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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2017, or

o Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-13374

REALTY INCOME CORPORATION

(Exact name of registrant as specified in its charter)

11995 El Camino Real, San Diego, California 92130

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (858) 284-5000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

There were 281,785,414 shares of common stock outstanding as of October 19, 2017.

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PART 1. FINANCIAL INFORMATION

Item 1.   Financial Statements

REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2017 and December 31, 2016

(dollars in thousands, except per share data)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the three and nine months ended September 30, 2017 and 2016

(dollars in thousands, except per share data) (unaudited)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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REALTY INCOME CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2017 and 2016

(dollars in thousands) (unaudited)

For supplemental disclosures, see note 17.

The accompanying notes to consolidated financial statements are an integral part of these statements.

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REALTY INCOME CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(unaudited)

1.         Management Statement

The consolidated financial statements of Realty Income Corporation (“Realty Income”, the “Company”, “we”, “our” or “us”) were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. Readers of this quarterly report should refer to our audited consolidated financial statements for the year ended December 31, 2016, which are included in our 2016 Annual Report on Form 10-K, as certain disclosures that would substantially duplicate those contained in the audited financial statements have not been included in this report.

At September 30, 2017, we owned 5,062 properties, located in 49 states and Puerto Rico, containing over 86.4 million leasable square feet.

2.      Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements

A.  The accompanying consolidated financial statements include the accounts of Realty Income and other entities for which we make operating and financial decisions (i.e., control), after elimination of all material intercompany balances and transactions.  We consolidate entities that we control and record a noncontrolling interest for the portion that we do not own. Noncontrolling interest that was created or assumed as part of a business combination was recognized at fair value as of the date of the transaction (see note 11).  We have no unconsolidated investments.

B.  We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended. We believe we have qualified and continue to qualify as a REIT. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income.  Assuming our dividends equal or exceed our taxable net income, we generally will not be required to pay federal corporate income taxes on such income. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements, except for federal income taxes of our taxable REIT subsidiaries. The income taxes recorded on our consolidated statements of income represent amounts paid by Realty Income and its subsidiaries for city and state income and franchise taxes.

C.  We assign a portion of goodwill to our applicable property sales, which results in a reduction of the carrying amount of our goodwill. In order to allocate goodwill to the carrying amount of properties that we sell, we utilize a relative fair value approach based on the original methodology for assigning goodwill.  As we sell properties, our goodwill will likely continue to gradually decrease over time. Based on our analyses of goodwill during the second quarters of 2017 and 2016, we determined there was no impairment on our existing goodwill.

D.  In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers.  This ASU, as amended by ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, outlines a comprehensive model for companies to use in accounting for revenue arising from contracts with customers, and will apply to transactions such as the sale of real estate. This ASU, which is effective for interim and annual periods beginning after December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also to provide certain additional disclosures. We will adopt this standard effective as of January 1, 2018 and will utilize the cumulative effect transition method of adoption. The adoption of this guidance will not have a material impact on our financial position or results of operations. We expect this standard will have an impact on the disclosure of certain lease and non-lease components of revenue from leases upon the adoption of the update ASU 2016-02, Leases, but will not have a material impact on “total revenues.”

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In February 2016, FASB issued ASU 2016-02 (Topic 842, Leases), which amended Topic 840, Leases.  Under this amended topic, the accounting applied by a lessor is largely unchanged from that applied under Topic 840, Leases. The large majority of operating leases should remain classified as operating leases, and lessors should continue to recognize lease income for those leases on a generally straight-line basis over the lease term. The amendments included in this topic are effective, on a retrospective or modified retrospective basis, for interim and annual periods beginning after December 15, 2018.  We have not yet adopted this topic and are currently evaluating the impact this amendment may have on our consolidated financial statements.

In January 2017, FASB issued ASU 2017-01, which amends Topic 805, Business Combinations. The FASB issued this ASU to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We elected to adopt this ASU early, effective October 1, 2017. As a result of this new guidance, we believe the majority of our future real estate transactions will qualify as asset acquisitions (or disposals), and future transaction costs associated with these acquisitions will be capitalized. The adoption of this topic will not have a material impact on our consolidated financial statements or related disclosures.

3.         Supplemental Detail for Certain Components of Consolidated Balance Sheets

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(1) In connection with Diageo’s sale of its wine business to Treasury Wine Estates, we agreed to release Diageo from its guarantee of our leases in exchange for Diageo’s payment of $75 million of additional rent to us.  The additional rent was paid in two equal installments, one of which was received in August 2016 for $37.5 million and was recorded as prepaid rent.  The final payment of $37.5 million was received in January 2017, at which time Treasury Wine Estates became the guarantor of our leases on those properties.  We have accounted for this transaction as a lease modification and the additional rent will be recognized on a straight-line basis over the remaining lease terms of approximately 15 years.

4.         Investments in Real Estate

We acquire land, buildings and improvements necessary for the successful operations of commercial tenants.

A.    Acquisitions During the First Nine Months of 2017 and 2016

During the first nine months of 2017, we invested $956.9 million in 177 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.5%. The 177 new properties and properties under development or expansion are located in 35 states, will contain approximately 4.3 million leasable square feet, and are 100% leased with a weighted average lease term of 14.9 years. The tenants occupying the new properties operate in 21 industries and the property types consist of 96.6% retail and 3.4% industrial, based on rental revenue.  None of our investments during 2017 caused any one tenant to be 10% or more of our total assets at September 30, 2017.

The $956.9 million invested during the first nine months of 2017 was allocated as follows: $233.7 million to land, $585.0 million to buildings and improvements, $152.7 million to intangible assets related to leases, and $14.5 million to intangible liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with these acquisitions.

The properties acquired during the first nine months of 2017 generated total revenues of $19.7 million and net income of $9.4 million during the nine months ended September 30, 2017.

In comparison, during the first nine months of 2016, we invested $1.1 billion in 236 properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.4%. The 236 properties and properties under development or expansion are located in 36 states, contain approximately 5.2 million leasable square feet, and are 100% leased with a weighted average lease term of 15.0 years. The tenants occupying those properties operate in 24 industries and the property types are 80.7% retail and 19.3% industrial, based on rental revenue.

The $1.1 billion invested during the first nine months of 2016 was allocated as follows: $267.8 million to land, $691.9 million to buildings and improvements, $140.4 million to intangible assets related to leases, and $26.3 million to intangible liabilities related to leases and other assumed liabilities. We also recorded mortgage premiums of $692,000. There was no contingent consideration associated with these acquisitions.

The properties acquired during the first nine months of 2016 generated total revenues of $22.5 million and net income of $11.2 million during the nine months ended September 30, 2016.

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The estimated initial weighted average contractual lease rate for a property is generally computed as estimated contractual net operating income, which, in the case of a net leased property, is equal to the aggregate base rent for the first full year of each lease, divided by the total cost of the property.  Since it is possible that a tenant could default on the payment of contractual rent, we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above.

In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return.  When the lease does not provide for a fixed rate of return on a property under development or expansion, the estimated initial weighted average contractual lease rate is computed as follows: estimated net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs. Of the $956.9 million we invested during the first nine months of 2017, $16.4 million was invested in 13 properties under development or expansion with an estimated initial weighted average contractual lease rate of 7.3%. Of the $1.1 billion we invested during the first nine months of 2016, $87.7 million was invested in 30 properties under development or expansion with an estimated initial weighted average contractual lease rate of 7.1%.

B.    Acquisition Transaction Costs

Acquisition transaction costs of $229,000 and $119,000 were recorded to general and administrative expense on our consolidated statements of income during the first nine months of 2017 and 2016, respectively.

C.    Investments in Existing Properties

During the first nine months of 2017, we capitalized costs of $9.5 million on existing properties in our portfolio, consisting of $1.2 million for re-leasing costs, $536,000 for recurring capital expenditures and $7.8 million for non-recurring building improvements. In comparison, during the first nine months of 2016, we capitalized costs of $5.3 million on existing properties in our portfolio, consisting of $564,000 for re-leasing costs, $486,000 for recurring capital expenditures and $4.2 million for non-recurring building improvements.

D.    Properties with Existing Leases

Of the $956.9 million we invested during the first nine months of 2017, approximately $562.1 million was used to acquire 68 properties with existing leases.  In comparison, of the $1.1 billion we invested during the first nine months of 2016, approximately $574.0 million was used to acquire 75 properties with existing leases. The value of the in-place and above-market leases is recorded to acquired lease intangible assets, net on our consolidated balance sheets, and the value of the below-market leases is recorded to acquired lease intangible liabilities, net on our consolidated balance sheets.

The values of the in-place leases are amortized as depreciation and amortization expense.  The amounts amortized to expense for all of our in-place leases, for the first nine months of 2017 and 2016 were $79.1 million and $69.6 million, respectively.

The values of the above-market and below-market leases are amortized over the term of the respective leases, including any bargain renewal options, as an adjustment to rental revenue on our consolidated statements of income. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for the first nine months of 2017 and 2016 were $10.2 million and $6.7 million, respectively.  If a lease was to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense, as appropriate.

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The following table presents the estimated impact during the next five years and thereafter related to the amortization of the acquired above-market and below-market lease intangibles and the amortization of the in-place lease intangibles at September 30, 2017 (in thousands):

5.         Credit Facility

We have a $2.0 billion unsecured revolving credit facility, or our credit facility with an initial term that expires in June 2019 and includes, at our option, two six-month extensions. Our credit facility has a $1.0 billion accordion expansion option.  Under our credit facility, our investment grade credit ratings as of September 30, 2017 provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 0.90% with a facility commitment fee of 0.15%, for all-in drawn pricing of 1.05% over LIBOR. The borrowing rate is subject to an interest rate floor and may change if our investment grade credit ratings change. We also have other interest rate options available to us under our credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.

At September 30, 2017, credit facility origination costs of $5.1 million are included in other assets, net on our consolidated balance sheet. These costs are being amortized over the remaining term of our credit facility.

At September 30, 2017, we had a borrowing capacity of $1.34 billion available on our credit facility (subject to customary conditions to borrowing) and an outstanding balance of $658.0 million as compared to an outstanding balance of $1.12 billion at December 31, 2016.

The weighted average interest rate on outstanding borrowings under our credit facility was 1.9% during the first nine months of 2017 and 1.4% during the first nine months of 2016. At September 30, 2017 and 2016, the weighted average interest rate on borrowings outstanding was 2.2% and 1.4%, respectively. Our credit facility is subject to various leverage and interest coverage ratio limitations, and at September 30, 2017 we were in compliance with the covenants on our credit facility.

6.         Term Loans

In June 2015, in conjunction with entering into our credit facility, we entered into a $250 million senior unsecured term loan maturing on June 30, 2020.  Borrowing under this term loan bears interest at the current one-month LIBOR, plus 0.95%.  In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest rate on this term loan at 2.67%.

In January 2013, in conjunction with our acquisition of American Realty Capital Trust, Inc., or ARCT, we entered into a $70 million senior unsecured term loan maturing January 2018.  Borrowing under this term loan bears interest at the current one-month LIBOR, plus 1.20%.  In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest rate on this term loan at 2.15%.

Deferred financing costs of $1.2 million incurred in conjunction with the $250 million term loan and $303,000 incurred in conjunction with the $70 million term loan are being amortized over the remaining terms of each respective term loan. The net balance of these deferred financing costs, which was $653,000 at September 30, 2017, and $873,000 at December 31, 2016, is included within term loans, net on our consolidated balance sheets.

7.         Mortgages Payable

During the first nine months of 2017, we made $123.5 million in principal payments, including the repayment of seven mortgages in full for $118.6 million. No mortgages were assumed during the first nine months of 2017.

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During the first nine months of 2016, we made $183.7 million in principal payments, including the repayment of eight mortgages in full for $161.5 million. Additionally, we assumed mortgages totaling $32.5 million, excluding net premiums. During the third quarter of 2016, we refinanced one of these assumed mortgages and received an additional $10.0 million in proceeds. The assumed mortgages are secured by the properties on which the debt was placed and are considered non-recourse debt with limited customary exceptions for items such as solvency, bankruptcy, misrepresentation, fraud, misapplication of payments, environmental liabilities, failure to pay taxes, insurance premiums, liens on the property, violations of the single purpose entity requirements, and uninsured losses.  We expect to pay off our outstanding mortgages as soon as prepayment penalties make it economically feasible to do so.

During the first nine months of 2016, aggregate net premiums totaling $692,000 were recorded upon the assumption of a mortgage with an above-market interest rate. Amortization of our net premiums is recorded as a reduction to interest expense over the remaining term of the respective mortgages, using a method that approximates the effective-interest method. Our mortgages contain customary covenants, such as limiting our ability to further mortgage each applicable property or to discontinue insurance coverage without the prior consent of the lender. At September 30, 2017, we were in compliance with these covenants.

The balance of our deferred financing costs, which are classified as part of mortgages payable, net, on our consolidated balance sheets, was $249,000 at September 30, 2017 and $324,000 at December 31, 2016. These costs are being amortized over the remaining term of each mortgage.

The following is a summary of all our mortgages payable as of September 30, 2017 and December 31, 2016, respectively (dollars in thousands):

(1) At September 30, 2017, there were 29 mortgages on 63 properties, while at December 31, 2016, there were 36 mortgages on 127 properties. The mortgages require monthly payments with principal payments due at maturity. The mortgages are at fixed interest rates, except for four mortgages on four properties with a principal balance totaling $44.9 million at September 30, 2017, and six mortgages on 15 properties with a principal balance totaling $76.3 million at December 31, 2016. After factoring in arrangements which limit our exposure to interest rate risk and effectively fix our per annum interest rates, our mortgage debt subject to variable rates totals $22.5 million at September 30, 2017 and $38.2 million at December 31, 2016.

(2) Stated interest rates ranged from 3.2% to 6.9% at September 30, 2017, while stated interest rates ranged from 2.4% to 6.9% at December 31, 2016.

(3) Effective interest rates ranged from 3.0% to 5.5% at September 30, 2017, while effective interest rates ranged from 2.5% to 8.8% at December 31, 2016.

The following table summarizes the maturity of mortgages payable, excluding net premiums of $4.8 million and deferred finance costs of $249,000, as of September 30, 2017 (dollars in millions):

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8.     Notes Payable

A. General

Our senior unsecured notes and bonds consist of the following, sorted by maturity date (dollars in millions):

The following table summarizes the maturity of our notes and bonds payable as of September 30, 2017, excluding unamortized original issuance discounts and deferred financing costs (dollars in millions):

As of September 30, 2017, the weighted average interest rate on our notes and bonds payable was 4.3% and the weighted average remaining years until maturity was 7.9 years.

B. Note Repayment

In September 2017, we repaid our $175.0 million of outstanding 5.375% notes, plus accrued and unpaid interest.

C. Note Issuances

In March 2017, we issued $300 million of 4.650% senior unsecured notes due 2047, or the 2047 Notes, and $400 million of 4.125% senior unsecured notes due 2026, or the 2026 Notes. The public offering price for the 2047 Notes was 99.97% of the principal amount for an effective yield to maturity of 4.65%. The public offering price for the 2026 Notes was 102.98% of the principal amount for an effective yield to maturity of 3.75%. The 2026 Notes constituted a further issuance of, and formed a single series with, the $250 million aggregate principal amount of senior notes due 2026, issued in September 2014. The net proceeds of approximately $705.2 million from the offerings were used to repay borrowings outstanding under our credit facility to fund investment opportunities, and for other general corporate purposes.

9.     Redemption of Preferred Stock

In April 2017, we redeemed all of the 16,350,000 shares of our 6.625% Monthly Income Class F Preferred Stock for $25 per share, plus accrued dividends. During the first nine months of 2017, we incurred a charge of $13.4 million, representing the Class F preferred stock original issuance costs that we paid in 2012.

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10.     Equity

A.   Issuance of Common Stock

In March 2017, we issued 11,850,000 shares of common stock.  After underwriting discounts and other offering costs of $29.7 million, the net proceeds of $704.9 million were used to repay borrowings under our credit facility.

In May 2016, we issued 6,500,000 shares of common stock. After underwriting discounts and other offering costs of $12.1 million, the net proceeds of $383.6 million were used to repay borrowings under our credit facility.

B.           Dividend Reinvestment and Stock Purchase Plan

Our Dividend Reinvestment and Stock Purchase Plan, or the DRSPP, provides our common stockholders, as well as new investors, with a convenient and economical method of purchasing our common stock and reinvesting their distributions. Our DRSPP also allows our current stockholders to buy additional shares of common stock by reinvesting all or a portion of their distributions. The DRSPP authorizes up to 26,000,000 common shares to be issued.  During the first nine months of 2017, we issued 1,155,883 shares and raised approximately $67.8 million under the DRSPP.  During the first nine months of 2016, we issued 133,432 shares and raised approximately $8.2 million under the DRSPP.  From the inception of the DRSPP through September 30, 2017, we have issued 14,025,772 shares and raised approximately $659.7 million.

Our DRSPP includes a waiver approval process, allowing larger investors or institutions, per a formal approval process, to purchase shares at a small discount, if approved by us. During the first nine months of 2017, we issued 927,695 shares and raised $54.7 million under the waiver approval process. These shares are included in the total activity for 2017 noted in the preceding paragraph. We did not issue shares under the waiver approval process during the first nine months of 2016.

C.           At-the-Market (ATM) Program

Through our “at-the-market” equity distribution program, or our ATM program, we were permitted to offer and sell shares of common stock to, or through, a consortium of banks acting as our sales agents either by means of ordinary brokers’ transactions on the NYSE at prevailing market prices or at negotiated prices. During the first nine months of 2017, we issued 8,506,559 shares and raised approximately $488.0 million under the ATM program. During the first nine months of 2016, we issued 1,312,269 shares and raised approximately $85.8 million under the ATM program. From the inception of our ATM program through September 30, 2017, we have issued all 12,000,000 shares authorized by our ATM program and raised $691.1 million.

11.     Noncontrolling Interests

In January 2013, we completed our acquisition of ARCT.  Equity issued as consideration for this transaction included common and preferred partnership units issued by Tau Operating Partnership, L.P., or Tau Operating Partnership, the consolidated subsidiary which owns properties acquired through the ARCT acquisition.  We and our subsidiaries hold a 99.4% interest in Tau Operating Partnership, and consolidate the entity.

In June 2013, we completed the acquisition of a portfolio of properties by issuing common partnership units in Realty Income, L.P.  The units were issued as consideration for the acquisition.  At September 30, 2017, the remaining units from this issuance represent a 0.4% ownership in Realty Income, L.P.  We hold the remaining 99.6% interests in this entity and consolidate the entity.

Neither of the common partnership units have voting rights. Both common partnership units are entitled to monthly distributions equal to the amount paid to common stockholders of Realty Income, and are redeemable in cash or Realty Income common stock, at our option, and at a conversion ratio of one to one, subject to certain exceptions.  Noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the balance sheet was appropriate.  We determined that the units meet the requirements to qualify for presentation as permanent equity.

In 2016, we completed the acquisition of two properties by acquiring a controlling interest in two separate joint ventures. We are the managing member of each of these joint ventures, and possess the ability to control the business and manage the affairs of these entities. At September 30, 2017, we and our subsidiaries held 95.0% and 74.0% interests, respectively, and fully consolidated these entities in our consolidated financial statements.  The following table represents the change in the carrying value of all noncontrolling interests through September 30, 2017 (dollars in thousands):

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(1)  317,022 Tau Operating Partnership units were issued on January 22, 2013 and remained outstanding as of September 30, 2017 and December 31, 2016.

(2)  534,546 Realty Income, L.P. units were issued on June 27, 2013, and 88,182 remain outstanding as of December 31, 2016 and September 30, 2017.

Both Tau Operating Partnership and Realty Income, L.P. are considered VIEs in which we are deemed the primary beneficiary based on our controlling financial interests. Below is a summary of selected financial data of consolidated VIEs, including the joint ventures acquired during 2016, for which we are the primary beneficiary included in the consolidated balance sheets at September 30, 2017 and December 31, 2016 (in thousands):

12.     Fair Value of Financial Instruments

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The disclosure for assets and liabilities measured at fair value requires allocation to a three-level valuation hierarchy. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, accounts receivable, escrow deposits, loans receivable, line of credit payable, term loans and all other liabilities, due to their short-term nature or interest rates and terms that are consistent with market, except for our notes receivable issued in connection with property sales, mortgages payable and our senior notes and bonds payable, which are disclosed as follows (dollars in millions):

(1) Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums is $4.8 million at September 30, 2017, and $6.4 million at December 31, 2016. Also excludes deferred financing costs of $249,000 at September 30, 2017, and $324,000 at December 31, 2016.

(2) Excludes non-cash original issuance discounts recorded on notes payable. The unamortized balance of the original issuance discounts is $7.1 million at September 30, 2017, and $19.8 million at December 31, 2016. Also excludes deferred financing costs of $24.2 million at September 30, 2017 and $20.8 million at December 31, 2016.

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The estimated fair values of our notes receivable issued in connection with property sales and our mortgages payable have been calculated by discounting the future cash flows using an interest rate based upon the relevant Treasury yield curve, plus an applicable credit-adjusted spread.  Because this methodology includes unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated fair values related to our notes receivable and mortgages payable is categorized as level three on the three-level valuation hierarchy.

The estimated fair values of our senior notes and bonds payable are based upon indicative market prices and recent trading activity of our senior notes and bonds payable. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values, related to our notes and bonds payable, is categorized as level two on the three-level valuation hierarchy.

We record interest rate swaps on the consolidated balance sheet at fair value. At September 30, 2017, interest rate swaps in a liability position valued at $871,000 were included in accounts payable and accrued expenses and interest rate swaps in an asset position valued at $73,000 were included in other assets, net on the consolidated balance sheet.  The fair value of our interest rate swaps are based on valuation techniques including discounted cash flow analysis on the expected cash flows of each swap, using both observable and unobservable market-based inputs, including interest rate curves.  Because this methodology uses observable and unobservable inputs, and the unobservable inputs are not significant to the fair value measurement, the measurement of interest rate swaps is categorized as level two on the three-level valuation hierarchy.

13.     Gain on Sales of Real Estate

During the third quarter of 2017, we sold 17 properties for $25.5 million, which resulted in a gain of $4.3 million.  During the first nine months of 2017, we sold 46 properties for $69.5 million, which resulted in a gain of $17.7 million.

During the third quarter of 2016, we sold 24 properties for $19.6 million, which resulted in a gain of $4.3 million.  During the first nine months of 2016, we sold 51 properties for $55.2 million, which resulted in a gain of $15.3 million.

14.     Impairments

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A provision is made for impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key factors that we utilize in this analysis include projected rental rates, estimated holding periods, historical sales and releases, capital expenditures and property sales capitalization rates. If a property is classified as held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell, and depreciation of the property ceases.

During the third quarter of 2017, we recorded total provisions for impairment of $365,000 on three sold properties. For the first nine months of 2017, we recorded total provisions for impairment of $8.1 million on ten sold properties, one property classified as held for sale, and six properties classified as held for investment.

In comparison, for the third quarter of 2016, we recorded total provisions for impairment of $8.8 million on 15 sold properties, two properties classified as held for investment, and one property classified as held for sale. For the first nine months of 2016, we recorded total provisions for impairment of $17.0 million on 29 sold properties, two properties classified as held for investment, and one property classified as held for sale.

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15.     Distributions Paid and Payable

A.            Common Stock

We pay monthly distributions to our common stockholders.  The following is a summary of monthly distributions paid per common share for the first nine months of 2017 and 2016:

At September 30, 2017, a distribution of $0.212 per common share was payable and was paid in October 2017.

B.      Class F Preferred Stock

In April 2017, we redeemed all 16,350,000 shares of our Class F preferred stock. During the first three months of 2017, we paid three monthly dividends to holders of our Class F preferred stock totaling $0.414063 per share, or $3.9 million. In April 2017, we paid a final monthly dividend of $0.101215 per share, or $1.7 million, which was recorded as interest expense. During the first nine months of 2016, we paid nine monthly dividends to holders of our Class F preferred stock totaling $1.242189 per share, or $20.3 million.

16.   Net Income per Common Share

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income available to common stockholders, plus income attributable to dilutive shares and convertible common units, for the period by the weighted average number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period.

The following is a reconciliation of the denominator of the basic net income per common share computation to the denominator of the diluted net income per common share computation.

17.     Supplemental Disclosures of Cash Flow Information

Cash paid for interest was $198.8 million in the first nine months of 2017 and $190.8 million in the first nine months of 2016.

Interest capitalized to properties under development was $347,000 in the first nine months of 2017 and $344,000 in the first nine months of 2016.

Cash paid for income taxes was $4.0 million in the first nine months of 2017 and $3.6 million in the first nine months of 2016.

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The following non-cash activities are included in the accompanying consolidated financial statements:

A.       During the first nine months of 2016, we assumed mortgages payable to third-party lenders of $32.5 million, and recorded $692,000 of net premiums.

B.       Accrued costs on properties under development resulted in an increase in buildings and improvements and accounts payable of $1.5 million at September 30, 2016.

18.     Segment Information

We evaluate performance and make resource allocation decisions on an industry by industry basis. For financial reporting purposes, we have grouped our tenants into 47 activity segments. All of the properties are incorporated into one of the applicable segments. Because almost all of our leases require the tenant to pay operating expenses, rental revenue is the only component of segment profit and loss we measure.

The following tables set forth certain information regarding the properties owned by us, classified according to the business of the respective tenants (dollars in thousands):

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