Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

Realty Income, The Monthly Dividend Company®, is an S&P 500 company dedicated to providing stockholders with dependable monthly dividends that increase over time. The company is structured as a real estate investment trust, or REIT, requiring it annually to distribute at least 90% of its taxable income (excluding net capital gains) in the form of dividends to its stockholders. The monthly dividends are supported by the cash flow generated from real estate owned under long-term, net lease agreements with regional and national commercial tenants. The company has in-house acquisition, portfolio management, asset management, real estate research, credit research, legal, finance and accounting, information technology and capital markets capabilities.

Realty Income was founded in 1969, and listed on the New York Stock Exchange (NYSE: O) in 1994. Over the past 48 years, Realty Income has been acquiring and managing freestanding commercial properties that generate rental revenue under long-term net lease agreements. The company is a member of the S&P High Yield Dividend Aristocrats® index for having increased its dividend every year for more than 20 consecutive years.

At December 31, 2016, we owned a diversified portfolio:

· Of 4,944 properties;

· With an occupancy rate of 98.3%, or 4,860 properties leased and 84 properties available for lease;

· Leased to 248 different commercial tenants doing business in 47 separate industries;

· Located in 49 states and Puerto Rico;

· With over 83.0 million square feet of leasable space; and

· With an average leasable space per property of approximately 16,800 square feet; approximately 11,520 square feet per retail property and 220,290 square feet per industrial property.

Of the 4,944 properties in the portfolio, 4,920, or 99.5%, are single-tenant properties, and the remaining are multi-tenant properties. At December 31, 2016, of the 4,920 single-tenant properties, 4,836 were leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 9.8 years.

LIQUIDITY AND CAPITAL RESOURCES

Capital Philosophy

Historically, we have met our long-term capital needs by issuing common stock, preferred stock and long-term unsecured notes and bonds. Over the long term, we believe that common stock should be the majority of our capital structure; however, we may issue additional preferred stock or debt securities. We may issue common stock when we believe that our share price is at a level that allows for the proceeds of any offering to be accretively invested into additional properties. In addition, we may issue common stock to permanently finance properties that were initially financed by our credit facility or debt securities. However, we cannot assure you that we will have access to the capital markets at all times and at terms that are acceptable to us.

Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,” which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common and preferred stockholders, primarily through cash provided by operating activities, borrowing on our credit facility and periodically through public securities offerings.

Conservative Capital Structure

We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At December 31, 2016, our total outstanding borrowings of senior unsecured notes and bonds, term loans, mortgages payable and credit facility borrowings were $5.875 billion, or approximately 27.6% of our total market capitalization of $21.26 billion.

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We define our total market capitalization at December 31, 2016 as the sum of:

· Shares of our common stock outstanding of 260,168,259, plus total common units outstanding of 405,204, multiplied by the last reported sales price of our common stock on the NYSE of $57.48 per share on December 31, 2016, or $14.98 billion;

· Aggregate liquidation value (par value of $25.00 per share) of the Class F preferred stock of $408.8 million;

· Outstanding borrowings of $1.12 billion on our credit facility;

· Outstanding mortgages payable of $460.0 million, excluding net mortgage premiums of $6.4 million and deferred financing costs of $324,000;

· Outstanding borrowings of $320.0 million on our term loans, excluding deferred financing costs of $873,000; and

· Outstanding senior unsecured notes and bonds of $3.98 billion, excluding unamortized original issuance discounts of $19.8 million and deferred financing costs of $20.8 million.

Universal Shelf Registration

In December 2015, we filed a shelf registration statement with the SEC, which is effective for a term of three years and will expire in December 2018. In accordance with SEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock, or depositary shares, and (6) any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.

At-the-Market (ATM) Program

In September 2015, we established an “at-the-market” equity distribution program, or our ATM program, pursuant to which we can offer and sell up to 12,000,000 shares of common stock to, or through, a consortium of banks acting as our sales agents by means of ordinary brokers’ transactions on the NYSE at prevailing market prices or at negotiated prices. During 2016, we issued 2,779,140 shares and raised gross proceeds of $166.8 million under the ATM program.

Issuance of Common Stock

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.

Dividend Reinvestment and Stock Purchase Plan

Our Dividend Reinvestment and Stock Purchase Plan, or our 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. Our DRSPP authorizes up to 26,000,000 common shares to be issued. In 2013, we revised our DRSPP so that we would pay for a majority of the plan-related fees, which were previously paid by investors, and to institute 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 2016, we issued 170,027 shares and raised approximately $10.3 million under our DRSPP. During 2016, we did not issue shares under the waiver approval process.

Preferred Stock

In February 2012, we issued 14,950,000 shares of our Class F preferred stock at $25.00 per share. In April 2012, we issued an additional 1,400,000 shares of Class F preferred stock at $25.2863 per share. Beginning February 15, 2017, shares of our Class F preferred stock are redeemable at our option for $25.00 per share, plus any accrued and unpaid dividends. Dividends on the shares of our Class F preferred stock are paid monthly in arrears. We are current on our obligations to pay dividends on our Class F preferred stock.

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$2.0 Billion Revolving Credit Facility

In June 2015, we entered into a $2.0 billion unsecured revolving credit facility, or our credit facility, 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 December 31, 2016 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 were to 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 December 31, 2016, we had a borrowing capacity of $880.0 million available on our credit facility and an outstanding balance of $1.12 billion. The weighted average interest rate on borrowings outstanding under our credit facility, at December 31, 2016, was 1.7% per annum. We must comply with various financial and other covenants in our credit facility. At December 31, 2016, we were in compliance with these covenants. We expect to use our credit facility to acquire additional properties and for other general corporate purposes. Any additional borrowings will increase our exposure to interest rate risk.

We generally use our credit facility for the short-term financing of new property acquisitions. Thereafter, we generally seek to refinance those borrowings with the net proceeds of long-term or permanent financing, which may include the issuance of common stock, preferred stock or debt securities. We cannot assure you, however, that we will be able to obtain any such refinancing, or that market conditions prevailing at the time of the refinancing will enable us to issue equity or debt securities at acceptable terms.

Term Loans

In June 2015, in conjunction with entering into our credit facility, we entered into a $250 million senior unsecured term loan maturing June 30, 2020. Borrowing under this term loan bears interest at 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, or ARCT, we entered into a $70 million senior unsecured term loan maturing in January 2018. Borrowing under the term loan bears interest at LIBOR, plus 1.20%. In conjunction with this term loan, we also acquired an interest rate swap which effectively fixes our per annum interest rate on this term loan at 2.15%.

Mortgage Debt

As of December 31, 2016, we had $460.0 million of mortgages payable, all of which were assumed in connection with our property acquisitions. Additionally, at December 31, 2016, we had net premiums totaling $6.4 million on these mortgages and deferred financing costs of $324,000. We expect to pay off the mortgages payable as soon as prepayment penalties have declined to a level that would make it economically feasible to do so. During 2016, we made $231.7 million of principal payments, including the repayment of 11 mortgages in full for $201.8 million, and refinanced one of our assumed mortgages whereby we received an additional $10.0 million in proceeds.

Notes Outstanding

Our senior unsecured note and bond obligations consist of the following as of December 31, 2016, sorted by maturity date (dollars in millions):

5.375% notes, issued in September 2005 and due in September 2017		$	175
2.000% notes, issued in October 2012 and due in January 2018		350
6.750% notes, issued in September 2007 and due in August 2019		550
5.750% notes, issued in June 2010 and due in January 2021		250
3.250% notes, issued in October 2012 and due in October 2022		450
4.650% notes, issued in July 2013 and due in August 2023		750
3.875% notes, issued in June 2014 and due in July 2024		350
4.125% notes, issued in September 2014 and due in October 2026		250
3.000% notes, issued in October 2016 and due in January 2027		600
5.875% bonds, $100 issued in March 2005 and $150 issued in
June 2011, both due in March 2035		250
Total principal amount		$	3,975
Unamortized original issuance discounts and deferred financing costs		(41)
		$	3,934

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In October 2016, we issued $600 million of 3.000% senior unsecured notes due January 2027. The public offering price for the notes was 98.671% of the principal amount for an effective yield to maturity of 3.153%. The net proceeds of approximately $586.7 million from the offering were used to repay borrowings outstanding under our credit facility.

In September 2016, we repaid $275 million of outstanding 5.950% notes, plus accrued and unpaid interest.

All of our outstanding notes and bonds have fixed interest rates and contain various covenants, with which we remained in compliance as of December 31, 2016. Additionally, interest on all of our senior note and bond obligations is paid semiannually.

The following is a summary of the key financial covenants for our senior unsecured notes, as defined and calculated per the terms of our senior notes and bonds. These calculations, which are not based on U.S. GAAP measurements, are presented to investors to show our ability to incur additional debt under the terms of our senior notes and bonds as well as to disclose our current compliance with such covenants, and are not measures of our liquidity or performance. The actual amounts as of December 31, 2016 are:

Note Covenants		Required		Actual
Limitation on incurrence of total debt		< 60% of adjusted assets		41.9%
Limitation on incurrence of secured debt		< 40% of adjusted assets		3.4%
Debt service coverage (trailing 12 months)(1)		> 1.5 x		4.8x
Maintenance of total unencumbered assets		> 150% of unsecured debt		243.7%

(1) This covenant is calculated on a pro forma basis for the preceding four-quarter period on the assumptions that: (i) the incurrence of any Debt (as defined in the covenants) incurred by us since the first day of such four-quarter period and the application of the proceeds therefrom (including to refinance other Debt since the first day of such four-quarter period), (ii) the repayment or retirement of any of our Debt since the first day of such four-quarter period, and (iii) any acquisition or disposition by us of any asset or group since the first day of such four quarters had in each case occurred on January 1, 2016, and subject to certain additional adjustments. Such pro forma ratio has been prepared on the basis required by that debt service covenant, reflects various estimates and assumptions and is subject to other uncertainties, and therefore does not purport to reflect what our actual debt service coverage ratio would have been had transactions referred to in clauses (i), (ii) and (iii) of the preceding sentence occurred as of January 1, 2016, nor does it purport to reflect our debt service coverage ratio for any future period. The following is our calculation of debt service coverage at December 31, 2016 (in thousands, for trailing twelve months):

Net income attributable to the Company		$	315,571
Plus: interest expense		211,379
Plus: provision for taxes		3,262
Plus: depreciation and amortization		449,943
Plus: provisions for impairment		20,664
Plus: pro forma adjustments		71,979
Less: gain on sales of real estate		(21,979)
Income available for debt service, as defined		$	1,050,819
Total pro forma debt service charge		$	220,921
Debt service coverage ratio		4.8

Fixed Charge Coverage Ratio

Fixed charge coverage ratio is calculated in exactly the same manner as the debt service coverage ratio, except that preferred stock dividends are also added to the denominator. Similar to debt service coverage ratio, we consider fixed charge coverage ratio to be an appropriate supplemental measure of a company’s ability to make its interest and preferred stock dividend payments. Our calculations of both debt service and fixed charge coverage ratios may be different from the calculations used by other companies and, therefore, comparability may be limited. The presentation of debt service and fixed charge coverage ratios should not be considered as alternatives to any U.S. GAAP operating performance measures. Below is our calculation of fixed charges at December 31, 2016 (in thousands, for the trailing twelve months):

Income available for debt service, as defined	$	1,050,819
Pro forma debt service charge plus preferred stock dividends	$	248,001
Fixed charge coverage ratio		4.2

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Cash Reserves

We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our properties. We intend to retain an appropriate amount of cash as working capital. At December 31, 2016, we had cash and cash equivalents totaling $9.4 million.

We believe that our cash and cash equivalents on hand, cash provided from operating activities, and borrowing capacity is sufficient to meet our liquidity needs for the next twelve months. We intend, however, to use permanent or long-term capital to fund property acquisitions and to repay future borrowings under our credit facility.

Credit Agency Ratings

The borrowing interest rates under our credit facility are based upon our ratings assigned by credit rating agencies. As of December 31, 2016, we were assigned the following investment grade corporate credit ratings on our senior unsecured notes and bonds: Moody’s Investors Service has assigned a rating of Baa1 with a “positive” outlook, Standard & Poor’s Ratings Group has assigned a rating of BBB+ with a “positive” outlook, and Fitch Ratings has assigned a rating of BBB+ with a “stable” outlook.

Based on our ratings as of December 31, 2016, the facility interest rate as of December 31, 2016 was LIBOR plus 0.90% with a facility commitment fee of 0.15%, for all-in drawn pricing of 1.05% over LIBOR. Our credit facility provides that the interest rate can range between: (i) LIBOR plus 1.55% if our credit rating is lower than BBB-/Baa3 or unrated and (ii) LIBOR plus 0.85% if our credit rating is A-/A3 or higher. In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which range from: (i) 0.30% for a rating lower than BBB-/Baa3 or unrated, and (ii) 0.125% for a credit rating of A-/A3 or higher.

We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease. The credit ratings assigned to us could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies and we cannot assure you that our ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, a rating is not a recommendation to buy, sell or hold our debt securities, preferred stock or common stock.

Table of Obligations

The following table summarizes the maturity of each of our obligations as of December 31, 2016 (dollars in millions):

																	Ground			Ground
																	Leases			Leases
					Notes												Paid by			Paid by
Year of		Credit			and			Term			Mortgages						Realty			Our
Maturity		Facility		(1)	Bonds		(2)	Loan		(3)	Payable		(4)	Interest		(5)	Income		(6)	Tenants		(7)	Other		(8)	Totals
2017		$	-		$	175.0		$	-		$	103.2		$	218.6		$	1.6		$	13.4		$	28.9		$	540.7
2018		-			350.0			70.0			21.9			197.2			1.6			13.5			-			654.2
2019		1,120.0			550.0			-			42.3			172.6			1.5			13.3			-			1,899.7
2020		-			-			250.0			82.4			136.7			1.4			13.1			-			483.6
2021		-			250.0			-			66.9			115.2			1.2			12.8			-			446.1
Thereafter		-			2,650.0			-			143.3			445.8			22.1			106.6			-			3,367.8
Totals		$	1,120.0		$	3,975.0		$	320.0		$	460.0		$	1,286.1		$	29.4		$	172.7		$	28.9		$	7,392.1

(1) The initial term of the credit facility expires in June 2019 and includes, at our option, two six-month extensions.

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

(3) Excludes deferred financing costs of $873,000.

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

(5) Interest on the term loans, notes, bonds, mortgages payable, and credit facility has been calculated based on outstanding balances as of December 31, 2016 through their respective maturity dates.

(6) Realty Income currently pays the ground lessors directly for the rent under the ground leases.

(7) Our tenants, who are generally sub-tenants under ground leases, are responsible for paying the rent under these ground leases. In the event a tenant fails to pay the ground lease rent, we are primarily responsible.

(8) “Other” consists of $21.9 million of commitments under construction contracts and $7.0 million of commitments for tenant improvements and leasing costs.

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Our credit facility, term loans, and notes payable obligations are unsecured. Accordingly, we have not pledged any assets as collateral for these obligations.

No Unconsolidated Investments

We have no unconsolidated investments, nor do we engage in trading activities involving energy or commodity contracts.

Impact of Real Estate and Credit Markets

In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, the U.S. credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.

Acquisitions During 2016

During 2016, we invested $1.86 billion in 505 new properties and properties under development or expansion, with an initial weighted average contractual lease rate of 6.3%. The 505 new properties and properties under development or expansion are located in 40 states, will contain approximately 8.2 million leasable square feet, and are 100% leased with a weighted average lease term of 14.7 years. The tenants occupying the new properties operate in 28 industries and the property types are 86.4% retail and 13.6% industrial, based on rental revenue. During 2016, none of our real estate investments caused any one tenant to be 10% or more of our total assets at December 31, 2016.

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 $1.86 billion we invested during 2016, $103.8 million was invested in 33 properties under development or expansion with an estimated initial weighted average contractual lease rate of 7.1%. We may continue to pursue development or expansion opportunities under similar arrangements in the future.

Portfolio Discussion

Leasing Results

At December 31, 2016, we had 84 properties available for lease out of 4,944 properties in our portfolio, which represents a 98.3% occupancy rate based on the number of properties in our portfolio. Since December 31, 2015, when we reported 71 properties available for lease out of 4,538 and a 98.4% occupancy rate, we:

· Had 256 lease expirations (including leases rejected in bankruptcy);

· Re-leased 186 properties; and

· Sold 57 vacant properties.

Of the 186 properties re-leased during 2016, 144 properties were re-leased to existing tenants, 21 were re-leased to new tenants without vacancy, and 21 were re-leased to new tenants after a period of vacancy. The annual rent on these 186 leases was $28.57 million, as compared to the previous rent on these same properties of $27.33 million, which represents a rent recapture rate of 104.5% on the properties re-leased during 2016.

As part of our re-leasing costs, we pay leasing commissions to unrelated, 3rd party real estate brokers consistent with the commercial real estate industry standard, and sometimes provide tenant rent concessions. We do not consider the collective impact of the leasing commissions or tenant rent concessions to be material to our financial position or results of operations.

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At December 31, 2016, our average annualized rental revenue was approximately $13.64 per square foot on the 4,860 leased properties in our portfolio. At December 31, 2016, we classified 15 properties with a carrying amount of $26.6 million as held for sale on our balance sheet. The expected sale of these properties does not represent a strategic shift that will have a major effect on our operations and financial results. The expected sale of these properties is consistent with our active disposition efforts to further enhance our real estate portfolio and maximize portfolio returns.

Investments in Existing Properties

In 2016, we capitalized costs of $16.3 million on existing properties in our portfolio, consisting of $797,000 for re-leasing costs, $679,000 for recurring capital expenditures and $14.9 million for non-recurring building improvements. In 2015, we capitalized costs of $11.5 million on existing properties in our portfolio, consisting of $748,000 for re-leasing costs, $7.6 million for recurring capital expenditures and $3.2 million for non-recurring building improvements.

The majority of our building improvements relate to roof repairs, HVAC improvements, and parking lot resurfacing and replacements. The amounts of our capital expenditures can vary significantly, depending on the rental market, tenant credit worthiness, the lease term and the willingness of tenants to pay higher rents over the terms of the leases.

With the increasing size and aging of our portfolio, overall investments in existing properties increased in 2016 and we refined our definition of recurring versus non-recurring capital expenditures. We define recurring capital expenditures as mandatory and repetitive landlord capital expenditure obligations that have a limited useful life. We define non-recurring capital expenditures as property improvements where we invest additional capital that extend the useful life of the property.

Increases in Monthly Dividends to Common Stockholders

We have continued our 48-year policy of paying monthly dividends. In addition, we increased the dividend six times during 2016 and twice in 2017. As of February 2017, we have paid 77 consecutive quarterly dividend increases and increased the dividend 90 times since our listing on the NYSE in 1994.

		Month		Month		Dividend			Increase
2016 Dividend increases		Declared		Paid		per share			per share
1st increase		Dec 2015		Jan 2016		$	0.1910		$	0.0005
2nd increase		Jan 2016		Feb 2016		$	0.1985		$	0.0075
3rd increase		Mar 2016		Apr 2016		$	0.1990		$	0.0005
4th increase		Jun 2016		Jul 2016		$	0.1995		$	0.0005
5th increase		Jul 2016		Sep 2016		$	0.2015		$	0.0020
6th increase		Sep 2016		Oct 2016		$	0.2020		$	0.0005
2017 Dividend increases
1st increase		Dec 2016		Jan 2017		$	0.2025		$	0.0005
2nd increase		Jan 2017		Feb 2017		$	0.2105		$	0.0080

The dividends paid per share during 2016 totaled approximately $2.392, as compared to approximately $2.271 during 2015, an increase of $0.121, or 5.3%.

The monthly dividend of $0.2105 per share represents a current annualized dividend of $2.526 per share, and an annualized dividend yield of approximately 4.2% based on the last reported sale price of our common stock on the NYSE of $59.63 on January 31, 2017. Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will be in any future period.

RESULTS OF OPERATIONS

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with GAAP, and are the basis for our discussion and analysis of financial condition and results of operations. Preparing our consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We believe that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in note 2 to our consolidated financial statements.

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In order to prepare our consolidated financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments must be made with regard to critical accounting policies. One of these judgments is our estimate for useful lives in determining depreciation expense for our properties. Depreciation on a majority of our buildings and improvements is computed using the straight-line method over an estimated useful life of 25 to 35 years for buildings and 4 to 20 years for improvements, which we believe are appropriate estimates of useful life. If we use a shorter or longer estimated useful life, it could have a material impact on our results of operations.

Management must make significant assumptions in determining the fair value of assets acquired and liabilities assumed. When acquiring a property for investment purposes, we typically allocate the fair value of real estate acquired to: (1) land, (2) building and improvements, and (3) identified intangible assets and liabilities, based in each case on their estimated fair values. Intangible assets and liabilities consist of above-market or below-market lease value of in-place leases, the value of in-place leases, and tenant relationships, as applicable. In an acquisition of multiple properties, we must also allocate the purchase price among the properties. The allocation of the purchase price is based on our assessment of estimated fair value and is often based upon the expected future cash flows of the property and various characteristics of the market where the property is located. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values. The estimated fair values of our mortgages payable have been calculated by discounting the future cash flows using applicable interest rates that have been adjusted for factors, such as industry type, tenant investment grade, maturity date, and comparable borrowings for similar assets. The initial allocation of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price allocation are made within the allocation period, which does not exceed one year. The use of different assumptions in the allocation of the purchase price of the acquired properties and liabilities assumed could affect the timing of recognition of the related revenue and expenses.

Another significant judgment must be made as to if, and when, impairment losses should be taken on our properties when events or a change in circumstances indicate that the carrying amount of the 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 inputs 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 held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell. The carrying value of our real estate is the largest component of our consolidated balance sheets. Our strategy of primarily holding properties, long-term, directly decreases the likelihood of their carrying values not being recoverable, thus requiring the recognition of an impairment. However, if our strategy, or one or more of the above assumptions were to change in the future, an impairment may need to be recognized. If events should occur that require us to reduce the carrying value of our real estate by recording provisions for impairment, they could have a material impact on our results of operations.

The following is a comparison of our results of operations for the years ended December 31, 2016, 2015 and 2014.

Rental Revenue

Rental revenue was $1.057 billion for 2016, as compared to $976.9 million for 2015, an increase of $80.5 million, or 8.2%. Rental revenue was $893.5 million for 2014. The increase in rental revenue in 2016 compared to 2015 is primarily attributable to:

· The 475 properties (7.6 million square feet) we acquired in 2016, which generated $39.7 million of rent in 2016;

· The 254 properties (5.6 million square feet) we acquired in 2015, which generated $80.3 million of rent in 2016, compared to $41.9 million in 2015, an increase of $38.4 million;

· Same store rents generated on 4,045 properties (66.5 million square feet) during 2016 and 2015, increased by $10.15 million, or 1.2%, to $888.51 million from $878.36 million; and

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· A net increase in straight-line rent and other non-cash adjustments to rent of $959,000 in 2016 as compared to 2015; partially offset by

· A net decrease of $7.1 million relating to properties sold in 2016 and during 2015; and

· A net decrease of $1.6 million relating to the aggregate of (i) rental revenue from properties (131 properties comprising 1.5 million square feet) that were available for lease during part of 2016 or 2015, (ii) rental revenue for 24 properties under development, and (iii) lease termination settlements. In aggregate, the revenues for these items totaled $33.3 million in 2016, compared to $34.9 million in 2015.

For purposes of determining the same store rent property pool, we include all properties that were owned for the entire year-to-date period, for both the current and prior year, except for properties during the current or prior year that; (i) were vacant at any time, (ii) were under development or redevelopment, and (iii) were involved in eminent domain and rent was reduced. Each of the exclusions from the same store pool are separately addressed within the applicable sentences above, explaining the changes in rental revenue for the period.

Of the 4,944 properties in the portfolio at December 31, 2016, 4,920, or 99.5%, are single-tenant properties and the remaining are multi-tenant properties. Of the 4,920 single-tenant properties, 4,836, or 98.3%, were net leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 9.8 years at December 31, 2016. Of our 4,836 leased single-tenant properties, 4,310 or 89.1% were under leases that provide for increases in rents through:

· Base rent increases tied to a consumer price index (typically subject to ceilings);

· Percentage rent based on a percentage of the tenants’ gross sales;

· Fixed increases; or

· A combination of two or more of the above rent provisions.

Percentage rent, which is included in rental revenue, was $5.3 million in 2016, $4.5 million in 2015, and $3.6 million in 2014. Percentage rent in 2016 was less than 1% of rental revenue and we anticipate percentage rent to be less than 1% of rental revenue in 2017.

Our portfolio of real estate, leased primarily to regional and national tenants under net leases, continues to perform well and provides dependable lease revenue supporting the payment of monthly dividends to our stockholders. At December 31, 2016, our portfolio of 4,944 properties was 98.3% leased with 84 properties available for lease, as compared to 98.4% leased, with 71 properties available for lease at December 31, 2015. It has been our experience that approximately 1% to 4% of our property portfolio will be unleased at any given time; however, it is possible that the number of properties available for lease could exceed these levels in the future.

Tenant Reimbursements

Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses were $43.1 million in 2016, compared to $42.0 million in 2015 and $37.1 million in 2014. The increase in tenant reimbursements is primarily due to our increase in acquisitions.

Other Revenue

Other revenue, which comprises property-related revenue not included in rental revenue or tenant reimbursements, was $2.7 million in 2016, compared to $4.4 million in 2015 and $2.9 million in 2014.

Depreciation and Amortization

Depreciation and amortization was $449.9 million for 2016, compared to $409.2 million for 2015 and $374.7 million for 2014. The increase in depreciation and amortization in 2016 and 2015 was primarily due to the acquisition of properties in 2015 and 2016, which was partially offset by property sales in those same periods. As discussed in the sections entitled “Funds from Operations Available to Common Stockholders (FFO)” and “Adjusted Funds from Operations Available to Common Stockholders (AFFO),” depreciation and amortization is a non-cash item that is added back to net income available to common stockholders for our calculation of FFO and AFFO.

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Interest Expense

The following is a summary of the components of our interest expense (dollars in thousands):

		2016			2015			2014
Interest on our credit facility, term loans, notes, mortgages and interest rate swaps		$	213,540		$	226,207		$	215,830
Credit facility commitment fees		3,050			2,854			2,661
Amortization of credit facility origination costs and deferred financing costs		8,596			8,741			8,219
(Gain) loss on interest rate swaps		(1,639		)	3,043			1,349
Dividend on preferred shares subject to redemption		-			-			1,526
Amortization of net mortgage premiums		(3,414		)	(7,482		)	(12,891		)
Capital lease obligation		310			310			116
Interest capitalized		(469		)	(594		)	(444		)
Interest expense		$	219,974		$	233,079		$	216,366
Credit facility, term loans, mortgages and notes
Average outstanding balances (dollars in thousands)		$	5,081,663		$	5,030,532		$	4,628,438
Average interest rates		4.11		%	4.43		%	4.62		%

The decrease in interest expense from 2015 to 2016 was primarily due to lower outstanding debt balances on our notes payable and mortgages payable, resulting from the payoff of $150.0 million of notes during November 2015 and $275.0 million of notes during September 2016, as well as the payoff of mortgages throughout 2015 and 2016. This decrease was slightly offset by an increase in interest expense related to the issuance of a $600 million note in October 2016.

The increase in interest expense from 2014 to 2015 was primarily due to the June 2014 issuance of our 3.88% senior unsecured notes due July 2024, the September 2014 issuance of our 4.125% senior unsecured notes due October 2026, the interest expense on the $250 million term loan that was entered into during June 2015, and the payoff of mortgages during 2015 which reduced the amortization of net mortgage premiums.

Additionally, each quarter we adjust the carrying value of our interest rate swaps to fair value. Changes in the fair value of our interest rate swaps are recorded directly to interest expense. We recorded a gain on interest rate swaps of $1.6 million during 2016 and a loss on interest rate swaps of $3.0 million and $1.3 million during 2015 and 2014, respectively.

At December 31, 2016, the weighted average interest rate on our:

· Credit facility outstanding borrowings of $1.12 billion was 1.7%;

· Term loans outstanding of $320.0 million (excluding deferred financing costs of $873,000) was 1.7%;

· Mortgages payable of $460.0 million (excluding net premiums totaling $6.4 million and deferred financing costs of $324,000 on these mortgages) was 4.9%;

· Notes and bonds payable of $3.98 billion (excluding unamortized original issue discounts of $19.8 million and deferred financing costs of $20.8 million) was 4.4%; and

· Combined outstanding notes, bonds, mortgages, term loan and credit facility borrowings of $5.88 billion was 3.8%.

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General and Administrative Expenses

General and administrative expenses increased by $2.7 million to $52.0 million for 2016, compared to $49.3 million in 2015 and $51.1 million in 2014. Included in general and administrative expenses are acquisition transaction costs of $346,000 for 2016, $913,000 for 2015, and $453,000 for 2014. General and administrative costs increased during 2016 primarily due to higher compensation costs. General and administrative expenses decreased during 2015 primarily due to lower compensation costs, lower corporate insurance premiums, and lower proxy costs. In January 2017, we had 146 employees, as compared to 132 employees in January 2016 and 125 employees in January 2015.

Dollars in thousands		2016			2015			2014
General and administrative expenses		$	51,966		$	49,298		$	51,085
Total revenue(1)		1,060,068			981,270			896,499
General and administrative expenses as a percentage of total revenue		4.9		%	5.0		%	5.7		%

(1) Excludes tenant reimbursements revenue, as well as revenue included in discontinued operations and gain on sales.

Property Expenses (including tenant reimbursable expenses)

Property expenses consist of costs associated with unleased properties, non-net-leased properties and general portfolio expenses, as well as contractually obligated reimbursable costs from tenants for recoverable real estate taxes and operating expenses. Expenses related to unleased properties and non-net-leased properties include, but are not limited to, property taxes, maintenance, insurance, utilities, property inspections, bad debt expense and legal fees. General portfolio costs include, but are not limited to, insurance, legal, property inspections, and title search fees. At December 31, 2016, 84 properties were available for lease, as compared to 71 at December 31, 2015 and 70 at December 31, 2014.

Property expenses were $62.9 million (including $43.1 million in reimbursable expenses) in 2016, $55.4 million (including $42.0 million in reimbursable expenses) in 2015 and $53.9 million (including $37.1 million in reimbursable expenses) in 2014. The increase in gross property expenses in 2016 is primarily attributable to the increased portfolio size, which contributed to higher contractually obligated reimbursements primarily due to our acquisitions during 2015 and 2016. We also incurred higher gross property expenses as a result of maintenance and utilities, property taxes, ground rent expenses, legal costs, and bad debt expense on vacant properties.

Dollars in thousands		2016			2015			2014
Property expenses net of tenant reimbursements		$	19,761		$	13,337		$	16,753
Total revenue(1)		1,060,068			981,270			896,499
Property expenses net of tenant reimbursements as a percentage of total revenue		1.9		%	1.4		%	1.9		%

(1) Excludes tenant reimbursements revenue, as well as revenue included in discontinued operations and gain on sales.

Income Taxes

Income taxes were $3.3 million in 2016, compared to $3.2 million in 2015 and $3.5 million in 2014. These amounts are for city and state income and franchise taxes paid by us and our subsidiaries.

Provisions for Impairment

In 2016, we recorded total provisions for impairment of $20.7 million on six properties classified as held for sale, two properties classified as held for investment, and 31 sold properties. These properties were not previously classified as held for sale in financial statements issued prior to the date of adoption of ASU 2014-08; accordingly, these provisions for impairment are included in income from continuing operations on our consolidated statements of income.

In 2015, we recorded total provisions for impairment of $10.6 million on three properties classified as held for investment, 11 sold properties, and one property disposed of other than by sale. These properties were not previously classified as held for sale in financial statements issued prior to the date of adoption of ASU 2014-08; accordingly, these provisions for impairment are included in income from continuing operations on our consolidated statements of income.

In 2014, we recorded total provisions for impairment of $4.6 million. Provisions for impairment of $4.1 million are included in income from continuing operations on 10 sold properties and one property classified as held for sale. These properties were not previously classified as held for sale in financial statements issued prior to the

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date of adoption of Accounting Standards Update (ASU) 2014-08 which amends Topic 205, Presentation of Financial Statements, and Topic 360, Property, Plant, and Equipment; accordingly, these provisions for impairment are included in income from continuing operations on our consolidated statements of income. Additionally, a provision for impairment of $510,000 is included in income from discontinued operations on one sold property that was classified as held for sale as of December 31, 2013.

Gain on Sales of Real Estate

During 2016, we sold 77 properties for $90.5 million, which resulted in a gain of $22.0 million. Additionally, during 2016 we sold our former corporate headquarters building for $8.6 million.

During 2015, we sold 38 properties for $65.8 million, which resulted in a gain of $22.2 million.

These property sales in 2016 and 2015 do not represent a strategic shift that will have a major effect on our operations and financial results, and therefore do not require presentation as discontinued operations.

During 2014, we sold 47 properties for $108.1 million, which resulted in a gain of $42.1 million. Only the results of operations specifically related to the properties classified as held for sale at December 31, 2013 and sold during 2014 were reclassified as discontinued operations.

At December 31, 2016, we classified real estate with a carrying amount of $26.6 million as held for sale on our balance sheet. In 2017, we intend to continue our active disposition efforts to further enhance our real estate portfolio and anticipate approximately $75 to $100 million in yet to be identified property sales for all of 2017. We intend to invest these proceeds into new property acquisitions, if there are attractive opportunities available. However, we cannot guarantee that we will sell properties during the next 12 months at our estimated values or be able to invest the property sale proceeds in new properties.

Preferred Stock Dividends

Preferred stock dividends totaled $27.1 million in 2016 and 2015, and $37.1 million in 2014.

Excess of Redemption Value over Carrying Value of Preferred Shares Redeemed

In October 2014, we redeemed all 8,800,000 shares of our 6.75% Monthly Income Class E Cumulative Redeemable Preferred Stock, or the Class E preferred stock, for $25.00 per share, plus accrued dividends. We incurred a non-cash charge of $6.0 million. This charge is for the excess of redemption value over the carrying value of the Class E preferred stock and represents the original issuance cost that was paid in 2006.

Net Income Available to Common Stockholders

Net income available to common stockholders was $288.5 million in 2016, compared to $256.7 million in 2015, an increase of $31.8 million. On a diluted per common share basis, net income was $1.13 in 2016, as compared to $1.09 in 2015, an increase of $0.04, or 3.7%. Net income available to common stockholders was $227.6 million in 2014, or $1.04 on a diluted per common share basis. Net income available to common stockholders for 2014 includes a non-cash redemption charge of $6.0 million on the shares of Class E preferred stock that were redeemed in October 2014, which represents $0.03 on a diluted per common share basis. This charge is for the excess of redemption value over the carrying value of the Class E preferred stock and represents the original issuance cost that was paid in 2006.

The calculation to determine net income available to common stockholders includes impairments, gains from the sale of properties and/or fair value adjustments on our interest rate swaps. These items vary from period to period based on the timing of property sales and the interest rate environment, and can significantly impact net income available to common stockholders.

Gains from the sale of properties during 2016 were $22.0 million, as compared to gains from the sale of properties of $22.2 million during 2015, and $42.1 million during 2014.

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Discontinued Operations

During the first quarter of 2014, the Financial Accounting Standards Board issued guidance that changed the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity’s operations and financial results. We early adopted the requirements of this accounting pronouncement in the first quarter of 2014. Starting with the first quarter of 2014, the results of operations for all qualifying disposals and properties classified as held for sale that were not previously reported in discontinued operations in our 2013 Annual Report on Form 10-K are presented within income from continuing operations on our consolidated statements of income. For 2014, we recorded income from discontinued operations of $2.8 million, or $0.01 per common share, basic and diluted.

Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA)

EBITDA, a non-GAAP financial measure, means, for the most recent quarter, earnings (net income) before (i) interest expense, including non-cash loss (gain) on swaps, (ii) income and franchise taxes, (iii) real estate depreciation and amortization, (iv) impairment losses, and (v) gain on sales of real estate. Our EBITDA may not be comparable to EBITDA reported by other companies that interpret the definitions of EBITDA differently than we do. Management believes EBITDA to be a meaningful measure of a REIT’s performance because it is widely followed by industry analysts, lenders and investors. The ratio of our total debt to EBITDA is also used to determine vesting of performance share awards granted to our executive officers. EBITDA should be considered along with, but not as an alternative to net income as a measure of our operating performance. Our ratio of debt to EBITDA, which is used by management as a measure of leverage, is calculated by annualizing quarterly EBITDA and then dividing by our total debt per the consolidated balance sheet.

		Three months ended December 31,
Dollars in thousands		2016			2015			2014
Net income		$	92,724		$	83,111		$	78,077
Interest		48,935			51,982			59,120
Income taxes		449			721			1,103
Depreciation and amortization		117,752			105,739			96,537
Impairment loss		3,709			1,378			1,450
Gain on sales of real estate		(6,696)			(5,126)			(24,994)
Discontinued Operations (EBITDA component)		-			-			234
Quarterly EBITDA		$	256,873		$	237,805		$	211,527
Annualized EBITDA(1)		$	1,027,492		$	951,220		$	846,108
Total Debt (2)		$	5,839,605		$	4,820,995		$	4,907,673
Debt/EBITDA		5.7			5.1			5.8

(1) We calculate Annualized EBITDA by multiplying the Quarterly EBITDA by four.

(2) Total debt is consistent with its definition under market capitalization as described in “Liquidity and Capital Resources – Conservative Capital Structure” earlier in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (FFO)

In 2016, our FFO increased by $83.0 million, or 12.7%, to $735.4 million, compared to $652.4 million in 2015. On a diluted per common share basis, FFO was $2.88 in 2016, compared to $2.77 in 2015, an increase of $0.11, or 4.0%. In 2014, FFO was $562.9 million, or $2.58 on a diluted per common share basis. Our FFO in 2014 included a non-cash redemption charge of $6.0 million on the shares of Class E preferred stock that were redeemed in October 2014, which represents $0.03 on a diluted per common share basis. This charge is for the excess of redemption value over the carrying value of the Class E preferred stock and represents the original issuance cost that was paid in 2006.

The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):

		2016			2015			2014
Net income available to common stockholders		$	288,491		$	256,686		$	227,558
Depreciation and amortization		449,943			409,215			374,661
Depreciation of furniture, fixtures and equipment		(747		)	(811		)	(482		)
Provisions for impairment:
Continuing operations		20,664			10,560			4,126
Discontinued operations		-			-			510
Gain on sales of real estate:
Continuing operations		(21,979		)	(22,243		)	(39,205		)
Discontinued operations		-			-			(2,883		)
FFO adjustments allocable to noncontrolling interests		(977		)	(970		)	(1,396		)
FFO available to common stockholders (1)		$	735,395		$	652,437		$	562,889
FFO allocable to dilutive noncontrolling interests		1,435			-			-
Diluted FFO		$	736,830		$	652,437		$	562,889
FFO per common share, basic and diluted (2)		$	2.88		$	2.77		$	2.58
Distributions paid to common stockholders		$	610,516		$	533,238		$	479,256
FFO available to common stockholders in excess of distributions paid to common stockholders		$	124,879		$	119,199		$	83,633
Weighted average number of common shares used for computation per share:
Basic		255,066,500			235,767,932			218,390,885
Diluted (2)		255,822,679			235,891,368			218,450,863
(1) FFO available to common stockholders and dilutive noncontrolling interests for 2016 is $736,830 after the inclusion of $1,435 of FFO allocable to dilutive noncontrolling interests. Noncontrolling interests were antidilutive for all other periods presented. (2) The computation of diluted FFO does not assume conversion of securities that are exchangeable for common shares if the conversion of those securities would increase diluted FFO per share in a given period.

We define FFO, a non-GAAP measure, consistent with the National Association of Real Estate Investment Trusts’ definition, as net income available to common stockholders, plus depreciation and amortization of real estate assets, plus impairments of depreciable real estate assets, and reduced by gains on property sales.

We consider FFO to be an appropriate supplemental measure of a REIT’s operating performance as it is based on a net income analysis of property portfolio performance that adds back items such as depreciation and impairments for FFO. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a supplemental performance measure. In addition, FFO is used as a measure of our compliance with the financial covenants of our credit facility.

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ADJUSTED FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (AFFO)

In 2016, our AFFO increased by $89.4 million, or 13.8%, to $736.4 million, compared to $647.0 million in 2015. On a diluted per common share basis, AFFO was $2.88 in 2016, compared to $2.74 in 2015, an increase of $0.14, or 5.1%. In 2014, AFFO was $561.7 million, or $2.57 on a diluted per common share basis. We consider AFFO to be an appropriate supplemental measure of our performance. Most companies in our industry use a similar measurement, but they may use the term “CAD” (for Cash Available for Distribution), “FAD” (for Funds Available for Distribution) or other terms.

The following is a reconciliation of net income available to common stockholders (which we believe is the most comparable GAAP measure) to FFO and AFFO. Also presented is information regarding distributions paid to common stockholders and the weighted average number of common shares used for the basic and diluted computation per share (dollars in thousands, except per share amounts):

		2016			2015			2014
Net income available to common stockholders		$	288,491		$	256,686		$	227,558
Cumulative adjustments to calculate FFO (1)		446,904			395,751			335,331
FFO available to common stockholders		735,395			652,437			562,889
Amortization of share-based compensation		12,007			10,391			11,959
Amortization of deferred financing costs (2)		5,352			5,294			4,804
Amortization of net mortgage premiums		(3,414		)	(6,978		)	(9,208		)
Gain on early extinguishment of debt		-			(504		)	(3,428		)
(Gain) loss on interest rate swaps		(1,639		)	3,043			1,349
Leasing costs and commissions		(797		)	(748		)	(821		)
Recurring capital expenditures		(679		)	(7,606		)	(5,210		)
Straight-line rent		(19,451		)	(16,468		)	(14,872		)
Amortization of above and below-market leases		9,297			7,861			8,024
Excess of redemption value over carrying value of preferred share redemptions		-			-			6,015
Other adjustments (3)		303			306			160
Total AFFO available to common stockholders (4)		$	736,374		$	647,028		$	561,661
AFFO allocable to dilutive noncontrolling interests		1,455			-			-
Diluted AFFO		$	737,829		$	647,028		$	561,661
AFFO per common share:
Basic		$	2.89		$	2.74		$	2.57
Diluted (5)		$	2.88		$	2.74		$	2.57
Distributions paid to common stockholders		$	610,516		$	533,238		$	479,256
AFFO available to common stockholders in excess of distributions paid to common stockholders		$	125,858		$	113,790		$	82,405
Weighted average number of common shares used for computation per share:
Basic		255,066,500			235,767,932			218,390,885
Diluted (5)		255,822,679			235,891,368			218,450,863
(1) See reconciling items for FFO presented under “Funds from Operations Available to Common Stockholders (FFO).” (2) Includes the amortization of costs incurred and capitalized upon issuance of our notes payable, assumption of our mortgages payable and upon issuance of our term loans. The deferred financing costs are being amortized over the lives of the respective mortgages and term loans. No costs associated with our credit facility agreements or annual fees paid to credit rating agencies have been included. (3) Includes adjustments allocable to both non-controlling interests and capital lease obligations. (4) AFFO available to common stockholders and dilutive noncontrolling interests for 2016 is $737,829 after the inclusion of $1,455 of AFFO allocable to dilutive noncontrolling interests. (5) The computation of diluted AFFO does not assume conversion of securities that are convertible to common shares if the conversion of those securities would increase diluted AFFO per share in a given period.

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We believe the non-GAAP financial measure AFFO provides useful information to investors because it is a widely accepted industry measure of the operating performance of real estate companies that is used by industry analysts and investors who look at and compare those companies. In particular, AFFO provides an additional measure to compare the operating performance of different REITs without having to account for differing depreciation assumptions and other unique revenue and expense items which are not pertinent to measuring a particular company’s on-going operating performance. Therefore, we believe that AFFO is an appropriate supplemental performance metric, and that the most appropriate GAAP performance metric to which AFFO should be reconciled is net income available to common stockholders.

Presentation of the information regarding FFO and AFFO is intended to assist the reader in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and AFFO in the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and AFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as alternatives to net income as an indication of our performance. FFO and AFFO should not be considered as alternatives to reviewing our cash flows from operating, investing, and financing activities. In addition, FFO and AFFO should not be considered as measures of liquidity, our ability to make cash distributions, or our ability to pay interest payments.

IMPACT OF INFLATION

Tenant leases generally provide for limited increases in rent as a result of increases in the tenants’ sales volumes, increases in the consumer price index (typically subject to ceilings), or fixed increases. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.

Moreover, our use of net lease agreements tends to reduce our exposure to rising property expenses due to inflation because the tenant is responsible for property expenses. Inflation and increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

For information on the impact of recent accounting pronouncements on our business, see note 2 of the Notes to the Consolidated Financial Statements.