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Merger with VEREIT, Inc. | 6 Months Ended
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Jun. 30, 2022
Business Combination and Asset Acquisition [Abstract] |
Merger with VEREIT, Inc. | Merger with VEREIT, Inc. Merger with VEREIT On November 1, 2021, we completed our merger with VEREIT, Inc. For further details, see note 3. Merger with VEREIT, Inc. and Orion Office REIT Inc. Divestiture, to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021. Our merger with VEREIT has been accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with Realty Income as the accounting acquirer, which requires, among other things, that the assets acquired, and liabilities assumed be recognized at their acquisition date fair value. The fair value of the consideration transferred on the date of the acquisition is as follows (in thousands, except share and per share data):
Shares of VEREIT common stock and VEREIT Operating Partnership, L.P. ("OP") common units exchanged (1) |  | 229,304,035 |
Exchange Ratio |  | 0.705
|  | 161,659,345
Less: Fractional shares settled in cash |  | (1,545)
Shares of Realty Income common stock and Realty Income L.P. units issued |  | 161,657,800
Adjusted opening price of Realty common stock on November 1, 2021 (2) |  | $ | 71.236 |
Fair value of Realty common stock issued to former holders of VEREIT common stock and VEREIT OP common units |  | $ | 11,515,855 |
Fair value of VEREIT's equity-based compensation awards attributable to pre-combination services (3) |  | 44,020 |
Total non-cash consideration |  | 11,559,875 |
Cash paid for fractional shares |  | 110 |
VEREIT indebtedness paid off in connection with the merger (4) |  | 500,414 |
Consideration transferred |  | $ | 12,060,399 |
(1) Includes 229,152,001 shares of VEREIT common stock and 152,034 VEREIT OP common units outstanding as of November 1, 2021. Under the Merger Agreement, these shares and units were converted to Realty Income common stock, or in certain instances, Realty Income L.P. units, at an Exchange Ratio of 0.705 per share of VEREIT common stock or VEREIT OP common unit, as applicable. (2) The fair value of Realty Income 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 Income common stock of $71.00 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 were eligible to receive when such dividend was paid on November 15, 2021. (3) Represents the fair value of fully vested deferred stock unit awards of VEREIT common stock (“VEREIT DSU Awards”) which were converted into Realty Income common stock upon our merger with VEREIT, as well as the estimated fair value of the Realty Income replacement employee and executive stock options and restricted stock units that were granted at the closing date of our merger with VEREIT and which were attributable to pre-combination services. (4) Represents the outstanding balance of the VEREIT revolving credit facility repaid by Realty Income in connection with the closing of the merger. The amount shown in the table above was based upon the balance outstanding immediately prior to November 1, 2021. A. Preliminary Purchase Price Allocation The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
ASSETS |  |
Land |  | $ | 3,021,906 |
Buildings |  | 8,677,467 |
Total real estate held for investment |  | 11,699,373 |
Cash and cash equivalents |  | 128,411 |
Accounts receivable |  | 53,355 |
Lease intangible assets (1) |  | 3,204,773 |
Goodwill |  | 3,717,620 |
Investment in unconsolidated entities |  | 175,379 |
Other assets |  | 308,910 |
Total assets acquired |  | $ | 19,287,821 |
LIABILITIES |  |
Accounts payable and accrued expenses |  | $ | 139,836 |
Lease intangible liabilities (2) |  | 949,349 |
Other liabilities |  | 320,893 |
Mortgages payable |  | 869,027 |
Notes payable |  | 4,946,965 |
Total liabilities assumed |  | $ | 7,226,070 |
Net assets acquired, at fair value |  | $ | 12,061,751 |
Noncontrolling interests |  | $ | 1,352 |
Total purchase price |  | $ | 12,060,399 |
(1) The weighted average amortization period for acquired lease intangible assets is 9.3 years. (2) The weighted average amortization period for acquired lease intangible liabilities is 25.5 years. The assessment of fair value is preliminary and is based on information that was available to management at the time the consolidated financial statements were prepared. Measurement period adjustments will be recorded in the future period in which they are determined, as if they had been completed at the acquisition date. The finalization of our purchase accounting assessment could result in changes in the valuation of assets acquired and liabilities assumed up to a year after the date of our merger with VEREIT, which could be material. As of June 30, 2022, we have recorded measurement period adjustments resulting in a net increase to Goodwill from the initial valuation of $54.8 million, which is reflected in the table above. Due to the timing and complexity of the merger, we recorded the assets acquired and liabilities assumed at their preliminary estimated fair values. As of June 30, 2022, we had not finalized the determination of fair values allocated to certain assets and liabilities, including land, buildings, lease intangible assets, lease intangible liabilities, and the allocation of goodwill. The preliminary purchase price allocation is subject to change as we complete our analysis of the fair value of real estate assets and associated intangible assets and liabilities at the date of the transactions, which could have an impact on our consolidated financial statements. A preliminary estimate of approximately $3.72 billion has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. The recognized goodwill is attributable to expected synergies and benefits arising from the merger transaction, including anticipated financing and overhead cost savings, potential economies of scale benefits in both customer and vendor relationships and the employee workforce onboarded from VEREIT following the closing of the merger. None of the goodwill recognized is expected to be deductible for tax purposes. B. Merger and Integration-related Costs In conjunction with our merger with VEREIT, we incurred approximately $2.7 million and $9.2 million of transaction costs during the three and six months ended June 30, 2022, respectively, compared to approximately $13.3 million of merger-related transaction costs during each of the three and six months ended June 30, 2021. Merger and integration-related costs consist of advisory fees, attorney fees, accountant fees, SEC filing fees and additional incremental and non-recurring costs necessary to convert data and systems, retain employees and otherwise enable us to operate the acquired business or assets efficiently. C. Unaudited Pro Forma Financial Information Our consolidated results of operations for the three and six months ended June 30, 2022, include $255.2 million and $513.5 million of revenues, respectively, and $9.0 million and $26.0 million of net income associated with the results of operations of VEREIT OP. The following unaudited pro forma information presents a summary of our combined results of operations for the three and six months ended June 30, 2021, as if our merger with VEREIT had occurred on January 1, 2020 (in millions, except per share data). There are no pro forma adjustments for the three and six months ended June 30, 2022, as the merger was completed November 1, 2021. Amounts for the three and six months ended June 30, 2022 are presented for comparative purposes. The following pro forma financial information is not necessarily indicative of the results of operations had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses. In accordance with ASC 805, Business Combinations, the following information excludes the impact of the spin-off of office assets to Orion Office REIT Inc.
| Three months ended June 30, |  | Six months ended June 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Total revenues | $ | 810.4 |  |  | $ | 765.3 |  |  | $ | 1,617.8 |  |  | $ | 1,507.8 |
Net income | $ | 223.8 |  |  | $ | 186.7 |  |  | $ | 423.8 |  |  | $ | 376.0 |
Basic and diluted earnings per share | $ | 0.37 |  |  | $ | 0.35 |  |  | $ | 0.71 |  |  | $ | 0.70 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI https://asc.fasb.org/topic&trid=2303972 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 5 -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=128092470&loc=d3e4946-128472 + Details
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