement. The converted awards issued by Realty Income have identical terms to the original VEREIT, Inc. award grant. On November 1, 2021, we issued 442,418 shares of Realty Income common stock in settlement of equity awards that vested upon the separation of certain former-VEREIT employees and directors in connection with the merger. This issuance is excluded from the Restricted Stock Units and Stock Options sections below, as the awards were not granted under the 2021 Plan. The aggregate fair value of the converted awards was $71.6 million, of which i.) $44.0 million related to pre-combination services and is included in the consideration transferred in the merger (please refer to Note 3, Merger with VEREIT and Orion Divestiture), ii.) $25.6 million of expense was recognized during November in merger and integration-related costs related to the acceleration of vesting upon the separation of certain employees in connection with the merger, and iii.) $2.0 million will be amortized through general and administrative expenses over the remaining vesting term for former VEREIT, Inc. employees who were retained by Realty Income. The following disclosures are inclusive of converted awards for former VEREIT employees continuing as employees of Realty Income, which are reflected as grants, as the replacement awards represent newly issued awards settled in Realty Income common shares. In connection with the Orion Divestiture, each stock option, restricted stock unit and performance award outstanding at November 12, 2021 was entitled to an equitable adjustment equal to the ratio of the five-day volume weighted average per-share price of Realty Income common stock prior to the Orion Divestiture divided by the five-day volume weighted average per-share of Realty Income common stock following the Orion Divestiture, resulting in an adjustment factor of approximately 1.002342. The equitable adjustment was considered a modification in accordance with the provisions of ASC 718, Compensation-Stock Compensation. As a result, we compared the fair value of each award immediately prior to the equitable adjustment to the fair value immediately after the equitable adjustment to measure incremental compensation cost, if any. The equitable adjustment did not result in any incremental fair value. Therefore, no stock-based compensation expense was recorded as of result of the modification. The following disclosures are inclusive of these adjustments, which has been labeled 'Equitable adjustment - Orion Divestiture' throughout. A. Restricted Stock The following table summarizes our common stock grant activity under our 2021 and 2012 Plans.
|  | 2021 |  | 2020 |  | 2019
|  | Number of shares |  | Weighted average price(1) |  | Number of shares |  | Weighted average price(1) |  | Number of shares |  | Weighted average price(1)
Outstanding nonvested shares, beginning of year |  | 219,482 |  |  | $ | 63.69 |  |  | 259,698 |  |  | $ | 58.39 |  |  | 307,821 |  |  | $ | 53.44 |
Shares granted |  | 133,052 |  |  | $ | 64.27 |  |  | 103,473 |  |  | $ | 67.84 |  |  | 87,327 |  |  | $ | 69.83 |
Shares vested |  | (124,505) |  |  | $ | 61.57 |  |  | (141,486) |  |  | $ | 56.94 |  |  | (126,363) |  |  | $ | 54.45 |
Shares forfeited |  | (15,399) |  |  | $ | 65.09 |  |  | (2,203) |  |  | $ | 66.48 |  |  | (9,087) |  |  | $ | 55.71 |
Outstanding nonvested shares, end of each period |  | 212,630 |  |  | $ | 65.20 |  |  | 219,482 |  |  | $ | 63.69 |  |  | 259,698 |  |  | $ | 58.39 |
(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% annual increments upon re-election to the Board at each of the three Annual Meetings of Stockholders following the grant date; •For directors with six years of service at the date of grant, shares vest in 50% annual increments upon re-election to the Board at each of the two Annual Meetings of Stockholders following the grant date; •For directors with seven years of service at the date of grant, shares are 100% vested upon re-election to the Board in the following year; 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 May 2021, we granted 36,000 shares of restricted stock to the independent members of our Board of Directors, in connection with our annual awards, of which 24,000 shares vested immediately, and 12,000 shares vest in equal parts over a three-year service period. In addition, in November 2021, we granted 8,000 shares of restricted stock to the new members of our Board of Directors, which vest in equal parts over a three-year service period. Our restricted stock awards granted to employees typically vest annually in equal parts over a four-year service period. During 2021, 89,052 shares were granted to our employees, and vest over a four-year service period. As of December 31, 2021, the remaining unamortized share-based compensation expense related to restricted stock totaled $9.2 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 conditions 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 2021, 2020 and 2019, we granted annual performance share awards, as well as dividend equivalent rights, to our executive officers. The number of performance shares that vest for each of the three years is based on the achievement of the following performance goals:
|  | Weighting for year granted
Annual Performance Awards Metrics |  | 2021 |  | 2020 |  | 2019
Total shareholder return (“TSR”) ranking relative to MSCI US REIT Index |  | 70 | % |  | 70 | % |  | 45 | %
TSR ranking relative to J.P. Morgan Net Lease Peer Group |  | N/A |  | N/A |  | 26 | %
Dividend per share Growth Rate |  | 15 | % |  | 15 | % |  | 16 | %
Debt-to-Adjusted EBITDA re Ratio |  | N/A |  | N/A |  | 13 | %
Net Debt-to-Adjusted EBITDA re Ratio |  | 15 | % |  | 15 | % |  | N/A
The annual performance shares are earned based on our performance related to our metrics above, 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 2019 performance awards began on January 1, 2019 and ended on December 31, 2021. The performance period for the 2020 performance awards began on January 1, 2020 and will end on December 31, 2022. The performance period for the 2021 performance awards began on January 1, 2021 and will end on December 31, 2023. On November 15, 2021, the Compensation Committee approved a one-time grant of performance share awards and a one-time cash bonus to certain of our named executives in connection with the completion of our merger with VEREIT and the transactions contemplated thereby, including the Orion Divestiture (the "VEREIT Transaction"). The awards were made to reward the executives for the successful consummation of the VEREIT Transaction and were intended to retain and motivate the executives to achieve optimal synergies and incentivize further growth from the merger. The performance shares are earned based on our performance related to AFFO accretion (50% weighting) and general and administrative expense synergies (50% weighting), and vest 50% upon the completion of the performance period. The remaining 50% will vest on the one-year anniversary of the completion of the applicable performance period. All vesting is subject to continued service. The performance period is one year for the AFFO accretion targets from January 1, 2022 to December 31, 2022 and two years for the general and administrative expense synergies from January 1, 2022 to December 31, 2023. The fair value of the annual performance shares was estimated on the date of grant using a Monte Carlo Simulation model. The fair value of the one-time performance shares was based on the fair value of our common stock at the grant date and is dependent on the probability of satisfying the performance conditions stipulated in the award grant. The following table summarizes our performance share grant activity, inclusive of annual performance shares and the one-time performance shares related to the merger with VEREIT:
|  | 2021 |  | 2020 |  | 2019
|  | Number of performance shares |  | Weighted average price(1) |  | Number of performance shares |  | Weighted average price(1) |  | Number of performance shares |  | Weighted average price(1)
Outstanding nonvested shares, beginning of year |  | 291,759 |  |  | $ | 69.73 |  |  | 304,663 |  |  | $ | 62.25 |  |  | 223,392 |  |  | $ | 58.78 |
Equitable adjustment - Orion Divestiture (2) |  | 752 |  |  |  |  | — |  |  |  |  | — |  |  |
Shares granted(3) |  | 257,149 |  |  | $ | 64.18 |  |  | 136,729 |  |  | $ | 79.98 |  |  | 128,581 |  |  | $ | 65.34 |
Shares vested |  | (109,113) |  |  | $ | 62.52 |  |  | (139,012) |  |  | $ | 63.66 |  |  | (47,310) |  |  | $ | 54.27 |
Shares forfeited |  | (52,408) |  |  | $ | 65.83 |  |  | (10,621) |  |  | $ | 66.64 |  |  | — |  |  |
Outstanding nonvested shares, end of each period |  | 388,139 |  |  | $ | 68.09 |  |  | 291,759 |  |  | $ | 69.73 |  |  | 304,663 |  |  | $ | 62.25 |
(1) Grant date fair value. (2) Effective with the Orion Divestiture on November 12, 2021, outstanding equity awards were adjusted by a conversion ratio of 1.002342 per one Realty Income share then held. (3) 194,053 shares granted relate to annual performance grants and 63,096 shares granted relate to one-time grant of performance shares. As of December 31, 2021, the remaining share-based compensation expense related to the performance shares totaled $14.6 million and is being recognized on a tranche-by-tranche basis over the service period. C. Restricted Stock Units During 2021, 2020 and 2019, and in connection with our merger with VEREIT, we also granted restricted stock units that primarily vest over service periods of three or four-years and have the same economic rights as shares of restricted stock:
|  | 2021 |  | 2020 |  | 2019
|  | Number of restricted stock units |  | Weighted average price(1) |  | Number of restricted stock units |  | Weighted average price(1) |  | Number of restricted stock units |  | Weighted average price(1)
Outstanding nonvested shares, beginning of year |  | 18,670 |  |  | $ | 70.38 |  |  | 15,511 |  |  | $ | 59.82 |  |  | 14,968 |  |  | $ | 54.62 |
Equitable adjustment - Orion Divestiture (2) |  | 109 |  |  |  |  | — |  |  |  |  | — |  |  |
Shares granted |  | 71,956 |  |  | $ | 68.96 |  |  | 9,966 |  |  | $ | 78.79 |  |  | 5,482 |  |  | $ | 69.58 |
Shares vested |  | (23,368) |  |  | $ | 66.96 |  |  | (6,807) |  |  | $ | 58.63 |  |  | (4,939) |  |  | $ | 54.90 |
Shares forfeited |  | — |  |  |  |  | — |  |  |  |  | — |  |  |
Outstanding nonvested shares, end of each period |  | 67,367 |  |  | $ | 69.69 |  |  | 18,670 |  |  | $ | 70.38 |  |  | 15,511 |  |  | $ | 59.82 |
(1) Grant date fair value. (2) Effective with the Orion Divestiture on November 12, 2021, outstanding equity awards were adjusted by a conversion ratio of 1.002342 per one Realty Income share then held. The amount of share-based compensation for the restricted stock units is based on the fair value of our common stock at the grant date. The expense amortization period for restricted stock units is the lesser of the four-year service period or the period over which the awardee reaches the qualifying retirement age. For employees who have already met the qualifying retirement age, restricted stock units are fully expensed at the grant date. As of December 31, 2021, the remaining share-based compensation expense related to the restricted stock units totaled $1.7 million and is being recognized on a straight-line basis over the service period. D. Stock Options During 2021, we also granted stock options, in connection with our merger with VEREIT. The following inputs and assumptions were used to calculate the weighted-average fair values of the options granted at the date of grant as follows: The fair value of the stock options as of their grant date is determined using the Black-Scholes option pricing model, which requires the input of assumptions including expected terms, expected volatility, dividend yield and risk free rate. The following table summarizes our stock option activity:
|  | Number of stock options |  | Weighted average exercise price(1) |  | Weighted average remaining contractual term (Years) |  | Aggregate intrinsic value
Outstanding nonvested options, beginning of year |  | — |  |  |  |  |  |  |
Options granted |  | 709,426 |  |  | $ | 53.80 |  |  |  |  |
Equitable adjustment - Orion Divestiture (2) |  | 1,547 |  |  |  |  |  |  |
Options exercised |  | (395,903) |  |  | $ | 54.54 |  |  |  |  |
Options forfeited |  | — |  |  |  |  |  |  |
Outstanding nonvested options, end of each period |  | 315,070 |  |  | $ | 52.89 |  |  | 2.4 |  | $ | 5,891,639 |
(1) Grant date fair value. (2) Effective with the Orion Divestiture on November 12, 2021, outstanding equity awards were adjusted by a conversion ratio of 1.002342 per one Realty Income share then held. Compensation expense for stock options is recognized on a straight-line basis over the service period described above. In 2021, we recorded $68,000 of expense related to stock options. As of December 31, 2021, there was $57,000 of unrecognized compensation expense related to stock options with a weighted-average remaining term of 0.2 years.

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