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Section 1: 10-Q (10-Q)

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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-36786
 
 RESTAURANT BRANDS INTERNATIONAL INC.
(Exact Name of Registrant as Specified in its Charter)


Canada 98-1202754
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
130 King Street West, Suite 300 M5X 1E1
Toronto, Ontario
(Address of Principal Executive Offices) (Zip Code)
(905) 845-6511
(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class Trading SymbolsName of each exchange on which registered
Common Shares, without par value QSRNew York Stock Exchange
 Toronto Stock Exchange
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Table of Contents
Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
Emerging growth company
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.  
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of July 31, 2020, there were 303,113,259 common shares of the Registrant outstanding.



Table of Contents
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
  Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 6.
3

Table of Contents
PART I — Financial Information
Item 1. Financial Statements
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions of U.S. dollars, except share data)
(Unaudited)
 As of
June 30,
2020
December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents$1,540  $1,533  
Accounts and notes receivable, net of allowance of $41 and $13, respectively
520  527  
Inventories, net96  84  
Prepaids and other current assets71  52  
Total current assets2,227  2,196  
Property and equipment, net of accumulated depreciation and amortization of $793 and $746, respectively
1,958  2,007  
Operating lease assets, net1,117  1,176  
Intangible assets, net10,288  10,563  
Goodwill5,498  5,651  
Net investment in property leased to franchisees62  48  
Other assets, net866  719  
Total assets$22,016  $22,360  
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts and drafts payable$470  $644  
Other accrued liabilities596  790  
Gift card liability112  168  
Current portion of long-term debt and finance leases106  101  
Total current liabilities1,284  1,703  
Long-term debt, net of current portion12,310  11,759  
Finance leases, net of current portion299  288  
Operating lease liabilities, net of current portion1,046  1,089  
Other liabilities, net1,810  1,698  
Deferred income taxes, net1,415  1,564  
Total liabilities18,164  18,101  
Shareholders’ equity:
Common shares, no par value; Unlimited shares authorized at June 30, 2020 and December 31, 2019; 302,623,813 shares issued and outstanding at June 30, 2020; 298,281,081 shares issued and outstanding at December 31, 2019
2,602  2,478  
Retained earnings708  775  
Accumulated other comprehensive income (loss)(1,025) (763) 
Total Restaurant Brands International Inc. shareholders’ equity2,285  2,490  
Noncontrolling interests1,567  1,769  
Total shareholders’ equity3,852  4,259  
Total liabilities and shareholders’ equity$22,016  $22,360  

See accompanying notes to condensed consolidated financial statements.
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RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In millions of U.S. dollars, except per share data)
(Unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Revenues:
Sales$406  $589  $909  $1,111  
Franchise and property revenues642  811  1,364  1,555  
Total revenues1,048  1,400  2,273  2,666  
Operating costs and expenses:
Cost of sales339  453  738  859  
Franchise and property expenses134  135  260  268  
Selling, general and administrative expenses295  316  620  628  
(Income) loss from equity method investments16  2  18    
Other operating expenses (income), net21  3  5  (14) 
Total operating costs and expenses805  909  1,641  1,741  
Income from operations243  491  632  925  
Interest expense, net128  137  247  269  
Income before income taxes115  354  385  656  
Income tax (benefit) expense(49) 97  (3) 153  
Net income164  257  388  503  
Net income attributable to noncontrolling interests (Note 12)58  115  138  226  
Net income attributable to common shareholders$106  $142  $250  $277  
Earnings per common share
Basic$0.35  $0.56  $0.83  $1.09  
Diluted$0.35  $0.55  $0.83  $1.07  
Weighted average shares outstanding
Basic301  255  300  254  
Diluted469  469  469  468  
See accompanying notes to condensed consolidated financial statements.

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RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions of U.S. dollars)
(Unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Net income$164  $257  $388  $503  
Foreign currency translation adjustment342  199  (409) 358  
Net change in fair value of net investment hedges, net of tax of $54, $13, $(52) and $39
(174) (40) 237  (116) 
Net change in fair value of cash flow hedges, net of tax of $13, $22, $92 and $34
(37) (57) (251) (91) 
Amounts reclassified to earnings of cash flow hedges, net of tax of $(6), $(1), $(10) and $(1)
18  3  29  2  
Other comprehensive income (loss)149  105  (394) 153  
Comprehensive income (loss)313  362  (6) 656  
Comprehensive income (loss) attributable to noncontrolling interests110  162  (3) 295  
Comprehensive income (loss) attributable to common shareholders$203  $200  $(3) $361  
See accompanying notes to condensed consolidated financial statements.

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RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(In millions of U.S. dollars, except shares and per share data)
(Unaudited)
 Issued Common SharesRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interest
Total
 SharesAmount
Balances at December 31, 2019298,281,081  $2,478  $775  (763) $1,769  $4,259  
Stock option exercises1,053,264  30  —  —  —  30  
Share-based compensation—  19  —  —  —  19  
Issuance of shares255,325  6  —  —  —  6  
Dividends declared ($0.52 per share)
—  —  (156) —  —  (156) 
Dividend equivalents declared on restricted stock units—  2  (2) —  —    
Distributions declared by Partnership on Partnership exchangeable units ($0.52 per unit)
—  —  —  —  (86) (86) 
Exchange of Partnership exchangeable units for RBI common shares178,046  2  —  —  (2)   
Restaurant VIE contributions (distributions)—  —  —  —  (1) (1) 
Net income—  —  144  —  80  224  
Other comprehensive income (loss)—  —  —  (350) (193) (543) 
Balances at March 31, 2020299,767,716  $2,537  $761  $(1,113) $1,567  $3,752  
Stock option exercises316,172  11  —  —  —  11  
Share-based compensation—  20  —  —  —  20  
Issuance of shares45,071    —  —  —    
Dividends declared ($0.52 per share)
—  —  (158) —  —  (158) 
Dividend equivalents declared on restricted stock units—  1  (1) —  —    
Distributions declared by Partnership on Partnership exchangeable units ($0.52 per unit)
—  —  —  —  (85) (85) 
Exchange of Partnership exchangeable units for RBI common shares2,494,854  33  —  (9) (24)   
Restaurant VIE contributions (distributions)—  —  —  —  (1) (1) 
Net income—  —  106  —  58  164  
Other comprehensive income (loss)—  —  —  97  52  149  
Balances at June 30, 2020302,623,813  $2,602  $708  $(1,025) $1,567  $3,852  
See accompanying notes to condensed consolidated financial statements.

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RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(In millions of U.S. dollars, except shares and per share data)
(Unaudited)
Issued Common SharesRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interest
Total
SharesAmount
Balances at December 31, 2018251,532,493  $1,737  $674  $(800) $2,007  $3,618  
Cumulative effect adjustment—  —  12  —  9  21  
Stock option exercises2,019,620  42  —  —  —  42  
Share-based compensation—  22  —  —  —  22  
Issuance of shares134,809  7  —  —  —  7  
Dividends declared ($0.50 per share)
—  —  (127) —  —  (127) 
Dividend equivalents declared on restricted stock units—  2  (2) —  —    
Distributions declared by Partnership on Partnership exchangeable units ($0.50 per unit)
—  —  —  —  (104) (104) 
Exchange of Partnership exchangeable units for RBI common shares141,190  2  —  (1) (1)   
Net income—  —  135  —  111  246  
Other comprehensive income (loss)—  —  —  26  22  48  
Balances at March 31, 2019253,828,112  $1,812  $692  $(775) $2,044  $3,773  
Stock option exercises1,697,488  38  —  —  —  38  
Share-based compensation—  17  —  —  —  17  
Issuance of shares59,970    —  —  —    
Dividends declared ($0.50 per share)
—  —  (128) —  —  (128) 
Dividend equivalents declared on restricted stock units—  2  (2) —  —    
Distributions declared by Partnership on Partnership exchangeable units ($0.50 per unit)
—  —  —  —  (103) (103) 
Exchange of Partnership exchangeable units for RBI common shares45,325  1  —  —  (1)   
Restaurant VIE contributions (distributions)—  —  —  —  1  1  
Net income—  —  142  —  115  257  
Other comprehensive income (loss)—  —  —  58  47  105  
Balances at June 30, 2019255,630,895  $1,870  $704  $(717) $2,103  $3,960  
See accompanying notes to condensed consolidated financial statements.



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RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
 Six Months Ended June 30,
 20202019
Cash flows from operating activities:
Net income$388  $503  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization91  92  
Amortization of deferred financing costs and debt issuance discount12  15  
(Income) loss from equity method investments18    
(Gain) loss on remeasurement of foreign denominated transactions10  (3) 
Net (gains) losses on derivatives(1) (34) 
Share-based compensation expense39  39  
Deferred income taxes(131) 23  
Other20  (3) 
Changes in current assets and liabilities, excluding acquisitions and dispositions:
Accounts and notes receivable(36) (16) 
Inventories and prepaids and other current assets(28) (10) 
Accounts and drafts payable(158) (40) 
Other accrued liabilities and gift card liability(13) (166) 
Tenant inducements paid to franchisees(5) (8) 
Other long-term assets and liabilities(10) 83  
Net cash provided by operating activities196  475  
Cash flows from investing activities:
Payments for property and equipment(39) (14) 
Net proceeds from disposal of assets, restaurant closures, and refranchisings5  22  
Settlement/sale of derivatives, net22  15  
Net cash (used for) provided by investing activities(12) 23  
Cash flows from financing activities:
Proceeds from revolving line of credit and long-term debt1,585    
Repayments of revolving line of credit, long-term debt and finance leases(1,045) (48) 
Payment of financing costs(10)   
Payment of dividends on common shares and distributions on Partnership exchangeable units(716) (437) 
Proceeds from stock option exercises41  80  
(Payments) proceeds from derivatives(14) 11  
Other financing activities, net(2) (1) 
Net cash used for financing activities(161) (395) 
Effect of exchange rates on cash and cash equivalents(16) 12  
Increase (decrease) in cash and cash equivalents7  115  
Cash and cash equivalents at beginning of period1,533  913  
Cash and cash equivalents at end of period$1,540  $1,028  
Supplemental cash flow disclosures:
Interest paid$234  $292  
Income taxes paid$60  $127  
See accompanying notes to condensed consolidated financial statements.
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RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business and Organization
Restaurant Brands International Inc. (the “Company”, “RBI”, “we”, “us” or “our”) was formed on August 25, 2014 and continued under the laws of Canada. The Company serves as the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King® brand (“Burger King” or “BK”), and chicken under the Popeyes® brand (“Popeyes” or “PLK”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of June 30, 2020, we franchised or owned 4,934 Tim Hortons restaurants, 18,756 Burger King restaurants, and 3,369 Popeyes restaurants, for a total of 27,059 restaurants, and operate in more than 100 countries and U.S. territories. Approximately 100% of current system-wide restaurants are franchised.
All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated.
COVID-19
The global crisis resulting from the spread of coronavirus (COVID-19) has had a substantial impact on our global restaurant operations for the three and six months ended June 30, 2020, which is expected to continue with the timing of recovery uncertain. During the three and six months ended June 30, 2020, many TH, BK and PLK restaurants were temporarily closed in certain countries and many of the restaurants that remained open had limited operations, such as Drive-thru, Takeout and Delivery (where applicable). This has continued into the third quarter of 2020.
Our operating results substantially depend upon our franchisees’ sales volumes, restaurant profitability, and financial stability. The financial impact of COVID-19 has had, and is expected to continue to have, an adverse effect on many of our franchisees’ liquidity and we are working closely with our franchisees to monitor and assist them with access to appropriate sources of liquidity in order to sustain their businesses throughout this crisis, such as the initiation of rent relief programs for eligible franchisees who lease property from us. See Note 4, Leases, for further information about the rent relief programs. Additionally, during the second quarter of 2020, we provided cash flow support by extending loans to eligible BK franchisees in the U.S. and advancing certain cash payments to eligible TH franchisees in Canada.
During the three and six months ended June 30, 2020, we recorded bad debt expense of $24 million and $28 million, respectively, compared to $4 million and $5 million during the three and six months ended June 30, 2019. While all receivables remain contractually due and payable to us, the certainty of the amount and timing of payments has been impacted by the COVID-19 pandemic. Therefore, our bad debt expense during the three and six months ended June 30, 2020 reflects an adjustment to our historical collections experience to incorporate an estimate of the impact of current economic conditions resulting from the COVID-19 pandemic. Actual collections may be materially higher or lower than this estimate reflects since it is reasonably possible the duration and future impact of the COVID-19 pandemic on our business or our franchisees may differ from our assumptions. Ongoing material adverse effects of the COVID-19 pandemic on our franchisees for an extended period could negatively affect our operating results, including reductions in revenue and cash flow and could impact our impairment assessments of accounts receivable, intangible assets, long-lived assets or goodwill.
Note 2. Basis of Presentation and Consolidation
We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 21, 2020.
The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All material intercompany balances and transactions have been eliminated in consolidation. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method.
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We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the amended and restated limited partnership agreement of Partnership (the “partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold.
We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable.
As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE.
Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of June 30, 2020 and December 31, 2019, we determined that we are the primary beneficiary of 33 and 35 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these Restaurant VIEs in our Financial Statements. Material intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year.
The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Certain prior year amounts in the accompanying Financial Statements and notes to the Financial Statements have been reclassified in order to be comparable with the current year classifications. These reclassifications had no effect on previously reported net income.
Note 3. New Accounting Pronouncements
Credit Losses – In June 2016, the Financial Accounting Standards Board ("FASB") issued guidance that requires companies to measure and recognize lifetime expected credit losses for certain financial instruments, including trade accounts receivable and net investments in direct financing and sales-type leases. Expected credit losses are estimated using relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This amendment was effective commencing in 2020, using a modified retrospective approach. The adoption of this new guidance did not have a material impact on our Financial Statements.
Simplifying the Accounting for Income Taxes – In December 2019, the FASB issued guidance which simplifies the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance applicable to accounting for income taxes. The amendment is effective commencing in 2021 with early adoption permitted. We are currently evaluating the impact that the adoption of this new guidance will have on our Financial Statements.
Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020, the FASB issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2022. The expedients and
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exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationships. We are currently evaluating the impact that the adoption of this new guidance will have on our Financial Statements.
Note 4. Leases
During the six months ended June 30, 2020, we initiated a rent relief program for eligible TH franchisees in Canada who lease property from us (the “TH rent relief program”) and a rent relief program for eligible BK franchisees in the U.S. and Canada who lease property from us (the "BK rent relief program" and together with the TH rent relief program, the “rent relief programs”). Under the rent relief programs, we temporarily converted the rent structure from a combination of fixed plus variable rent to 100% variable rent. While in effect, these programs will result in a reduction in our property revenues.
In April 2020, the FASB staff issued interpretive guidance that indicated it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Accounting Standards Codification Topic 842, Leases ("ASC 842"), as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract). Consequently, for concessions related to the effects of the COVID-19 pandemic, an entity will not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance in ASC 842 to those contracts. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee.
We have elected to apply this interpretive guidance to the rent relief programs, and have assumed that enforceable rights and obligations for those concessions exist in the lease contract. As such, we began recognizing reductions in rents arising from the rent relief programs as reductions in variable lease payments, as the rent reductions did not result in a substantial increase in the rights of the lessor or the obligations of the lessee. This election will continue while our rent relief program is in effect.
Property revenues are comprised primarily of lease income from operating leases and earned income on direct financing leases with franchisees as follows (in millions):
Three Months Ended
June 30,
Six Months Ended
June 30,
2020201920202019
Lease income - operating leases
Minimum lease payments$109  $112  $221  $223  
Variable lease payments46  97  109  181  
Amortization of favorable and unfavorable income lease contracts, net1  2  3  4  
Subtotal - lease income from operating leases156  211  333  408  
Earned income on direct financing leases2  3  3  5  
Total property revenues$158  $214  $336  $