18. Common Stock Incentive Plan

In 2012, our Board of Directors adopted and stockholders approved the Realty Income Corporation 2012 Incentive Award Plan, or the 2012 Plan, to enable us to motivate, attract and retain the services of directors, employees and consultants considered essential to our long-term success. The 2012 Plan offers our directors, employees and consultants an opportunity to own stock in Realty Income or rights that will reflect our growth, development and financial success. Under the terms of the 2012 plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than 3,985,734 shares. The 2012 Plan, which has a term of 10 years from the date it was adopted by our Board of Directors, replaced the 2003 Incentive Award Plan of Realty Income Corporation (as amended and restated February 21, 2006), or the 2003 Plan, which was set to expire in March 2013. No further awards will be granted under the 2003 Plan. The disclosures below incorporate activity for both the 2003 Plan and the 2012 Plan.

The amount of share-based compensation costs recognized in general and administrative expense on our consolidated statements of income was $12.0 million during 2014, $20.8 million during 2013, and $10.0 million during 2012.

A. Restricted Stock

The following table summarizes our common stock grant activity under our 2012 Plan and the previous 2003 Plan. Our common stock grants vest over periods ranging from immediately to five years.

	2014				2013				2012
			Weighted				Weighted				Weighted
	Number of		average		Number of		average		Number of		average
	shares		price(1)		shares		price(1)		shares		price(1)
Outstanding nonvested
shares, beginning of year	722,263		$	23.37	895,550		$	19.94	925,526		$	20.21
Shares granted	262,655		$	39.87	484,060		$	41.13	261,811		$	35.06
Shares vested	(440,348	)	$	36.88	(654,650	)	$	30.91	(290,877	)	$	27.47
Shares forfeited	(17,394	)	$	39.07	(2,697	)	$	37.30	(910	)	$	31.67
Outstanding nonvested
shares, end of each period	527,176		$	29.02	722,263		$	23.37	895,550		$	19.94

(1) Grant date fair value.

During 2014, we issued 262,655 shares of common stock under the 2012 Plan. These 262,655 shares vest over the following service periods: 34,896 vested immediately, 8,000 vest over a service period of two years, 8,000 vest over a service period of three years, 30,535 shares vest over a service period of four years, and 181,224 vest over a service period of five years. Additionally, during 2013, 51,454 shares of performance-based common stock was granted, of which 12,864 shares vested at the end of both 2013 and 2014 based on the achievement of certain performance metrics, and of which 12,864 may vest at the end of 2015 and 2016, if certain performance metrics are reached.

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

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

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

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

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

For shares granted prior to December 2014, the typical vesting schedule for shares granted to employees was as follows:

– For employees age 55 and below at the grant date, shares vest in 20% increments on each of the first five anniversaries of the grant date;

– For employees age 56 at the grant date, shares vest in 25% increments on each of the first four anniversaries of the grant date;

– For employees age 57 at the grant date, shares vest in 33.33% increments on each of the first three anniversaries of the grant date;

– For employees age 58 at the grant date, shares vest in 50% increments on each of the first two anniversaries of the grant date;

– For employees age 59 at the grant date, shares are 100% vested on the first anniversary of the grant date; and

– For employees age 60 and above at the grant date, shares vest immediately on the grant date.

After being employed for six full months, all non-executive employees receive 200 shares of nonvested stock which vests over a five year period. Additionally, depending on certain company performance metrics or attainment of individual achievements, non-executive employees may receive grants of nonvested stock which vests over a five year period.

As of December 31, 2014, the remaining unamortized share-based compensation expense totaled $15.2 million, which is being amortized on a straight-line basis over the service period of each applicable award. The amount of share-based compensation is based on the fair value of the stock at the grant date. We define the grant date as the date the recipient and Realty Income have a mutual understanding of the key terms and condition of the award, and the recipient of the grant begins to benefit from, or be adversely affected by, subsequent changes in the price of the shares.

Due to a historically low turnover rate, we do not estimate a forfeiture rate for our nonvested shares. Accordingly, unexpected forfeitures will lower share-based compensation expense during the applicable period. Under the terms of our 2012 and 2003 Plans, we pay non-refundable dividends to the holders of our nonvested shares. Applicable accounting guidance requires that the dividends paid to holders of these nonvested shares be charged as compensation expense to the extent that they relate to nonvested shares that do not or are not expected to vest. However, since we do not estimate forfeitures given our historical trends, we did not record any compensation expense related to dividends paid in 2014, 2013 or 2012.

As of December 31, 2014 and 2013, there were no remaining common stock options outstanding for any of the periods presented.

B. Performance Shares

During 2014, we granted performance share awards, as well as dividend equivalent rights. Eighty percent (80%) of the total award value is market-based and subject to two Total Shareholder Return (“TSR”) market measures: 60% relative to the MSCI US REIT Index and 20% relative to the NAREIT Freestanding Index. The remaining 20% is performance-based, and will vest based on our debt-to-EBITDA ratio achieved during the performance period. The number of performance shares that vest based on the achievement of the performance goals will vest 50% on January 1, 2017 and 50% on January 1, 2018, subject to continued employment.

During 2014, 71,705 performance shares, with an estimated fair value of $3.0 million and an average grant date fair value of $41.46, were granted to our executive officers. The performance period for these awards began on January 1, 2014 and will end on December 31, 2016. The fair value of the market-based awards was estimated on the date of grant using a Monte Carlo Simulation model.

As of December 31, 2014, the remaining share-based compensation expense related to the performance shares totaled $1.9 million. The portion related to the market-based awards is being recognized on a straight-line basis over the service period, and the portion related to the performance-based awards is being recognized on a tranche-by-tranche basis over the service period.