UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017,2021, or
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☐Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 000-55774001-39529
BROADSTONE NET LEASE, INC.
(Exact name of registrant as specified in its charter)
Maryland | 26-1516177 |
(State or other jurisdiction of | (I.R.S. Employer |
800 Clinton Square Rochester, New York | 14604 |
(Address of principal executive offices) | (Zip Code) |
(585) 287-6500
(585) 287-6500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.00025 par value | BNL | The New York Stock Exchange |
Indicate by check mark whether the registrant: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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ 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.
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 ☒
There were 18,491,182.216161,266,662 shares of the Registrant’s common stock, $0.001Common Stock, $0.00025 par value per share, outstanding as of November 13, 2017.October 29, 2021.
BROADSTONE NET LEASE, INC.
TABLE OF CONTENTS
Page | ||
1 | ||
Item 1. | 1 | |
1 | ||
Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited) | 2 | |
Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity (Unaudited) | 3 | |
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Notes to the Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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29 | ||
30 | ||
36 | ||
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| 47 | |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)
|
| September 30, |
|
| December 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| September 30, |
| December 31, |
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Assets |
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Accounted for using the operating method, net of accumulated depreciation |
| $ | 1,891,708 |
|
| $ | 1,637,700 |
|
| $ | 3,674,206 |
| $ | 3,354,511 |
| |
Accounted for using the direct financing method |
|
| 41,612 |
|
|
| 47,271 |
|
| 28,830 |
| 29,066 |
| |||
Accounted for using the sales-type method |
|
| 568 |
|
| 567 |
| |||||||||
Investment in rental property, net |
|
| 1,933,320 |
|
|
| 1,684,971 |
|
| 3,703,604 |
| 3,384,144 |
| |||
|
|
|
|
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|
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|
| ||||||||
Cash and cash equivalents |
|
| 13,698 |
|
|
| 21,635 |
|
| 16,182 |
| 100,486 |
| |||
Restricted cash |
|
| 925 |
|
|
| 1,468 |
| ||||||||
Accrued rental income |
|
| 47,766 |
|
|
| 36,577 |
|
| 112,163 |
| 102,117 |
| |||
Tenant and other receivables, net |
|
| 1,120 |
|
|
| 355 |
|
| 940 |
| 1,604 |
| |||
Tenant and capital reserves |
|
| 897 |
|
|
| 767 |
| ||||||||
Prepaid expenses and other assets |
|
| 699 |
|
|
| 260 |
|
| 13,819 |
| 22,277 |
| |||
Notes receivable |
|
| 6,527 |
|
|
| 6,527 |
| ||||||||
Investment in related party |
|
| 10,000 |
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|
| 10,000 |
| ||||||||
Interest rate swap, assets |
|
| 7,493 |
|
|
| 9,598 |
| ||||||||
Goodwill |
| 339,769 |
| 339,769 |
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Intangible lease assets, net |
|
| 205,469 |
|
|
| 168,121 |
|
| 301,046 |
| 290,913 |
| |||
Debt issuance costs – unsecured revolver, net |
|
| 3,139 |
|
|
| 446 |
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Debt issuance costs – unsecured revolving credit facility, net |
| 4,658 |
| 6,435 |
| |||||||||||
Leasing fees, net |
|
| 13,046 |
|
|
| 11,329 |
|
|
| 9,791 |
|
| 10,738 |
| |
Total assets |
| $ | 2,244,099 |
|
| $ | 1,952,054 |
|
| $ | 4,501,972 |
| $ | 4,258,483 |
| |
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Liabilities and equity |
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Unsecured revolver |
| $ | 126,500 |
|
| $ | 102,000 |
| ||||||||
Mortgages and notes payable, net |
|
| 57,883 |
|
|
| 106,686 |
| ||||||||
Unsecured term notes, net |
|
| 721,907 |
|
|
| 657,891 |
| ||||||||
Unsecured revolving credit facility |
| $ | — |
| $ | — |
| |||||||||
Mortgages, net |
| 97,530 |
| 107,382 |
| |||||||||||
Unsecured term loans, net |
| 646,458 |
| 961,330 |
| |||||||||||
Senior unsecured notes, net |
| 843,665 |
| 472,466 |
| |||||||||||
Interest rate swap, liabilities |
|
| 7,119 |
|
|
| 10,217 |
|
| 36,196 |
| 72,103 |
| |||
Earnout liability |
| 0 |
| 7,509 |
| |||||||||||
Accounts payable and other liabilities |
|
| 18,426 |
|
|
| 17,396 |
|
| 79,606 |
| 74,936 |
| |||
Due to related parties |
|
| 1,688 |
|
|
| 364 |
| ||||||||
Tenant improvement allowances |
|
| 6,627 |
|
|
| 9,490 |
| ||||||||
Accrued interest payable |
|
| 4,880 |
|
|
| 1,602 |
|
| 9,895 |
| 4,023 |
| |||
Intangible lease liabilities, net |
|
| 66,303 |
|
|
| 47,871 |
|
|
| 72,497 |
|
| 79,653 |
| |
Total liabilities |
|
| 1,011,333 |
|
|
| 953,517 |
|
|
| 1,785,847 |
|
| 1,779,402 |
| |
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Commitments and contingencies (See Note 16) |
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Commitments and contingencies (See Note 18) |
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Equity |
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Broadstone Net Lease, Inc. stockholder’s equity: |
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Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding |
|
| - |
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|
| - |
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Common stock, $0.001 par value; 80,000 shares authorized, 18,260 and 15,158 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively |
|
| 18 |
|
|
| 15 |
| ||||||||
Broadstone Net Lease, Inc. stockholders' equity: |
|
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|
|
| ||||||||||
Preferred stock, $0.001 par value; 20,000 shares authorized, 0 shares issued or outstanding |
| — |
| — |
| |||||||||||
Common stock, $0.00025 par value; 500,000 shares authorized, 161,255 shares issued |
| 40 |
| 27 |
| |||||||||||
Class A common stock, $0.00025 par value; 0 shares authorized, issued or outstanding at |
| 0 |
| 9 |
| |||||||||||
Additional paid-in capital |
|
| 1,253,431 |
|
|
| 1,009,431 |
|
| 2,895,219 |
| 2,624,997 |
| |||
Subscriptions receivable |
|
| (470 | ) |
|
| (9,790 | ) | ||||||||
Cumulative distributions in excess of retained earnings |
|
| (112,725 | ) |
|
| (89,960 | ) |
| (305,665 | ) |
| (259,673 | ) | ||
Accumulated other comprehensive income |
|
| (40 | ) |
|
| 2,092 |
| ||||||||
Accumulated other comprehensive loss |
|
| (37,590 | ) |
|
| (66,255 | ) | ||||||||
Total Broadstone Net Lease, Inc. stockholders’ equity |
|
| 1,140,214 |
|
|
| 911,788 |
|
| 2,552,004 |
| 2,299,105 |
| |||
Non-controlling interests |
|
| 92,552 |
|
|
| 86,749 |
|
|
| 164,121 |
|
| 179,976 |
| |
Total equity |
|
| 1,232,766 |
|
|
| 998,537 |
|
|
| 2,716,125 |
|
| 2,479,081 |
| |
Total liabilities and equity |
| $ | 2,244,099 |
|
| $ | 1,952,054 |
|
| $ | 4,501,972 |
| $ | 4,258,483 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Loss)
(Unaudited)
(in thousands, except per share amounts)
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| For the Three Months Ended |
| For the Nine Months Ended |
| |||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||||||||
Revenues |
|
|
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|
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Rental income from operating leases |
| $ | 43,233 |
|
| $ | 34,806 |
|
| $ | 123,890 |
|
| $ | 96,779 |
| ||||||||||||||||
Earned income from direct financing leases |
|
| 968 |
|
|
| 1,143 |
|
|
| 3,175 |
|
|
| 3,406 |
| ||||||||||||||||
Operating expenses reimbursed from tenants |
|
| 1,995 |
|
|
| 1,056 |
|
|
| 4,908 |
|
|
| 3,059 |
| ||||||||||||||||
Other income from real estate transactions |
|
| 39 |
|
|
| 5 |
|
|
| 117 |
|
|
| 176 |
| ||||||||||||||||
Total revenues |
|
| 46,235 |
|
|
| 37,010 |
|
|
| 132,090 |
|
|
| 103,420 |
| ||||||||||||||||
Lease revenues, net |
| $ | 122,777 |
| $ | 80,744 |
| $ | 290,234 |
| $ | 239,346 |
| |||||||||||||||||||
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Operating expenses |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
| 15,643 |
|
|
| 12,114 |
|
|
| 44,969 |
|
|
| 33,273 |
|
| 36,682 |
| 31,363 |
| 98,620 |
| 102,503 |
| |||||||
Asset management fees |
|
| 3,844 |
|
|
| 2,789 |
|
|
| 10,666 |
|
|
| 7,770 |
|
| 0 |
| 0 |
| 0 |
| 2,461 |
| |||||||
Property management fees |
|
| 1,249 |
|
|
| 1,010 |
|
|
| 3,635 |
|
|
| 2,868 |
|
| 0 |
| 0 |
| 0 |
| 1,275 |
| |||||||
Acquisition expenses |
|
| - |
|
|
| 2,367 |
|
|
| - |
|
|
| 8,256 |
| ||||||||||||||||
Property and operating expense |
|
| 2,009 |
|
|
| 1,184 |
|
|
| 4,710 |
|
|
| 3,005 |
|
| 4,842 |
| 4,187 |
| 14,019 |
| 12,492 |
| |||||||
General and administrative |
|
| 1,173 |
|
|
| 598 |
|
|
| 3,297 |
|
|
| 1,951 |
|
| 8,552 |
| 7,214 |
| 27,840 |
| 18,756 |
| |||||||
State and franchise tax |
|
| 301 |
|
|
| 71 |
|
|
| 511 |
|
|
| 181 |
| ||||||||||||||||
Provision for impairment of investment in rental properties |
|
| 2,608 |
|
|
| - |
|
|
| 2,608 |
|
|
| - |
|
|
| 25,989 |
|
| 14,732 |
|
| 28,001 |
|
| 17,399 |
| |||
Total operating expenses |
|
| 26,827 |
|
|
| 20,133 |
|
|
| 70,396 |
|
|
| 57,304 |
|
|
| 76,065 |
|
| 57,496 |
|
| 168,480 |
|
| 154,886 |
| |||
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Operating income |
|
| 19,408 |
|
|
| 16,877 |
|
|
| 61,694 |
|
|
| 46,116 |
| ||||||||||||||||
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Other income (expenses) |
|
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Preferred distribution income |
|
| 187 |
|
|
| 181 |
|
|
| 550 |
|
|
| 531 |
| ||||||||||||||||
Interest income |
|
| 127 |
|
|
| 4 |
|
|
| 354 |
|
|
| 9 |
|
| — |
|
|
| 0 |
| 11 |
|
|
| 20 |
| |||
Interest expense |
|
| (9,380 | ) |
|
| (4,576 | ) |
|
| (25,182 | ) |
|
| (24,166 | ) |
| (15,611 | ) |
|
| (18,511 | ) |
| (47,149 | ) |
|
| (59,015 | ) | ||
Cost of debt extinguishment |
|
| (1,404 | ) |
|
| (52 | ) |
|
| (5,019 | ) |
|
| (105 | ) |
| (242 | ) |
|
| (392 | ) |
| (368 | ) |
|
| (414 | ) | ||
Gain on sale of real estate |
|
| 4,052 |
|
|
| 2,983 |
|
|
| 10,332 |
|
|
| 4,089 |
|
| 1,220 |
|
|
| 1,060 |
| 9,791 |
|
|
| 9,725 |
| |||
Income taxes |
| (473 | ) |
|
| (129 | ) |
| (1,187 | ) |
|
| (1,080 | ) | ||||||||||||||||||
Internalization expenses |
| — |
|
|
| (1,929 | ) |
| — |
|
|
| (3,523 | ) | ||||||||||||||||||
Change in fair value of earnout liability |
| (1,059 | ) |
|
| 6,362 |
| (5,539 | ) |
|
| 8,506 |
| |||||||||||||||||||
Other (expenses) income |
|
| (25 | ) |
|
| 2 |
|
| (11 | ) |
|
| (22 | ) | |||||||||||||||||
Net income |
|
| 12,990 |
|
|
| 15,417 |
|
|
| 42,729 |
|
|
| 26,474 |
|
| 30,522 |
| 9,711 |
| 77,302 |
| 38,657 |
| |||||||
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Net income attributable to non-controlling interests |
|
| (1,042 | ) |
|
| (1,459 | ) |
|
| (3,460 | ) |
|
| (2,600 | ) |
|
| (1,824 | ) |
|
| (961 | ) |
|
| (5,167 | ) |
|
| (3,738 | ) |
Net income attributable to Broadstone Net Lease, Inc. |
| $ | 11,948 |
|
| $ | 13,958 |
|
| $ | 39,269 |
|
| $ | 23,874 |
|
| $ | 28,698 |
| $ | 8,750 |
| $ | 72,135 |
| $ | 34,919 |
| |||
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| ||||
Weighted average number of common shares outstanding |
|
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| ||||
Basic |
|
| 17,617 |
|
|
| 13,647 |
|
|
| 16,607 |
|
|
| 12,738 |
|
|
| 159,226 |
|
| 111,155 |
|
| 150,227 |
|
| 108,228 |
| |||
Diluted |
|
| 19,147 |
|
|
| 15,074 |
|
|
| 18,069 |
|
|
| 14,154 |
|
|
| 169,587 |
|
| 123,381 |
|
| 161,273 |
|
| 119,747 |
| |||
Net Earnings per common share |
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Net earnings per share attributable to common stockholders |
|
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| ||||||||||||||||||||
Basic and diluted |
| $ | 0.68 |
|
| $ | 1.02 |
|
| $ | 2.36 |
|
| $ | 1.87 |
|
| $ | 0.18 |
| $ | 0.08 |
| $ | 0.48 |
| $ | 0.32 |
| |||
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| ||||||||||||||||
Comprehensive income (loss) |
|
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| ||||
Net income |
| $ | 12,990 |
|
| $ | 15,417 |
|
| $ | 42,729 |
|
| $ | 26,474 |
|
| $ | 30,522 |
| $ | 9,711 |
| $ | 77,302 |
| $ | 38,657 |
| |||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Change in fair value of interest rate swaps |
|
| 283 |
|
|
| 1,280 |
|
|
| (1,448 | ) |
|
| (20,551 | ) |
| 4,559 |
| 4,352 |
| 30,328 |
| (59,766 | ) | |||||||
Realized loss on interest rate swaps |
|
| - |
|
|
| - |
|
|
| (873 | ) |
|
| - |
| ||||||||||||||||
Comprehensive income |
|
| 13,273 |
|
|
| 16,697 |
|
|
| 40,408 |
|
|
| 5,923 |
| ||||||||||||||||
Comprehensive income attributable to non-controlling interests |
|
| (1,046 | ) |
|
| (1,581 | ) |
|
| (3,271 | ) |
|
| (443 | ) | ||||||||||||||||
Comprehensive income attributable to Broadstone Net Lease, Inc. |
| $ | 12,227 |
|
| $ | 15,116 |
|
| $ | 37,137 |
|
| $ | 5,480 |
| ||||||||||||||||
Realized loss (gain) on interest rate swaps |
|
| 85 |
|
| (42 | ) |
|
| 2 |
|
| (125 | ) | ||||||||||||||||||
Comprehensive income (loss) |
| 35,166 |
| 14,021 |
| 107,632 |
| (21,234 | ) | |||||||||||||||||||||||
Comprehensive (income) loss attributable to non-controlling interests |
|
| (2,101 | ) |
|
| (1,387 | ) |
|
| (7,313 | ) |
|
| 1,510 |
| ||||||||||||||||
Comprehensive income (loss) attributable to Broadstone Net Lease, Inc. |
| $ | 33,065 |
| $ | 12,634 |
| $ | 100,319 |
| $ | (19,724 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity
(Unaudited)
(in thousands, except per share amounts)
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Subscriptions Receivable |
|
| Cumulative Distributions in Excess of Retained Earnings |
|
| Accumulated Other Comprehensive (Loss)/Income |
|
| Non-controlling Interests |
|
| Total |
| |||||||
Balance, January 1, 2016 |
| $ | 11 |
|
| $ | 738,909 |
|
| $ | (1,506 | ) |
| $ | (56,911 | ) |
| $ | (10,340 | ) |
| $ | 77,782 |
|
| $ | 747,945 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 23,874 |
|
|
| - |
|
|
| 2,600 |
|
|
| 26,474 |
|
Issuance of 2,809 shares of common stock, net |
|
| 3 |
|
|
| 209,049 |
|
|
| (1,977 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 207,075 |
|
Other offering costs |
|
| - |
|
|
| (976 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (976 | ) |
Issuance of 97 membership units |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7,190 |
|
|
| 7,190 |
|
Distributions declared ($0.405 per share January and February 2016, $0.410 per share March through September 2016) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (51,558 | ) |
|
| - |
|
|
| (5,860 | ) |
|
| (57,418 | ) |
Change in fair value of interest rate swap agreements |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (18,394 | ) |
|
| (2,157 | ) |
|
| (20,551 | ) |
Redemption of 87 shares of common stock |
|
| - |
|
|
| (6,487 | ) |
|
| - |
|
|
| - |
|
|
| - | �� |
|
| - |
|
|
| (6,487 | ) |
Balance, September 30, 2016 |
| $ | 14 |
|
| $ | 940,495 |
|
| $ | (3,483 | ) |
| $ | (84,595 | ) |
| $ | (28,734 | ) |
| $ | 79,555 |
|
| $ | 903,252 |
|
|
| Common |
|
| Class A |
|
| Additional |
|
| Cumulative |
|
| Accumulated |
|
| Non- |
|
| Total |
| |||||||
Balance, January 1, 2021 |
| $ | 27 |
|
| $ | 9 |
|
| $ | 2,624,997 |
|
| $ | (259,673 | ) |
| $ | (66,255 | ) |
| $ | 179,976 |
|
| $ | 2,479,081 |
|
Net income |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 22,223 |
|
|
| 0 |
|
|
| 1,737 |
|
|
| 23,960 |
|
Issuance of 211 shares of common stock |
|
| 0 |
|
|
| 0 |
|
|
| 233 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 233 |
|
Offering costs, discounts and commissions |
|
| 0 |
|
|
| 0 |
|
|
| (500 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (500 | ) |
Stock-based compensation |
|
| 0 |
|
|
| 0 |
|
|
| 1,769 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,769 |
|
Retirement of 45 shares of common stock |
|
| 0 |
|
|
| 0 |
|
|
| (832 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (832 | ) |
Conversion of 37,000 Class A common stock to |
|
| 9 |
|
|
| (9 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Conversion of 38 OP Units to 38 shares of |
|
| 0 |
|
|
| 0 |
|
|
| 606 |
|
|
| 0 |
|
|
| 0 |
|
|
| (606 | ) |
|
| 0 |
|
Distributions declared ($0.250 per share and OP Unit) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (36,690 | ) |
|
| 0 |
|
|
| (2,963 | ) |
|
| (39,653 | ) |
Change in fair value of interest rate swap agreements |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 26,602 |
|
|
| 2,078 |
|
|
| 28,680 |
|
Realized gain on interest rate swap agreements |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (39 | ) |
|
| (2 | ) |
|
| (41 | ) |
Adjustment to non-controlling interests |
|
| 0 |
|
|
| 0 |
|
|
| (953 | ) |
|
| 0 |
|
|
| 1,008 |
|
|
| (55 | ) |
|
| 0 |
|
Balance, March 31, 2021 |
| $ | 36 |
|
| $ | 0 |
|
| $ | 2,625,320 |
|
| $ | (274,140 | ) |
| $ | (38,684 | ) |
| $ | 180,165 |
|
| $ | 2,492,697 |
|
Net income |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 21,214 |
|
|
| 0 |
|
|
| 1,606 |
|
|
| 22,820 |
|
Issuance of 11,659 shares of common stock |
|
| 4 |
|
|
| 0 |
|
|
| 264,795 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 264,799 |
|
Issuance of 248 OP Units |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Offering costs, discounts and commissions |
|
| 0 |
|
|
| 0 |
|
|
| (11,013 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (11,013 | ) |
Stock-based compensation |
|
| 0 |
|
|
| 0 |
|
|
| 951 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 951 |
|
Retirement of 16 shares of common stock |
|
| 0 |
|
|
| 0 |
|
|
| (309 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (309 | ) |
Conversion of 1,127 OP Units to 1,127 shares of |
|
| 0 |
|
|
| 0 |
|
|
| 17,859 |
|
|
| 0 |
|
|
| 0 |
|
|
| (17,859 | ) |
|
| 0 |
|
Distributions declared ($0.255 per share and OP Unit) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (40,696 | ) |
|
| 0 |
|
|
| (2,788 | ) |
|
| (43,484 | ) |
Change in fair value of interest rate swap agreements |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (2,708 | ) |
|
| (203 | ) |
|
| (2,911 | ) |
Realized gain on interest rate swap agreements |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (38 | ) |
|
| (4 | ) |
|
| (42 | ) |
Adjustment to non-controlling interests |
|
| 0 |
|
|
| 0 |
|
|
| (7,472 | ) |
|
| 0 |
|
|
| (466 | ) |
|
| 7,938 |
|
|
| 0 |
|
Balance, June 30, 2021 |
| $ | 40 |
|
| $ | — |
|
| $ | 2,890,131 |
|
| $ | (293,622 | ) |
| $ | (41,896 | ) |
| $ | 168,855 |
|
| $ | 2,723,508 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 28,698 |
|
|
| — |
|
|
| 1,824 |
|
|
| 30,522 |
|
Issuance of 957 shares of common stock |
|
| — |
|
|
| — |
|
|
| 281 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 281 |
|
Issuance of 1,611 OP Units |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Offering costs, discounts and commissions |
|
| — |
|
|
| — |
|
|
| (256 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (256 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 949 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 949 |
|
Retirement of three shares of common stock |
|
| — |
|
|
| — |
|
|
| (75 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (75 | ) |
Forfeiture of five shares of common stock |
|
| — |
|
|
| — |
|
|
| (25 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (25 | ) |
Conversion of 1,723 OP Units to 1,723 shares of |
|
| — |
|
|
| — |
|
|
| 27,755 |
|
|
| — |
|
|
| — |
|
|
| (27,755 | ) |
|
| — |
|
Distributions declared ($0.255 per share and OP Unit) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (40,741 | ) |
|
| — |
|
|
| (2,682 | ) |
|
| (43,423 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,287 |
|
|
| 272 |
|
|
| 4,559 |
|
Realized loss on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 80 |
|
|
| 5 |
|
|
| 85 |
|
Adjustment to non-controlling interests |
|
| — |
|
|
| — |
|
|
| (23,541 | ) |
|
| — |
|
|
| (61 | ) |
|
| 23,602 |
|
|
| — |
|
Balance, September 30, 2021 |
| $ | 40 |
|
| $ | — |
|
| $ | 2,895,219 |
|
| $ | (305,665 | ) |
| $ | (37,590 | ) |
| $ | 164,121 |
|
| $ | 2,716,125 |
|
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Subscriptions Receivable |
|
| Cumulative Distributions in Excess of Retained Earnings |
|
| Accumulated Other Comprehensive (Loss)/Income |
|
| Non-controlling Interests |
|
| Total |
| |||||||
Balance, January 1, 2017 |
| $ | 15 |
|
| $ | 1,009,431 |
|
| $ | (9,790 | ) |
| $ | (89,960 | ) |
| $ | 2,092 |
|
| $ | 86,749 |
|
| $ | 998,537 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 39,269 |
|
|
| - |
|
|
| 3,460 |
|
|
| 42,729 |
|
Issuance of 3,163 shares of common stock, net |
|
| 3 |
|
|
| 249,942 |
|
|
| 9,320 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 259,265 |
|
Other offering costs |
|
| - |
|
|
| (1,144 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,144 | ) |
Issuance of 103 membership units |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 8,278 |
|
|
| 8,278 |
|
Distributions declared ($0.410 per share January 2017, $0.415 per share February through September 2017) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (62,034 | ) |
|
| - |
|
|
| (5,719 | ) |
|
| (67,753 | ) |
Change in fair value of interest rate swap agreements |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,328 | ) |
|
| (120 | ) |
|
| (1,448 | ) |
Realized loss on interest rate swap agreements |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (804 | ) |
|
| (69 | ) |
|
| (873 | ) |
Conversion of 1 membership unit to 1 share of common stock |
|
| - |
|
|
| 27 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (27 | ) |
|
| - |
|
Redemption of 62 shares of common stock |
|
| - |
|
|
| (4,825 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4,825 | ) |
Balance, September 30, 2017 |
| $ | 18 |
|
| $ | 1,253,431 |
|
| $ | (470 | ) |
| $ | (112,725 | ) |
| $ | (40 | ) |
| $ | 92,552 |
|
| $ | 1,232,766 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash FlowsStockholders’ Equity and Mezzanine Equity
(Unaudited)
(in thousands)thousands, except per share amounts)
|
| For the nine months ended |
| |||||
|
| September 30, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 42,729 |
|
| $ | 26,474 |
|
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization including intangibles associated with investment in rental property |
|
| 45,456 |
|
|
| 32,900 |
|
Provision for impairment of investment in rental properties |
|
| 2,608 |
|
|
| - |
|
Amortization of debt issuance costs charged to interest expense |
|
| 1,478 |
|
|
| 1,136 |
|
Straight-line rent and financing lease adjustments |
|
| (12,505 | ) |
|
| (9,736 | ) |
Cost of debt extinguishment |
|
| 5,019 |
|
|
| 105 |
|
(Gain) on sale of real estate |
|
| (10,332 | ) |
|
| (4,089 | ) |
Non-cash interest expense |
|
| (1,349 | ) |
|
| 2,219 |
|
Repayment of interest rate swap, liability |
|
| (1,965 | ) |
|
| - |
|
Leasing fees paid |
|
| (2,597 | ) |
|
| (2,827 | ) |
Other non-cash items |
|
| 325 |
|
|
| 306 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Tenant and other receivables |
|
| (237 | ) |
|
| 286 |
|
Prepaid expenses and other assets |
|
| (440 | ) |
|
| (630 | ) |
Accounts payable and other liabilities |
|
| 897 |
|
|
| 5,870 |
|
Accrued interest payable |
|
| 3,278 |
|
|
| 134 |
|
Net cash provided by operating activities |
|
| 72,365 |
|
|
| 52,148 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Acquisition of rental property accounted for using the operating method |
|
| (345,789 | ) |
|
| (367,654 | ) |
Acquisition of rental property accounted for using the direct financing method |
|
| (3,546 | ) |
|
| (544 | ) |
Capital expenditures and improvements |
|
| (3,871 | ) |
|
| (7,525 | ) |
Proceeds from disposition of rental property, net |
|
| 55,296 |
|
|
| 15,608 |
|
Increase in tenant and capital reserves |
|
| (130 | ) |
|
| (43 | ) |
Decrease in restricted cash |
|
| 543 |
|
|
| 65 |
|
Net cash used in investing activities |
|
| (297,497 | ) |
|
| (360,093 | ) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net |
|
| 229,698 |
|
|
| 186,013 |
|
Redemptions of common stock |
|
| (4,825 | ) |
|
| (6,487 | ) |
Borrowings on unsecured term notes |
|
| 400,000 |
|
|
| 95,000 |
|
Principal payments on mortgages and notes payable and unsecured term notes |
|
| (384,087 | ) |
|
| (9,171 | ) |
Borrowings on unsecured revolver |
|
| 220,000 |
|
|
| 226,500 |
|
Repayments on unsecured revolver |
|
| (195,500 | ) |
|
| (146,000 | ) |
Cash distributions paid to stockholders |
|
| (32,533 | ) |
|
| (26,060 | ) |
Cash distributions paid to non-controlling interests |
|
| (5,669 | ) |
|
| (5,275 | ) |
Debt issuance and extinguishment costs paid |
|
| (9,889 | ) |
|
| (622 | ) |
Net cash provided by financing activities |
|
| 217,195 |
|
|
| 313,898 |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
| (7,937 | ) |
|
| 5,953 |
|
Cash and cash equivalents at beginning of period |
|
| 21,635 |
|
|
| 27,050 |
|
Cash and cash equivalents at end of period |
| $ | 13,698 |
|
| $ | 33,003 |
|
|
| Common |
|
| Class A |
|
| Additional |
|
| Cumulative |
|
| Accumulated |
|
| Non- |
|
| Total |
|
|
| Mezzanine |
|
| Mezzanine |
|
| Total |
| ||||||||||
Balance, January 1, 2020 |
| $ | 26 |
|
| $ | 0 |
|
| $ | 1,895,935 |
|
| $ | (208,261 | ) |
| $ | (20,086 | ) |
| $ | 111,406 |
|
| $ | 1,779,020 |
|
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
Cumulative effect of accounting change |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (323 | ) |
|
| 0 |
|
|
| 0 |
|
|
| (323 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,816 |
|
|
| — |
|
|
| 710 |
|
|
| 11,526 |
|
|
|
| — |
|
|
| 322 |
|
|
| 322 |
|
Issuance of 293 shares of common stock and 3,124 shares |
|
| — |
|
|
| — |
|
|
| 6,097 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,097 |
|
|
|
| 66,376 |
|
|
| 0 |
|
|
| 66,376 |
|
Issuance of 5,278 mezzanine non-controlling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| 0 |
|
|
| 112,159 |
|
|
| 112,159 |
|
Adjustment to carrying value of mezzanine equity |
|
| 0 |
|
|
| 0 |
|
|
| (2,416 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (2,416 | ) |
|
|
| — |
|
|
| 2,416 |
|
|
| 2,416 |
|
Distributions declared ($0.330 per share and OP Unit) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (35,299 | ) |
|
| 0 |
|
|
| (2,100 | ) |
|
| (37,399 | ) |
|
|
| 0 |
|
|
| (1,161 | ) |
|
| (1,161 | ) |
Change in fair value of interest rate swap agreements |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (53,014 | ) |
|
| (3,472 | ) |
|
| (56,486 | ) |
|
|
| 0 |
|
|
| (1,576 | ) |
|
| (1,576 | ) |
Realized gain on interest rate swap agreements |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (38 | ) |
|
| (2 | ) |
|
| (40 | ) |
|
|
| 0 |
|
|
| (2 | ) |
|
| (2 | ) |
Balance, March 31, 2020 |
| $ | 26 |
|
| $ | 0 |
|
| $ | 1,899,616 |
|
| $ | (233,067 | ) |
| $ | (73,138 | ) |
| $ | 106,542 |
|
| $ | 1,699,979 |
|
|
| $ | 66,376 |
|
| $ | 112,158 |
|
| $ | 178,534 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15,353 |
|
|
| — |
|
|
| 992 |
|
|
| 16,345 |
|
|
|
| — |
|
|
| 753 |
|
|
| 753 |
|
Issuance of 11 shares of common stock |
|
| — |
|
|
| 0 |
|
|
| 232 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 232 |
|
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Adjustment to carrying value of mezzanine equity |
|
| 0 |
|
|
| 0 |
|
|
| (97 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (97 | ) |
|
|
| — |
|
|
| 97 |
|
|
| 97 |
|
Distributions declared ($0.110 per share and OP Unit) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (11,817 | ) |
|
| 0 |
|
|
| (701 | ) |
|
| (12,518 | ) |
|
|
| 0 |
|
|
| (581 | ) |
|
| (581 | ) |
Change in fair value of interest rate swap agreements |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (5,438 | ) |
|
| (351 | ) |
|
| (5,789 | ) |
|
|
| 0 |
|
|
| (267 | ) |
|
| (267 | ) |
Realized gain on interest rate swap agreements |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (37 | ) |
|
| (3 | ) |
|
| (40 | ) |
|
|
| 0 |
|
|
| (1 | ) |
|
| (1 | ) |
Balance, June 30, 2020 |
| $ | 26 |
|
| $ | 0 |
|
| $ | 1,899,751 |
|
| $ | (229,531 | ) |
| $ | (78,613 | ) |
| $ | 106,479 |
|
| $ | 1,698,112 |
|
|
| $ | 66,376 |
|
| $ | 112,159 |
|
| $ | 178,535 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,750 |
|
|
| — |
|
|
| 587 |
|
|
| 9,337 |
|
|
|
| — |
|
|
| 374 |
|
|
| 374 |
|
Issuance of 341 shares of common stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0 |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 796 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 796 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 33,500 shares of Class A common stock |
|
| — |
|
|
| 8 |
|
|
| 569,492 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 569,500 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Offering costs, discounts, and commissions |
|
| — |
|
|
| — |
|
|
| (37,180 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (37,180 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Reclassification of portion of contingent earnout liability |
|
| — |
|
|
| — |
|
|
| 6,809 |
|
|
| — |
|
|
| — |
|
|
| 11,627 |
|
|
| 18,436 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Reclassification of 3,124 shares of mezzanine equity |
|
| 1 |
|
|
| — |
|
|
| 66,375 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 66,376 |
|
|
|
| (66,376 | ) |
|
| — |
|
|
| (66,376 | ) |
Reclassification of 5,278 mezzanine equity |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 112,698 |
|
|
| 112,698 |
|
|
|
| — |
|
|
| (112,698 | ) |
|
| (112,698 | ) |
Repurchase of two fractional shares of common stock |
|
| — |
|
|
| — |
|
|
| (35 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Repurchase of fractional OP Units |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| (1 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Distributions declared ($0.135 per share and OP Unit) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18,739 | ) |
|
| — |
|
|
| (1,738 | ) |
|
| (20,477 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,921 |
|
|
| 264 |
|
|
| 4,185 |
|
|
|
| — |
|
|
| 167 |
|
|
| 167 |
|
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (37 | ) |
|
| (3 | ) |
|
| (40 | ) |
|
|
| — |
|
|
| (2 | ) |
|
| (2 | ) |
Balance, September 30, 2020 |
| $ | 27 |
|
| $ | 8 |
|
| $ | 2,506,008 |
|
| $ | (239,520 | ) |
| $ | (74,729 | ) |
| $ | 229,913 |
|
| $ | 2,421,707 |
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
| For the Nine Months Ended |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Operating activities |
|
|
|
|
|
| ||
Net income |
| $ | 77,302 |
|
| $ | 38,657 |
|
Adjustments to reconcile net income including non-controlling interests to net cash provided by |
|
|
|
|
|
| ||
Depreciation and amortization including intangibles associated with investment in rental property |
|
| 96,312 |
|
|
| 102,536 |
|
Provision for impairment of investment in rental properties |
|
| 28,001 |
|
|
| 17,399 |
|
Amortization of debt issuance costs and original issuance discount charged to interest expense |
|
| 2,725 |
|
|
| 2,421 |
|
Stock-based compensation expense |
|
| 3,644 |
|
|
| 796 |
|
Straight-line rent, direct financing and sales-type lease adjustments |
|
| (13,042 | ) |
|
| (14,696 | ) |
Cost of debt extinguishment |
|
| 368 |
|
|
| 414 |
|
Gain on sale of real estate |
|
| (9,791 | ) |
|
| (9,725 | ) |
Change in fair value of earnout liability |
|
| 5,539 |
|
|
| (8,506 | ) |
Cash paid for earnout liability |
|
| (6,440 | ) |
|
| 0 |
|
Settlement of interest rate swaps |
|
| (5,580 | ) |
|
| 0 |
|
Leasing fees paid |
|
| (319 | ) |
|
| 0 |
|
Adjustment to provision for credit losses |
|
| (1 | ) |
|
| (142 | ) |
Other non-cash items |
|
| 830 |
|
|
| 420 |
|
Changes in assets and liabilities, net of acquisition: |
|
|
|
|
|
| ||
Tenant and other receivables |
|
| 664 |
|
|
| (3,023 | ) |
Prepaid expenses and other assets |
|
| 1,690 |
|
|
| (4,751 | ) |
Accounts payable and other liabilities |
|
| (456 | ) |
|
| 5,305 |
|
Accrued interest payable |
|
| 5,872 |
|
|
| 5,859 |
|
Net cash provided by operating activities |
|
| 187,318 |
|
|
| 132,964 |
|
|
|
|
|
|
|
| ||
Investing activities |
|
|
|
|
|
| ||
Acquisition of rental property accounted for using the operating method |
|
| (516,111 | ) |
|
| (76 | ) |
Cash paid for Internalization |
|
| 0 |
|
|
| (30,861 | ) |
Capital expenditures and improvements |
|
| (1,451 | ) |
|
| (7,629 | ) |
Proceeds from disposition of rental property, net |
|
| 68,608 |
|
|
| 54,810 |
|
Change in deposits on investments in rental property |
|
| 575 |
|
|
| (37 | ) |
Net cash (used in) provided by investing activities |
|
| (448,379 | ) |
|
| 16,207 |
|
|
|
|
|
|
|
| ||
Financing activities |
|
|
|
|
|
| ||
Proceeds from issuance of common stock and Class A common stock, net of $11,194 and $35,514 offering |
|
| 253,170 |
|
|
| 534,117 |
|
Repurchase of fractional shares of common stock |
|
| 0 |
|
|
| (36 | ) |
Borrowings on mortgages, senior unsecured notes and unsecured term loans |
|
| 381,810 |
|
|
| 60,000 |
|
Principal payments on mortgages and unsecured term loans |
|
| (332,193 | ) |
|
| (393,294 | ) |
Borrowings on unsecured revolving credit facility |
|
| 216,600 |
|
|
| 192,000 |
|
Repayments on unsecured revolving credit facility |
|
| (216,600 | ) |
|
| (389,300 | ) |
Cash distributions paid to stockholders |
|
| (113,304 | ) |
|
| (52,447 | ) |
Cash distributions paid to non-controlling interests |
|
| (8,638 | ) |
|
| (5,395 | ) |
Cash paid for earnout liability |
|
| (6,608 | ) |
|
| 0 |
|
Debt issuance and extinguishment costs paid |
|
| (3,827 | ) |
|
| (6,140 | ) |
Net cash provided by (used in) financing activities |
|
| 170,410 |
|
|
| (60,495 | ) |
Net (decrease) increase in cash and cash equivalents and restricted cash |
|
| (90,651 | ) |
|
| 88,676 |
|
Cash and cash equivalents and restricted cash at beginning of period |
|
| 110,728 |
|
|
| 20,311 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 20,077 |
|
| $ | 108,987 |
|
|
|
|
|
|
|
| ||
Reconciliation of cash and cash equivalents and restricted cash |
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| $ | 100,486 |
|
| $ | 12,455 |
|
Restricted cash at beginning of period |
|
| 10,242 |
|
|
| 7,856 |
|
Cash and cash equivalents and restricted cash at beginning of period |
| $ | 110,728 |
|
| $ | 20,311 |
|
|
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 16,182 |
|
| $ | 101,787 |
|
Restricted cash at end of period |
|
| 3,895 |
|
|
| 7,200 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 20,077 |
|
| $ | 108,987 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Broadstone Net Lease, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Unaudited)
(in thousands)thousands, except per share amounts)
1. Business Description
Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008. The Corporation focuses on investing in income-producing, net leased commercial properties.properties, primarily in the United States. The Corporation leases properties toindustrial, healthcare, restaurant, retail, healthcare, industrial, and otheroffice commercial businessesproperties under long-term lease agreements. Properties are generally leased on a triple-net basis such that tenants pay all operating expenses relating to the property, including, but not limited to, property taxes, insurance, maintenance, repairs, and capital costs, during the lease term. As ofAt September 30, 2017,2021, the Corporation owned a diversified portfolio of 477696 individual net leased commercial properties with 695 properties located in 3742 U.S. states throughout the continental United States.and 1 property located in British Columbia, Canada.
Broadstone Net Lease, LLC (the “Operating Company”Corporation’s operating company, or the “OP”), is the entity through which the Corporation conducts its business and owns (either directly or through subsidiaries) all of the Corporation’s properties. At September 30, 2017 and December 31, 2016, the Corporation owned economic interests of 92.3% and 91.4%, respectively, in the Operating Company. The Corporation is also the sole managing member of the Operating Company.OP. The remaining interestsmembership units in the Operating CompanyOP (“OP Units”), which are referred to as non-controlling interests, are held by members who acquired their interest by contributing propertywere issued OP Units pursuant to the Operating CompanyInternalization (defined below) or in exchange for membership units oftheir interests in properties acquired by the Operating Company.OP. As the Corporation conducts substantially all of its operations through the Operating Company,OP, it is structured as what is referred to as an Umbrella Partnershipumbrella partnership real estate investment trust (“UPREIT”). The Corporation, the OP, and its consolidated subsidiaries are collectively referred to as the “Company.”
Prior to February 7, 2020, the Corporation was externally managed by Broadstone Real Estate, Investment TrustLLC (“UPREIT”BRE”).
The Corporation operates under and Broadstone Asset Management, LLC (the “Asset Manager”) subject to the direction, oversight, and approval of itsthe Company’s board of directors (the “Board of Directors”), which is responsible for the management and control of the Company’s affairs. The Corporation is externally managed and its board of directors has retained Broadstone Asset Management, LLC (the “Asset Manager”) to manage the day-to-day affairs and to implement the Corporation’s investment strategy, and the Corporation’s sponsor, Broadstone Real Estate, LLC (the “Manager”), to provide certain property management services for the Corporation’s properties, subject to the board of directors’ direction, oversight, and approval.. The Asset Manager iswas a wholly-ownedwholly owned subsidiary of the ManagerBRE and all of the Corporation’s officers arewere employees of the Manager.BRE. Accordingly, both the ManagerBRE and the Asset Manager arewere related parties of the Corporation.Company. Refer to Note 3 for further discussion overconcerning related parties and related party transactions.
On February 7, 2020, the Corporation, the OP, BRE, and certain of their respective subsidiaries and affiliates, completed through a series of mergers (the “Mergers”) the internalization of the external management functions previously performed for the Corporation and the OP by BRE and the Asset Manager (such transactions, collectively, the “Internalization”). Upon consummation of the Internalization, the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP and the Company became internally managed. Upon Internalization, the prior Property Management Agreement and Asset Management Agreement were terminated. The Internalization was not considered a “Termination Event” under the terms of the agreements and therefore 0 fees were paid under them as a result of the Internalization.
On September 18, 2020, the Corporation effected a 4-for-one stock split on its then outstanding 26,944 shares of common stock (“Common Stock”) that previously had a $0.001 par value. Concurrent with the stock split, the OP effected a four-for-one stock split of its outstanding OP Units. No fractional shares or OP Units were issued as a result of the stock split. All historic share and per share amounts in these Condensed Consolidated Financial Statements have been adjusted to give retroactive effect to the stock split.
On September 21, 2020, the Corporation completed its initial public offering (“IPO”) and issued an aggregate of 37,000 shares of a new class of common stock, $0.00025 par value per share (“Class A Common Stock”) at $17.00 per share, which includes shares issued pursuant to the underwriters’ partial exercise of their over-allotment option on October 20, 2020, pursuant to a registration statement on Form S-11 (File No. 333-240381), as amended, under the Securities Act of 1933, as amended. Shares of Class A Common Stock were listed on the New York Stock Exchange (“NYSE”) under the symbol “BNL.” On March 20, 2021, each share of Class A Common Stock automatically converted into one share of Common Stock, and effective March 22, 2021, all shares of Common Stock were listed and freely tradeable on the NYSE under the symbol “BNL.” See Note 14.
The following table summarizes the outstanding equity and economic ownership interest of the Corporation and the OP:
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||||||||||||||||||
(in thousands) |
| Shares of |
|
| OP Units |
|
| Total Diluted |
|
| Shares of |
|
| OP Units |
|
| Total Diluted |
| ||||||
Ownership interest |
|
| 161,255 |
|
|
| 10,370 |
|
|
| 171,625 |
|
|
| 145,609 |
|
|
| 11,399 |
|
|
| 157,008 |
|
Percent ownership of OP |
|
| 94.0 | % |
|
| 6.0 | % |
|
| 100.0 | % |
|
| 92.7 | % |
|
| 7.3 | % |
|
| 100.0 | % |
Refer to Note 16 for further discussion regarding the calculation of weighted average shares outstanding.
6
2. Summary of Significant Accounting Policies
Interim Information
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and Article 10 of the SEC’sSecurities and Exchange Commission’s (“SEC”) Regulation S-X. Accordingly, the Corporation has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2016,2020, included in the Company’s Amendment No. 2 to its Registration Statement2020 Annual Report on Form 10,10-K, filed with the SEC on June 29, 2017 (the “Form 10”).February 25, 2021. Therefore, the readers of this quarterly report should refer to those audited consolidated financial statements, specifically Note 2, Summary of Significant Accounting Policies, for further discussion of significant accounting policies and estimates. The Corporation believes all adjustments necessary for a fair presentation have been included in these interim Condensed Consolidated Financial Statements (which include only normal recurring adjustments).
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts and operations of the Corporation, the Operating Company and its consolidated subsidiaries, all of which are wholly-owned by the Operating Company (collectively, the “Company”).Company. All intercompany balances and transactions have been eliminated in consolidation.
To the extent the Corporation has a variable interest in entities that are not evaluated under the variable interest entity (“VIE”) model, the Corporation evaluates its interests using the voting interest entity model. The Corporation holds a 92.3% interest in the Operating Company at September 30, 2017 and is the sole managing member of the Operating Company, which gives the Corporation exclusive andhas complete responsibility for the day-to-day management of, authority to make decisions for, and control of the Operating Company.OP. Based on consolidation guidance, effective for the Corporation as of January 1, 2016, the Corporationhas concluded that the Operating CompanyOP is a VIE as the members in the Operating CompanyOP do not possess kick-out rights or substantive participating rights. Accordingly, the Corporation consolidates its interest in the Operating Company.OP. However, asbecause the Corporation holds the majority voting interest in the Operating Company,OP and certain other conditions are met, it qualifies for the exemption from providing certain disclosure requirements associated with investments in VIEs.
The portion of the Operating CompanyOP not owned by the Corporation is presented as non-controlling interests as of and during the periods presented.
Basis of Accounting
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP.
Use of Estimates
The preparation of consolidated financial statementsCondensed Consolidated Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include, but are not limited to, the allocation of purchase price between investment in rental propertytangible and intangible assets acquired and liabilities assumed, the value of long-lived assets and goodwill, the provision for impairment, the depreciable lives of rental property, the amortizable lives of intangible assets and liabilities, the allowanceprovisions for doubtful accounts,uncollectible rent and credit losses, the fair value of the earnout liability, the fair value of assumed debt, and notes payables, the fair value of the Company’s interest rate swap agreements, and the determination of any uncertain tax positions. Accordingly, actual results may differ from those estimates.
Long-lived Asset Impairment
We reviewThe Company reviews long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. Such cash flows include factors such as expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. An impairment loss is measured as the amount by which the carrying amount of the asset or asset group exceeds theits fair value of the asset or asset group. A significant judgementvalue. Significant judgment is made as toin determining if and when impairment should be taken, if our strategy, or one or moretaken. The Company’s assessment of impairment as of September 30, 2021 was based on the most current information available to the Company. Certain of the assumptionsCompany’s properties may have fair values less than their carrying amounts. However, based on the Company’s plans with respect to each of those properties, the Company believes that their carrying amounts are recoverable and therefore, 0 impairment charges were recognized other than those described below. If the operating conditions mentioned above were to changedeteriorate or if the Company’s expected holding period for assets changes, subsequent tests for impairments could result in additional impairment charges in the future, an impairment may need to be recognized.future.
7
Inputs used in establishing fair value for real estate assets generally fall within Level 3 of the fair value hierarchy, which are characterized as requiring significant judgment as little or no current market activity may be available for validation. The main indicator used to establish the classification of the inputs is current market condition,conditions, as derived through ourthe use of published commercial real estate market information. We determineThe Company determines the valuation of impaired assets using generally accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations, and bona fide purchase offers received from third parties. Management may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.
The following table summarizes the Company's impairment charges, resulting primarily from changes in the Company's long-term hold strategy with respect to the individual properties:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands, except number of properties) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Number of properties |
|
| 4 |
|
|
| 3 |
|
|
| 5 |
|
|
| 6 |
|
Impairment charge |
| $ | 25,989 |
|
| $ | 14,732 |
|
| $ | 28,001 |
|
| $ | 17,399 |
|
During the three months ended September 30, 2017 we recorded impairment2021, the Company executed an early lease termination with an office tenant on two properties in exchange for a fee of $2,608 based on our consideration$35,000, and simultaneously sold the underlying properties to an unrelated third party for aggregate gross proceeds of $16,000. As the sale of the factors detailed above. In determiningunderlying properties was to an unrelated third party, the fair valueCompany accounted for the lease termination income and sale of properties as separate transactions in accordance with GAAP.
The Company recognized the termination fee income, net of $1,496 write-off of accrued rental income associated with the lease as other income from real estate transactions, a component of Lease revenues, net, in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss). Refer to the Lease Termination Fee Income accounting policy below for additional information on the Company's accounting for lease terminations. As a result of the assets atearly lease termination, the timeCompany accelerated the amortization of measurement, we utilized capitalization rates ranging from 7.25% to 12%the remaining lease intangibles, recognizing $289 in Lease revenues, net and $4,047 in Depreciation and amortization in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
The Company sold the underlying vacant properties for an aggregate sales price of $16,000, and incurred sales expenses of $661. The properties’ carrying value, net of the fully amortized lease intangibles, was $41,085, resulting in a weighted average discount rate$25,746 loss on sale of 8%the properties. As the lease termination income was recognized separate from the sale of the underlying properties, the $35,000 cash receipt was not able to be factored into the properties' future undiscounted cash flows, and the properties were immediately deemed impaired. As such, the Company recognized the loss as an impairment charge in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
The following summarizes the impact of the above transactions, together with the corresponding financial statement line item:
(in thousands) |
|
|
| |
Lease revenues, net |
|
|
| |
Lease termination fee |
| $ | 35,000 |
|
Write-off of accrued rental income |
|
| (1,496 | ) |
Accelerated amortization of above-market and below-market lease intangibles |
|
| 289 |
|
|
|
| 33,793 |
|
Depreciation and amortization |
|
|
| |
Accelerated amortization of in-place lease intangible |
|
| (4,046 | ) |
Provision for impairment of investment in rental properties |
|
|
| |
Loss on sale |
|
| (25,746 | ) |
Total impact to net income |
| $ | 4,001 |
|
The remaining impairments recognized during the three and nine months ended September 30, 2021 were immaterial.
Lease Termination Fee Income
The Company has reduced the carrying valuerecognizes lease termination fee income when all conditions of the impaired real estate assets to the estimated fair value as detailed below:
|
| September 30, 2017 |
| |||||||||
(in thousands) |
| Carrying Amount |
|
| Allocation of Impairment |
|
| Net Carrying Amount |
| |||
Investments in rental property accounted for using the operating method, net of accumulated depreciation |
| $ | 16,159 |
|
| $ | (2,401 | ) |
| $ | 13,758 |
|
Intangible lease assets, net |
|
| 1,263 |
|
|
| (204 | ) |
|
| 1,059 |
|
Leasing fees, net |
|
| 123 |
|
|
| (16 | ) |
|
| 107 |
|
Intangible lease liabilities, net |
|
| (101 | ) |
|
| 13 |
|
|
| (88 | ) |
|
| $ | 17,444 |
|
| $ | (2,608 | ) |
| $ | 14,836 |
|
Revenue Recognition
At the inception of a new lease arrangement, including new leases that arise from amendments, the Company assesses the termstermination agreement have been met, and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) ownership transfers to the lessee prior to or shortly after the endcollection of the lease term, (ii) lessee has a bargain purchase option during or attermination fee is probable. If the endtenant immediately vacates the property upon satisfying the conditions of the lease term, (iii)termination agreement, the Company recognizes the lease term is greater than or equaltermination fee income net of accrued rental income associated with the lease immediately,
8
as other income from real estate transactions, a component of Lease revenues, net, in the Condensed Consolidated Statement of Income and Comprehensive Income (Loss).
Restricted Cash
Restricted cash includes escrow funds the Company maintains pursuant to 75%the terms of certain mortgages, and lease agreements, and undistributed proceeds from the sale of properties under Section 1031 of the underlying property’s estimated useful life, or (iv) the present valueInternal Revenue Code of the future minimum lease payments (excluding executory costs)1986, as amended (the “Code”), and is greater than or equal to 90% of the fair value of the leased property. If one or more of these criteria are met,reported within Prepaid expenses and the minimum lease payments are determined to be reasonably predictable and collectible, the lease arrangement is generally accounted for as a direct financing lease. Consistent with ASC 840, Leases, if the fair value of the land component is 25% or more of the total fair value of the leased property, the land is considered separately from the building for purposes of applying the lease term and minimum lease payments criterion in (iii) and (iv) above.
Revenue recognition methods for operating leases and direct financing leases are described below:
Rental property accounted for under operating leases – Revenue is recognized as rents are earned on a straight-line basis over the non-cancelable terms of the related leases. In most cases, revenue recognition under operating leases begins when the lessee takes possession of, or controls, the physical use of the leased asset. Generally, this occurs on the lease commencement date. For leases that have fixed and measurable rent escalations, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded as Accrued rental incomeother assets on the Condensed Consolidated Balance Sheets.
Rental property accounted for under direct financing leases – The Company utilizes the direct finance method of accounting to record direct financing lease income. For a lease accounted for as a direct financing lease, the net investment in the direct financing lease represents receivables for the sum of future minimum lease payments and the estimated residual valueRestricted cash consisted of the leased property, less the unamortized unearned income. Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases.following:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Escrow funds and other |
| $ | 3,895 |
|
| $ | 7,852 |
|
Undistributed 1031 proceeds |
|
| — |
|
|
| 2,390 |
|
|
| $ | 3,895 |
|
| $ | 10,242 |
|
Rent Received in Advance
Rent received in advance represents tenant payments received prior to itsthe contractual due date, and is included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets. RentsRent received in advance was $6,845 and $7,566 at September 30, 2017 and December 31, 2016, respectively.
Property Loss and Insurance Recoveries
Property losses, whether full or partial, are accounted for using a combination of impairment, insurance, and revenue recognition guidance prescribed by GAAP. Upon incurring a loss event, the Company evaluates for asset impairment under ASC 350, Intangibles – Goodwill and Other, and ASC 360, Property, Plant, and Equipment. Under the termsconsisted of the Company’s lease agreementsfollowing:
(in thousands) |
| September 30, |
|
| December 31, |
| ||
Rent received in advance |
| $ | 14,516 |
|
| $ | 13,651 |
|
Provision for Uncollectible Rent
In accordance with tenants, a significant majority of whichASC 842, Leases, provisions for uncollectible rent are triple-net whereby the tenants are responsible for insurance, taxes, and maintenance, amongst other property costs, the tenants are responsible for repairs and maintenance to the properties. The terms of the leases also require the tenants to continue making their monthly rental payments despite the property loss. To the extent that the assets are recoverable, determined utilizing undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition, the Company accounts for a full or partial property lossrecorded as an acceleration of depreciation and evaluates whether all or a portion of the property loss can be offset by the recognition of insurance recoveries.
Under the terms of the lease agreements with tenants, in the case of full or partial loss to a property the tenant has an obligation to restore/rebuild the premises as nearly as possible to its value, condition and character immediately prior to such event. To mitigate the risk of loss, the Company requires tenants to maintain general liability insurance policiesLease revenues, net on the replacement value of the properties. Based on these considerations, the Company follows the guidance in ASC 605-40, Classification of Insurance Recoveries, for the conversion of nonmonetary assets (i.e., the properties) to monetary assets (i.e., insurance recoveries or tenant recoveries). Under ASC 605-40, once probable of receipt, the Company recognizes an insurance/tenant recovery receivable in Tenant and other receivables, net, in the Condensed Consolidated Balance Sheet, with a corresponding offset to the accelerated depreciation recognized in the Condensedaccompanying Consolidated Statements of Income and Comprehensive Income (Loss).
The following table summarizes the changes in the provision for uncollectible rent:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Beginning balance |
| $ | 400 |
|
| $ | 2,222 |
|
| $ | 201 |
|
| $ | 0 |
|
Provision for uncollectible rent, net |
|
| (150 | ) |
|
| (262 | ) |
|
| 49 |
|
|
| 1,961 |
|
Write-offs |
|
| — |
|
|
| (1,750 | ) |
|
| — |
|
|
| (1,751 | ) |
Ending balance |
| $ | 250 |
|
| $ | 210 |
|
| $ | 250 |
|
| $ | 210 |
|
Derivative Instruments
The Company uses interest rate swap agreements to manage risks related to interest rate movements. The interest rate swap agreements, designated and qualifying as cash flow hedges, are reported at fair value. The Company early adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting and Hedging Activities, effective January 1, 2018 on a modified retrospective basis. ASU 2017-12 amended the designation and measurement guidance for qualifying hedging transactions and the presentation of hedge results in an entity’s financial statements.
ASU 2017-12 removed the concept of separately measuring and reporting hedge ineffectiveness and requires a company to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. In accordance with ASU 2017-12, the gain or loss on the qualifying hedges is initially included as a component of other comprehensive income or loss and is subsequently reclassified into earnings when interest payments (the forecasted transactions) on the related debt are incurred and as the swap net settlements occur.
When an existing cash flow hedge is terminated, the Company determines the accounting treatment for the accumulated gain or loss recognized in Accumulated other comprehensive loss based on the probability of the hedged forecasted transaction occurring within the period the cash flow hedge was anticipated to affect earnings. If the insurance/tenant recoveryCompany determines that the hedged forecasted transaction is less thanprobable of occurring during the original period, the accumulated gain or loss is reclassified into earnings over the remaining life of the cash flow hedge using a straight-line method. If the Company determines that the hedged forecasted transaction is not probable of occurring during the original period, the entire amount of accelerated depreciation recognized,accumulated gain or loss is reclassified into earnings at such time.
9
The Company documents its risk management strategy and hedge effectiveness at the inception of, and during the term of, each hedge. The Company’s interest rate risk management strategy is intended to stabilize cash flow requirements by maintaining interest rate swap agreements to convert certain variable-rate debt to a fixed rate.
Fair Value Measurements
Recurring Fair Value Measurements
Earnout Liability – In connection with the Internalization, the Company will recognize a net loss in the Condensed Consolidated Statements of Incomerecognized an earnout liability that was due and Comprehensive Income (Loss). If the insurance/tenant recovery is greater than the amount of accelerated depreciation recognized, the Company will only recognize a recovery uppayable to the amountformer owners of BRE once certain milestones were achieved during specified periods of time following the closing of the accelerated depreciation, and will account forInternalization (the “Earnout Periods”). Under the excess asterms of the agreement, the milestones related to either (a) the 40-day dollar volume-weighted average price of a gain contingency in accordance with ASC 450-30, Gain Contingencies. Gain contingencies are recognized when earned and realized, which typically will occur at the time of final settlement or when non-refundable cash advances are received.
Non-controlling Interests
Non-controlling interests represents the membership interests held in the Operating Company of 7.7% and 8.6% at September 30, 2017 and December 31, 2016, respectively, by third parties which are accounted for as a separate component of equity.
The Company periodically adjusts the carrying value of non-controlling interests to reflect its share of the book valueCompany’s common stock (“VWAP per REIT Share”), following the completion of an IPO of the Operating Company. Such adjustments are recordedCompany’s common stock, or (b) the Company’s AFFO per share, prior to Additional paid-in capital as a reallocationthe completion of Non-controlling interestsan IPO.
The Company utilized third-party valuation experts to assist in the accompanying Condensed Consolidated Statements of Stockholders’ Equity.
Fair Value Measurements
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices that are available in active markets for identical assets or liabilities. The types of financial instruments included in Level 1 are marketable, available-for-sale equity securities that are traded in an active exchange market.
Level 2 – Pricing inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Instruments included in this category are derivative contracts whose value is determined using a pricing model with inputs (such as yield curves and credit spreads) that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant toestimating the fair value of the assets or liabilities. Level 3 includes assetsearnout liability, and liabilities whose values are determineddeveloped estimates by considering weighted-average probabilities of likely outcomes, and using pricing models,a Monte Carlo simulation and discounted cash flow methodologies, or similar techniques, as well as instruments foranalysis. These estimates required the Company to make various assumptions about share price volatility and, prior to the IPO, about the timing of an IPO and net asset prices, each of which are unobservable and considered Level 3 inputs in the determination of fair value requireshierarchy. A change in these inputs to a different amount could have resulted in a significantly higher or lower fair value measurement at the reporting date. Specifically, advancements in the estimated IPO date assumption increased the earnout liability’s fair value given the earnout’s fixed time horizon. Peer share price volatilities were used to estimate the Company’s expected share price volatility, and the Company’s corresponding ability to achieve the earnout targets. Increases in the volatility assumption would increase the earnout liability’s fair value. Increases in net asset values would also increase the earnout liability’s fair value.
The Company achieved all four VWAP milestones applicable to the earnout as of September 30, 2021, and therefore 0 remaining earnout liability was recorded at September 30, 2021.
The table below provides a summary of the significant management judgment or estimation.unobservable inputs used to estimate the fair value of the earnout liability as of September 30, 2020:
Significant Unobservable Inputs | Weighted Average | Range | ||
Peer stock price volatility | 40.0% | 26.11% - 56.85% |
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of February 7, 2020, which was the date of the Internalization:
Significant Unobservable Inputs | Weighted Average | Range | ||
Expected IPO date | April 15, 2020 | March 2020 through May 2020 | ||
Peer stock price volatility | 20.0% | 16.22% to 23.09% | ||
Company's net asset value per diluted share | $21.30 | (a) |
10
The following table presents a reconciliation of the change in the earnout liability:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Beginning balance |
| $ | 10,063 |
|
| $ | 37,975 |
|
| $ | 7,509 |
|
| $ | 0 |
|
Allocation of Internalization purchase price at |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 40,119 |
|
Change in fair value subsequent to Internalization |
|
| 1,059 |
| (b) |
| (6,362 | ) |
|
| 5,539 |
|
|
| (8,506 | ) |
Reclassification as a component of additional paid-in |
|
| — |
|
|
| (18,436 | ) |
|
| — |
|
|
| (18,436 | ) |
Payout of tranches earned |
|
| (11,122 | ) |
|
| — |
|
|
| (13,048 | ) |
|
| — |
|
Ending balance |
| $ | 0 |
|
| $ | 13,177 |
|
| $ | 0 |
|
| $ | 13,177 |
|
The balances of financial instruments measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016 are as follows (see Note 10):follows:
|
| September 30, 2017 |
|
| September 30, 2021 |
| ||||||||||||||||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| |||||||||||
Interest rate swaps, assets |
| $ | 7,493 |
|
| $ | - |
|
| $ | 7,493 |
|
| $ | - |
| ||||||||||||||||
Interest rate swap, liabilities |
|
| (7,119 | ) |
|
| - |
|
|
| (7,119 | ) |
|
| - |
|
| (36,196 | ) |
| — |
|
|
| (36,196 | ) |
|
| — |
| ||
|
| $ | 374 |
|
| $ | - |
|
| $ | 374 |
|
| $ | - |
|
|
| December 31, 2020 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swap, liabilities |
| $ | (72,103 | ) |
| $ | — |
|
| $ | (72,103 | ) |
| $ | — |
|
Earnout liability |
|
| (7,509 | ) |
|
| — |
|
|
| — |
|
|
| (7,509 | ) |
|
| December 31, 2016 |
| |||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swaps, assets |
| $ | 9,598 |
|
| $ | - |
|
| $ | 9,598 |
|
| $ | - |
|
Interest rate swap, liabilities |
|
| (10,217 | ) |
|
| - |
|
|
| (10,217 | ) |
|
| - |
|
|
| $ | (619 | ) |
| $ | - |
|
| $ | (619 | ) |
| $ | - |
|
Interest rate swaps are derivative instruments that have no quoted readily available Level 1 inputs, and therefore are measured at fair value using inputs that are directly observable in active markets and are classified within Level 2 of the valuation hierarchy, using an income approach. Specifically, the fair value of the interest rate swaps are determined using a discounted cash flow analysis on the expected future cash flows of each instrument. This analysis utilizes observable market data including yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the interest rate swaps are then discounted using calculated discount factors developed based on the London Interbank Offered Rate (“LIBOR”) swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its interest rate swaps utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. At September 30, 2017 and December 31, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company has determined that its interest rate swap valuations in their entirety are appropriately classified within Level 2 of the fair value hierarchy.
The Company has estimated that the carrying amount reported on the Condensed Consolidated Balance Sheets for Cash and cash equivalents, Restricted cash, Tenant and other receivables, Notes receivable, and Accounts payable and other liabilities approximates their fair values due to their short term nature.
Long-term Debt – The fair value of the Company’s debt was estimated using Level 1, Level 2, and Level 3 inputs based on recent secondary market trades of the Company's 2031 Senior Unsecured Public Notes (defined below), recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current LIBOR, US treasuryLondon Interbank Offered Rate (“LIBOR”), U.S. Treasury obligation interest rates, and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect the Company’s judgment as to the approximate current lending rates for loans or groups of loans with similar maturities and assumes that the debt is outstanding through maturity. Market information, as available, or present value techniques were utilized to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist on specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.
The fair value of the Company’s Mortgage and notes payable, Unsecured term notes, net, and Unsecured revolver are estimated to be $914,270 and $873,026 at September 30, 2017 and December 31, 2016, respectively, as compared tofollowing table summarizes the carrying amount of such debt of $910,072 and $869,524reported on the Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, respectively.the Company’s estimate of the fair value of the Unsecured revolving credit facility, Mortgages, net, Unsecured term loans, net and Senior unsecured notes, net, which reflects the fair value of interest rate swaps:
As disclosed under the Long-lived Asset Impairment Charges section of Note 2, the
(in thousands) |
| September 30, |
|
| December 31, |
| ||
Carrying amount |
| $ | 1,597,868 |
|
| $ | 1,547,667 |
|
Fair value |
|
| 1,710,238 |
|
|
| 1,679,188 |
|
Non-recurring Fair Value Measurements
The Company’s non-recurring fair value measurements for the three months endedat September 30, 20172021 and December 31, 2020 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.
Right-of-Use Assets and Lease Liabilities
The Company did not have any assets measured at fair value onis a nonrecurring basis at December 31, 2016.
Taxes Collected From Tenantslessee under non-cancelable operating leases associated with its corporate headquarters and Remitted to Governmental Authorities
Substantially allother office spaces as well as with leases of the Company’s leases are triple-net, which provide that the lessees are responsible for the payment of all property operating expenses, including property taxes, maintenance and insurance.land (“ground leases”). The Company records such expenses on a net basis. For the three months ended September 30, 2017right-of-use assets and 2016, the Company’s tenants, pursuant to their lease obligations, have made direct payment for property taxesliabilities associated with these leases. The lease liability is equal to the taxing authoritiesnet present value of approximately $2,448 and $1,609, respectively. For the nine months ended September 30, 2017 and 2016,future payments to be made under the Company’s tenants, pursuant to their lease, obligations, have made direct payment for property taxesdiscounted using estimates based on observable market factors. The right-of-use asset is generally equal to the taxing authoritieslease liability plus initial direct costs associated with the leases. The Company includes in the recognition of approximately $13,405the right-of-use asset and $11,176, respectively.
In some situations,lease liability those renewal periods that are reasonably certain to be exercised, based on the Company may collect property taxes from its tenantsfacts and remit those taxes to governmental authorities. Taxes collected from tenantscircumstances that exist at lease inception. Amounts associated with percentage rent provisions are considered variable lease costs and remitted to governmental authorities are presented on a gross basis, where revenue of $608 and $551 isnot included in Operating expenses reimbursedthe initial measurement of the right-of-use asset or lease liability. The Company has made an accounting policy election, applicable to all asset types, not to separate lease from tenantsnonlease components when allocating contract consideration related to operating leases.
11
Right-of-use assets and expense of $885 and $718 islease liabilities associated with operating leases were included in Propertythe accompanying Condensed Consolidated Balance Sheets as follows:
|
|
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| Financial Statement Presentation |
| 2021 |
|
| 2020 |
| ||
Right-of-use assets |
| Prepaid expenses and other assets |
| $ | 3,250 |
|
| $ | 3,075 |
|
Lease liabilities |
| Accounts payable and other liabilities |
|
| 2,714 |
|
|
| 2,659 |
|
Stock-Based Compensation
The Company has issued restricted stock awards (“RSAs”) and operatingperformance-based restricted stock units (“PRSUs”) under its 2020 Omnibus Equity and Incentive Plan (the “Equity Incentive Plan”). The Company accounts for stock-based incentives in accordance with ASC 718, Compensation – Stock Compensation, which requires that such compensation be recognized in the financial statements based on the award’s estimated grant date fair value. The value of such awards is recognized as compensation expense in General and administrative expenses in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) forover the three months ended September 30, 2017 and 2016, respectively. Taxes collected from tenants were $1,787 and $1,379, while taxes remittedappropriate vesting period on a straight-line basis or at the cumulative amount vested at each balance sheet date, if greater. The Company records forfeitures during the period in which they occur by reversing all previously recorded stock compensation expense associated with the forfeited shares. Dividends declared on RSAs issued under the Equity Incentive Plan are recorded as Cumulative distributions in excess of retained earnings on the Condensed Consolidated Balance Sheets. Accumulated dividends related to governmental authorities were $2,084 and $1,442 forforfeited RSAs will be reversed through compensation expense in the nine months ended September 30, 2017 and 2016, respectively.period the forfeiture occurs. Dividends accrued on the PRSUs are recorded as Cumulative distributions in excess of retained earnings on the Condensed Consolidated Balance Sheets. Accumulated dividends accrued related to forfeited PRSUs are reversed in the period the forfeiture occurs.
Recently Adopted Accounting Standards
In January 2017,2021, the Financial Accounting Standards BoardsBoard (“FASB”) issued ASU 2017-01, Business CombinationsAccounting Standards Update (“ASU”) 2021-01, Reference Rate Reform (Topic 805)848): Clarifying the Definition of a Business (“ASU 2017-01”)Scope, which changesrefines the definitionscope of ASC 848, to include all derivative contracts subject to a businesstransition for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest (PAI) as a result of reference rate reform (the “discounting transition”). ASU 2021-01 gives market participants the ability to exclude acquisitions where substantially allapply certain aspects of the fair valuecontract modification and hedge accounting expedients to derivative contracts affected by a discounting transition. ASU 2021-01 permits an entity to elect certain hedging relief if it has designated a derivative as a hedging instrument in a hedging relationship and the terms of the assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets. Under ASU 2017-01, the Company expects that most of its investments in real estate will be considered asset acquisitions. While there are various differences between accounting for an asset acquisition and a business combination, the largest impact is the capitalization of acquisition expenses for asset acquisitions, which are expensed for business combinations. ASU 2017-01 is effective, on a prospective basis, for interim and annual periods beginning after January 1, 2019, with early adoption permitted. The Company adopted the guidance, effective January 1, 2017. Asderivative have changed as a result of the adoption,discounting transition. The Company will apply the Company capitalized $6,583 of acquisition costsamendments in connection with investments in real estate closed during the nine months ended September 30, 2017 that qualified as asset acquisitions under the adopted guidance.ASU 2021-01 related to contract modifications and hedging relationships prospectively.
Other Recently Issued Accounting Standards
In November 2016,August 2020, the FASB issued ASU 2016-18, Statement2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in ASU 2020-06 also simplify the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of Cash Flows—Restricted Cash. ASU 2016-18 requiresfreestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that the statement of cash flows explain the change during the periodmay be settled in the total of cash, cash equivalents, and amounts generally described as restricted cash or cash equivalents. Therefore, amounts generally described as restricted cash and equivalents should be included with cash and cash equivalents when reconcilingother assets. The amendments in ASU 2020-06 are effective for the beginning and end of period total amounts on the statement of cash flows. Currently, there is no specific guidance to address how to classify or present these changes. ASU 2016-18 is effective, on a retrospective basis,Company for interim and annual periodsfiscal years beginning after December 15, 2017, with early2021. Early adoption permitted. The Company currently reflects the change in restricted cash in its cash flows from investing activities. Upon adoption, these amounts will be included in the cash and cash equivalents balance when reconciling the beginning and end of period total amounts. For the nine months ended September 30, 2017 the decrease in restricted cash included in cash flows from investing activities was $543.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides classification guidance for eight specific topics, includingis permitted, but not limited to, debt extinguishment costs, contingent consideration payments made after a business combination, and distributions received from equity method investees. ASU 2016-18 is effective, on a retrospective basis, for interim and annual periodsno earlier than fiscal years beginning after December 15, 2017, with early adoption permitted.2020. The Company has assessed the impactguidance must be adopted as of adopting ASU 2016-15, noting the classification of debt extinguishment costs in the Condensed Consolidated Statement of Cash Flows is applicable to the Company, however, will have no impact as the Company currently classifies these as cash flows used in financing activities.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize a right-of-use asset and a corresponding lease liability, initially measured at the present value of lease payments, for both operating and financing leases. For leases with a term of 12 months or less, lessees will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. The Company does not have any material leases where the Company is the lessee. Under the new pronouncement, lessor accounting will be largely unchanged from existing GAAP. However, there are certain changes, including 1) accounting for non-lease components of leases and 2) lease classification tests. In adopting the new guidance, companies are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The amendments are effective January 1, 2019, with early adoption permitted.fiscal year of adoption. The Company is continuing to evaluate the impact that adoption of this guidance will have on its Condensed Consolidated Financial Statements and footnote disclosures until the guidance becomes effective.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09, Revenue from Contracts with Customers, for all entities by one year. With the deferral, ASU 2014-09 is effective January 1, 2018, with early adoption permitted beginning January 1, 2017. While the Company anticipates additional disclosure, it does not expect the adoption of this pronouncement to have a material effect on the amount or timing of revenue recognized in its Condensed Consolidated Financial Statements as it believes its revenue, excluding revenue streams recognized in Other income from real estate transactions and Gain on sale of real estate, falls outside the scope of this guidance. The Company expects to adopt the guidance using the modified retrospective approach on January 1, 2018. The Company will, however, continue to evaluatecurrently evaluating the impact of this guidance until it becomes effective.new guidance.
In February 2017,Reclassifications
The Company reclassified $961,330 of Unsecured term notes, net at December 31, 2020 to Unsecured term loans, net at September 30, 2021 and $472,466 of Unsecured term notes, net at December 31, 2020 to Senior unsecured notes, net at September 30, 2021 on the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets. This new guidance is requiredCondensed Consolidated Balance Sheets, to be adopted concurrentlyconform with the amendments in ASU 2014-09.current period presentation. The new pronouncement, which adds guidance for partial sales of nonfinancial assets, including real estate. In adopting ASU 2017-05, companies may use either a full retrospective or a modified retrospective approach. The Company currently recognizes revenue on sales of real estate at the time the asset is transferred (i.e., at the time of closing). Upon adoption of ASU 2014-09, and therefore ASU 2017-05, the Company will needreclassifications are changes from one acceptable presentation to evaluate any separate contracts or performance obligations to determine proper timing of revenue recognition, as well as transaction price allocation. The Company does not expect the adoption of this pronouncement to have a material effect on the amount or timing of revenue recognized in its Condensed Consolidated Financial Statements. The Company expects to adopt the guidance using the modified retrospective approach on January 1, 2018. The Company will, however, continue to evaluate the impact of this guidance until it becomes effective.another acceptable presentation.
12
3. Related-Party Transactions
Property Management Agreement
The Corporation andPrior to the Operating Company have entered into a property management agreement (the “Property Management Agreement”) with the Manager,Internalization on February 7, 2020, BRE, a related party in which certain officers and directors of the Corporation havehad either a direct or indirect ownership interest. Underinterest, and the terms ofAsset Manager were considered to be related parties.
Earnout Consideration
In connection with the Property Management Agreement,Internalization, the Manager manages and coordinatesCompany incurred a contingent obligation that would be payable to certain aspects of the leasingmembers of the Company’s rental property.
In exchange for various services provided underBoard of Directors and employees who had previously been owners and/or employees of BRE, upon the Property Management Agreement,occurrence of certain events (see Note 4). As of September 30, 2021, the Manager is compensated as outlined in the agreement.
In addition, the Manager may also provide, but is not obligated to provide, short-term financing to, or guarantees for, the Operating Company. In exchange for these services, the Manager is entitled to receive an interest rate of upCompany achieved all four VWAP milestones applicable to the prime rate plus 1.00% in exchange for any advancesearnout. As a result, the Company issued 1,089 shares of common stock, 1,859 OP Units and made cash payments of $13,048 to these related parties (see Note 4).
Conversion of OP Units to Common Stock
During the Operating Company,three and 0.05% for guaranteeing recourse carve-outs on financing arrangements. No such advances or guarantees were outstanding or made during the nine months ended September 30, 2017 and 2016, respectively.
The initial term of the Property Management Agreement is effective through December 31, 2017, after which it automatically renews for successive one year periods, unless either party provides written notice of termination2021, in accordance with the Property Management Agreement. The Corporation’s Independent Directors Committee (“IDC”) has approved the renewal of the Property Management Agreement through December 31, 2018. If the Corporation terminates the Property Management Agreement prior to any renewal term or the IDC terminates the agreement within 30 days following a change in control of the Manager (as defined in Property Management Agreement)non-cash transaction (see Note 17), the Corporation will be requiredCompany converted 1,029 and 2,049 OP Units held by an affiliated third party to pay to the Manager1,029 and 2,049 shares of common stock at a termination fee equal to three times the Management Fees, as defined in the Property Management Agreement, to which the Manager was entitled during the 12 month period immediately preceding the datetotal conversion value of such termination. Although not terminable as of September 30, 2017, if the Property Management Agreement had been terminated at September 30, 2017 subject to the conditions noted above, the termination fee would have been $14,121.
Asset Management Agreement
The Corporation$16,586 and the Operating Company have entered into an asset management agreement (the “Asset Management Agreement”) with the Asset Manager, a wholly-owned subsidiary of the Manager, and therefore a$32,761, respectively. There were no related party in which certain officers and directors of the Company have an indirect ownership interest. Under the terms of the Asset Management Agreement, the Asset Manager is responsible for, among other things, the Corporation’s acquisition, initial leasing, and disposition strategies, financing activities, and providing support to the IDC for its valuation functions and other duties. The Asset Manager also designates two individuals to serve on the Board of Directors of the Corporation.
Under the terms of the Asset Management Agreement, the Asset Manager receives an annual asset management fee (“Asset Management Fee”) equal to 1% of the aggregate value of the Corporation’s common stock, based on the Determined Share Value (as defined in Note 13) as determined by the IDC each quarter, on a fully diluted basis as if all interests in the Operating Company had been converted into shares of the Corporation’s common stock. Through December 31, 2017, compensation to the Asset Manager for any quarter will be deferred in whole or in part at any time during a rolling 12 month period when cumulative distributions are below $3.50 per share. Any deferred compensation under the Asset Management Agreement will accrue interest at the rate of 7% per annum until paid and will be paid from available funds after cumulative 12 month distributions equal $3.50 per share. No compensation to the Asset Manager was deferred during the nine months ended September 30, 2017 and 2016. In addition, the Company pays the Asset Manager, or its designee, a marketing fee equal to 0.5% of all contributions of cash or property to the Corporation or the Operating Company, excluding reinvestments of distributions pursuant to the Distribution Reinvestment Plan (See Note 13), as compensation for its internal and third party offering and marketing costs and expenses. The Asset Manager has the responsibility to cover offering, marketing, and brokerage expenses associated with investor related matters of the Corporation and Operating Company.
The Asset Management Agreement includes various other fees paid to the Asset Manager in exchange for services provided under the agreement, as noted in the table below.
The initial term of the Asset Management Agreement is effective through December 31, 2017, after which it automatically renews for successive one year periods, unless either party provides written notice of termination in accordance with the Asset Management Agreement. The IDC has approved the renewal of the agreement through December 31, 2018. If the Corporation terminates the agreement prior to any renewal term or the IDC terminates the agreement within thirty days following a change in control of the Asset Manager (as defined in the Asset Management Agreement), the Corporation will be required to pay to the Asset Manager a termination fee equal to three times the Asset Management Fee to which the Asset Manager was entitled during the 12 month period immediately preceding the date of such termination. Although not terminable as of September 30, 2017, if the Asset Management Agreement had been terminated at September 30, 2017 subject to the conditions noted above, the termination fee would have been $41,552. Total fees incurred under the Property Management Agreement and Asset Management AgreementOP Unit conversions for the three and nine months ended September 30, 20172020.
4. Internalization
On February 7, 2020, the Company completed the Internalization and 2016 are as follows:the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP. The effect of the Internalization has been reflected in the Company’s operating results beginning on February 7, 2020.
|
|
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
(in thousands) |
|
|
| September 30, |
|
| September 30, |
| ||||||||||
Type of Fee |
| Financial Statement Presentation |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Asset management fee |
| Asset management fees |
| $ | 3,844 |
|
| $ | 2,789 |
|
| $ | 10,666 |
|
| $ | 7,770 |
|
Property management fee |
| Property management fees |
|
| 1,249 |
|
|
| 1,010 |
|
|
| 3,635 |
|
|
| 2,868 |
|
Total management fee expense |
|
|
|
| 5,093 |
|
|
| 3,799 |
|
|
| 14,301 |
|
|
| 10,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing fee |
| Additional paid-in capital |
|
| 342 |
|
|
| 318 |
|
|
| 1,144 |
|
|
| 976 |
|
Acquisition fee |
| Capitalized as a component of assets acquired in 2017 (See Note 4) and included as acquisition expenses in 2016 |
|
| 1,591 |
|
|
| 1,354 |
|
|
| 3,520 |
|
|
| 3,810 |
|
Leasing fee |
| Leasing fees, net |
|
| 801 |
|
|
| 797 |
|
|
| 2,597 |
|
|
| 2,827 |
|
Disposition fee |
| Gain on sale of real estate |
|
| 219 |
|
|
| 23 |
|
|
| 522 |
|
|
| 61 |
|
Total management fees |
|
|
| $ | 8,046 |
|
| $ | 6,291 |
|
| $ | 22,084 |
|
| $ | 18,312 |
|
IncludedIn accordance with the Internalization, the Company was required to pay additional earnout consideration of up to $75,000 payable in management fees are $1,6884 tranches of $10,000, $15,000, $25,000, and $364 of unpaid fees recorded in Due to related parties on the Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, respectively. All fees$25,000 when certain milestones related to the Property Management Agreement40-day VWAP per REIT Share were achieved. The consideration consisted of a combination of cash, shares of the Company’s common stock, and OP Units, based on the Asset Management Agreement aresame proportions paid in the base consideration.
As of September 30, 2021, the Company achieved all four VWAP milestones, thereby triggering the payout of all earnout tranches. Below is a summary of the shares of common stock and OP Units issued, and cash paid for in cash withineach earnout tranche:
(in thousands, except per share amounts) | ||||||||||||||||||
|
| Shares of |
|
|
|
|
|
|
|
| 40-Day |
|
|
| ||||
|
| Common Stock |
|
| OP Units |
|
|
|
|
| VWAP of a |
|
|
| ||||
Tranche |
| Issued |
|
| Issued |
|
| Cash Paid |
|
| REIT Share |
|
| Achievement Date | ||||
1 |
|
| 145 |
|
|
| 248 |
|
| $ | 1,926 |
| (a) | $ | 22.50 |
|
| June 16, 2021 |
2 |
|
| 218 |
|
|
| 371 |
|
|
| 2,888 |
| (a) |
| 23.75 |
|
| July 14, 2021 |
3 |
|
| 363 |
|
|
| 620 |
|
|
| 4,117 |
|
|
| 24.375 |
|
| September 21, 2021 |
4 |
|
| 363 |
|
|
| 620 |
|
|
| 4,117 |
|
|
| 25.00 |
|
| September 21, 2021 |
Condensed Pro Forma Financial Information (Unaudited)
The following pro forma information summarizes selected financial information from the Company’s normal payment cycle for vendors.
Legal Services
The Company retainscombined results of operations, as if the legal servicesInternalization had occurred on January 1, 2019. These results contain certain adjustments totaling $1,929 and $8,068 of Vaisey Nicholson & Nearpass, PLLC (“VNN”), formerly a related party. One former minority partner of VNN is an immediate family member to a member of the management of the Company and an indirect minority owner of the Manager. Beginning January 2017, the family member was no longer an owner or partner of VNN and therefore, prospectively, VNN will no longer be deemed a related party. Legal services obtained from VNN are mainly for acquisition and disposition of real estate related matters, as well as general counsel regarding property management and financing. The IDC has reviewed the billings and other aspects of the relationship between VNN and the Company. The Company utilizes the services of other outside legal counsel as well. These fees are paid for in cash within the Company’s normal payment cycle for vendor payments. Included in these expenses are $527 of unpaid fees recorded in Accounts payable and other liabilities at September 30, 2016. The following table details the type of legal fees incurred from VNNincome, respectively, for the three and nine months ended September 30, 2016:2020. These pro forma adjustments reflect the elimination of Internalization expenses and asset management, property management, and disposition fees between the Company and BRE and the Asset Manager in historic financial results, and adjustments to reflect compensation and related costs, incremental general and administrative expenses related to the Internalization, and incremental interest expense associated with the borrowing related to the Internalization. This pro forma information is presented for informational purposes only, and may not be indicative of what actual results of operations would have been had the Internalization occurred at the beginning of the period, nor does it purport to represent the results of future operations.
The condensed pro forma financial information is as follows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||
(in thousands) |
| September 30, 2020 |
|
| September 30, 2020 |
| ||
Revenues |
| $ | 80,744 |
|
| $ | 239,346 |
|
Net income |
|
| 11,640 |
|
|
| 42,982 |
|
13
(in thousands) |
| Financial Statement |
| For the three months ended |
|
| For the nine months ended |
| ||
Type of Fee |
| Presentation |
| September 30, 2016 |
|
| September 30, 2016 |
| ||
Legal services – general |
| General and administrative |
| $ | 107 |
|
| $ | 276 |
|
Organization costs |
| General and administrative |
|
| 4 |
|
|
| 18 |
|
|
|
|
|
| 111 |
|
|
| 294 |
|
|
|
|
|
|
|
|
|
|
|
|
Finance related |
| Debt issuance costs(a) |
|
| 47 |
|
|
| 94 |
|
Acquisition related fees |
| Acquisition expenses |
|
| 89 |
|
|
| 1,756 |
|
Property disposition related |
| Gain on sale of real estate |
|
| 34 |
|
|
| 34 |
|
Legal services - tenant related |
| Property and operating expenses |
|
| 28 |
|
|
| 40 |
|
Total related party legal expenses |
|
|
| $ | 309 |
|
| $ | 2,218 |
|
5. Acquisitions of Rental Property
|
|
4. Acquisitions
The Company closed on the following acquisitions during the nine months ended September 30, 2017:2021:
(in thousands, except number of properties) |
| Number of |
|
| Real Estate |
|
| ||||
Date |
| Property Type |
| Properties |
|
| Acquisition Price |
|
| ||
February 5, 2021 |
| Healthcare |
|
| 1 |
|
| $ | 4,843 |
|
|
February 26, 2021 |
| Restaurant |
| (a) |
|
|
| 181 |
|
| |
March 11, 2021 |
| Retail |
|
| 13 |
|
|
| 26,834 |
|
|
March 30, 2021 |
| Retail |
|
| 11 |
|
|
| 41,324 |
|
|
March 31, 2021 |
| Healthcare |
|
| 3 |
|
|
| 14,140 |
|
|
June 4, 2021 |
| Retail |
|
| 2 |
|
|
| 19,420 |
|
|
June 9, 2021 |
| Industrial |
|
| 1 |
|
|
| 8,500 |
|
|
June 9, 2021 |
| Industrial |
|
| 11 |
|
|
| 106,578 |
|
|
June 25, 2021 |
| Retail |
|
| 8 |
|
|
| 12,131 |
|
|
June 28, 2021 |
| Healthcare |
|
| 4 |
|
|
| 15,300 |
|
|
June 30, 2021 |
| Retail |
|
| 1 |
|
|
| 1,279 |
|
|
June 30, 2021 |
| Healthcare |
|
| 7 |
|
|
| 30,750 |
|
|
July 2, 2021 |
| Industrial |
| (b) |
|
|
| 4,500 |
|
| |
July 21, 2021 |
| Retail |
|
| 1 |
|
|
| 5,565 |
|
|
July 29, 2021 |
| Retail |
|
| 3 |
|
|
| 4,586 |
|
|
July 29, 2021 |
| Industrial |
|
| 1 |
|
|
| 13,041 |
|
|
July 30, 2021 |
| Industrial |
|
| 2 |
|
|
| 11,011 |
|
|
August 23, 2021 |
| Healthcare |
|
| 1 |
|
|
| 60,000 |
|
|
September 8, 2021 |
| Retail |
|
| 2 |
|
|
| 8,901 |
|
|
September 17, 2021 |
| Retail |
|
| 1 |
|
|
| 1,722 |
|
|
September 24, 2021 |
| Retail |
|
| 1 |
|
|
| 2,456 |
|
|
September 24, 2021 |
| Industrial |
|
| 2 |
|
|
| 48,699 |
|
|
September 29, 2021 |
| Industrial |
|
| 1 |
|
|
| 10,600 |
|
|
September 30, 2021 |
| Industrial |
|
| 3 |
|
|
| 59,343 |
|
|
|
|
|
|
| 80 |
|
| $ | 511,704 |
| (c) |
(in thousands, except number of properties) |
|
|
|
|
|
|
|
|
| ||
Date |
| Tenant Type |
| Number of Properties |
|
| Real Estate Acquisition Price |
|
| ||
January 18, 2017 |
| Retail |
|
| 1 |
|
| $ | 2,520 |
|
|
March 1, 2017 |
| Retail |
|
| 9 |
|
|
| 87,196 |
|
|
April 28, 2017 |
| Retail |
|
| 25 |
|
|
| 48,898 |
|
|
June 2, 2017 |
| Retail |
|
| 2 |
|
|
| 13,300 |
|
|
June 15, 2017 |
| Retail |
|
| 2 |
|
|
| 2,700 |
|
|
June 30, 2017 |
| Industrial |
|
| 2 |
|
|
| 12,250 |
|
|
June 30, 2017 |
| Office |
|
| 7 |
|
|
| 25,989 |
|
|
July 7, 2017 |
| Office |
|
| 1 |
|
|
| 32,210 |
|
|
August 4, 2017 |
| Healthcare |
|
| 3 |
|
|
| 11,732 |
|
|
August 31, 2017 |
| Healthcare |
|
| 3 |
|
|
| 16,700 |
|
|
August 31, 2017 |
| Industrial |
|
| 2 |
|
|
| 6,148 |
|
|
September 13, 2017 |
| Retail |
|
| 5 |
|
|
| 4,994 |
|
|
September 29, 2017 |
| Industrial/Retail |
|
| 7 |
|
|
| 30,012 |
|
|
September 29, 2017 |
| Industrial |
|
| 1 |
|
|
| 57,372 |
|
|
|
|
|
|
| 70 |
|
| $ | 352,021 |
| (a) |
|
|
The Company closed on the followingdid 0t complete any acquisitions of rental property during the nine months ended September 30, 2016:2020.
(in thousands, except number of properties) |
|
|
|
|
|
|
|
| ||
Date |
| Tenant Type |
| Number of Properties |
|
| Real Estate Acquisition Price |
| ||
January 25, 2016 |
| Retail |
|
| 3 |
|
| $ | 13,376 |
|
February 1, 2016 |
| Retail |
|
| 1 |
|
|
| 27,000 |
|
March 24, 2016 |
| Industrial |
|
| 1 |
|
|
| 15,650 |
|
April 7, 2016 |
| Office |
|
| 2 |
|
|
| 17,115 |
|
April 25, 2016 |
| Office |
|
| 2 |
|
|
| 54,600 |
|
May 9, 2016 |
| Retail |
|
| 5 |
|
|
| 42,390 |
|
May 12, 2016 |
| Office |
|
| 1 |
|
|
| 4,500 |
|
May 20, 2016 |
| Retail |
|
| 19 |
|
|
| 36,843 |
|
May 25, 2016 |
| Healthcare |
| (b) |
|
|
| 5,624 |
| |
June 30, 2016 |
| Retail |
|
| 7 |
|
|
| 28,477 |
|
July 15, 2016 |
| Healthcare |
|
| 2 |
|
|
| 26,700 |
|
August 12, 2016 |
| Other |
|
| 3 |
|
|
| 12,399 |
|
September 14, 2016 |
| Office |
|
| 1 |
|
|
| 14,000 |
|
September 29, 2016 |
| Retail |
|
| 24 |
|
|
| 82,338 |
|
|
|
|
|
| 71 |
|
| $ | 381,012 |
|
|
|
The Company allocated the purchase price of these properties to the relative fair value of the real estate assets acquired and liabilities assumed. The following table summarizes the purchase price allocation for acquisitions completed during the nine months ended September 30, 2017 and 2016, discussed above, excluding non-realreal estate liabilities assumed of $1,000 during the three and nine months ended September 30, 2017:
acquisitions:
|
| September 30, |
|
| September 30, |
| ||
(in thousands) |
| 2017 |
|
| 2016 |
| ||
Land |
| $ | 18,499 |
|
| $ | 63,918 |
|
Land improvements |
|
| 28,463 |
|
|
| 28,250 |
|
Buildings and other improvements |
|
| 279,110 |
|
|
| 251,861 |
|
Equipment |
|
| 508 |
|
|
| - |
|
Acquired in-place leases(c) |
|
| 37,110 |
|
|
| 38,456 |
|
Acquired above-market leases(d) |
|
| 13,229 |
|
|
| 16,090 |
|
Acquired below-market leases(e) |
|
| (21,861 | ) |
|
| (18,107 | ) |
Direct financing |
|
| 3,546 |
|
|
| 544 |
|
|
| $ | 358,604 |
|
| $ | 381,012 |
|
|
| For the Nine Months Ended |
| |
(in thousands) |
| September 30, 2021 |
| |
Land |
| $ | 72,829 |
|
Land improvements |
|
| 22,103 |
|
Buildings and improvements |
|
| 379,946 |
|
Acquired in-place leases(d) |
|
| 40,865 |
|
Acquired above-market lease (e) |
|
| 211 |
|
Right-of-use asset |
|
| 663 |
|
Lease liability |
|
| (481 | ) |
|
| $ | 516,136 |
|
|
|
|
|
|
|
The above acquisitions were funded using a combination of available cash on hand, revolving credit facility borrowings, and proceeds from the Company’s unsecured revolving line of credit.2031 Senior Unsecured Public Notes (see Note 9). All of thereal estate acquisitions closed during the nine months ended September 30, 20172021, qualified as asset acquisitions and, as such, acquisition costs were capitalized in accordance with ASU 2017-01. In conjunction with the acquisitions closed during the nine months ended September 30, 2016, expenses of $2,233 and $7,614 for the three and nine months ended September 30, 2016 were incurred and included in Acquisition expenses in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss). From the date of acquisition through September 30, 2016, the Company recorded revenues of $5,173 and $8,515 for the three and nine months ended September 30, 2016, respectively, related to the properties acquired and accounted for as business combinations, and recognized net income of $2,655 and $5,204 for the three and nine months ended September 30, 2016, excluding the impact of one-time acquisition expenses from the date of acquisition through September 30, 2016.have been capitalized.
14
Subsequent to September 30, 2017,2021, the Company closed on the following acquisitions (see Note 17)19):
(in thousands, except number of properties) |
| Number of |
|
| Real Estate |
| ||||
Date |
| Property Type |
| Properties |
|
| Acquisition Price |
| ||
October 1, 2021 |
| Healthcare |
|
| 1 |
|
| $ | 3,306 |
|
October 22, 2021 |
| Industrial |
|
| 1 |
|
|
| 5,386 |
|
October 27, 2021 |
| Retail |
|
| 3 |
|
|
| 4,278 |
|
|
|
|
|
| 5 |
|
| $ | 12,970 |
|
(in thousands, except number of properties) |
|
|
|
|
|
|
|
|
|
Date |
| Property Type |
| Number of Properties |
| Acquisition Price |
|
| |
October 13, 2017 |
| Healthcare |
| 1 |
| $ | 10,000 |
|
|
November 1, 2017 |
| Other |
| 4 |
|
| 15,693 |
| (f) |
|
|
|
| 5 |
| $ | 25,693 |
|
|
|
|
The Company has not completed the allocation of the acquisition date relative fair values for the properties acquired subsequent to September 30, 2017; however, it expects the acquisitions to qualify as asset acquisitions and that the purchase price of these properties will primarily be allocated to land, land improvements, building and acquired lease intangibles.
Condensed Pro Forma Financial Information
The results of operations, excluding the impact of one-time acquisition costs, of the acquisitions accounted for as business combinations, for which financial information was available, are included in the following condensed pro forma financial information as if these acquisitions had been completed as of the beginning of the comparable prior annual period prior to the acquisition date. The following condensed pro forma financial information is presented as if the 2016 acquisitions were completed as of January 1, 2015. Pro forma financial information is not presented for the 2017 acquisitions based on their qualification as asset acquisitions in accordance with ASU 2017-01. These pro forma results are for comparative purposes only and are not necessarily indicative of what the Company’s actual results of operations would have been had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.
The condensed pro forma financial information are as follows for the three and nine months ended September 30, 2016:
|
| For the three months ended |
|
| For the nine months ended |
| ||
(in thousands) |
| September 30, 2016 |
|
| September 30, 2016 |
| ||
Revenues |
| $ | 39,290 |
|
| $ | 117,175 |
|
Net income |
|
| 18,394 |
|
|
| 38,088 |
|
5.6. Sale of Real Estate
The Company closed on the following sales of real estate, none of which qualified as discontinued operations, during the three and nine months ended September 30, 2017 and 2016:operations:
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| For the Three Months Ended |
| For the Nine Months Ended |
| |||||||||||||||||||||
(in thousands, except number of properties) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||||||||
Number of properties disposed |
|
| 4 |
|
|
| 2 |
|
|
| 10 |
|
|
| 4 |
|
| 6 |
|
|
| 5 |
| 25 |
|
|
| 18 |
| |||
Aggregate sale price |
| $ | 27,725 |
|
| $ | 12,345 |
|
| $ | 58,170 |
|
| $ | 16,095 |
|
| $ | 26,567 |
|
| $ | 9,816 |
| $ | 71,905 |
|
| $ | 57,539 |
| |
Aggregate carrying value |
|
| 22,335 |
|
|
| 9,163 |
|
|
| 44,984 |
|
|
| 11,519 |
|
| (24,244 | ) |
|
| (8,327 | ) |
| (58,817 | ) |
|
| (45,085 | ) | ||
Additional sales expenses |
|
| 1,338 |
|
|
| 199 |
|
|
| 2,854 |
|
|
| 487 |
|
|
| (1,103 | ) |
|
| (429 | ) |
|
| (3,297 | ) |
|
| (2,729 | ) |
Gain on sale of real estate |
|
| 4,052 |
|
|
| 2,983 |
|
|
| 10,332 |
|
|
| 4,089 |
|
| $ | 1,220 |
|
| $ | 1,060 |
| $ | 9,791 |
|
| $ | 9,725 |
|
6. 7. Investment in Rental Property and Lease Arrangements
The Company generally leases its investment rental property to established tenants.tenants in the industrial, healthcare, restaurant, retail, and office property types. At September 30, 2017,2021, the Company had 462681 real estate properties which were leased under leases that have been classified as operating leases, and 1510 that have been classified as direct financing leases.leases, and 1 that has been classified as a sales-type lease. Of the 1510 leases classified as direct financing leases, five3 include land portions which are accounted for as operating leases (see Revenue Recognition within Note 2).leases. The sales-type lease includes a land portion which is accounted for as an operating lease. Substantially all leases have initial terms of 10 to 20 years and provide for minimum rentals as defined in ASC 840, Leases. In addition, theThe Company’s leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/CPI, or increases in the tenant’s sales volume. Generally, the tenant istenants are also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and maintain property and liability insurance coverage. The leases also typically provide for one or more multiple year renewal options, at the election of the tenant, and are subject to generally the same terms and conditions as the initial lease.
Investment in Rental Property – Accounted for Using the Operating Method
Rental property subject to non-cancelable operating leases with tenants arewas as follows at September 30, 2017 and December 31, 2016:follows:
|
| September 30, |
|
| December 31, |
| ||||||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| September 30, |
| December 31, |
| |||||
Land |
| $ | 300,633 |
|
| $ | 288,276 |
|
| $ | 616,917 |
| $ | 555,748 |
| |
Land improvements |
|
| 185,776 |
|
|
| 162,341 |
|
| 291,045 |
| 279,360 |
| |||
Buildings |
|
| 1,530,429 |
|
|
| 1,283,322 |
| ||||||||
Tenant improvements |
|
| 9,656 |
|
|
| 8,665 |
| ||||||||
Buildings and improvements |
| 3,161,728 |
| 2,857,510 |
| |||||||||||
Equipment |
|
| 519 |
|
|
| 799 |
|
|
| 11,870 |
|
| 11,870 |
| |
|
|
| 2,027,013 |
|
|
| 1,743,403 |
|
| 4,081,560 |
| 3,704,488 |
| |||
Less accumulated depreciation |
|
| (135,305 | ) |
|
| (105,703 | ) |
|
| (407,354 | ) |
|
| (349,977 | ) |
|
| $ | 1,891,708 |
|
| $ | 1,637,700 |
|
| $ | 3,674,206 |
| $ | 3,354,511 |
|
Depreciation expense on investment in rental property was $12,600 and $9,796 for the three months ended September 30, 2017 and 2016, respectively, and $36,455 and $27,323 for the nine months ended September 30, 2017 and 2016, respectively.as follows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Depreciation |
| $ | 25,232 |
|
| $ | 23,317 |
|
| $ | 73,119 |
|
| $ | 70,392 |
|
15
Estimated minimum future rental receipts requiredlease payments to be received under non-cancelable operating leases with tenants at September 30, 20172021 are as follows:
(in thousands) |
|
|
|
|
Remainder of 2017 |
| $ | 40,732 |
|
2018 |
|
| 165,923 |
|
2019 |
|
| 169,255 |
|
2020 |
|
| 171,908 |
|
2021 |
|
| 174,168 |
|
Thereafter |
|
| 1,778,342 |
|
|
| $ | 2,500,328 |
|
(in thousands) |
|
|
| |
Remainder of 2021 |
| $ | 80,375 |
|
2022 |
|
| 323,733 |
|
2023 |
|
| 327,663 |
|
2024 |
|
| 324,289 |
|
2025 |
|
| 317,470 |
|
Thereafter |
|
| 2,467,607 |
|
|
| $ | 3,841,137 |
|
Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future minimum lease payments due during the initial lease terms. In addition, suchSuch amounts exclude any potential variable rent increases that are based on changes in the consumer price indexCPI or future contingentvariable rents which may be received under the leases based on a percentage of the tenant’s gross sales. Additionally, certain of our leases provide tenants with the option to terminate their leases in exchange for termination penalties, or that are contingent upon the occurrence of a future event. Future lease payments within the table above have not been adjusted for these termination rights.
Investment in Rental Property – Accounted for Using the Direct Financing MethodLeases
The Company’s net investment in direct financing leases is as follows at September 30, 2017 and December 31, 2016:was comprised of the following:
(in thousands) |
| September 30, |
|
| December 31, |
| ||
Undiscounted estimated lease payments to be received |
| $ | 43,397 |
|
| $ | 45,782 |
|
Estimated unguaranteed residual values |
|
| 15,203 |
|
|
| 15,203 |
|
Unearned revenue |
|
| (29,605 | ) |
|
| (31,753 | ) |
Reserve for credit losses |
|
| (165 | ) |
|
| (166 | ) |
Net investment in direct financing leases |
| $ | 28,830 |
|
| $ | 29,066 |
|
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2017 |
|
| 2016 |
| ||
Minimum lease payments to be received |
| $ | 78,837 |
|
| $ | 90,447 |
|
Estimated unguaranteed residual values |
|
| 19,758 |
|
|
| 22,335 |
|
Less unearned revenue |
|
| (56,983 | ) |
|
| (65,511 | ) |
Net investment in direct financing leases |
| $ | 41,612 |
|
| $ | 47,271 |
|
Minimum future rental receipts requiredUndiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at September 30, 20172021 are as follows:
(in thousands) |
|
|
|
|
Remainder of 2017 |
| $ | 947 |
|
2018 |
|
| 3,857 |
|
2019 |
|
| 3,931 |
|
2020 |
|
| 4,037 |
|
2021 |
|
| 4,126 |
|
Thereafter |
|
| 61,939 |
|
|
| $ | 78,837 |
|
(in thousands) |
|
|
| |
Remainder of 2021 |
| $ | 795 |
|
2022 |
|
| 3,241 |
|
2023 |
|
| 3,304 |
|
2024 |
|
| 3,361 |
|
2025 |
|
| 3,475 |
|
Thereafter |
|
| 29,221 |
|
|
| $ | 43,397 |
|
The above rental receipts do not include future minimum lease payments for renewal periods, potential variable consumer price indexCPI rent increases, or contingent rentalvariable percentage rent payments that may become due in future periods.
16
The following table summarizes amounts reported as Lease revenues, net on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss):
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Contractual rental amounts billed for operating leases |
| $ | 78,886 |
|
| $ | 69,270 |
|
| $ | 227,142 |
|
| $ | 209,440 |
|
Adjustment to recognize contractual operating lease billings on a |
|
| 4,942 |
|
|
| 6,768 |
|
|
| 14,033 |
|
|
| 16,709 |
|
Variable rental amounts earned |
|
| 130 |
|
|
| 234 |
|
|
| 335 |
|
|
| 308 |
|
Earned income from direct financing leases |
|
| 726 |
|
|
| 757 |
|
|
| 2,184 |
|
|
| 2,599 |
|
Interest income from sales-type leases |
|
| 14 |
|
|
| 0 |
|
|
| 43 |
|
|
| 0 |
|
Operating expenses billed to tenants |
|
| 4,414 |
|
|
| 3,389 |
|
|
| 12,998 |
|
|
| 11,456 |
|
Other income from real estate transactions (a) |
|
| 33,515 |
|
|
| 64 |
|
|
| 33,548 |
|
|
| 795 |
|
Adjustment to revenue recognized for uncollectible rental |
|
| 150 |
|
|
| 262 |
|
|
| (49 | ) |
|
| (1,961 | ) |
Total Lease revenues, net |
| $ | 122,777 |
|
| $ | 80,744 |
|
| $ | 290,234 |
|
| $ | 239,346 |
|
7.8. Intangible Assets and Liabilities
The following is a summary of intangible assets and liabilities and related accumulated amortization at September 30, 2017amortization:
(in thousands) |
| September 30, |
|
| December 31, |
| ||
Lease intangibles: |
|
|
|
|
|
| ||
Acquired above-market leases |
| $ | 49,195 |
|
| $ | 54,616 |
|
Less accumulated amortization |
|
| (17,862 | ) |
|
| (18,928 | ) |
Acquired above-market leases, net |
|
| 31,333 |
|
|
| 35,688 |
|
Acquired in-place leases |
|
| 370,685 |
|
|
| 340,958 |
|
Less accumulated amortization |
|
| (100,972 | ) |
|
| (85,733 | ) |
Acquired in-place leases, net |
|
| 269,713 |
|
|
| 255,225 |
|
Total intangible lease assets, net |
| $ | 301,046 |
|
| $ | 290,913 |
|
Acquired below-market leases |
| $ | 105,334 |
|
| $ | 107,788 |
|
Less accumulated amortization |
|
| (32,837 | ) |
|
| (28,135 | ) |
Intangible lease liabilities, net |
| $ | 72,497 |
|
| $ | 79,653 |
|
Leasing fees |
| $ | 14,776 |
|
| $ | 15,462 |
|
Less accumulated amortization |
|
| (4,985 | ) |
|
| (4,724 | ) |
Leasing fees, net |
| $ | 9,791 |
|
| $ | 10,738 |
|
Amortization of intangible lease assets and December 31, 2016:liabilities was as follows:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2017 |
|
| 2016 |
| ||
Lease intangibles: |
|
|
|
|
|
|
|
|
Acquired above-market leases |
| $ | 57,922 |
|
| $ | 45,490 |
|
Less accumulated amortization |
|
| (8,047 | ) |
|
| (4,940 | ) |
Acquired above-market leases, net |
|
| 49,875 |
|
|
| 40,550 |
|
Acquired in-place leases |
|
| 177,044 |
|
|
| 141,676 |
|
Less accumulated amortization |
|
| (21,450 | ) |
|
| (14,105 | ) |
Acquired in-place leases, net |
|
| 155,594 |
|
|
| 127,571 |
|
Total intangible lease assets, net |
| $ | 205,469 |
|
| $ | 168,121 |
|
|
|
|
|
|
|
|
|
|
Acquired below-market leases |
| $ | 75,038 |
|
| $ | 54,062 |
|
Less accumulated amortization |
|
| (8,735 | ) |
|
| (6,191 | ) |
Intangible lease liabilities, net |
| $ | 66,303 |
|
| $ | 47,871 |
|
|
|
|
|
|
|
|
|
|
Leasing fees |
| $ | 15,543 |
|
| $ | 13,279 |
|
Less accumulated amortization |
|
| (2,497 | ) |
|
| (1,950 | ) |
Leasing fees, net |
| $ | 13,046 |
|
| $ | 11,329 |
|
(in thousands) |
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
Intangible |
| Financial Statement Presentation |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Acquired in-place leases and leasing fees |
| Depreciation and amortization |
| $ | 11,424 |
|
| $ | 8,026 |
|
| $ | 25,429 |
|
| $ | 32,060 |
|
Above-market and below-market leases |
| Lease revenues, net |
|
| 944 |
|
|
| (149 | ) |
|
| 2,362 |
|
|
| (25 | ) |
Amortization expense for acquired in-place leases and fees was $3,043 and $2,318 for17
For the three months ended September 30, 2017 and 2016, respectively and $8,514 and $5,950 for the nine months ended September 30, 2017 and 2016, respectively. Amortization2021, amortization expense includes $3,757 of acquired above-market and below-market leases, net, was a (decrease) increase in rental income of $(99) and $100 foraccelerated amortization resulting from early lease terminations. For the three months ended September 30, 2017 and 2016, respectively, and $(487) and $373 for the nine months ended September 30, 20172020, amortization expense includes $2,459 and 2016,$14,517, of accelerated amortization resulting from early lease termination, respectively.
Estimated future amortization of intangible assets and liabilities at September 30, 20172021 is as follows:
(in thousands) |
|
|
| |
Remainder of 2021 |
| $ | 6,482 |
|
2022 |
|
| 24,480 |
|
2023 |
|
| 24,168 |
|
2024 |
|
| 23,410 |
|
2025 |
|
| 22,113 |
|
Thereafter |
|
| 137,687 |
|
|
| $ | 238,340 |
|
(in thousands) |
|
|
|
|
Remainder of 2017 |
| $ | 3,273 |
|
2018 |
|
| 12,224 |
|
2019 |
|
| 11,439 |
|
2020 |
|
| 11,330 |
|
2021 |
|
| 11,278 |
|
Thereafter |
|
| 102,667 |
|
|
| $ | 152,211 |
|
8.9. Unsecured Credit Agreements
The following table summarizes the Company’s unsecured credit agreements:
2017 Unsecured Revolving Credit
|
| Outstanding Balance |
|
|
|
|
| |||||
(in thousands, except interest rates) |
| September 30, |
|
| December 31, |
|
| Interest |
| Maturity | ||
Unsecured revolving credit facility(a) |
| $ | 0 |
|
| $ | 0 |
|
| (d) (e) |
| Sep. 2023 |
Unsecured term loans(a): |
|
|
|
|
|
|
|
|
|
| ||
2022 Unsecured Term Loan |
|
| 60,000 |
|
|
| 60,000 |
|
| one-month LIBOR |
| Feb. 2022 |
2023 Unsecured Term Loan |
|
| 0 |
|
|
| 265,000 |
|
| one-month LIBOR |
| Jan. 2023 |
2024 Unsecured Term Loan |
|
| 190,000 |
|
|
| 190,000 |
|
| one-month LIBOR |
| Jun. 2024 |
2026 Unsecured Term Loan |
|
| 400,000 |
|
|
| 450,000 |
|
| one-month LIBOR |
| Feb. 2026 |
Total unsecured term loans |
|
| 650,000 |
|
|
| 965,000 |
|
|
|
|
|
Unamortized debt issuance costs, net |
|
| (3,542 | ) |
|
| (3,670 | ) |
|
|
|
|
Total unsecured term loans, net |
|
| 646,458 |
|
|
| 961,330 |
|
|
|
|
|
Senior unsecured notes(a): |
|
|
|
|
|
|
|
|
|
| ||
2027 Senior Unsecured Notes - Series A |
|
| 150,000 |
|
|
| 150,000 |
|
| 4.84% |
| Apr. 2027 |
2028 Senior Unsecured Notes - Series B |
|
| 225,000 |
|
|
| 225,000 |
|
| 5.09% |
| Jul. 2028 |
2030 Senior Unsecured Notes - Series C |
|
| 100,000 |
|
|
| 100,000 |
|
| 5.19% |
| Jul. 2030 |
2031 Senior Unsecured Public Notes |
|
| 375,000 |
|
|
| — |
|
| 2.60% |
| Sep. 2031 |
Total senior unsecured notes |
|
| 850,000 |
|
|
| 475,000 |
|
|
|
|
|
Unamortized debt issuance costs and |
|
| (6,335 | ) |
|
| (2,534 | ) |
|
|
|
|
Total senior unsecured notes, net |
|
| 843,665 |
|
|
| 472,466 |
|
|
|
|
|
Total unsecured debt, net |
| $ | 1,490,123 |
|
| $ | 1,433,796 |
|
|
|
|
|
On June 23, 2017,December 31, 2020, one-month LIBOR was
18
At September 30, 2021, the weighted average interest rate on all outstanding borrowings was 2.71%, exclusive of interest rate swap agreements.
On September 15, 2021, the Company completed a $250,000public offering of $375,000 in aggregate principal amount of 2.60% senior unsecured delayed draw term loannotes due 2031 (“5.5-Year Term Loan”2031 Senior Unsecured Public Notes”), issued at 99.816% of the principal amount. The 2031 Senior Unsecured Public Notes require semi-annual interest payments through the maturity date of September 15, 2031, unless earlier redeemed. The 2031 Senior Unsecured Public Notes can be redeemed by the Company at par within three months of their respective maturities, or the Company can call the notes at any time for the principal, accrued interest, and a $150,000 senior unsecured delayed draw term loan (“7-Year Term Loan”).make-whole amount based upon the applicable government bond yield plus 20 basis points. The Credit Agreement provides an accordion feature for up to a total of $1,000,000. The Revolver includes a $35,000 sublimit for swingline loans and $20,000 available for issuance of letters of credit. Proceeds from the Company’s borrowings under the Credit Agreementproceeds were used to repay in full borrowings on the Company’s existing unsecuredUnsecured revolving credit facility and term notes with M&Tthe 2023 Unsecured Term Loan, and Regions Bank for $5,000 and $100,000, respectively, the Company’s existing unsecured term note with Regions Bank for $185,000, and $50,000 of the Company’s unsecured term note with SunTrust Bank. The Revolver has an initial maturity date of January 2022 and provides for one five month extension, at the election ofto fund acquisitions.
On March 12, 2021, the Company subject to certain conditions set forth inamended the agreement2026 Unsecured Term Loan and payment ofmade a 0.0625% fee$50,000 paydown on the revolving commitments. Borrowings onloan. Prior to the Revolver bearamendment, the borrowings under the 2026 Unsecured Term Loan were subject to interest at variable rates based on LIBOR plus a margin based on the Operating Company’s investment gradeOP’s current credit rating ranging between 0.825%1.45% and 1.55%2.40% per annum.annum with the applicable margin being 1.60% immediately prior to the amendment. The initial applicable facility fee onamendment reduced the Revolver is 0.25%margin to a range between 0.85% and 1.65% per annum. The 5.5-Year Term Loan provides for up to three delayed draws from inception through June 2018 at the request of the Company. Borrowings under the 5.5-Year Term Loan bear interest at variable rates based on LIBOR plus a marginannum and based on the Operating Company’s credit rating ranging between 0.90% and 1.75% per annum through the maturity date of January 2023. The 7-Year Term Loan provides for up to three delayed draws from inception through June 2018 at the request of the Company. Borrowings under the 7-Year Term Loan bear interest at variable rates based on LIBOR plus a margin based on the Operating Company’s credit rating ranging between 1.50% and 2.45% through the maturity date of June 2024. Based on the Operating Company’s currentOP’s credit rating of Baa3,BBB, the applicable margin under the Revolver, 5.5-Year Term Loan,was 1.0% beginning March 12, 2021. All other terms and 7-Year Term Loan are 1.20%, 1.35% and 1.90%, respectively. The 5.5-Year Term Loan and 7-Year Term Loan are both subject to a fee of 0.25% per annum on the amountconditions of the commitments, reduced by the amount of term loans outstanding under the applicable loan. The Company is subject to various financial and nonfinancial covenants under the Credit Agreement.
20152026 Unsecured Term Loan Agreementremained materially the same as those in effect prior to this amendment.
On June 23, 2017, the Company amended and restated the Term Loan Agreement by and among the Company, the Operating Company, as the borrower, SunTrust Bank, as Administrative Agent, and the lenders party thereto (as amended and restated, the “Restated Term Loan Agreement”). The Restated Term Loan Agreement amended certain terms, conditions, covenants, and other provisions to align them with those included in the Credit Agreement described above. The Restated Term Loan Agreement has an initial maturity date of February 2019 and provides for two one year extension options, at the election of the Company, subject to compliance with all covenants and the payment of a 0.01% fee. Borrowings under the Restated Term Loan Agreement bear interest at variable rates based on the one month LIBOR plus a margin based on the Operating Company’s investment grade credit rating ranging between 0.90% and 1.75%. Based on the Operating Company’s current credit rating of Baa3, the applicable margin under the Restated Term Loan Agreement is 1.40%.
2017 Senior Notes
In January 2017, the Company commenced a private offering of unsecured, fixed rate, guaranteed senior promissory notes (“Senior Notes”). On March 16, 2017, the Company entered into a Note and Guaranty Agreement with each of the purchasers of the Senior Notes. On April 18, 2017, the Company closed the offering and issued the Senior Notes for an aggregate principal amount of $150,000. The Senior Notes were issued by the Operating Company and guaranteed by the Corporation. The Senior Notes were issued at par, bear interest at a rate of 4.84% per annum (priced at 240 basis points above the 10 year U.S. Treasury yield at the time of pricing), and have a 10 year maturity, maturing on April 18, 2027. J.P. Morgan Securities, LLC and Wells Fargo Securities, LLC served as the joint placement agents.
The following table summarizes the Company’s unsecured credit agreements:
|
| Outstanding Balance |
|
|
|
|
|
|
| |||||
|
| September 30, |
|
| December 31, |
|
| Interest |
|
| Maturity | |||
(in thousands, except interest rates) |
| 2017 |
|
| 2016 |
|
| Rate(d) |
|
| Date | |||
2015 Unsecured Term Loan Agreement(a) |
| $ | 325,000 |
|
| $ | 375,000 |
|
| 1 month LIBOR + 1.40% |
|
| Feb. 2019 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Unsecured Revolving Credit and Term Loan Agreement(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolver (f) |
|
| 126,500 |
|
|
| - |
|
| 1 month LIBOR + 1.20% |
|
| Jan. 2022 | |
5.5-Year term loan |
|
| 250,000 |
|
|
| - |
|
| 1 month LIBOR + 1.35% |
|
| Jan. 2023 | |
7-Year term loan |
|
| - |
|
|
| - |
|
| 1 month LIBOR + 1.90% |
|
| June 2024 | |
|
|
| 376,500 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Senior Notes(a) |
|
| 150,000 |
|
|
| - |
|
|
| 4.84% |
|
| Apr. 2027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Unsecured Credit Agreement(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note |
|
| - |
|
|
| 50,000 |
|
| 3 month LIBOR + 1.45% |
|
| June 2017 | |
Term note |
|
| - |
|
|
| 50,000 |
|
| 1 month LIBOR + 1.45% |
|
| June 2017 | |
Revolver(b) |
|
| - |
|
|
| 102,000 |
|
| 1 month LIBOR + 1.45% |
|
| June 2017 | |
|
|
| - |
|
|
| 202,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Unsecured Credit Agreement(a) |
|
| - |
|
|
| 185,000 |
|
| 1 month LIBOR + 1.75% to 2.50%(e) |
|
| Oct. 2018 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 851,500 |
|
|
| 762,000 |
|
|
|
|
|
|
|
Debt issuance costs, net(c) |
|
| (3,093 | ) |
|
| (2,109 | ) |
|
|
|
|
|
|
|
| $ | 848,407 |
|
| $ | 759,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2017 and December 31, 2016, the weighted average interest rate on all outstanding borrowings was 2.96% and 2.14%, respectively.
Debt issuance costs were amortized and recorded as interest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) of $486 and $403 forFor the three months ended September 30, 2017 and 2016, respectively, and $1,343 and $1,279 for the nine months ended September 30, 20172021, the Company incurred $4,069 and 2016, respectively.
$5,020, respectively, in debt issuance costs and original issuance discount associated with the 2031 Senior Unsecured Public Notes and the amended 2026 Unsecured Term Loan. For the three and nine months ended September 30, 2017,2020, the Company paid $8,344incurred $5,918 in debt issuance costs associated with the Senior Notes, theRevolving Credit Agreement with M&T as Administrative Agent, and the Amended and Restated Term Loan Agreement with SunTrust Bank.Facility. For each separate debt instrument, on a lender by lender basis, in accordance with ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction iswas deemed to be new debt, a modification of existing debt, or an extinguishment of existing debt. Debt issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred.
Based on thisthe assessment, $5,443$3,379 and $4,325 of the debt issuance costs incurred during the three and nine months ended September 30, 2021, respectively, were deemed to be related to new debt, and the modification of existing debt, and therefore have been deferred and are being amortized over the term of the associated debt. The remaining $2,901For the three and nine months ended September 30, 2020, $5,918 of debt issuance costs wasincurred were related to the issuance of new debt, or the modification of existing debt, and therefore were deferred and are being amortized over the term of the associated with lenders whose commitments underdebt.
Additionally, during the new agreements have been determined to be an extinguishmentthree and suchnine months ended September 30, 2021, $214 and $340, respectively, of unamortized debt issuance costs were expensed, as a component of the costand included in Cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for. Such amounts totaled $392 during the three and nine months ended September 30, 2017. Additionally, $654 of unamortized debt2020.
Debt issuance costs were expensed and included in costoriginal issuance discounts are amortized as a component of debt extinguishmentInterest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss). The following table summarizes debt issuance cost and original issuance discount amortization:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Debt issuance costs and original issuance discount amortization |
| $ | 962 |
|
| $ | 819 |
|
| $ | 2,832 |
|
| $ | 2,528 |
|
The Company is subject to various financial and operational covenants and financial reporting requirements pursuant to its unsecured credit agreements. These covenants require the Company to maintain certain financial ratios, including leverage, fixed charge coverage, debt service coverage, aggregate debt ratio, consolidated income available for the nine months endeddebt to annual debt service charge, total unencumbered assets to total unsecured debt, and secured debt ratio, among others. As of September 30, 2017.2021, the Company believes it was in compliance with all of its loan covenants. Failure to comply with the covenants would result in a default which, if the Company were unable to cure or obtain a waiver from the lenders, could accelerate the repayment of the obligations. Further, in the event of default, the Company may be restricted from paying dividends to its stockholders in excess of dividends required to maintain its REIT qualification. Accordingly, an event of default could have a material and adverse impact on the Company.
19
9.10. Mortgages and Notes Payable
The Company’s mortgages and notes payable consist of the followingfollowing:
|
| Origination |
| Maturity |
|
|
|
|
|
|
|
|
|
| ||
(in thousands, except interest rates) |
| Date |
| Date |
| Interest |
| September 30, |
|
| December 31, |
|
|
| ||
Lender |
| (Month/Year) |
| (Month/Year) |
| Rate |
| 2021 |
|
| 2020 |
|
|
| ||
Wilmington Trust National Association |
| Apr-19 |
| Feb-28 |
| 4.92% |
| $ | 47,064 |
|
| $ | 47,945 |
|
| (a) (b) (c) (j) |
Wilmington Trust National Association |
| Jun-18 |
| Aug-25 |
| 4.36% |
|
| 19,657 |
|
|
| 19,947 |
|
| (a) (b) (c) (i) |
PNC Bank |
| Oct-16 |
| Nov-26 |
| 3.62% |
|
| 17,196 |
|
|
| 17,498 |
|
| (b) (c) |
T2 Durham I, LLC |
| Jul-21 |
| Jul-24 |
| Greater of Prime + 1.25% or 5.00% |
|
| 7,500 |
|
|
| 0 |
|
| (b) (k) |
Aegon |
| Apr-12 |
| Oct-23 |
| 6.38% |
|
| 6,451 |
|
|
| 7,039 |
|
| (b) (f) |
Sun Life |
| Mar-12 |
| Oct-21 |
| 5.13% |
|
| 0 |
|
|
| 10,469 |
|
| (b) (e) |
M&T Bank |
| Oct-17 |
| Aug-21 |
| one - month |
|
| 0 |
|
|
| 4,769 |
|
| (b) (d) (g) |
Total mortgages |
|
|
|
|
|
|
|
| 97,868 |
|
|
| 107,667 |
|
|
|
Debt issuance costs, net |
|
|
|
|
|
|
|
| (338 | ) |
|
| (285 | ) |
|
|
Mortgages, net |
|
|
|
|
|
|
| $ | 97,530 |
|
| $ | 107,382 |
|
|
|
(in thousands, except interest rates) | |||||||||||||||||||
|
|
| Origination Date |
| Maturity Date |
|
|
|
|
| September 30, |
|
| December 31, |
|
|
| ||
Lender |
| (Month/Year) |
| (Month/Year) |
| Interest Rate |
|
| 2017 |
|
| 2016 |
|
|
| ||||
(1) | M&T Bank |
| Dec-10 |
| Apr-20 |
| 1 month LIBOR+1.90% |
|
| $ | - |
|
| $ | 21,335 |
|
| (b) (f) (g) | |
(2) | Sun Life |
| Mar-12 |
| Oct-21 |
|
| 5.13% |
|
|
| 11,763 |
|
|
| 12,036 |
|
| (b) (i) |
(3) | Aegon |
| Apr-12 |
| Oct-23 |
|
| 6.38% |
|
|
| 9,330 |
|
|
| 9,804 |
|
| (b) (j) |
(4) | Legg Mason Mortgage Capital Corporation |
| Aug-10 |
| Aug-22 |
|
| 7.06% |
|
|
| 5,900 |
|
|
| 6,538 |
|
| (b) (e) |
(5) | Columbian Mutual Life Insurance Company |
| Aug-10 |
| Sep-25 |
|
| 7.00% |
|
|
| 1,510 |
|
|
| 1,538 |
|
| (b) (c) (d) |
(6) | Symetra Financial |
| Mar-11 |
| Apr-31 |
|
| 6.34% |
|
|
| 1,015 |
|
|
| 1,036 |
|
| (a) (b) |
(7) | Note holders |
| Dec-08 |
| Dec-23 |
|
| 6.25% |
|
|
| 750 |
|
|
| 750 |
|
| (d) |
(8) | Standard Insurance Co. |
| Jul-10 |
| Aug-30 |
|
| 6.75% |
|
|
| 585 |
|
|
| 597 |
|
| (b) (c) (d) (h) |
(9) | Siemens Financial Services, Inc. |
| Sep-10 |
| Sep- 20 |
|
| 5.47% |
|
|
| 5,869 |
|
|
| 6,010 |
|
| (a) (b) |
(10) | Standard Insurance Co. |
| Apr-09 |
| May-34 |
|
| 6.88% |
|
|
| 1,827 |
|
|
| 1,870 |
|
| (b) (c) (h) |
(11) | Wells Fargo Bank, N.A. |
| May-07 |
| Jun-17 |
|
| 6.69% |
|
|
| - |
|
|
| 1,694 |
|
| (a) (b) |
(12) | Standard Insurance Co. |
| May-09 |
| Jun-34 |
|
| 6.88% |
|
|
| 1,312 |
|
|
| 1,342 |
|
| (b) (c) (h) (l) |
(13) | Standard Insurance Co. |
| Mar-10 |
| Apr-31 |
|
| 7.00% |
|
|
| - |
|
|
| 1,058 |
|
| (b) (c) (d) (h) |
(14) | Standard Insurance Co. |
| Mar-10 |
| Apr-31 |
|
| 7.00% |
|
|
| - |
|
|
| 844 |
|
| (b) (c) (d) (h) |
(15) | Columbus Life Insurance |
| Feb-13 |
| Jan-26 |
|
| 4.65% |
|
|
| - |
|
|
| 9,400 |
|
| (b) (k) |
(16) | Athene Annuity & Life Co. |
| Feb-12 |
| Feb-17 |
|
| 3.76% |
|
|
| - |
|
|
| 12,701 |
|
| (b) |
(17) | PNC Bank |
| Oct-16 |
| Nov-26 |
|
| 3.62% |
|
|
| 18,711 |
|
|
| 18,971 |
|
| (b) (c) |
|
|
|
|
|
|
|
|
|
|
|
| 58,572 |
|
|
| 107,524 |
|
|
|
| Debt issuance costs, net |
|
|
|
|
|
|
|
|
|
| (689 | ) |
|
| (838 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 57,883 |
|
| $ | 106,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage is subject to interest at a daily floating annual rate equal to the Prime Rate plus 1.25%, but no less than 5.00% per annum. At September 30, 2017,2021, the interest rate was 5.00%
At September 30, 2021, investment in rental property of $91,326 is$162,642 was pledged as collateral against the Company’s mortgages and notes payable.
The Company extinguished six and four mortgages totaling $46,804 and $8,199, during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. For the three months ended September 30, 2017 and 2016, the cost of extinguishment for the mortgages was $1,404 and $52, respectively. For the nine months ended September 30, 2017 and 2016, the cost of extinguishment for the mortgages was $1,464 and $105, respectively.mortgages.
Estimated future principal payments to be made under the above mortgage and note payable agreements,mortgages and the Company’s unsecured credit agreements (see Note 8)9) at September 30, 20172021 are as follows:
(in thousands) |
|
|
|
|
Remainder of 2017 |
| $ | 28,677 |
|
2018 |
|
| 2,829 |
|
2019 |
|
| 328,034 |
|
2020 |
|
| 8,449 |
|
2021 |
|
| 13,305 |
|
Thereafter |
|
| 528,778 |
|
|
| $ | 910,072 |
|
(in thousands) |
|
|
| |
Remainder of 2021 |
| $ | 707 |
|
2022 |
|
| 62,907 |
|
2023 |
|
| 7,582 |
|
2024 |
|
| 199,760 |
|
2025 |
|
| 20,195 |
|
Thereafter |
|
| 1,306,717 |
|
|
| $ | 1,597,868 |
|
Certain of the Company’s mortgage and note payable agreements provide for prepayment fees and can be terminated under certain events of default as defined under the related agreements whichagreements. These prepayment fees are not reflected as part of the table above.
10.
20
11. Interest Rate Swaps
Interest rate swaps were entered into with certain financial institutions in order to mitigate the impact of interest rate variability over the term of the related debt agreements. The interest rate swaps are considered cash flow hedges. In order to reduce counterparty concentration risk, the Company has a diversification policy for institutions that serve as swap counterparties. Under these agreements, the Company receives monthly payments from the counterparties on these interest rate swaps equal to the related variable interest rates multiplied by the outstanding notional amounts. All of the Company's interest swaps at September 30, 2021 and December 31, 2020 are tied to the one-month LIBOR rate. Certain interest rate swaps amortize on a monthly basis. In turn, the Company pays the counterparties each month an amount equal to a fixed rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that the Company pays a fixed interest rate on its variable-rate borrowings.
In connection with the issuance of the 2031 Senior Unsecured Public Notes in September 2021 and repayment of outstanding borrowings of variable rate borrowings.debt indexed to the one-month LIBOR rate (see Note 9), the Company terminated interest rate swap agreements with an aggregate termination value of $5,580. The Company determined that it is not probable the hedge forecasted transactions will not occur during the original periods, and therefore, the $5,580 of accumulated losses held in Other comprehensive income (loss) will be reclassified to interest expense on a straight-line basis over the original lives of the terminated swaps. For the three and nine months ended September 30, 2021, amounts reclassified out of Other comprehensive income (loss) to Interest expense were $126.
The following is a summary of the Company’s outstanding interest rate swap agreements atagreements:
(in thousands, except interest rates) |
|
|
|
| September 30, 2021 |
|
| December 31, 2020 |
|
| |||||||||||||
Counterparty |
| Maturity Date |
| Fixed |
|
| Notional |
|
| Fair |
|
| Notional |
|
| Fair |
|
| |||||
Wells Fargo Bank, N.A. |
| February 2021 |
|
| 2.39 | % |
| $ | 0 |
|
| $ | — |
|
| $ | 35,000 |
|
| $ | (70 | ) |
|
M&T Bank |
| August 2021 |
|
| 1.02 | % |
|
| 0 |
|
|
| — |
|
|
| 4,768 |
|
|
| (25 | ) | (a) |
Capital One, National Association |
| December 2021 |
|
| 1.05 | % |
|
| 0 |
|
|
| — |
| (b) |
| 15,000 |
|
|
| (141 | ) |
|
M&T Bank |
| September 2022 |
|
| 2.83 | % |
|
| 0 |
|
|
| 0 |
| (b) |
| 25,000 |
|
|
| (1,139 | ) |
|
Bank of America, N.A. |
| November 2023 |
|
| 2.80 | % |
|
| 0 |
|
|
| — |
| (b) |
| 25,000 |
|
|
| (1,848 | ) |
|
M&T Bank |
| November 2023 |
|
| 2.65 | % |
|
| 0 |
|
|
| — |
| (b) |
| 25,000 |
|
|
| (1,785 | ) |
|
Regions Bank |
| December 2023 |
|
| 1.18 | % |
|
| 0 |
|
|
| — |
| (b) |
| 25,000 |
|
|
| (763 | ) |
|
Truist Financial Corporation |
| April 2024 |
|
| 1.99 | % |
|
| 0 |
|
|
| — |
| (b) |
| 25,000 |
|
|
| (1,487 | ) |
|
Bank of Montreal |
| July 2024 |
|
| 1.16 | % |
|
| 0 |
|
|
| — |
| (b) |
| 40,000 |
|
|
| (1,380 | ) |
|
Wells Fargo Bank, N.A. |
| October 2024 |
|
| 2.72 | % |
|
| 15,000 |
|
|
| (964 | ) |
|
| 15,000 |
|
|
| (1,422 | ) |
|
Capital One, National Association |
| December 2024 |
|
| 1.58 | % |
|
| 15,000 |
|
|
| (463 | ) |
|
| 15,000 |
|
|
| (799 | ) |
|
Bank of Montreal |
| January 2025 |
|
| 1.91 | % |
|
| 25,000 |
|
|
| (1,044 | ) |
|
| 25,000 |
|
|
| (1,725 | ) |
|
Truist Financial Corporation |
| April 2025 |
|
| 2.20 | % |
|
| 25,000 |
|
|
| (1,324 | ) |
|
| 25,000 |
|
|
| (2,084 | ) |
|
Bank of Montreal |
| July 2025 |
|
| 2.32 | % |
|
| 25,000 |
|
|
| (1,478 | ) |
|
| 25,000 |
|
|
| (2,351 | ) |
|
Truist Financial Corporation |
| July 2025 |
|
| 1.99 | % |
|
| 25,000 |
|
|
| (1,174 | ) |
|
| 25,000 |
|
|
| (1,941 | ) |
|
Truist Financial Corporation |
| December 2025 |
|
| 2.30 | % |
|
| 25,000 |
|
|
| (1,546 | ) |
|
| 25,000 |
|
|
| (2,481 | ) |
|
Bank of Montreal |
| January 2026 |
|
| 1.92 | % |
|
| 25,000 |
|
|
| (1,156 | ) |
|
| 25,000 |
|
|
| (2,039 | ) |
|
Bank of Montreal |
| January 2026 |
|
| 2.05 | % |
|
| 40,000 |
|
|
| (2,062 | ) |
|
| 40,000 |
|
|
| (3,523 | ) |
|
Capital One, National Association |
| January 2026 |
|
| 2.08 | % |
|
| 35,000 |
|
|
| (1,842 | ) |
|
| 35,000 |
|
|
| (3,078 | ) |
|
Truist Financial Corporation |
| January 2026 |
|
| 1.93 | % |
|
| 25,000 |
|
|
| (1,164 | ) |
|
| 25,000 |
|
|
| (2,019 | ) |
|
Capital One, National Association |
| April 2026 |
|
| 2.68 | % |
|
| 15,000 |
|
|
| (1,204 | ) |
|
| 15,000 |
|
|
| (1,843 | ) |
|
Capital One, National Association |
| July 2026 |
|
| 1.32 | % |
|
| 35,000 |
|
|
| (682 | ) |
|
| 35,000 |
|
|
| (1,806 | ) |
|
Bank of Montreal |
| December 2026 |
|
| 2.33 | % |
|
| 10,000 |
|
|
| (692 | ) |
|
| 10,000 |
|
|
| (1,156 | ) |
|
Bank of Montreal |
| December 2026 |
|
| 1.99 | % |
|
| 25,000 |
|
|
| (1,300 | ) |
|
| 25,000 |
|
|
| (2,372 | ) |
|
Wells Fargo Bank, N.A. |
| April 2027 |
|
| 2.72 | % |
|
| 25,000 |
|
|
| (2,287 | ) |
|
| 25,000 |
|
|
| (3,555 | ) |
|
Bank of Montreal |
| December 2027 |
|
| 2.37 | % |
|
| 25,000 |
|
|
| (1,904 | ) |
|
| 25,000 |
|
|
| (3,234 | ) |
|
Capital One, National Association |
| December 2027 |
|
| 2.37 | % |
|
| 25,000 |
|
|
| (1,909 | ) |
|
| 25,000 |
|
|
| (3,199 | ) |
|
Wells Fargo Bank, N.A. |
| January 2028 |
|
| 2.37 | % |
|
| 75,000 |
|
|
| (5,743 | ) |
|
| 75,000 |
|
|
| (9,650 | ) |
|
Bank of Montreal |
| May 2029 |
|
| 2.09 | % |
|
| 25,000 |
|
|
| (1,557 | ) |
|
| 25,000 |
|
|
| (2,994 | ) |
|
Regions Bank |
| May 2029 |
|
| 2.11 | % |
|
| 25,000 |
|
|
| (1,599 | ) |
|
| 25,000 |
|
|
| (3,004 | ) |
|
Regions Bank |
| June 2029 |
|
| 2.03 | % |
|
| 25,000 |
|
|
| (1,459 | ) |
|
| 25,000 |
|
|
| (2,843 | ) |
|
U.S. Bank National Association |
| June 2029 |
|
| 2.03 | % |
|
| 25,000 |
|
|
| (1,456 | ) |
|
| 25,000 |
|
|
| (2,902 | ) |
|
U.S. Bank National Association |
| August 2029 |
|
| 1.35 | % |
|
| 25,000 |
|
|
| (187 | ) |
|
| 25,000 |
|
|
| (1,445 | ) |
|
|
|
|
|
|
|
| $ | 640,000 |
|
| $ | (36,196 | ) |
| $ | 859,768 |
|
| $ | (72,103 | ) |
|
21
At September 30, 2017:
(in thousands, except interest rates) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty |
| Maturity Date |
| Fixed Rate |
|
| Variable Rate Index |
| Notional Amount |
|
| Fair Value |
| |||
Bank of America, N.A. |
| November 2023 |
|
| 2.80% |
|
| LIBOR 1 month |
| $ | 25,000 |
|
| $ | (1,177 | ) |
Bank of Montreal |
| July 2024 |
|
| 1.16% |
|
| LIBOR 1 month |
|
| 40,000 |
|
|
| 2,147 |
|
Bank of Montreal |
| January 2025 |
|
| 1.91% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| 193 |
|
Bank of Montreal |
| July 2025 |
|
| 2.32% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| (490 | ) |
Bank of Montreal |
| January 2026 |
|
| 1.92% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| 297 |
|
Bank of Montreal |
| January 2026 |
|
| 2.05% |
|
| LIBOR 1 month |
|
| 40,000 |
|
|
| 84 |
|
Bank of Montreal |
| December 2026 |
|
| 2.33% |
|
| LIBOR 1 month |
|
| 10,000 |
|
|
| (175 | ) |
Capital One, N.A. |
| December 2021 |
|
| 1.05% |
|
| LIBOR 1 month |
|
| 15,000 |
|
|
| 487 |
|
Capital One, N.A. |
| December 2024 |
|
| 1.58% |
|
| LIBOR 1 month |
|
| 15,000 |
|
|
| 459 |
|
Capital One, N.A. |
| January 2026 |
|
| 2.08% |
|
| LIBOR 1 month |
|
| 35,000 |
|
|
| 39 |
|
Capital One, N.A. |
| July 2026 |
|
| 1.32% |
|
| LIBOR 1 month |
|
| 35,000 |
|
|
| 2,289 |
|
M&T Bank |
| September 2022 |
|
| 2.83% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| (1,150 | ) |
M&T Bank |
| November 2023 |
|
| 2.65% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| (1,023 | ) |
Regions Bank |
| March 2018 |
|
| 1.77% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| (46 | ) |
Regions Bank |
| March 2019 |
|
| 1.91% |
|
| LIBOR 3 month |
|
| 25,000 |
|
|
| (106 | ) |
Regions Bank |
| May 2020 |
|
| 2.12% |
|
| LIBOR 1 month |
|
| 50,000 |
|
|
| (562 | ) |
Regions Bank |
| March 2022 |
|
| 2.43% |
|
| LIBOR 3 month |
|
| 25,000 |
|
|
| (550 | ) |
Regions Bank |
| December 2023 |
|
| 1.18% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| 1,178 |
|
SunTrust Bank |
| April 2024 |
|
| 1.99% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| (63 | ) |
SunTrust Bank |
| April 2025 |
|
| 2.20% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| (332 | ) |
SunTrust Bank |
| July 2025 |
|
| 1.99% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| 72 |
|
SunTrust Bank |
| January 2026 |
|
| 1.93% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| 248 |
|
Wells Fargo Bank, N.A. |
| February 2021 |
|
| 2.39% |
|
| LIBOR 1 month |
|
| 35,000 |
|
|
| (739 | ) |
Wells Fargo Bank, N.A. |
| October 2024 |
|
| 2.72% |
|
| LIBOR 1 month |
|
| 15,000 |
|
|
| (706 | ) |
|
|
|
|
|
|
|
|
|
| $ | 640,000 |
|
| $ | 374 |
|
The fair value of2021, the weighted average fixed rate on all outstanding interest rate swaps are reported on the Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 as follows:
was 2.11%.
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2017 |
|
| 2016 |
| ||
Interest rate swaps, asset |
| $ | 7,493 |
|
| $ | 9,598 |
|
Interest rate swaps, liability |
|
| (7,119 | ) |
|
| (10,217 | ) |
Interest rate swap |
| $ | 374 |
|
| $ | (619 | ) |
The total lossamounts recognized, and the location of the loss in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss), from converting from variable rates to fixed rates under these agreements iswere as follows for the three months ended September 30, 2017 and 2016:follows:
|
| Effective Portion |
|
| Ineffective Portion |
| ||||||
(in thousands) |
| Location of Loss Reclassified from Accumulated Other Comprehensive Income into Income |
| Amount of Loss Reclassified from Accumulated Other Comprehensive Income into Income |
|
| Location of Loss Recognized in Income on Derivatives |
| Amount of Gain Recognized in Income on Derivatives |
| ||
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
| Interest expense |
| $ | 448 |
|
| Interest expense |
| $ | - |
|
2016 |
| Interest expense |
|
| 2,426 |
|
| Interest expense |
|
| (2,991 | ) |
|
|
|
|
| Reclassification from |
|
| Total Interest Expense |
| |||||
|
| Amount of Gain |
|
| Accumulated Other |
|
| Presented in the Condensed |
| |||||
|
| Recognized in |
|
| Comprehensive Loss |
|
| Consolidated Statements of |
| |||||
(in thousands) |
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
| |||
For the Three Months Ended September 30, |
| Comprehensive Loss |
|
| Location |
| Loss |
|
| Income (Loss) |
| |||
2021 |
| $ | 4,559 |
|
| Interest expense |
| $ | 4,085 |
|
| $ | 15,611 |
|
2020 |
|
| 4,352 |
|
| Interest expense |
|
| 4,166 |
|
|
| 18,511 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Amount of Gain |
|
| Reclassification from |
|
| Total Interest Expense |
| |||||
|
| (Loss) |
|
| Accumulated Other |
|
| Presented in the Condensed |
| |||||
|
| Recognized in |
|
| Comprehensive Loss |
|
| Consolidated Statements of |
| |||||
(in thousands) |
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
| |||
For the Nine Months Ended September 30, |
| Comprehensive Loss |
|
| Location |
| Loss |
|
| Income (Loss) |
| |||
2021 |
| $ | 30,328 |
|
| Interest expense |
| $ | 12,140 |
|
| $ | 47,149 |
|
2020 |
|
| (59,766 | ) |
| Interest expense |
|
| 8,467 |
|
|
| 59,015 |
|
The total loss recognized, and the location of the loss in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss), from converting from variable rates to fixed rates under these agreements is as follows for the nine months ended September 30, 2017 and 2016:
|
| Effective Portion |
|
| Ineffective Portion |
| ||||||
(in thousands) |
| Location of Loss Reclassified from Accumulated Other Comprehensive Income into Income |
| Amount of Loss Reclassified from Accumulated Other Comprehensive Income into Income |
|
| Location of Loss Recognized in Income on Derivatives |
| Amount of Loss Recognized in Income on Derivatives |
| ||
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
| Interest expense |
| $ | 3,152 |
|
| Interest expense |
| $ | 332 |
|
2016 |
| Interest expense |
|
| 7,030 |
|
| Interest expense |
|
| 2,219 |
|
Ineffectiveness of $2,219 for the nine months ended September 30, 2017 was attributable to inconsistencies in certain terms between the interest rate swaps and the credit agreements. The interest rate swaps continued to qualify for hedge accounting, with the effective portion of mark-to-market adjustments included in Accumulated other comprehensive income. During the fourth quarter of 2016, the Company amended the terms of the credit agreements, thereby reversing the impact of the ineffectiveness and rendering a $0 full year 2016 impact to the Condensed Consolidated Statement of Income and Comprehensive Income (Loss).
Amounts related to the interest rate swaps expected to be reclassified out of Accumulated other comprehensive incomeloss to Interest expense during the next twelve months are estimated to be $3,460.a loss of $15,477. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes thisthe risk exposure by limiting counterparties to major banks who meet established credit and capital guidelines.
11.
12. Non-Controlling Interests
The following table summarizes OP Units exchanged for shares of common stock:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
OP Units exchanged for shares of common stock |
|
| 1,723 |
|
|
| 0 |
|
|
| 2,888 |
|
|
| 0 |
|
Value of units exchanged |
| $ | 27,755 |
|
| $ | 0 |
|
| $ | 46,220 |
|
| $ | 0 |
|
UnderAs of September 30, 2021, the Company’s UPREIT structure, entities and individuals can contribute their propertiesCompany achieved all four VWAP milestones applicable to the Operatingearnout. As a result, the Company in exchangeissued 1,611 and 1,859 OP Units for membership interests in the Operating Company. Properties contributed as part of UPREIT transactions during thethree and nine months ended September 30, 2017 and 2016 were valued at $8,278 and $7,190,2021, respectively which represents the estimated fair value of the properties contributed, less any assumed debt.(see Note 4).
The Company recognized rental income related to UPREIT transactions in the amount of $3,539 and $3,025 for the three months ended September 30, 2017 and 2016, respectively. The Company recognized rental income related to UPREIT transactions in the amount of $9,503 and $8,754 for the nine months ended September 30, 2017 and 2016, respectively.
12.13. Credit Risk Concentrations
The Company maintained bank balances that, at times, exceeded the federally insured limit during the nine months ended September 30, 2017.2021. The Company has not experienced losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts.
The Company’s rental property is managed by the Manager and the Asset Manager as described in Note 3. Management fees and expense reimbursements paid to the Manager and Asset Manager represent 21% and 26% of the Company’s total operating expenses for the three months ended September 30, 2017 and 2016, and 21% and 25% of the Company’s total operating expenses for the nine months ended September 30, 2017 and 2016, respectively. The Company has mortgages and notes payable with fivetwo institutions that comprise 32%, 20%, 16%, 10%,comprised 68% and 10%18% of total mortgages and notes payable at September 30, 2017.2021. The Company hashad mortgages and notes payable with fourthree institutions that comprise 20%comprised 63%, 18%, 12%16%, and 11%10% of total mortgages and notes payable at December 31, 2016.2020. For the three and nine months ended September 30, 20172021 and 2016,2020, the Company had no0 individual tenants or common franchises that accounted for more than 10% of total revenues.revenues, excluding lease termination fees.
14. Equity
13. EquityGeneral
General
Pursuant to the Corporation’s Articles of Incorporation (the “Charter”),On June 28, 2021, the Corporation is authorized to issue an aggregate of 100,000completed its first public follow-on equity offering and issued 11,500 shares of capital stock, consisting of 80,000Common Stock, including shares designated as common stock with a par value of $0.001 per share, and 20,000 shares designated as preferred stock with a par value of $0.001 per share (unrounded). The Board of Directors, without any action by the Corporation’s stockholders, may amend the Charter from time to time to increase or decrease the aggregate number of shares of capital stock or the number of shares of capital stock of any class or series that the Corporation has authority to issue.
Common Stock
The shares of the Corporation’s common stock entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Board of Directors in accordance with the Maryland General Corporation Law and to all rights of a stockholderissued pursuant to the Maryland Generalunderwriters' full exercise of their over-allotment option, at $23.00 per share. The net proceeds, after deducting underwriting discounts and commissions of $10,580 and $433 of other expenses, were $253,487. The Company used the net proceeds to repay the remaining $160,600 principal due under the Company's revolving credit facility. The remaining net proceeds were used for general business purposes, including acquisitions. As of September 30, 2021, the Company had $242 of accrued offering costs related to the public follow-on equity offering.
22
On September 21, 2020, the Corporation Law. The common stock has no preferences or preemptive, conversion or exchange rights.
Pursuant to limited liability company agreementcompleted its IPO and issued 37,000 shares of Class A Common Stock inclusive of the Operating Company, each outstanding membership unitunderwriters’ partial exercise of their over-allotment option on October 20, 2020.
Aside from the conversion discussed below, the terms of the Operating Company is convertibleClass A Common Stock were identical to the terms of the Common Stock. Each share of Class A Common Stock automatically converted into one share of Common Stock on March 20, 2021, and effective March 22, 2021, all shares of Common Stock were listed and freely tradeable on the NYSE under the ticker “BNL.” The Common Stock and Class A Common Stock are collectively referred to as the Corporation’s common stock, subject to the terms and conditions set forth in the Operating Company’s operating agreement.“common stock.”
Preferred Stock
The Charter also provides the Board of Directors with the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such shares of preferred stock, the Board of Directors shall have the power from time to time to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares of preferred stock. As of September 30, 20172021, the Company achieved all four VWAP milestones applicable to the earnout. As a result, the Company issued 944 and December 31, 2016, no1,089 shares of the Corporation’s preferred stock were issued and outstanding.
Share Redemption Program
In 2009, the Board of Directors approved a share redemption program (“Share Redemption Program”) under which the Corporation may repurchase shares of its outstanding common stock after December 31, 2009. The Board of Directors approved and adopted an amended and restated Share Redemption Program effective as of June 28, 2017.
Under the Share Redemption Program, stockholders may request that the Corporation redeem shares after one year from the original investment date, subject to certain exceptions as set forth in the Share Redemption Program. Under the Share Redemption Program, the Corporation is not obligated to repurchase shares and, notwithstanding any other term of the Share Redemption Program, the Board of Directors or IDC may reject any share redemption request made by any stockholder at any time. Shares held for more than 12 months, but less than five years, will be redeemed at a purchase price equal to 95% of the current share value established from time-to-time by the IDC (the “Determined Share Value”), and shares held for five years or more will be redeemed at a purchase price equal to 100% of the current Determined Share Value, subject to certain exemptions as set forth in the Share Redemption Program.
Total shares redeemed pursuant to the Share Redemption Program in any quarter may not exceed 1% of the total number of shares outstanding at the beginning of the calendar year plus 50% of the total number of any additional shares issued during the prior calendar quarter under the Corporation’s Distribution Reinvestment Plan (“DRIP”), provided that the total number of shares redeemed during any calendar year may not exceed 5% of the number of shares outstanding as of the first day of such calendar year. The Board of Directors or the IDC may amend, suspend, or terminate the Share Redemption Program at any time upon 30 days’ notice to the Corporation’s stockholders.
The following table summarizes redemptions under the Share Redemption Program for the three and nine months ended September 30, 20172021, respectively (see Note 4).
On August 23, 2021, the Company established an at-the-market common equity offering program ("ATM Program"), through which it may, from time to time, publicly offer and 2016:
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
(in thousands, except stockholders and shares) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Number of stockholders |
| 6 |
|
| 7 |
|
| 20 |
|
| 20 |
| ||||
Number of shares |
| 23 |
|
| 45 |
|
| 62 |
|
| 87 |
| ||||
Aggregate redemption price |
| $ | 1,808 |
|
| $ | 3,427 |
|
| $ | 4,825 |
|
| $ | 6,487 |
|
Distribution Reinvestment Plan
The Corporation has adopted the DRIP, pursuant to which the Corporation’s stockholders and holders of membership units in the Operating Company (other than the Corporation), may elect to have cash distributions reinvested in additional shares of the Corporation’s common stock. Cash distributions will be reinvested in additionalsell shares of common stock pursuanthaving an aggregate gross sales price of up to $400,000. The ATM Program provides for forward sale agreements, enabling the Company to set the price of shares upon pricing the offering, while delaying the issuance of shares and the receipt of the net proceeds. There was 0 activity relating to the DRIPATM Program during the three and nine months ended September 30, 2021.
15. Stock-Based Compensation
Restricted Stock Awards
On March 1, 2021 and August 4, 2020, the Company awarded 199 and 341 shares of RSAs, respectively, to certain officers and employees under the Equity Incentive Plan. The holder of RSAs is generally entitled at all times on and after the date of issuance of the restricted common shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The RSAs vest over a one, three, or four year period from the date of grant and are subject to the employee’s continued service through the applicable vesting dates and in accordance with the terms of the individual award agreements. The March 1, 2021 grant date fair value per share of $18.66 was based on the market price of the Company’s common stock on the grant date. The August 4, 2020 grant date fair value per share of $20.50 was based on the determined share value established by the Board of Directors ("Determined Share Value"). Prior to the IPO, the Company sold shares of common stock in a private offering at a per share price equal to 98% of the Determined Share Value, which was established at least quarterly by the Board of Directors based on the net asset value ("NAV") of the Company's portfolio, input from management and third-party consultants, and such other factors as the Board of Directors determined. The Company's NAV was calculated using its established valuation process, starting with an estimate of the fair value of the properties in the portfolio as of the applicable distributiondate based upon, among other factors, the implied market price for each asset based upon a review of market capitalization rates.
The following table presents information about the Company’s RSAs:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Compensation cost |
| $ | 701 |
|
| $ | 796 |
|
| $ | 3,124 |
|
| $ | 796 |
|
Dividends declared on unvested RSAs |
|
| 95 |
|
|
| 46 |
|
|
| 296 |
|
| 46 |
| |
Grant date fair value of shares vested during the period |
|
| 0 |
|
|
| 0 |
|
|
| 3,296 |
|
|
| 0 |
|
(in thousands, except recognition period) |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Unamortized value of RSAs |
| $ | 5,508 |
|
| $ | 5,001 |
|
Weighted average amortization period (in years) |
|
| 2.6 |
|
|
| 2.8 |
|
23
The following table presents information about the Company’s RSA activity:
|
| For the Three Months Ended September 30, 2021 |
|
| For the Nine Months Ended September 30, 2021 |
| ||||||||||
(in thousands, except per share amounts) |
| Number of Shares |
|
| Weighted Average |
|
| Number of Shares |
|
| Weighted Average |
| ||||
Unvested at beginning of period |
|
| 378 |
|
| $ | 19.60 |
|
|
| 341 |
|
| $ | 20.50 |
|
Granted |
|
| 1 |
|
|
| 26.02 |
|
|
| 202 |
|
|
| 18.68 |
|
Vested |
|
| 0 |
|
|
| 0 |
|
|
| (164 | ) |
|
| 20.15 |
|
Forfeited |
|
| (5 | ) |
|
| 19.72 |
|
|
| (5 | ) |
|
| 19.72 |
|
Unvested at end of period |
|
| 374 |
|
| $ | 19.61 |
|
|
| 374 |
|
| $ | 19.61 |
|
|
| For the Three Months Ended September 30, 2020 |
|
| For the Nine Months Ended September 30, 2020 |
| ||||||||||
(in thousands, except per share amounts) |
| Number of Shares |
|
| Weighted Average |
|
| Number of Shares |
|
| Weighted Average |
| ||||
Unvested at beginning of period |
|
| 0 |
|
| $ | 0 |
|
|
| 0 |
|
| $ | 0 |
|
Granted |
|
| 341 |
|
|
| 20.50 |
|
|
| 341 |
|
|
| 20.50 |
|
Vested |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Forfeited |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Unvested at end of period |
|
| 341 |
|
| $ | 20.50 |
|
|
| 341 |
|
| $ | 20.50 |
|
Performance-based Restricted Stock Units
On March 1, 2021, the Company issued target grants of 132 PRSUs under the Equity Incentive Plan to the officers of the Company. The awards are non-vested restricted stock units where the vesting percentages and the ultimate number of units vesting will be measured 50% based on the relative total shareholder return (“rTSR”) of the Company’s common stock as compared to the rTSR of peer companies over a three-year period, as identified in the grant agreements, and 50% based on the rTSR of the Company’s common stock as compared to the rTSR of the MSCI US REIT Index over a three year measurement period. The payout schedules can produce vesting percentages ranging from 0% to 200% with a target of 100%. rTSR means the percentage appreciation in the fair market value of one share over the three year measurement period beginning on the date of grant, assuming the reinvestment of dividends on the ex-dividend date. The Corporation may amend the DRIP at any time upon written notice to each participant at least 10 days priortarget number of units is based on achieving a rTSR equal to the effective date55th percentile of the amendment. The Corporation may terminatepeer companies and MSCI US REIT Index. Dividends accrue during the DRIP upon written notice to each participantmeasurement period and will be paid on the PRSUs ultimately earned at least 30 days prior to the effective dateend of the termination. Atmeasurement period in either cash or common stock, at the direction of the Board’s Compensation Committee. The grant date fair value of the PRSUs was measured using a Monte Carlo simulation model based on assumptions including share price volatility.
The following table presents information about the Company’s PRSUs:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||
(in thousands, except recognition period) |
| September 30, 2021 |
|
| September 30, 2021 |
| ||
Compensation cost |
| $ | 223 |
|
| $ | 520 |
|
|
|
|
|
|
|
| ||
|
|
|
|
| September 30, 2021 |
| ||
Unamortized value of PRSUs |
|
|
|
| $ | 2,154 |
| |
Weighted average amortization period (in years) |
|
|
|
|
| 2.4 |
|
There were 0 PRSUs at September 30, 2017 and December 31, 2016, a total of 1,451 and 1,076, shares of common stock, respectively, have been issued under2020.
The following table presents information about the DRIP.Company’s PRSU activity:
14.
|
| For the Three Months Ended September 30, 2021 |
|
| For the Nine Months Ended September 30, 2021 |
| ||||||||||
(in thousands, except per share amounts) |
| Number of Shares |
|
| Weighted Average |
|
| Number of Shares |
|
| Weighted Average |
| ||||
Unvested at beginning of period |
|
| 110 |
|
| $ | 24.40 |
|
|
| 0 |
|
| $ | 0 |
|
Granted |
|
| 0 |
|
|
| 0 |
|
|
| 132 |
|
|
| 24.40 |
|
Vested |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Forfeited |
|
| 0 |
|
|
| 0 |
|
|
| (22 | ) |
|
| 24.40 |
|
Unvested at end of period |
|
| 110 |
|
| $ | 24.40 |
|
|
| 110 |
|
| $ | 24.40 |
|
24
16. Earnings per Share
The following table summarizes the components used in the calculation of basic and diluted earnings per share (“EPS”):
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands, except per share amounts) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net earnings attributable to Broadstone Net Lease, Inc. common |
| $ | 28,698 |
|
| $ | 8,750 |
|
| $ | 72,135 |
|
| $ | 34,919 |
|
Less earnings allocated to unvested restricted shares |
|
| (95 | ) |
|
| (46 | ) |
|
| (296 | ) |
|
| (46 | ) |
Net earnings used to compute basic earnings per common share |
| $ | 28,603 |
|
| $ | 8,704 |
|
| $ | 71,839 |
|
| $ | 34,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net earnings used to compute basic earnings per share |
| $ | 28,603 |
|
| $ | 8,704 |
|
| $ | 71,839 |
|
| $ | 34,873 |
|
Net earnings attributable to non-controlling interests |
|
| 1,824 |
|
|
| 961 |
|
|
| 5,167 |
|
|
| 3,738 |
|
Net earnings used to compute diluted earnings per common share |
| $ | 30,427 |
|
| $ | 9,665 |
|
| $ | 77,006 |
|
| $ | 38,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common shares outstanding |
|
| 159,604 |
|
|
| 111,371 |
|
|
| 150,593 |
|
|
| 108,300 |
|
Less weighted average unvested restricted shares (a) |
|
| (378 | ) |
|
| (216 | ) |
|
| (366 | ) |
|
| (72 | ) |
Weighted average number of common shares outstanding used in |
|
| 159,226 |
|
|
| 111,155 |
|
|
| 150,227 |
|
|
| 108,228 |
|
Effects of restricted stock units (b) |
|
| 219 |
|
|
| 0 |
|
|
| 172 |
|
|
| 0 |
|
Effects of convertible membership units (c) |
|
| 10,142 |
|
|
| 12,226 |
|
|
| 10,874 |
|
|
| 11,519 |
|
Weighted average number of common shares outstanding used in |
|
| 169,587 |
|
|
| 123,381 |
|
|
| 161,273 |
|
|
| 119,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share |
| $ | 0.18 |
|
| $ | 0.08 |
|
| $ | 0.48 |
|
| $ | 0.32 |
|
Diluted earnings per share |
| $ | 0.18 |
|
| $ | 0.08 |
|
| $ | 0.48 |
|
| $ | 0.32 |
|
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
(in thousands, except per share) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Broadstone Net Lease, Inc. |
| $ | 11,948 |
|
| $ | 13,958 |
|
| $ | 39,269 |
|
| $ | 23,874 |
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Broadstone Net Lease, Inc. |
| $ | 11,948 |
|
| $ | 13,958 |
|
| $ | 39,269 |
|
| $ | 23,874 |
|
Net earnings attributable to non-controlling interests |
|
| 1,042 |
|
|
| 1,459 |
|
|
| 3,460 |
|
|
| 2,600 |
|
|
| $ | 12,990 |
|
| $ | 15,417 |
|
| $ | 42,729 |
|
| $ | 26,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in basic earnings per share |
|
| 17,617 |
|
|
| 13,647 |
|
|
| 16,607 |
|
|
| 12,738 |
|
Effects of convertible membership units |
|
| 1,530 |
|
|
| 1,427 |
|
|
| 1,462 |
|
|
| 1,416 |
|
Weighted average number of common shares outstanding used in diluted earnings per share |
|
| 19,147 |
|
|
| 15,074 |
|
|
| 18,069 |
|
|
| 14,154 |
|
Basic and diluted net earnings per common share |
| $ | 0.68 |
|
| $ | 1.02 |
|
| $ | 2.36 |
|
| $ | 1.87 |
|
In(a)
15.17. Supplemental Cash Flow Disclosures
Cash paid for interest was $20,364$38,551 and $16,430$50,853 for the nine months ended September 30, 20172021 and 2016,2020, respectively. Cash paid for state income and franchise taxes was $751$1,144 and $323$1,385 for the nine months ended September 30, 20172021 and 2016,2020, respectively.
The following are non-cash transactions and have been excluded from the accompanying Condensed Consolidated Statements of Cash Flows:
During the nine months ended September 30, 2017 and 2016,2021, the Corporation issued 375 and 284 shares, respectively, of the Corporation’s common stock with a value of approximately $29,031 and $20,659, respectively, under the terms of the DRIP (see Note 13).
During the nine months ended September 30, 2017 and 2016, the Operating Company issued 103 and 97, respectively, membership units in the Operating Company in exchange for property contributed in UPREIT transactionsconverted 2,888 OP Units valued at $8,278 and $7,190, respectively (see Note 11).
At September 30, 20172021 and 2016,2020, dividend amounts declared and accrued but not yet paid amounted to $8,099$43,874 and $6,303,$20,722, respectively.
In connection with fire damage incurred at three properties duringDuring the nine months ended September 30, 2017,2020, the Corporation issued 275 shares of Common Stock with a value of approximately $5,733 under the terms of the Distribution Reinvestment Plan (“DRIP”). The Company terminated the DRIP effective February 10, 2020.
16.25
18. Commitments and Contingencies
Litigation
From time to time, the Company is a party to various litigation matters incidental to the conduct of the Company’s business. While the resolution of such matters cannot be predicted with certainty, based on currently available information, the Company does not believe that the final outcome of any of these matters will have a material effect on its consolidated financial position, results of operations, or liquidity.
Property and Acquisition Related
In connection with ownership and operation of real estate, the Company may potentially be liable for costcosts and damages related to environmental matters. The Company is not aware of any non-compliance, liability, claim, or other environmental condition that would have a material effect on its consolidated financial position, results of operations, or liquidity.
As partThe Company has a commitment to fund a building expansion expected to be completed in 2022, totaling $17,388 as of acquisitions closed during 2016September 30, 2021, in exchange for an increase in rent contractually scheduled to commence in August 2022.
The Company is a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and one acquisition closedto the Founding Owners’ Tax Protection Agreement in 2017,connection with the Internalization. The tax protection agreements require the Company assumed four separate leaseto indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. The Company is required to allocate an amount of nonrecourse liabilities to each beneficiary that provided for a total of $11,464is at least equal to the minimum liability amount, as contained in tenant improvement allowances. During the nine months ended September 30,2017agreements. The minimum liability amount and the year ended December 31, 2016, paymentsassociated allocation of $3,863nonrecourse liabilities are calculated in accordance with applicable tax regulations, are completed at the OP level, and $974, respectively, have been made for work completeddo not represent GAAP accounting. Therefore, there is no impact to the Condensed Consolidated Financial Statements. Based on values as of September 30, 2021, taxable sales of the applicable properties would trigger liability under these allowances,the agreements of approximately $22,300. Based on information available, the Company does not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future.
In the normal course of business, the Company enters into various types of commitments to purchase real estate properties. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated to purchase the properties.
Obligations Under Operating Leases
Subsequent to the Internalization, the Company leases office space for its corporate headquarters and other locations under non-cancellable operating leases with expiration dates ranging from 2021 to 2023. These leases contain provisions for fixed monthly payments, subject to rent escalations. None of the leases are subject to any sublease agreement.
The Company also leases land at certain properties under non-cancellable operating leases (“ground leases”) with initial lease terms ranging from 2034 to 2069. These leases contain provisions for fixed monthly payments, subject to rent escalations. One lease requires the Company to make annual rent payments calculated based upon sales generated at the property (“percentage rent”). None of the leases are subject to any sublease agreement.
26
The following table summarizes the total tenant improvement allowancelease costs associated with operating leases:
|
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands) |
| Financial Statement Presentation |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Operating lease costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Office leases |
| General and administrative |
| $ | 158 |
|
| $ | 155 |
|
| $ | 473 |
|
| $ | 362 |
|
Ground leases |
| Property and operating expense |
|
| 39 |
|
|
| 33 |
|
|
| 106 |
|
|
| 100 |
|
Variable lease costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Ground leases |
| Property and operating expense |
|
| 14 |
|
|
| 13 |
|
|
| 42 |
|
|
| 43 |
|
Total lease costs |
|
|
| $ | 211 |
|
| $ | 201 |
|
| $ | 621 |
|
| $ | 505 |
|
The following table summarizes payments associated with obligations under operating leases, reported as Net cash provided by operating activities on the accompanying Condensed Consolidated Statements of $6,627 and $9,490Cash Flows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Operating lease payments |
| $ | 191 |
|
| $ | 179 |
|
| $ | 618 |
|
| $ | 490 |
|
Estimated future lease payments required under non-cancelable operating leases at September 30, 20172021, and a reconciliation to the lease liabilities, is as follows:
(in thousands) |
|
|
| |
Remainder of 2021 |
| $ | 186 |
|
2022 |
|
| 723 |
|
2023 |
|
| 539 |
|
2024 |
|
| 153 |
|
2025 |
|
| 155 |
|
Thereafter |
|
| 3,777 |
|
Total undiscounted cash flows |
|
| 5,533 |
|
Less imputed interest |
|
| (2,819 | ) |
Lease liabilities |
| $ | 2,714 |
|
The above rental payments include future minimum lease payments due during the initial lease terms. Such amounts exclude any contingent amounts associated with percentage rent that may become due in future periods.
19. Subsequent Events
On October 15, 2021, the Company paid distributions totaling $43,764.
On October 28, 2021, the Board of Directors declared a quarterly distribution of $0.265 per share on the Company’s common stock and OP Units for the fourth quarter of 2021, which will be payable on or before January 15, 2022 to stockholders and unit holders of record as of December 31, 2016, respectively.2021.
During the nine months ended September 30, 2017, three properties held in the Company’s real estate portfolio incurred losses due to fire damage. Management anticipates that the proceeds received from insurance will exceed the book value of the property destroyed, and accordingly a gain on insurance settlement may be recorded in a future period upon receipt of funds.
17. Subsequent Events
Subsequent to September 30, 2017, the Company has raised $18,443 for a total of 231 shares of the Corporation’s common stock through monthly equity closings, including dividend reinvestments, and $4,635 for a total of 58 units of the Operating Company’s membership interest through an UPREIT transaction. Through November 13, 2017, the Company has paid $8,099 in distributions, including dividend reinvestments.
Subsequent to September 30, 2017,2021, the Company continued to expand its operations through the acquisition of additional rental property and associated intangible assets and liabilities. The Company acquired approximately $25,693$12,970 of rental property and associated intangible assets and liabilities (see Note 4), and assumed $11,933 of liabilities.5).
On November 7, 2017,Subsequent to September 30, 2021, the Board of Directors declared a distribution of $0.415 per shareCompany borrowed $38,000 on the Corporation’s common stockUnsecured revolving credit facility, the proceeds of which were used to fund acquisitions and approved a distributionfor other general corporate purposes.
27
Item 2. Management’s Discussion and Analysis of $0.415 per membership unitFinancial Condition and Results of the Operating Company for monthly distributions through January 2018. The distributions are payable on or prior to the 15th of the following month to the Corporation’s common stockholders and the Operating Company’s unit holders of record on the last day of the month. In addition, the IDC determined the Determined Share Value for the Corporation’s common stock to be $81.00 per share for subscription agreements received from November 1, 2017 through January 31, 2018.Operations
Except where the context suggests otherwise, as used in this Quarterly Report on Form 10-Q, the terms “BNL,” “we,” “us,” “our,” and “our company” refer to Broadstone Net Lease, Inc., a Maryland corporation incorporated on October 18, 2007, and, as required by context, Broadstone Net Lease, LLC, a New York limited liability company (the “OP”), which we refer to as the or our “Operating Company,“OP,” and to their respective subsidiaries.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statementsCondensed Consolidated Financial Statements and the accompanying notesNotes to the consolidated financial statementsCondensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q may containcontains forward-looking statements, withinwhich reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends, that are intended to be made pursuant to the meaningsafe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding, among other things, our plans, strategies, and prospects, both business and financial.. Forward-looking statements include butall statements that are not limited to,historical facts. In some cases, you can identify these forward-looking statements that represent our beliefs concerning future operations, strategies, financial results or other developments. Forward-looking statements can be identified by the use of forward-looking terminologywords such as but not limited to,“outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “expect,“could,” “anticipate,“seeks,” “estimate,“approximately,” “would be,“projects,” “believe,“predicts,” or “continue”“intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other variationscomparable words. All of comparable terminology. Because thesethe forward-looking statements are basedincluded in this Quarterly Report on estimates and assumptions thatForm 10-Q are subject to significantvarious risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business economic,decisions, all of which are difficult or impossible to predict accurately and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.control. Although we believe that our plans, intentions, andthe expectations reflected in or suggested by thesesuch forward-looking statements are based on reasonable we cannot assure you that we will achieveassumptions, our actual results, performance, and achievements could differ materially from those expressed in or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions. Readers are cautioned not to place undue reliance on theseby the forward-looking statements which speak only asand may be affected by a variety of the date this Form 10-Q is filed with the Securitiesrisks and Exchange Commission (the “SEC”). Except as required by law, we do not undertake any obligationother factors. Accordingly, there are or will be important factors that could cause actual outcomes or results to update or revise anydiffer materially from such forward-looking statements contained in this Form 10-Q. statements.
Important factors that could cause actual results to differ materially from the forward-looking statements are discloseddescribed in Item 1. “Business,” Item 1A. “Risk Factors”Factors,” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Amendment No. 2 to our Registration Statement2020 Annual Report on Form 10,10-K, as filed with the SEC on June 29, 2017 (the “Form 10”).February 25, 2021. The “Risk Factors” of our 2020 Annual Report should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this Quarterly Report on Form 10-Q.
OverviewYou are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report on Form 10-Q. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this Quarterly Report on Form 10-Q will increase with the passage of time. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
WeExplanatory Note and Certain Defined Terms
Unless the context otherwise requires, the following terms and phrases are an externally managedused throughout this MD&A as described below:
28
Overview
We acquire, own, and holdmanage primarily single-tenant commercial real estate properties throughout the United States that are net leased to the properties’ operators under long-term leases. We focus on real estate that is operated by a single tenant which is an integral part of the tenant’s business. Our diversified portfolio of real estate includes retail properties, such as quick service and casual dining restaurants, healthcare facilities, industrial manufacturing facilities, warehouse and distribution centers, and corporate offices, amongst others. We target properties with credit-worthy tenants that look to engage in a long-term lease relationship. Through long-term leases, our tenants are ablebasis to retain control of their critical locations, while conserving their debt and equity capital to fund their fundamental business operations.
As of September 30, 2017, we owned a diversified portfoliogroup of 477 individualtenants. Since our inception in 2007, we have selectively invested in net leased commercial properties located in 37 states comprising approximately 14.1 million rentable square feet of operational space. As of September 30, 2017, our properties were 100% leased to 119 different commercial tenants, with no single tenant accounting for more than 5% of our annual rental stream.
We elected to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with our taxable year ending December 31, 2008. As a REIT, we are not subject to federal income tax to the extent that we meet certain requirements, including that we distribute at least 90% of our annual taxable income to our stockholders and satisfy other requirements based on the composition of our asset portfolio and sources of income.
We operate under the direction of our board of directors, which is responsible for the management and control of our affairs. Our board of directors has retained Broadstone Real Estate, LLC (the “Manager”), to provide certain property management services for our properties, and Broadstone Asset Management, LLC, the wholly-owned subsidiary of the Manager (the “Asset Manager”), to manage our day-to-day affairs and implement our investment strategy, subject to our board of director’s direction, oversight, and approval.
We conduct substantially all of our activities through, and all of our properties are held directly or indirectly by, Broadstone Net Lease, LLC (the “Operating Company”). We are the sole managing member of the Operating Company and as of September 30, 2017, we owned approximately 92.3% of its issued and outstanding membership units, with the remaining 7.7% of its membership units held by persons who were issued membership units in exchange for their interests in properties acquired by the Operating Company.
As we conduct substantially all of our operations through the Operating Company, we are structured as what is referred to as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”). The UPREIT structure allows a property owner to contribute their property to the Operating Company in exchange for membership unitsassets in the Operating Companyindustrial, healthcare, restaurant, retail, and generally defer taxation of a resulting gain until the contributor later disposes of the membership units. The membership units of the Operating Company held by members of the Operating Company other than us are referred to herein and in our consolidated financial statements as “non-controlling interests,” “non-controlling membership units,” or “membership units,” and are convertible into shares of our common stock on a one-for-one basis, subject to certain restrictions. We allocate consolidated earnings to holders of our common stock and non-controlling membership unit holders of the Operating Company based on the weighted average number of shares of our common stock and non-controlling membership units outstanding during the year. Approximately 1.5 million non-controlling membership units were outstanding as of September 30, 2017, with a year-to-date weighted average of 1.5 million.
We commenced our ongoing private offering of shares of our common stock (our “private offering”) in 2007. The first closing of our private offering occurred on December 31, 2007, and we have conducted additional closings at least once every calendar quarter since then. Currently, we close sales of additional shares of our common stock monthly. Shares of our common stock are currently being offered in our private offering at $81.00 per share, provided that the per share offering price may be adjusted quarterly by the committee of our board of directors comprised of our independent directors (“IDC”) based on the Determined Share Value (as defined below), which is based on input from management, and such other factors as our IDC may consider. Foroffice property types. During the nine months ended September 30, 2017,2021, we sold 3.2 million shares of our common stock in our private offering, including 0.4 million shares of common stock issued pursuant to our Distribution Reinvestment Plan (“DRIP”), for gross offering proceeds of approximately $249.6 million. We intend to use substantially all of the net proceeds from our private offering, supplemented with additional borrowings, to continue to invest in additional net leased properties. We conduct our private offering in reliance upon the exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), provided by Rule 506(c) of Regulation D promulgated under the Securities Act.
As of September 30, 2017, there were 18.3 million shares of our common stock issued and outstanding, and 1.5 million membership units in the Operating Company issued and outstanding. Each outstanding membership unit in the Operating Company is convertible on a one-for-one basis into shares of our common stock, subject to certain limitations.
Our principal executive offices are located at 800 Clinton Square, Rochester, New York, 14604, and our telephone number is (585) 287-6500.
Q3 2017 Highlights
For the three and nine months ended September 30, 2017, we:
Generated earnings per share on a GAAP basis (as defined below), including amounts attributable to non-controlling interests, of $0.68 and $2.36 for the three and nine months ended September 30, 2017, respectively.
Generated funds from operations (“FFO”), a non-GAAP financial measure, of $1.42 and $4.43 per diluted share for the three and nine months ended September 30, 2017, respectively.
Generated adjusted funds from operations (“AFFO”), a non-GAAP financial measure, of $1.30 and $4.04 per diluted share for the three and nine months ended September 30, 2017, respectively.
Subsequent to quarter end, the IDC approved increasing the Determined Share Value to $81.00 per share, from $80.00 per share, which will remain in effect through January 31, 2018.
Closed seven real estate acquisitions during the three months ended September 30, 2017, totaling $159.2invested $507.2 million, excluding capitalized acquisition expenses, adding 22 newcosts, in 80 properties at a weighted average initial cash capitalization rate of 7.7%6.4%. The acquisitions included properties acquired hadin industrial (48%, based on ABR), healthcare (27%), and retail (25%) asset classes located across 27 states with a weighted average initial lease term of 13.0 years at the time of acquisition and weighted averageminimum annual rent increases of 1.8%.
Received $79.2 million in investments from new16.4 years and existing stockholders during the three months ended1.5%, respectively. As of September 30, 2017. As of the end of the quarter we had 2,546 common stockholders and 51 holders of non-controlling membership units.
Collected over 99% of rents due during the three and nine months ended September 30, 2017, and maintained a 100% leased portfolio.
FFO and AFFO are performance measures that are not calculated in accordance2021, our portfolio has grown to 696 properties, with accounting principles generally accepted in the United States of America (“GAAP”). We present these non-GAAP measures as we believe certain investors and other users of our financial information use them as part of their evaluation of our historical operating performance. Please see our discussion below under the heading “Net Income and Non-GAAP Measures (FFO and AFFO),” which includes discussion of the definition, purpose, and use of these non-GAAP measures as well as a reconciliation of each to the most comparable GAAP measure.
Our Properties and Investment Objectives
We target acquisitions of fee simple interests in individual properties priced between $5 million and $75 million. Portfolios may be significantly larger, depending on balance sheet capacity and whether the portfolio is diversified or concentrated by tenant, geography, or brand. Our investment policy (“Investment Policy”) has three primary objectives that drive the investments we make: (1) preserve, protect, and return capital to investors; (2) realize increased cash available for distributions and long-term capital appreciation from growth in the rental income and value of our properties; and (3) maximize the level of sustainable cash distributions to our investors. We primarily acquire freestanding, single-tenant commercial695 properties located in the United States either directly from our credit-worthy42 U.S. states and one property located in British Columbia, Canada.
We focus on investing in real estate that is operated by creditworthy single tenants in sale-leaseback transactions, where they sell usindustries characterized by positive business drivers and trends. We target properties that are an integral part of the tenants’ businesses and for which there are therefore opportunities to secure long-term net leases. Through long-term net leases, our tenants are able to retain operational control of their propertiesstrategically important locations, while allocating their debt and simultaneously lease them back through long-term, triple-net leases, or through the purchase of properties already under a triple-net lease (i.e., a lease assumption). Under either scenario, our properties are generally under lease and fully occupied at the time of acquisition. Ourequity capital to fund their core business operations rather than real estate portfolio asownership.
29
Regulation FD Disclosures
We believe the changes will allow us greater flexibility in deploying capital in investment opportunities that maximize the risk-adjusted return to our shareholders. Our criteria for selecting properties (“Property Selection Criteria”) is based on three pillars of underwriting evaluation:
fundamental value and characteristicsuse any of the underlying real estate,
creditworthiness offollowing to comply with our disclosure obligations under Regulation FD: SEC filings, press releases, public conference calls, or our website. We routinely post important information on our website at www.Broadstone.com, including information that may be deemed material. We encourage our shareholders and others interested in our company to monitor these distribution channels for material disclosures. Our website address is included in this Quarterly Report as a textual reference only and the tenant, and
transaction structure and pricing.
We believe we can achieve an appropriate risk-adjusted return through these pillars and conservatively project a property’s potential to generate targeted returns from current and future cash flows. We believe targeted returns are achieved through a combination of in-place income atinformation on the time of acquisition, rent growth, and a property’s potential for appreciation.website is not incorporated by reference in this Quarterly Report.
To achieve an appropriate risk-adjusted return, we maintain a diversified portfolio of real estate spread across multiple tenants, industries, and geographic locations. Real Estate Portfolio Information
The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as of September 30, 2017.2021. The percentages below are calculated based on our contractual rental revenue over the next twelve months (“NTM Rent”), on a per property type basis divided by total NTM Rent. Late payments, non-payments or other unscheduled payments are not considered in the calculation. NTM Rent includes the impactABR of contractual rent escalations, excluding any potential variable rent increases that are based on consumer price index (“CPI”) and/or the tenants’ sales volume.$324.6 million as of September 30, 2021.
Industry
Diversification by % of NTM RentProperty Type
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Geographic
30
Property Type |
| # Properties |
|
| ABR |
|
| ABR as a % of |
|
| Square Feet |
|
| SF as a % of |
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Industrial |
|
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Manufacturing |
|
| 61 |
|
| $ | 47,962 |
|
|
| 14.8 | % |
|
| 8,715 |
|
|
| 27.8 | % |
Distribution & Warehouse |
|
| 44 |
|
|
| 47,563 |
|
|
| 14.6 | % |
|
| 9,052 |
|
|
| 28.8 | % |
Food Processing |
|
| 16 |
|
|
| 21,357 |
|
|
| 6.6 | % |
|
| 2,405 |
|
|
| 7.7 | % |
Flex and R&D |
|
| 7 |
|
|
| 17,025 |
|
|
| 5.2 | % |
|
| 1,457 |
|
|
| 4.6 | % |
Cold Storage |
|
| 4 |
|
|
| 12,620 |
|
|
| 3.9 | % |
|
| 933 |
|
|
| 3.0 | % |
Services |
|
| 19 |
|
|
| 7,787 |
|
|
| 2.4 | % |
|
| 446 |
|
|
| 1.4 | % |
Industrial Total |
|
| 151 |
|
|
| 154,314 |
|
|
| 47.5 | % |
|
| 23,008 |
|
|
| 73.3 | % |
Healthcare |
|
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|
|
|
|
|
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|
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Clinical |
|
| 50 |
|
|
| 25,009 |
|
|
| 7.7 | % |
|
| 1,055 |
|
|
| 3.4 | % |
Healthcare Services |
|
| 28 |
|
|
| 12,413 |
|
|
| 3.8 | % |
|
| 463 |
|
|
| 1.5 | % |
Animal Health Services |
|
| 27 |
|
|
| 10,196 |
|
|
| 3.1 | % |
|
| 405 |
|
|
| 1.3 | % |
Surgical |
|
| 11 |
|
|
| 9,611 |
|
|
| 3.0 | % |
|
| 316 |
|
|
| 1.0 | % |
Life Science |
|
| 9 |
|
|
| 7,655 |
|
|
| 2.4 | % |
|
| 549 |
|
|
| 1.7 | % |
Untenanted |
|
| 2 |
|
|
| — |
|
|
| 0.0 | % |
|
| 23 |
|
|
| 0.1 | % |
Healthcare Total |
|
| 127 |
|
|
| 64,884 |
|
|
| 20.0 | % |
|
| 2,811 |
|
|
| 9.0 | % |
Restaurant |
|
|
|
|
|
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|
|
|
|
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Quick Service Restaurants |
|
| 148 |
|
|
| 24,522 |
|
|
| 7.5 | % |
|
| 505 |
|
|
| 1.6 | % |
Casual Dining |
|
| 82 |
|
|
| 19,362 |
|
|
| 6.0 | % |
|
| 527 |
|
|
| 1.7 | % |
Untenanted |
|
| 1 |
|
|
| — |
|
|
| 0.0 | % |
|
| 5 |
|
|
| 0.0 | % |
Restaurant Total |
|
| 231 |
|
|
| 43,884 |
|
|
| 13.5 | % |
|
| 1,037 |
|
|
| 3.3 | % |
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
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| |||||
General Merchandise |
|
| 90 |
|
|
| 15,958 |
|
|
| 4.9 | % |
|
| 1,178 |
|
|
| 3.8 | % |
Automotive |
|
| 68 |
|
|
| 12,914 |
|
|
| 4.0 | % |
|
| 844 |
|
|
| 2.7 | % |
Home Furnishings |
|
| 13 |
|
|
| 6,999 |
|
|
| 2.2 | % |
|
| 797 |
|
|
| 2.5 | % |
Untenanted |
|
| 1 |
|
|
| — |
|
|
| 0.0 | % |
|
| 34 |
|
|
| 0.1 | % |
Retail Total |
|
| 172 |
|
|
| 35,871 |
|
|
| 11.1 | % |
|
| 2,853 |
|
|
| 9.1 | % |
Office |
|
|
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|
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| |||||
Corporate Headquarters |
|
| 6 |
|
|
| 10,221 |
|
|
| 3.1 | % |
|
| 671 |
|
|
| 2.1 | % |
Strategic Operations |
|
| 5 |
|
|
| 9,587 |
|
|
| 3.0 | % |
|
| 615 |
|
|
| 2.0 | % |
Call Center |
|
| 4 |
|
|
| 5,853 |
|
|
| 1.8 | % |
|
| 391 |
|
|
| 1.2 | % |
Office Total |
|
| 15 |
|
|
| 25,661 |
|
|
| 7.9 | % |
|
| 1,677 |
|
|
| 5.3 | % |
Total |
|
| 696 |
|
| $ | 324,614 |
|
|
| 100.0 | % |
|
| 31,386 |
|
|
| 100.0 | % |
31
Diversification by % of NTM RentTenant
Tenant |
| Property Type |
| # Properties |
|
| ABR |
|
| ABR as a % |
|
| Square Feet |
|
| SF as a % |
| |||||
Jack's Family Restaurants LP* |
| Quick Service Restaurants |
|
| 43 |
|
| $ | 7,026 |
|
|
| 2.2 | % |
|
| 147 |
|
|
| 0.5 | % |
Red Lobster Hospitality & Red Lobster |
| Casual Dining |
|
| 22 |
|
|
| 6,994 |
|
|
| 2.1 | % |
|
| 181 |
|
|
| 0.6 | % |
Joseph T. Ryerson & Son, Inc |
| Distribution & Warehouse |
|
| 11 |
|
|
| 6,395 |
|
|
| 2.0 | % |
|
| 1,537 |
|
|
| 4.9 | % |
Axcelis Technologies, Inc. |
| Flex and R&D |
|
| 1 |
|
|
| 5,859 |
|
|
| 1.8 | % |
|
| 417 |
|
|
| 1.4 | % |
Hensley & Company* |
| Distribution & Warehouse |
|
| 3 |
|
|
| 5,756 |
|
|
| 1.8 | % |
|
| 577 |
|
|
| 1.8 | % |
BluePearl Holdings, LLC* |
| Animal Health Services |
|
| 13 |
|
|
| 5,309 |
|
|
| 1.6 | % |
|
| 160 |
|
|
| 0.5 | % |
Outback Steakhouse of Florida LLC*1 |
| Casual Dining |
|
| 22 |
|
|
| 5,192 |
|
|
| 1.6 | % |
|
| 140 |
|
|
| 0.4 | % |
Krispy Kreme Doughnut Corporation |
| Quick Service Restaurants/ |
|
| 27 |
|
|
| 5,034 |
|
|
| 1.5 | % |
|
| 156 |
|
|
| 0.5 | % |
Siemens Medical Solutions USA, Inc. & |
| Manufacturing/Flex |
|
| 2 |
|
|
| 4,862 |
|
|
| 1.5 | % |
|
| 545 |
|
|
| 1.7 | % |
Big Tex Trailer Manufacturing, Inc.* |
| Automotive/Distribution & |
|
| 17 |
|
|
| 4,860 |
|
|
| 1.5 | % |
|
| 1,302 |
|
|
| 4.1 | % |
Total Top 10 Tenants |
|
|
|
| 161 |
|
|
| 57,287 |
|
|
| 17.6 | % |
|
| 5,162 |
|
|
| 16.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Santa Cruz Valley Hospital |
| Healthcare Facilities |
|
| 1 |
|
|
| 4,500 |
|
|
| 1.4 | % |
|
| 148 |
|
|
| 0.5 | % |
Nestle' Dreyer's Ice Cream Company |
| Cold Storage |
|
| 1 |
|
|
| 4,409 |
|
|
| 1.4 | % |
|
| 310 |
|
|
| 1.0 | % |
Tractor Supply Company |
| General Merchandise |
|
| 17 |
|
|
| 4,406 |
|
|
| 1.4 | % |
|
| 341 |
|
|
| 1.1 | % |
Arkansas Surgical Hospital |
| Surgical |
|
| 1 |
|
|
| 4,260 |
|
|
| 1.3 | % |
|
| 129 |
|
|
| 0.4 | % |
American Signature, Inc. |
| Home Furnishings |
|
| 6 |
|
|
| 4,224 |
|
|
| 1.3 | % |
|
| 474 |
|
|
| 1.5 | % |
Cascade Aerospace Inc. |
| Manufacturing |
|
| 1 |
|
|
| 4,084 |
|
|
| 1.2 | % |
|
| 231 |
|
|
| 0.7 | % |
Dollar General Corporation |
| General Merchandise |
|
| 40 |
|
|
| 4,077 |
|
|
| 1.2 | % |
|
| 371 |
|
|
| 1.2 | % |
Fresh Express Incorporated |
| Food Processing |
|
| 1 |
|
|
| 3,869 |
|
|
| 1.2 | % |
|
| 335 |
|
|
| 1.1 | % |
Aventiv Technologies, LLC |
| Corporate Headquarters |
|
| 1 |
|
|
| 3,819 |
|
|
| 1.2 | % |
|
| 154 |
|
|
| 0.5 | % |
Kith Kitchens* |
| Manufacturing |
|
| 3 |
|
|
| 3,561 |
|
|
| 1.1 | % |
|
| 843 |
|
|
| 2.7 | % |
Total Top 20 Tenants |
|
|
|
| 233 |
|
| $ | 98,496 |
|
|
| 30.3 | % |
|
| 8,498 |
|
|
| 27.1 | % |
1Tenant’s properties include 20 Outback Steakhouse restaurants and two Carrabba’s Italian Grill restaurants.
*Subject to a master lease.
Diversification by Brand
Brand |
| Property Type |
| # Properties |
|
| ABR |
|
| ABR as a % |
|
| Square Feet |
|
| SF as a % |
| |||||
Jack's Family Restaurants* |
| Quick Service Restaurants |
|
| 43 |
|
| $ | 7,026 |
|
|
| 2.2 | % |
|
| 147 |
|
|
| 0.5 | % |
Red Lobster* |
| Casual Dining |
|
| 22 |
|
|
| 6,994 |
|
|
| 2.1 | % |
|
| 181 |
|
|
| 0.6 | % |
Ryerson |
| Distribution & Warehouse |
|
| 11 |
|
|
| 6,395 |
|
|
| 2.0 | % |
|
| 1,537 |
|
|
| 4.9 | % |
Axcelis |
| Flex and R&D |
|
| 1 |
|
|
| 5,859 |
|
|
| 1.8 | % |
|
| 417 |
|
|
| 1.4 | % |
Hensley* |
| Distribution & Warehouse |
|
| 3 |
|
|
| 5,756 |
|
|
| 1.8 | % |
|
| 577 |
|
|
| 1.8 | % |
BluePearl Veterinary Partners* |
| Animal Health Services |
|
| 13 |
|
|
| 5,309 |
|
|
| 1.6 | % |
|
| 160 |
|
|
| 0.5 | % |
Bob Evans Farms*1 |
| Casual Dining/Food |
|
| 21 |
|
|
| 5,247 |
|
|
| 1.6 | % |
|
| 282 |
|
|
| 0.9 | % |
Krispy Kreme |
| Quick Service Restaurants/ |
|
| 27 |
|
|
| 5,034 |
|
|
| 1.5 | % |
|
| 156 |
|
|
| 0.5 | % |
Siemens |
| Manufacturing/Flex |
|
| 2 |
|
|
| 4,862 |
|
|
| 1.5 | % |
|
| 545 |
|
|
| 1.7 | % |
Big Tex Trailers* |
| Automotive/Distribution & |
|
| 17 |
|
|
| 4,860 |
|
|
| 1.5 | % |
|
| 1,302 |
|
|
| 4.1 | % |
Total Top 10 Brands |
|
|
|
| 160 |
|
|
| 57,342 |
|
|
| 17.6 | % |
|
| 5,304 |
|
|
| 16.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Wendy's** |
| Quick Service Restaurants |
|
| 31 |
|
|
| 4,549 |
|
|
| 1.5 | % |
|
| 88 |
|
|
| 0.3 | % |
Santa Cruz Valley Hospital |
| Healthcare Facilities |
|
| 1 |
|
|
| 4,500 |
|
|
| 1.4 | % |
|
| 148 |
|
|
| 0.5 | % |
Outback Steakhouse* |
| Casual Dining |
|
| 20 |
|
|
| 4,492 |
|
|
| 1.4 | % |
|
| 126 |
|
|
| 0.4 | % |
Nestle' |
| Cold Storage |
|
| 1 |
|
|
| 4,409 |
|
|
| 1.4 | % |
|
| 310 |
|
|
| 1.0 | % |
Tractor Supply Co. |
| General Merchandise |
|
| 17 |
|
|
| 4,406 |
|
|
| 1.4 | % |
|
| 341 |
|
|
| 1.1 | % |
Arkansas Surgical Hospital |
| Surgical |
|
| 1 |
|
|
| 4,260 |
|
|
| 1.3 | % |
|
| 129 |
|
|
| 0.4 | % |
Value City Furniture |
| Home Furnishings |
|
| 6 |
|
|
| 4,224 |
|
|
| 1.3 | % |
|
| 474 |
|
|
| 1.5 | % |
Taco Bell** |
| Quick Service Restaurants |
|
| 31 |
|
|
| 4,122 |
|
|
| 1.2 | % |
|
| 80 |
|
|
| 0.2 | % |
Cascade Aerospace |
| Manufacturing |
|
| 1 |
|
|
| 4,084 |
|
|
| 1.2 | % |
|
| 231 |
|
|
| 0.7 | % |
Dollar General |
| General Merchandise |
|
| 40 |
|
|
| 4,077 |
|
|
| 1.2 | % |
|
| 371 |
|
|
| 1.2 | % |
Total Top 20 Brands |
|
|
|
| 309 |
|
| $ | 100,465 |
|
|
| 30.9 | % |
|
| 7,602 |
|
|
| 24.2 | % |
1Brand includes one BEF Foods, Inc property and 19 Bob Evans Restaurants, LLC properties.
Substantially*Subject to a master lease.
**Includes properties leased by multiple tenants, some, not all, of our leases are triple-net, meaning that our tenants are responsible for the maintenance, insurance, and property taxes associated with the properties they lease from us. Since inception and at September 30, 2017, all of our propertieswhich are subject to master leases. We do not currently engage in the development of real estate, which could cause a delay in timing between the funds used to invest in properties and the corresponding cash inflows from rental receipts. Our cash flows from operations are primarily generated through our real estate investment portfolio and the monthly lease payments under our long-term leases with our tenants.
Due to the fact that all of our properties are leased to single tenants under long-term leases, we are not currently required to perform significant ongoing leasing activities on our properties. The leases for only two of our properties, representing less than 1% of our annual rental streams (calculated based on NTM Rent), will expire before 2020. 32
Diversification by Industry
Industry |
| # Properties |
|
| ABR |
|
| ABR as a % |
|
| Square Feet ('000s) |
|
| ABR as a % |
| |||||
Healthcare Facilities |
|
| 100 |
|
| $ | 51,781 |
|
|
| 16.0 | % |
|
| 2,022 |
|
|
| 6.4 | % |
Restaurants |
|
| 232 |
|
|
| 44,549 |
|
|
| 13.7 | % |
|
| 1,067 |
|
|
| 3.4 | % |
Packaged Foods & Meats |
|
| 8 |
|
|
| 14,212 |
|
|
| 4.4 | % |
|
| 1,404 |
|
|
| 4.5 | % |
Distributors |
|
| 24 |
|
|
| 13,906 |
|
|
| 4.3 | % |
|
| 2,519 |
|
|
| 8.0 | % |
Food Distributors |
|
| 7 |
|
|
| 12,978 |
|
|
| 4.0 | % |
|
| 1,556 |
|
|
| 5.0 | % |
Auto Parts & Equipment |
|
| 39 |
|
|
| 12,427 |
|
|
| 3.8 | % |
|
| 2,387 |
|
|
| 7.6 | % |
Specialized Consumer Services |
|
| 47 |
|
|
| 12,078 |
|
|
| 3.7 | % |
|
| 720 |
|
|
| 2.3 | % |
Metal & Glass Containers |
|
| 8 |
|
|
| 9,796 |
|
|
| 3.0 | % |
|
| 2,206 |
|
|
| 7.0 | % |
Healthcare Services |
|
| 18 |
|
|
| 9,088 |
|
|
| 2.8 | % |
|
| 515 |
|
|
| 1.6 | % |
Home Furnishing |
|
| 5 |
|
|
| 8,898 |
|
|
| 2.7 | % |
|
| 1,785 |
|
|
| 5.7 | % |
Specialty Stores |
|
| 21 |
|
|
| 8,813 |
|
|
| 2.7 | % |
|
| 1,064 |
|
|
| 3.4 | % |
Home Furnishing Retail |
|
| 16 |
|
|
| 8,794 |
|
|
| 2.7 | % |
|
| 1,149 |
|
|
| 3.7 | % |
Aerospace & Defense |
|
| 7 |
|
|
| 8,675 |
|
|
| 2.7 | % |
|
| 952 |
|
|
| 3.0 | % |
Electronic Components |
|
| 2 |
|
|
| 6,658 |
|
|
| 2.1 | % |
|
| 466 |
|
|
| 1.5 | % |
General Merchandise Stores |
|
| 65 |
|
|
| 6,657 |
|
|
| 2.1 | % |
|
| 584 |
|
|
| 1.9 | % |
Other (41 industries) |
|
| 93 |
|
|
| 95,304 |
|
|
| 29.3 | % |
|
| 10,928 |
|
|
| 34.8 | % |
Untenanted properties |
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| 62 |
|
|
| 0.2 | % |
Total |
|
| 696 |
|
| $ | 324,614 |
|
|
| 100.0 | % |
|
| 31,386 |
|
|
| 100.0 | % |
33
Diversification by Geographic Location
State |
| # |
|
| ABR |
|
| ABR as a |
|
| Square Feet ('000s) |
|
| SF as a % |
|
|
| State |
| # |
|
| ABR |
|
| ABR as a |
|
| Square Feet ('000s) |
|
| SF as a % |
| ||||||||||
TX |
|
| 61 |
|
| $ | 32,960 |
|
|
| 10.2 | % |
|
| 3,468 |
|
|
| 11.0 | % |
|
| NJ |
|
| 3 |
|
| $ | 4,900 |
|
|
| 1.5 | % |
|
| 366 |
|
|
| 1.2 | % |
IL |
|
| 25 |
|
|
| 19,980 |
|
|
| 6.2 | % |
|
| 1,986 |
|
|
| 6.3 | % |
|
| MO |
|
| 10 |
|
|
| 4,822 |
|
|
| 1.5 | % |
|
| 959 |
|
|
| 3.1 | % |
WI |
|
| 34 |
|
|
| 18,548 |
|
|
| 5.7 | % |
|
| 1,884 |
|
|
| 6.0 | % |
|
| WA |
|
| 15 |
|
|
| 4,203 |
|
|
| 1.3 | % |
|
| 150 |
|
|
| 0.5 | % |
FL |
|
| 47 |
|
|
| 16,350 |
|
|
| 5.0 | % |
|
| 859 |
|
|
| 2.7 | % |
|
| LA |
|
| 4 |
|
|
| 3,394 |
|
|
| 1.0 | % |
|
| 194 |
|
|
| 0.6 | % |
CA |
|
| 12 |
|
|
| 16,035 |
|
|
| 4.9 | % |
|
| 1,563 |
|
|
| 5.0 | % |
|
| NE |
|
| 6 |
|
|
| 3,027 |
|
|
| 0.9 | % |
|
| 509 |
|
|
| 1.6 | % |
OH |
|
| 36 |
|
|
| 14,879 |
|
|
| 4.6 | % |
|
| 1,400 |
|
|
| 4.5 | % |
|
| MD |
|
| 4 |
|
|
| 2,903 |
|
|
| 0.9 | % |
|
| 293 |
|
|
| 0.9 | % |
MI |
|
| 34 |
|
|
| 14,854 |
|
|
| 4.6 | % |
|
| 1,411 |
|
|
| 4.5 | % |
|
| NM |
|
| 8 |
|
|
| 2,782 |
|
|
| 0.9 | % |
|
| 96 |
|
|
| 0.3 | % |
AZ |
|
| 9 |
|
|
| 13,092 |
|
|
| 4.0 | % |
|
| 909 |
|
|
| 2.9 | % |
|
| MS |
|
| 8 |
|
|
| 2,759 |
|
|
| 0.9 | % |
|
| 334 |
|
|
| 1.1 | % |
NC |
|
| 35 |
|
|
| 12,893 |
|
|
| 4.0 | % |
|
| 1,308 |
|
|
| 4.2 | % |
|
| IA |
|
| 4 |
|
|
| 2,704 |
|
|
| 0.8 | % |
|
| 622 |
|
|
| 2.0 | % |
IN |
|
| 29 |
|
|
| 12,746 |
|
|
| 3.9 | % |
|
| 1,759 |
|
|
| 5.6 | % |
|
| WV |
|
| 16 |
|
|
| 2,466 |
|
|
| 0.8 | % |
|
| 109 |
|
|
| 0.3 | % |
MN |
|
| 20 |
|
|
| 12,662 |
|
|
| 3.9 | % |
|
| 2,021 |
|
|
| 6.4 | % |
|
| SC |
|
| 13 |
|
|
| 2,461 |
|
|
| 0.8 | % |
|
| 308 |
|
|
| 1.0 | % |
AL |
|
| 49 |
|
|
| 10,784 |
|
|
| 3.3 | % |
|
| 836 |
|
|
| 2.7 | % |
|
| CO |
|
| 4 |
|
|
| 2,408 |
|
|
| 0.7 | % |
|
| 125 |
|
|
| 0.4 | % |
NY |
|
| 26 |
|
|
| 10,660 |
|
|
| 3.3 | % |
|
| 680 |
|
|
| 2.2 | % |
|
| UT |
|
| 3 |
|
|
| 2,345 |
|
|
| 0.7 | % |
|
| 280 |
|
|
| 0.9 | % |
TN |
|
| 42 |
|
|
| 10,509 |
|
|
| 3.2 | % |
|
| 509 |
|
|
| 1.6 | % |
|
| CT |
|
| 2 |
|
|
| 1,690 |
|
|
| 0.5 | % |
|
| 55 |
|
|
| 0.2 | % |
MA |
|
| 5 |
|
|
| 10,286 |
|
|
| 3.2 | % |
|
| 1,026 |
|
|
| 3.3 | % |
|
| MT |
|
| 7 |
|
|
| 1,544 |
|
|
| 0.5 | % |
|
| 43 |
|
|
| 0.1 | % |
AR |
|
| 11 |
|
|
| 7,391 |
|
|
| 2.3 | % |
|
| 282 |
|
|
| 0.9 | % |
|
| NV |
|
| 2 |
|
|
| 1,332 |
|
|
| 0.4 | % |
|
| 80 |
|
|
| 0.3 | % |
GA |
|
| 21 |
|
|
| 7,375 |
|
|
| 2.3 | % |
|
| 1,056 |
|
|
| 3.4 | % |
|
| DE |
|
| 4 |
|
|
| 1,130 |
|
|
| 0.3 | % |
|
| 133 |
|
|
| 0.4 | % |
OK |
|
| 20 |
|
|
| 7,126 |
|
|
| 2.2 | % |
|
| 944 |
|
|
| 3.0 | % |
|
| ND |
|
| 2 |
|
|
| 933 |
|
|
| 0.3 | % |
|
| 28 |
|
|
| 0.1 | % |
PA |
|
| 14 |
|
|
| 6,689 |
|
|
| 2.1 | % |
|
| 1,010 |
|
|
| 3.2 | % |
|
| VT |
|
| 2 |
|
|
| 413 |
|
|
| 0.1 | % |
|
| 24 |
|
|
| 0.1 | % |
KY |
|
| 20 |
|
|
| 5,813 |
|
|
| 1.8 | % |
|
| 672 |
|
|
| 2.1 | % |
|
| WY |
|
| 1 |
|
|
| 307 |
|
|
| 0.1 | % |
|
| 21 |
|
|
| 0.1 | % |
VA |
|
| 17 |
|
|
| 5,367 |
|
|
| 1.7 | % |
|
| 204 |
|
|
| 0.6 | % |
|
| Total US |
|
| 695 |
|
| $ | 320,530 |
|
|
| 98.8 | % |
|
| 31,155 |
|
|
| 99.3 | % |
KS |
|
| 10 |
|
|
| 5,008 |
|
|
| 1.5 | % |
|
| 639 |
|
|
| 2.0 | % |
|
| Total Canada |
|
| 1 |
|
|
| 4,084 |
|
|
| 1.2 | % |
|
| 231 |
|
|
| 0.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Grand Total |
|
| 696 |
|
| $ | 324,614 |
|
|
| 100.0 | % |
|
| 31,386 |
|
|
| 100.0 | % |
34
Lease Expirations
As of September 30, 2017,2021, the ABR weighted average remaining term of our leases (calculated based on NTM Rent) was approximately 13.2 years, excluding renewal options, which are exercisable at the option of our tenants upon expiration of their base lease term.10.6 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Furthermore, the weighted average lease term on the $159.2 million in properties acquired during the three months ended September 30, 2017, was 13.0 years. Over 50%Approximately 47.9% of our rental revenue isABR was derived from leases that will expire duringafter 2030, and thereafter. As of September 30, 2017, notno more than 10%7.2% of our rental revenue isABR was derived from leases that expire in any single year in the decade between 2020 andprior to 2030. The following chart sets forth our lease expirations based upon the terms of ourthe leases in place as of September 30, 2017.2021.
Expiration |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028 |
| 2029 |
| 2030 |
| 2031 |
| 2032 |
| 2033 |
| 2034 |
| 2035 |
| 2036 |
| 2037 |
| 2038 |
| 2039 |
| 2040+ |
| ||||||||||||||||||||
Number of |
|
| 2 |
|
| 3 |
|
| 6 |
|
| 11 |
|
| 19 |
|
| 34 |
|
| 27 |
|
| 35 |
|
| 71 |
|
| 98 |
|
| 23 |
|
| 45 |
|
| 42 |
|
| 32 |
|
| 16 |
|
| 84 |
|
| 24 |
|
| 33 |
|
| 12 |
|
| 75 |
|
Number of |
|
| 2 |
|
| 4 |
|
| 7 |
|
| 11 |
|
| 22 |
|
| 31 |
|
| 27 |
|
| 30 |
|
| 39 |
|
| 54 |
|
| 18 |
|
| 30 |
|
| 16 |
|
| 21 |
|
| 12 |
|
| 20 |
|
| 9 |
|
| 29 |
|
| 7 |
|
| 15 |
|
35
The following table presents certain information based on lease expirations by year. Amounts are in thousands, except for number of properties.
Expiration Year |
| # Properties |
|
| ABR |
|
| ABR as a % of |
|
| Square Feet |
|
| SF as a % of |
| |||||
2021 |
|
| 2 |
|
| $ | 294 |
|
|
| 0.1 | % |
|
| 37 |
|
|
| 0.1 | % |
2022 |
|
| 3 |
|
|
| 2,466 |
|
|
| 0.8 | % |
|
| 85 |
|
|
| 0.3 | % |
2023 |
|
| 6 |
|
|
| 4,867 |
|
|
| 1.5 | % |
|
| 515 |
|
|
| 1.6 | % |
2024 |
|
| 11 |
|
|
| 13,858 |
|
|
| 4.3 | % |
|
| 1,689 |
|
|
| 5.4 | % |
2025 |
|
| 19 |
|
|
| 7,889 |
|
|
| 2.4 | % |
|
| 682 |
|
|
| 2.2 | % |
2026 |
|
| 34 |
|
|
| 18,679 |
|
|
| 5.8 | % |
|
| 1,404 |
|
|
| 4.5 | % |
2027 |
|
| 27 |
|
|
| 23,128 |
|
|
| 7.1 | % |
|
| 2,010 |
|
|
| 6.4 | % |
2028 |
|
| 35 |
|
|
| 23,283 |
|
|
| 7.2 | % |
|
| 2,352 |
|
|
| 7.5 | % |
2029 |
|
| 71 |
|
|
| 21,713 |
|
|
| 6.7 | % |
|
| 2,711 |
|
|
| 8.6 | % |
2030 |
|
| 98 |
|
|
| 52,598 |
|
|
| 16.2 | % |
|
| 5,080 |
|
|
| 16.2 | % |
2031 |
|
| 23 |
|
|
| 7,636 |
|
|
| 2.3 | % |
|
| 737 |
|
|
| 2.3 | % |
2032 |
|
| 45 |
|
|
| 26,218 |
|
|
| 8.1 | % |
|
| 3,023 |
|
|
| 9.6 | % |
2033 |
|
| 42 |
|
|
| 16,866 |
|
|
| 5.2 | % |
|
| 1,717 |
|
|
| 5.5 | % |
2034 |
|
| 32 |
|
|
| 5,850 |
|
|
| 1.8 | % |
|
| 376 |
|
|
| 1.2 | % |
2035 |
|
| 16 |
|
|
| 11,602 |
|
|
| 3.6 | % |
|
| 1,552 |
|
|
| 4.9 | % |
2036 |
|
| 84 |
|
|
| 24,085 |
|
|
| 7.4 | % |
|
| 2,608 |
|
|
| 8.3 | % |
2037 |
|
| 24 |
|
|
| 17,256 |
|
|
| 5.3 | % |
|
| 1,367 |
|
|
| 4.4 | % |
2038 |
|
| 33 |
|
|
| 6,839 |
|
|
| 2.1 | % |
|
| 306 |
|
|
| 1.0 | % |
2039 |
|
| 12 |
|
|
| 9,131 |
|
|
| 2.8 | % |
|
| 933 |
|
|
| 3.0 | % |
2040 |
|
| 33 |
|
|
| 5,906 |
|
|
| 1.8 | % |
|
| 317 |
|
|
| 1.0 | % |
Thereafter |
|
| 42 |
|
|
| 24,450 |
|
|
| 7.5 | % |
|
| 1,823 |
|
|
| 5.8 | % |
Untenanted properties |
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| 62 |
|
|
| 0.2 | % |
Total |
|
| 696 |
|
| $ | 324,614 |
|
|
| 100.0 | % |
|
| 31,386 |
|
|
| 100.0 | % |
Results of Operations
The following discussion includes the results of our operations for the periods presented.
Three Months Ended September 30, 2021 Compared to Three Months Ended June 30, 2021
Lease Maturity Schedule, by %Revenues, net
|
| For the Three Months Ended | ||||||||||||||||||||
|
| September 30, |
| June 30, |
| Increase/(Decrease) | ||||||||||||||||
(in thousands) |
| 2021 |
| 2021 |
| $ |
| % | ||||||||||||||
Contractual rental amounts billed for operating leases |
| $ | 78,886 |
|
| $ | 75,011 |
|
| $ | 3,875 |
|
| 5.2 | % | |||||||
Adjustment to recognize contractual operating lease |
|
| 4,942 |
|
|
| 4,724 |
|
|
| 218 |
|
| 4.6 | % | |||||||
Variable rental amounts earned |
|
| 130 |
|
|
| 114 |
|
|
| 16 |
|
| 14.0 | % | |||||||
Earned income from direct financing leases |
|
| 726 |
|
|
| 728 |
|
|
| (2 | ) |
| (0.3 | )% | |||||||
Interest income from sales-type leases |
|
| 14 |
|
|
| 15 |
|
|
| (1 | ) |
| (6.7 | )% | |||||||
Operating expenses billed to tenants |
|
| 4,414 |
|
|
| 4,196 |
|
|
| 218 |
|
| 5.2 | % | |||||||
Other income from real estate transactions |
|
| 33,515 |
|
|
| 28 |
|
|
| 33,487 |
|
| >100 | % | |||||||
Adjustment to revenue recognized for uncollectible |
|
| 150 |
|
|
| (57 | ) |
|
| 207 |
|
| >(100 | )% | |||||||
Total Lease revenues, net |
| $ | 122,777 |
|
| $ | 84,759 |
|
| $ | 38,018 |
|
| 44.9 | % |
The increase in Lease revenues, net was primarily attributable to lease termination fee income of NTM Rent$35.0 million during the three months ended September 30, 2021, with no comparable activity during the three months ended June 30, 2021. In September 2021, we executed the early termination of a long-term, master lease with an investment-grade office tenant in exchange for a termination fee of $35.0 million. Simultaneously, we sold the underlying vacant properties to an unrelated third party. Through the simultaneous transactions, we recorded $33.8 million of revenue, $4.1 million of amortization, and $25.7 million of impairment, for a net $4.0 million increase to net income. The classifications resulted in a $33.8 million increase to FFO, but no impact to AFFO or net debt to annualized adjusted EBITDAre. Refer to our non-GAAP reconciliations in the Non-GAAP Measures section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Lease revenues, net also increased due to growth in our real estate portfolio through accretive property acquisitions during the second quarter of 2021. During the second quarter of 2021, we invested $194.0 million, excluding capitalized acquisition costs, in 34 properties at a weighted average initial cash cap rate of 6.2%. Most of these acquisitions closed during the month of June 2021, and therefore did not materially contribute to Lease revenues, net for the three months ended June 30, 2021.
36
Operating Expenses
|
| For the Three Months Ended |
| |||||||||||||
|
| September 30, |
|
| June 30, |
|
| Increase/(Decrease) |
| |||||||
(in thousands) |
| 2021 |
|
| 2021 |
|
| $ |
|
| % |
| ||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| $ | 36,682 |
|
| $ | 31,225 |
|
| $ | 5,457 |
|
|
| 17.5 | % |
Property and operating expense |
|
| 4,842 |
|
|
| 4,572 |
|
|
| 270 |
|
|
| 5.9 | % |
General and administrative |
|
| 8,552 |
|
|
| 8,655 |
|
|
| (103 | ) |
|
| (1.2 | )% |
Provision for impairment of investment in rental properties |
|
| 25,989 |
|
|
| — |
|
|
| 25,989 |
|
|
| 100.0 | % |
Total operating expenses |
| $ | 76,065 |
|
| $ | 44,452 |
|
| $ | 31,613 |
|
|
| 71.1 | % |
Depreciation and amortization
The increase in depreciation and amortization for the three months ended September 30, 2021 was primarily due to $4.1 million of accelerated amortization resulting from an early lease termination, as discussed in Lease Revenues, net above, together with growth in our real estate portfolio.
Provision for impairment of investment in rental properties
During the three months ended September 30, 2021, we recognized $26.0 million of impairment on our investments in rental properties. Although we recognized $25.7 million of impairment associated with the early lease termination transaction, we also recognized $33.8 million of revenue and $4.1 million of amortization, resulting in a net $4.0 million increase to net income. No properties were impaired during the three months ended June 30, 2021. The following table presents the impairment charges for the three months ended September 30, 2021:
(in thousands, except number of properties) |
|
|
| |
Number of properties |
|
| 4 |
|
Carrying value prior to impairment charge |
| $ | 44,290 |
|
Fair value |
|
| 18,301 |
|
Impairment charge |
| $ | 25,989 |
|
The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.
Other income (expenses)
|
| For the Three Months Ended | |||||||||||||||
|
| September 30, |
|
| June 30, |
|
| Increase/(Decrease) | |||||||||
(in thousands) |
| 2021 |
|
| 2021 |
|
| $ |
| % | |||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Interest income |
| $ |
| — |
|
| $ |
| 6 |
|
| $ | (6 | ) |
| (100.0 | )% |
Interest expense |
|
|
| (15,611 | ) |
|
|
| (15,430 | ) |
|
| 181 |
|
| 1.2 | % |
Cost of debt extinguishment |
|
|
| (242 | ) |
|
|
| — |
|
|
| 242 |
|
| 100.0 | % |
Gain on sale of real estate |
|
|
| 1,220 |
|
|
|
| 3,838 |
|
|
| (2,618 | ) |
| (68.2 | )% |
Income taxes |
|
|
| (473 | ) |
|
|
| (301 | ) |
|
| 172 |
|
| 57.1 | % |
Change in fair value of earnout liability |
|
|
| (1,059 | ) |
|
|
| (5,604 | ) |
|
| (4,545 | ) |
| (81.1 | )% |
Other income (expenses) |
|
|
| (25 | ) |
|
|
| 4 |
|
|
| (29 | ) |
| >(100.0 | )% |
Gain on sale of real estate
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months ended September 30, 2021, we recognized gains of $1.2 million on the sale of six properties, compared to gains of $3.8 million on the sale of 11 properties during the three months ended June 30, 2021. Our proactive asset management strategy includes determining to sell any of our properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives.
Change in fair value of earnout liability
As part of the Internalization, we were required to pay additional earnout consideration if certain milestones were achieved during the Earnout Periods. During the three months ended September 30, 2021, we achieved the remaining share price milestones and paid the earnout consideration as follows: $13.0 million in cash, 1,089 common shares, and 1,859 OP units. At September 30, 2021, the earnout consideration had been paid in full. The change in fair value of the earnout liability during the corresponding period represents the difference between the June 30, 2021 valuation, and the actual cash paid during the three months ended September 30, 2021.
37
Net income and Net earnings per diluted share
|
| For the Three Months Ended |
| |||||||||||||
|
| September 30, |
|
| June 30, |
|
| Increase/(Decrease) |
| |||||||
(in thousands, except per share data) |
| 2021 |
|
| 2021 |
|
| $ |
|
| % |
| ||||
Net income |
| $ | 30,522 |
|
| $ | 22,820 |
|
| $ | 7,702 |
|
|
| 33.8 | % |
Net earnings per diluted share |
|
| 0.18 |
|
|
| 0.14 |
|
|
| 0.04 |
|
|
| 28.6 | % |
The increase in net income is primarily attributable to the $4.0 million increase associated with the simultaneous early lease expirationstermination transaction and sale of underlying properties as discussed in Lease Revenue, net above, an additional $4.2 million of revenue associated with growth in our real estate portfolio, and a $4.5 million change in the fair value of our earnout liability, partially offset by year, includinga $2.6 million decrease in gain on sale of real estate and incremental depreciation and amortization associated with growth in our real estate portfolio.
GAAP net income includes items such as gain or loss on sale of real estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Lease Revenues, net
|
| For the Nine Months Ended | ||||||||||||||||||||
|
| September 30, |
| Increase/(Decrease) | ||||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| $ |
| % | ||||||||||||||
Contractual rental amounts billed for operating leases |
| $ | 227,142 |
|
| $ | 209,440 |
|
| $ | 17,702 |
|
| 8.5 | % | |||||||
Adjustment to recognize contractual operating lease |
|
| 14,033 |
|
|
| 16,709 |
|
|
| (2,676 | ) |
| (16.0 | )% | |||||||
Variable rental amounts earned |
|
| 335 |
|
|
| 308 |
|
|
| 27 |
|
| 8.8 | % | |||||||
Earned income from direct financing leases |
|
| 2,184 |
|
|
| 2,599 |
|
|
| (415 | ) |
| (16.0 | )% | |||||||
Interest income from sales-type leases |
|
| 43 |
|
|
| — |
|
|
| 43 |
|
| 100.0 | % | |||||||
Operating expenses billed to tenants |
|
| 12,998 |
|
|
| 11,456 |
|
|
| 1,542 |
|
| 13.5 | % | |||||||
Other income from real estate transactions |
|
| 33,548 |
|
|
| 795 |
|
|
| 32,753 |
|
| >100.0 | % | |||||||
Adjustment to revenue recognized for uncollectible |
|
| (49 | ) |
|
| (1,961 | ) |
|
| 1,912 |
|
| (97.5 | )% | |||||||
Total Lease revenues, net |
| $ | 290,234 |
|
| $ | 239,346 |
|
| $ | 50,888 |
|
| 21.3 | % |
The increase in Lease revenues, net was primarily attributable to lease termination fee income of $35.0 million during the nine months ended September 30, 2021, with no comparable activity during the nine months ended September 30, 2020. In September 2021, we executed the early termination of a long-term, master lease with an investment-grade office tenant in exchange for a termination fee of $35.0 million. Simultaneously, we sold the underlying vacant properties to an unrelated third party. Through the simultaneous transactions, we recorded $33.8 million of revenue, $4.1 million of amortization, and $25.7 million of impairment, for a net $4.0 million increase to net income. The classifications resulted in a $33.8 million increase to FFO, but no impact to AFFO or net debt to annualized adjusted EBITDAre. Refer to our non-GAAP reconciliations in the Non-GAAP Measures section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Lease revenues, net also increased due to growth in our real estate portfolio through accretive property acquisitions during the fourth quarter of 2020 and first half of 2021. During this period, we invested $381.6 million, excluding capitalized acquisition costs, in 81 properties at a weighted average initial cash cap rate of 6.4%. We did not acquire any properties during the first three quarters of 2020 as a result of the COVID-19 pandemic.
Operating Expenses
|
| For the Nine Months Ended |
| |||||||||||||
|
| September 30, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| $ | 98,620 |
|
| $ | 102,503 |
|
| $ | (3,883 | ) |
|
| (3.8 | )% |
Asset management fees |
|
| — |
|
|
| 2,461 |
|
|
| (2,461 | ) |
|
| (100.0 | )% |
Property management fees |
|
| — |
|
|
| 1,275 |
|
|
| (1,275 | ) |
|
| (100.0 | )% |
Property and operating expense |
|
| 14,019 |
|
|
| 12,492 |
|
|
| 1,527 |
|
|
| 12.2 | % |
General and administrative |
|
| 27,840 |
|
|
| 18,756 |
|
|
| 9,084 |
|
|
| 48.4 | % |
Provision for impairment of investment in rental properties |
|
| 28,001 |
|
|
| 17,399 |
|
|
| 10,602 |
|
|
| 60.9 | % |
Total operating expenses |
| $ | 168,480 |
|
| $ | 154,886 |
|
| $ | 13,594 |
|
|
| 8.8 | % |
38
Depreciation and amortization
The decrease in depreciation and amortization was due to $4.1 million of accelerated amortization resulting from an early lease termination during the nine months ended September 30, 2021, as discussed in Lease Revenues, net above, together with growth in our real estate portfolio, compared to $11.1 million of accelerated amortization during the nine months ended September 30, 2020 (as a result of the COVID-19 pandemic and certain lease terminations).
Asset management fees and Property management fees
The decrease in asset management fees and property management fees was due to the completion of the Internalization in February 2020, which terminated the associated agreements with our third-party manager.
Property and operating expense
The increase in property and operating expense was mainly attributable to the number of tenantsproperties we own for which we pay insurance and properties with leases expiring, the square footage coveredreal estate taxes and are reimbursed by the leases expiring,tenants under the NTM Rent,terms of the respective leases. There was a corresponding increase in operating expenses billed to tenants included within Lease revenues, net.
General and the percentage of NTM Rent for the leases expiring. Late payments, non-payments or other unscheduled payments are not consideredadministrative
The increase in the NTM Rent amounts. NTM Rent includesgeneral and administrative expenses mainly reflects the impact of contractual rent escalations, excluding any potential variable rent increases that are based on CPI and/or the tenants’ sales volume. Amounts are in thousands, except the number of tenants and properties.
Year |
| Number of Tenants |
|
| Number of Properties |
|
| Square Footage |
|
| NTM Rent |
|
| Percentage of NTM Rent |
| |||||
2017 |
|
| — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
|
| — | % |
2018 |
|
| 1 |
|
|
| 1 |
|
|
| 2 |
|
|
| 131 |
|
|
| <0.1 | % |
2019 |
|
| 1 |
|
|
| 1 |
|
|
| 2 |
|
|
| 117 |
|
|
| <0.1 | % |
2020 |
|
| 3 |
|
|
| 4 |
|
|
| 116 |
|
|
| 1,376 |
|
|
| 0.8 | % |
2021 |
|
| 2 |
|
|
| 4 |
|
|
| 9 |
|
|
| 576 |
|
|
| 0.3 | % |
2022 |
|
| 3 |
|
|
| 3 |
|
|
| 87 |
|
|
| 2,393 |
|
|
| 1.4 | % |
2023 |
|
| 9 |
|
|
| 13 |
|
|
| 724 |
|
|
| 6,786 |
|
|
| 4.0 | % |
2024 |
|
| 12 |
|
|
| 15 |
|
|
| 1,741 |
|
|
| 13,933 |
|
|
| 8.2 | % |
2025 |
|
| 2 |
|
|
| 8 |
|
|
| 28 |
|
|
| 1,034 |
|
|
| 0.6 | % |
2026 |
|
| 17 |
|
|
| 27 |
|
|
| 620 |
|
|
| 9,964 |
|
|
| 5.9 | % |
2027 |
|
| 16 |
|
|
| 30 |
|
|
| 1,210 |
|
|
| 14,785 |
|
|
| 8.8 | % |
2028 |
|
| 12 |
|
|
| 22 |
|
|
| 1,025 |
|
|
| 11,184 |
|
|
| 6.6 | % |
2029 |
|
| 12 |
|
|
| 54 |
|
|
| 2,483 |
|
|
| 15,623 |
|
|
| 9.2 | % |
2030 and thereafter |
|
| 61 |
|
|
| 295 |
|
|
| 6,015 |
|
|
| 91,023 |
|
|
| 53.9 | % |
Our top tenants and brands at September 30, 2017, are listed in the tables below. The percentages are calculated based on our NTM Rent on a per property type basis divided by total NTM Rent. Late payments, non-payments or other unscheduled payments are not considered in the calculation. NTM Rent includes the impact of contractual rent escalations, excluding any potential variable rent increases that are based on CPI and/or the tenants’ sales volume.
Top Ten Tenants, by % of NTM Rent
Tenant |
| Property Type |
| % NTM Rent |
|
| Properties |
| ||
Red Lobster Hospitality LLC & Red Lobster Restaurants LLC |
| Retail |
|
| 4.3 | % |
|
| 25 |
|
Art Van Furniture, LLC |
| Retail |
|
| 3.9 | % |
|
| 9 |
|
Jack’s Family Restaurants LP |
| Retail |
|
| 3.4 | % |
|
| 36 |
|
Outback Steakhouse of Florida, LLC(1) |
| Retail |
|
| 3.1 | % |
|
| 24 |
|
Big Tex Trailer Manufacturing Inc. |
| Industrial/Retail |
|
| 2.7 | % |
|
| 17 |
|
Siemens Medical Solutions USA, Inc. & Siemens Corporation |
| Industrial |
|
| 2.6 | % |
|
| 2 |
|
Nestle' Dreyer's Ice Cream Company |
| Industrial |
|
| 2.5 | % |
|
| 1 |
|
Nationwide Mutual Insurance Company |
| Other |
|
| 2.3 | % |
|
| 2 |
|
Arkansas Surgical Hospital LLC |
| Healthcare |
|
| 2.3 | % |
|
| 1 |
|
Bob Evans Restaurants, LLC |
| Retail |
|
| 2.2 | % |
|
| 25 |
|
Total |
|
|
|
| 29.3 | % |
|
| 142 |
|
All Other |
|
|
|
| 70.7 | % |
|
| 335 |
|
|
|
Top Ten Brands, by % of NTM Rent
Brand |
| Property Type |
| % NTM Rent |
|
| Properties |
| ||
Bob Evans Farms(1) |
| Industrial/Retail |
|
| 4.3 | % |
|
| 27 |
|
Red Lobster |
| Retail |
|
| 4.3 | % |
|
| 25 |
|
Art Van Furniture |
| Retail |
|
| 3.9 | % |
|
| 9 |
|
Jack's Family Restaurants |
| Retail |
|
| 3.4 | % |
|
| 36 |
|
Taco Bell |
| Retail |
|
| 3.1 | % |
|
| 41 |
|
Wendy's |
| Retail |
|
| 2.9 | % |
|
| 35 |
|
Outback Steakhouse |
| Retail |
|
| 2.8 | % |
|
| 22 |
|
Big Tex Trailers |
| Industrial/Retail |
|
| 2.7 | % |
|
| 17 |
|
Siemens |
| Industrial |
|
| 2.6 | % |
|
| 2 |
|
Nestle' |
| Retail |
|
| 2.5 | % |
|
| 1 |
|
Total |
|
|
|
| 32.5 | % |
|
| 215 |
|
All Other |
|
|
|
| 67.5 | % |
|
| 262 |
|
|
|
As previously mentioned, the IDC approved certain updates to our Investment Policy following the regular annual review of the policy at the November 2017 meeting of our board of directors. As updated, our Investment Policy generally requires us to seek diversification of our investments. Based on the aggregate NTM rent of the properties in the portfolio, determined as of the date of the prior quarter end, new investments may not cause us to exceed:
5% in any single property,
8% leased to any single tenant or brand,
10% located in any single metropolitan statistical area, or
20% located in any single state.
We may exceed these diversification targets from time to time with the approval of the IDC. To avoid undue risk concentrations in any single asset class or category, long-term asset allocation will be set with the following target percentages and within the following ranges, although these ranges may be temporarily waived by the IDC:
|
|
| ||||
|
|
|
| |||
|
|
|
| |||
|
|
|
| |||
|
|
|
| |||
|
|
|
|
Our Investment Policy provides the Asset Manager with the authority to make any acquisition or sale of any property or group of related properties involving up to $50 million for any single or portfolio transaction, $75 million per cumulative tenant concentration, or $100 million per cumulative brand concentration on our behalf, without approval of the IDC, provided that any properties so acquired otherwise meet our Investment Policy and Property Selection Criteria, and any financing related to any such acquisitions does not violate our Leverage Policy (as defined below), as such are established by the IDC from time to time. Our Investment Policy permits investments in properties that do not otherwise meet our Investment Policy or Property Selection Criteria with the approval of the IDC.
Leverage Policy
In March of 2016, Moody’s Investors Service (“Moody’s”) assigned the Operating Company an investment grade credit rating of Baa3 with a stable outlook. Moody’s re-affirmed the investment grade credit rating in March 2017. The investment grade credit rating allowed us to take advantage of preferential borrowing margins on our outstanding debt, including the $800 million credit facility we entered into on June 23, 2017. The investment grade credit ratings will also allow us more attractive access to the debt private placement markets. The rating is based on a number of factors, including an assessment of our financial strength, portfolio size and diversification, credit and operating metrics, corporate governance policies, and sustainability of cash flow and earnings. We are strongly committed to maintaining modest leverage, commensurateInternalization associated with our newly acquired employee base. Following the Internalization, our asset and property management fees were replaced with compensation and related expenses, along with associated general and administrative expenses in February 2020.
Provision for impairment of investment grade rating. While Moody’s utilizes other factors outside of our leverage ratio, our leverage policy (“Leverage Policy”) is to maintain a leverage ratio in the 35% to 45% range based on the market value of assets, recognizing that the actual leverage ratio will vary over time and there may be opportunistic reasons to exceed a 45% leverage ratio; provided, however, that we cannot exceed a 50% leverage ratio without the approval of the IDC.rental properties
To reduce its exposure to variable rate debt, the Operating Company enters into interest rate swap agreements to fix the rate of interest as a hedge against interest rate fluctuations. These interest rate hedges have staggered maturities to reduce the exposure to interest rate fluctuations in any one year, and generally extend up to 10 years. The interest rate swaps are applied against a pool of debt, which offers flexibility in maintaining our hedge designation concurrent with our ongoing capital market activity. We limit our total exposure to floating rate debt to no more than 5% of the market value of total assets, measured at quarter end.
During the nine months ended September 30, 2017,2021, we added $150recognized $28.0 million of unsecured Senior Notes (as defined below)impairment on our investments in rental properties, primarily attributable to our capital structure. The Senior Notes bear interest at a fixedsimultaneous early lease termination transactions and sale of 4.84% per annum, with a 10 year maturity. We strategically used this channel of long-term, fixed rate debt capitalunderlying properties as discussed in Lease revenues, net above, compared to help mitigate interest rate risk, lengthen our maturity profile, and diversify our sources of debt capital.
The IDC reviews our Leverage Policy at least annually, however, depending on market conditions and other factors, they may change our Leverage Policy from time to time.
As of September 30, 2017, our total outstanding indebtedness was $910.1$17.4 million and the ratio of our total indebtedness to the market value of our assets was approximately 36.5%.
Determined Share Value
Our shares of common stock are sold by us in our ongoing private offering at a price equal to a determined share value (the “Determined Share Value”), which is established quarterly by the IDC based on the net asset value (“NAV”) of our portfolio, input from management, and such other factors as the IDC may determine. Shares of our common stock are also sold pursuant to our DRIP, and repurchased by us pursuant to our share redemption program, at a price based upon the Determined Share Value. For additional information regarding our valuation policy and procedures, please see the section titled “Determined Share Value” in Item 1 of our Form 10. The following table presents our Determined Share Value for each period indicated below, together with the corresponding NAV as of the preceding quarter-end:
Period |
| NAV as of |
| Determined Share Value |
|
| NAV per share |
| ||
November 1, 2017 - January 31, 2018 |
| September 30, 2017 |
| $ | 81.00 |
|
| $ | 80.55 |
|
August 1, 2017 - October 31, 2017 |
| June 30, 2017 |
| $ | 80.00 |
|
| $ | 79.90 |
|
The adjustments to NAV per share in arriving at the Determined Share Value for the periods presented above account for the inherent imprecision in the valuation estimates. In February 2018, the IDC will review the NAV calculations as of December 31, 2017, and will assess whether adjustments to the current Determined Share Value of $81.00 are appropriate.
The following table provides a breakdown of the major components of our estimated NAV and NAV per share amounts as of September 30, 2017 and June 30, 2017 (in thousands, except per share amounts):
NAV as of: |
| September 30, 2017 |
|
| June 30, 2017 |
| ||
Investment in rental property |
| $ | 2,502,140 |
|
| $ | 2,351,989 |
|
Debt |
|
| (909,416 | ) |
|
| (883,112 | ) |
Other assets and liabilities, net |
|
| 1,348 |
|
|
| 34,790 |
|
NAV |
| $ | 1,594,072 |
|
| $ | 1,503,667 |
|
Number of outstanding shares, including noncontrolling interests |
| $ | 19,790 |
|
| $ | 18,820 |
|
NAV per share |
| $ | 80.55 |
|
| $ | 79.90 |
|
The following table details the implied market capitalization rates (shown on a weighted average basis) used to value the investment in rental property, by property type, as of September 30, 2017 and June 30, 2017, supporting the Determined Share Value in effect for the periods of November 1, 2017 through January 31, 2018, and August 1, 2017 through October 31, 2017, respectively:
Market capitalization rates, as of: |
| Retail |
|
| Industrial |
|
| Healthcare |
|
| Other |
|
| Portfolio Total |
| |||||
September 30, 2017 |
|
| 6.38 | % |
|
| 6.96 | % |
|
| 6.95 | % |
|
| 7.11 | % |
|
| 6.75 | % |
June 30, 2017 |
|
| 6.40 | % |
|
| 6.96 | % |
|
| 6.87 | % |
|
| 7.05 | % |
|
| 6.73 | % |
While we believe our assumptions are reasonable, a change in these assumptions would impact the calculation of the value of our real estate investments. For example, assuming all other factors remain unchanged, an increase in the weighted average implied market capitalization rate used as of September 30, 2017, of 0.25%, would result in a decrease in the fair value of our investment in rental property of 3.6%, and our NAV per share would have been $76.03.
Distributions and Distribution Reinvestment
At its November 7, 2017, meeting, our board of directors declared monthly distributions of $0.415 per share of our common stock and unit of membership interest in the Operating Company to be paid by us to our stockholders and members of the Operating Company (other than us) of record prior to the end of November 2017, December 2017, and January 2018:
Dividend Per Share/Unit |
|
| Record Date |
| Payment Date (on or before) | |
$ | 0.415 |
|
| November 29, 2017 |
| December 15, 2017 |
$ | 0.415 |
|
| December 28, 2017 |
| January 15, 2018 |
$ | 0.415 |
|
| January 30, 2018 |
| February 15, 2018 |
Investors may purchase additional shares of our common stock by electing to reinvest their distributions through our DRIP. The purchase price for shares of our common stock acquired through our DRIP will be 98% of the then-current Determined Share Value. Please refer to Item 11. “Description of Registrant’s Securities to Be Registered” of our Form 10 for additional discussion of our DRIP.
The following table summarizes distributions paid in cash and pursuant to our DRIP for the nine months ended September 30, 2017 (in thousands).
Month |
| Year |
| Cash Distribution - Common Stockholders |
|
| Cash Distribution - Membership Units |
|
| Distribution Paid Pursuant to DRIP on Common Stock (1) |
|
| Distribution Paid Pursuant to DRIP on Membership Units (1) |
|
| Total Amount of Distribution |
| |||||
January |
| 2017 |
| $ | 3,319 |
|
| $ | 488 |
|
| $ | 2,738 |
|
| $ | 98 |
|
| $ | 6,643 |
|
February |
| 2017 |
|
| 3,394 |
|
|
| 488 |
|
|
| 2,836 |
|
|
| 98 |
|
|
| 6,816 |
|
March |
| 2017 |
|
| 3,522 |
|
|
| 493 |
|
|
| 2,972 |
|
|
| 99 |
|
|
| 7,086 |
|
April |
| 2017 |
|
| 3,555 |
|
|
| 493 |
|
|
| 3,068 |
|
|
| 99 |
|
|
| 7,215 |
|
May |
| 2017 |
|
| 3,618 |
|
|
| 493 |
|
|
| 3,167 |
|
|
| 99 |
|
|
| 7,377 |
|
June |
| 2017 |
|
| 3,680 |
|
|
| 493 |
|
|
| 3,220 |
|
|
| 99 |
|
|
| 7,492 |
|
July |
| 2017 |
|
| 3,742 |
|
|
| 493 |
|
|
| 3,296 |
|
|
| 99 |
|
|
| 7,630 |
|
August |
| 2017 |
|
| 3,815 |
|
|
| 512 |
|
|
| 3,378 |
|
|
| 122 |
|
|
| 7,827 |
|
September |
| 2017 |
|
| 3,883 |
|
|
| 512 |
|
|
| 3,420 |
|
|
| 123 |
|
|
| 7,938 |
|
TOTAL |
|
|
| $ | 32,528 |
|
| $ | 4,465 |
|
| $ | 28,095 |
|
| $ | 936 |
|
| $ | 66,024 |
|
|
|
The following table summarizes our distributions paid during the nine months ended September 30, 20172021. Although we recognized $25.7 million of impairment associated with the lease termination transaction, we also recognized $33.8 million of revenue and 2016,$4.1 million of amortization, resulting in a net $4.0 million increase to net income. The following table presents the impairment charges for their respective periods:
|
| For the Nine Months Ended |
| |||||
|
| September 30, |
| |||||
(in thousands, except number of properties) |
| 2021 |
|
| 2020 |
| ||
Number of properties |
|
| 5 |
|
|
| 6 |
|
Carrying value prior to impairment charge |
| $ | 47,108 |
|
| $ | 51,445 |
|
Fair value |
|
| 19,107 |
|
|
| 34,046 |
|
Impairment charge |
| $ | 28,001 |
|
| $ | 17,399 |
|
The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.
Other income (expenses)
|
| For the Nine Months Ended | ||||||||||||||||||||
|
| September 30, |
| Increase/(Decrease) | ||||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| $ |
| % | ||||||||||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest income |
| $ | 11 |
|
| $ | 20 |
|
| $ | (9 | ) |
| (45.0 | )% | |||||||
Interest expense |
|
| (47,149 | ) |
|
| (59,015 | ) |
|
| (11,866 | ) |
| (20.1 | )% | |||||||
Cost of debt extinguishment |
|
| (368 | ) |
|
| (414 | ) |
|
| (46 | ) |
| (11.1 | )% | |||||||
Gain on sale of real estate |
|
| 9,791 |
|
|
| 9,725 |
|
|
| 66 |
|
| 0.7 | % | |||||||
Income taxes |
|
| (1,187 | ) |
|
| (1,080 | ) |
|
| 107 |
|
| 9.9 | % | |||||||
Internalization expenses |
|
| — |
|
|
| (3,523 | ) |
|
| (3,523 | ) |
| (100.0 | )% | |||||||
Change in fair value of earnout liability |
|
| (5,539 | ) |
|
| 8,506 |
|
|
| (14,045 | ) |
| >(100.0 | )% | |||||||
Other income (expenses) |
|
| (11 | ) |
|
| (22 | ) |
|
| 11 |
|
| (50.0 | )% |
Interest expense
The decrease in interest expense primarily reflects a decrease in our average outstanding borrowings, combined with a decrease in our weighted average cost of borrowings. In September 2020, we used the proceeds of our IPO to repay $456.7 million of outstanding borrowings, including accrued interest, significantly reducing our leverage profile. In January 2021, we received an initial credit rating
39
of 'BBB' with a stable outlook from S&P Global Ratings ("S&P"), which had the sourceeffect of distributionslowering the applicable margin on our then existing $965 million of bank loans by 25 basis points beginning in February 2021. In September 2021, Moody's upgraded our credit rating to 'Baa2' with a stable outlook, which aligned with S&P's credit rating and therefore had no impact to our actual interest expense. We also repriced and partially repaid our 2026 Unsecured Term Loan in March 2021, reducing the applicable margin and principal balance by an additional 60 basis points and $50 million, respectively. Our Net Debt to Annualized Adjusted EBITDAre ratio, used as a comparison against FFO (in thousands).relative leverage measure, decreased from 7.04x as of January 1, 2020, to 5.06x as of September 30, 2021.
Internalization expenses
|
| For the nine months ended |
| |||||
|
| September 30, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Distributions: |
|
|
|
|
|
|
|
|
Paid in cash |
| $ | 37,929 |
|
| $ | 31,229 |
|
Reinvested in shares |
|
| 28,095 |
|
|
| 19,781 |
|
Total Distributions |
| $ | 66,024 |
|
| $ | 51,010 |
|
Source of Distributions: |
|
|
|
|
|
|
|
|
Cash flow from operating activities |
| $ | 66,024 |
|
| $ | 51,010 |
|
Cash flow from investing activities |
|
| — |
|
|
| — |
|
Cash flow from financing activities |
|
| — |
|
|
| — |
|
Total Sources of Distributions |
| $ | 66,024 |
|
| $ | 51,010 |
|
FFO |
| $ | 79,974 |
|
| $ | 55,658 |
|
ForDuring the nine months ended September 30, 20172020, we incurred $3.5 million of third-party fees and 2016, we paid distributions from our cash flow from operating activities. Refer to “Net Income and Non-GAAP Measures (FFO and AFFO)” below for further discussion of our FFO.
consulting expenses associated with the Internalization. We intend to fund future distributions from cash generated by operations; however, we may fund distributions from the sale of assets, borrowings, or proceeds from the sale of our securities.
Share Redemptions
The following table sets forth the redemption requests honored pursuant to our share redemption programdid not incur these expenses during the three and nine months ended September 30, 2017. We did not defer or reject any redemption requests2021.
Change in fair value of earnout liability
The change in the fair value of the earnout liability during this period. Please referthe nine months ended September 30, 2021, reflects our achievement of all earnout milestones during 2021.
Net income and Net earnings per diluted share
|
| For the Nine Months Ended |
| |||||||||||||
|
| September 30, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands, except per share data) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||
Net income |
| $ | 77,302 |
|
| $ | 38,657 |
|
| $ | 38,645 |
|
|
| 100.0 | % |
Net earnings per diluted share |
|
| 0.48 |
|
|
| 0.32 |
|
|
| 0.16 |
|
|
| 50.0 | % |
The increase in net income is primarily due to Item 11. “Descriptionrevenue growth of Registrant’s Securities to Be Registered”$50.9 million, a $11.9 million decrease in interest expense, a $3.9 million decrease in depreciation and amortization expenses, a $3.7 million decrease in asset and property management fees, and a $3.5 million decrease in Internalization expenses. These factors were partially offset by $14.0 million increase in the fair value of our Form 10earnout liability, $10.6 million increase in impairment of investment in rental properties, and $9.1 million increase in general and administrative expenses.
GAAP net income includes items such as gain or loss on sale of real estate and provisions for additional discussion of our share redemption program.impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons.
Period |
| Shares Redeemed |
|
| Average Determined Share Value(1) |
|
| Average Redemption Price |
|
| Redemption Amount |
|
| Discount on Redemption(2) |
| |||||
Q1 2017 |
|
| 17,861 |
|
| $ | 79.00 |
|
| $ | 77.24 |
|
| $ | 1,379,570 |
|
|
| 2.2 | % |
Q2 2017 |
|
| 20,641 |
|
| $ | 80.00 |
|
| $ | 79.29 |
|
| $ | 1,636,650 |
|
|
| 0.9 | % |
Q3 2017 |
|
| 23,374 |
|
| $ | 80.00 |
|
| $ | 77.36 |
|
| $ | 1,808,288 |
|
|
| 3.3 | % |
YTD 2017 |
|
| 61,876 |
|
| $ | 79.67 |
|
| $ | 77.97 |
|
| $ | 4,824,508 |
|
|
| 2.1 | % |
|
|
|
|
Liquidity and Capital Resources
General
We acquire real estate withusing a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on maximizing the risk-adjusted return to our shareholdersstockholders through an appropriate balance of debt and equity in our capital structure. Therefore, we attemptWe are committed to maintain a conservative debt level on ourmaintaining an investment grade balance sheet with appropriate interest and fixed charge coverage ratios. We target a leverage ratio with total debt equal to 35% to 45% of the approximate market valuethrough active management of our assets.leverage profile and overall liquidity position. We believe our current leverage modelstrategy has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by theour current investment grade credit ratings of 'BBB' from S&P and 'Baa2' from Moody’s Investors Service (“Moody’s”). We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with lenders and with rating the Operating Company received in March of 2016 and re-affirmed in March of 2017. The actual leverageagencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio will vary over time but may not exceed 50% without the approval of the IDC.that is generally less than 6.0x. As of September 30, 2017, the leverage2021, we had total debt outstanding and Net Debt of $1.6 billion and a Net Debt to Annualized Adjusted EBITDAre ratio was approximately 36.5% of the market value5.06x.
Net Debt and Annualized Adjusted EBITDAre are non-GAAP financial measures, and Annualized Adjusted EBITDAre is calculated based upon EBITDA, EBITDAre, and Adjusted EBITDAre, each of our assets. From a management perspective and in communications with the credit rating agencies, wewhich is also consider our leverage position as a multiple of Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”), a non-GAAP financial measure. EBITDARefer to Non-GAAP Measures below for further details concerning our calculation of non-GAAP measures and reconciliations to the comparable GAAP measure.
Liquidity/REIT Requirements
Liquidity is a toolmeasure of our ability to meet potential cash requirements, including our ongoing commitments to repay debt, fund our operations, acquire properties, make distributions to our stockholders, and other general business needs. As a REIT, we useare required to measure leveragedistribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gain, on an annual basis. As a result, it is unlikely that we will be able to retain substantial cash balances to meet our long-term liquidity needs, including repayment of debt and the acquisition of additional properties, from our annual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital.
40
Short-term Liquidity Requirements
Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including our general and administrative expenses as well as interest payments on our outstanding debt, and to pay distributions. We do not currently anticipate making significant capital expenditures or incurring other significant property costs because of the strong occupancy levels across our portfolio and the net lease nature of our leases. We expect to meet our short-term liquidity requirements primarily from cash and cash equivalents balances and net cash provided by operating activities, supplemented by borrowings under our Revolving Credit Facility.
As detailed in the contextcontractual obligations table below, we have approximately $16.1 million of expected obligations due to be paid throughout the remainder of 2021, primarily consisting of $0.7 million of mortgage maturities, and $15.1 million of interest expense due, including the impact of our interest rate swaps. We expect our cash flow expectationsprovided by operating activities, as discussed below, will be sufficient to pay for our current obligations including interest expense on our borrowings. We expect to either repay the maturing mortgages with available cash on hand generated from our results of operations or borrowings under our Revolving Credit Facility, or refinance with property-level borrowings.
Long-term Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds necessary to repay debt and projections. Furthermore, giveninvest in additional revenue generating properties. Debt capital has historically been provided through unsecured term loans from commercial banks, revolving credit facilities, and private placement senior unsecured notes. In September 2021, we completed our inaugural public bond offering of $375 million aggregate principal amount of 2.600% senior unsecured notes due 2031 (the “2031 Senior Unsecured Public Notes”), and expect to use additional public bond offerings in the significancefuture as a form of growth capital.
The source and mix of our growth overdebt capital in the past two years, adding $352.0future will be impacted by market conditions as well as our continued focus on lengthening our debt maturity profile to better align with our portfolio’s long-term leases, staggering debt maturities to reduce the risk that a significant amount of debt will mature in any single year in the future, and managing our exposure to interest rate risk. Our $60 million in investments during the nine months ended2022 Unsecured Term Loan has a short-term maturity date of February 2022, which we expect to either repay with available cash on hand, or with borrowings under our Revolving Credit Facility. As of September 30, 2017, $518.82021, we had full capacity available under our $900 million in investments during 2016,Revolving Credit Facility.
We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and $550.1 million in investments during 2015, coupled with our continued strategic growth initiatives, historical EBITDA may not provide investors with an adequate picture of the contractual cash in-flows associated with these investments. Our investments are typically made throughout the year,equity financings, and therefore the full year, or “normalized” cash flows, will not be realized until subsequent years. Accordingly, we look at contractual, “normalized,” cash flows and EBITDA as an appropriate tool to manage our leverage profile. We utilize this analysis inclusiveproceeds from limited sales of our focus on debt-to-market value metrics.
properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital for our real estate acquisition activity is provided from the proceedsmarkets, that are outside of our ongoing private offering, including distributions reinvested throughcontrol. In addition, our DRIP. During the threesuccess will depend on our operating performance, our borrowing restrictions, our degree of leverage, and nine months ended September 30, 2017, we raised $79.2 million and $249.6 million, respectively, in equity capitalother factors. Our acquisition growth strategy significantly depends on our ability to be used in ourobtain acquisition activities, including distributions reinvested through our DRIP and properties exchanged for membership units in the Operating Company through UPREIT transactions.financing on favorable terms. We seek to maintainreduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate balancemix of debt and equity capital in our overall leverage policy, while maintaining a focus on increasing core value for existing stockholders (achieved via share appreciation and earnings growth). Our debt capital is provided through unsecured term notes, revolving debt facilities, and senior unsecured notes.capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our leverage profile. Rather,capital structure.
Equity Capital Resources
On September 21, 2020, we enter into mortgagescompleted our IPO and notes payableissued 37 million shares of stock for net proceeds of $588.3 million, including shares issued subsequently pursuant to the underwriters’ partial exercise of their over-allotment option.
On June 28, 2021, we completed our first public follow-on equity offering and issued 11.5 million shares of stock for net proceeds of $253.5 million, including shares issued pursuant to the underwriters' full exercise of their over-allotment option. Our public offerings have been used to repay debt, fund acquisitions, and for other general corporate purposes.
On August 23, 2021, we established an at-the-market common equity offering program ("ATM Program"), through which we may, from time to time, publicly offer and sell shares of our common stock having an aggregate gross sales price of up to $400 million. The ATM Program provides for forward sale agreements, enabling us to set the price of shares upon pricing the offering while delaying the issuance of shares and the receipt of the net proceeds.
As we continue to invest in accretive real estate properties, we expect to balance our debt and equity capitalization, while maintaining a Net Debt to Annualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of follow-on equity offerings and the ATM Program.
41
Unsecured Indebtedness and Capital Markets Activities as ancillary business transactionsof and for the Nine Months Ended September 30, 2021
The following table sets forth our outstanding Revolving Credit Facility, Unsecured Term Loans and Senior Unsecured Notes at September 30, 2021.
(in thousands, except interest rates) |
| Outstanding |
|
| Interest |
| Maturity | |
Unsecured revolving credit facility |
| $ | — |
|
| one-month LIBOR + 1.00% |
| Sep. 2023 |
Unsecured term loans: |
|
|
|
|
|
|
| |
2022 Unsecured Term Loan |
|
| 60,000 |
|
| one-month LIBOR + 1.00% |
| Feb. 2022 |
2024 Unsecured Term Loan |
|
| 190,000 |
|
| one-month LIBOR + 1.00% |
| Jun. 2024 |
2026 Unsecured Term Loan |
|
| 400,000 |
|
| one-month LIBOR + 1.00% |
| Feb. 2026 |
Total unsecured term loans |
|
| 650,000 |
|
|
|
|
|
Senior unsecured notes: |
|
|
|
|
|
|
| |
2027 Senior Unsecured Notes - Series A |
|
| 150,000 |
|
| 4.84% |
| Apr. 2027 |
2028 Senior Unsecured Notes - Series B |
|
| 225,000 |
|
| 5.09% |
| Jul. 2028 |
2030 Senior Unsecured Notes - Series C |
|
| 100,000 |
|
| 5.19% |
| Jul. 2030 |
2031 Senior Unsecured Public Notes |
|
| 375,000 |
|
| 2.60% |
| Sep. 2031 |
Total senior unsecured notes |
|
| 850,000 |
|
|
|
|
|
Total unsecured debt |
| $ | 1,500,000 |
|
|
|
|
|
The addition of S&P's investment grade credit rating of 'BBB' with stable outlook in January 2021, together with Moody's then existing investment grade credit rating, facilitated the successful completion of our inaugural public bond offering discussed above. Additionally S&P's credit rating reduced the applicable margin on our existing bank loans by 25 basis points beginning in February 2021, and reduced the applicable margin on borrowings under our Revolving Credit Facility by 20 basis points. During the three months ended September 30, 2021, Moody’s upgraded our credit rating to ‘Baa2’ with stable outlook. The Moody’s upgrade aligned with our ‘BBB’ rating from S&P, and therefore did not impact the applicable margin on the debt set forth in the table above.
On March 12, 2021, we amended our $450 million 2026 Unsecured Term Loan, reducing the applicable margin an as-needed basis.additional 60 basis points based on our current credit rating. In connection with the amendment, we repaid in full the outstanding commitments for two lenders and elected to repay an additional $10 million in outstanding principal, bringing the outstanding balance to $400 million as of March 31, 2021.
To reduceAs discussed above, on September 15, 2021, we completed our exposureinaugural public bond offering of our 2031 Senior Unsecured Public Notes. We used the proceeds to variablerepay the Unsecured revolving credit facility and the 2023 Unsecured Term Loan in full, to fund acquisitions, and for other general corporate purposes. Borrowings under the 2031 Senior Unsecured Public Notes are subject to interest only, semi-annual payments at a fixed rate of 2.60% per annum and mature on September 15, 2031.
We have full capacity available under our $900 million Revolving Credit Facility as of September 30, 2021.
Debt Covenants
We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of September 30, 2021, we believe we were in compliance with all of our covenants on all outstanding borrowings. In the Operating Company entersevent of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification.
Covenants | Requirements | |
Leverage Ratio | ≤ 0.60 to 1.00 | |
Secured Indebtedness Ratio | ≤ 0.40 to 1.00 | |
Unencumbered Coverage Ratio | ≥ 1.75 to 1.00 | |
Fixed Charge Coverage Ratio | ≥ 1.50 to 1.00 | |
Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value | ≤ 0.60 to 1.00 | |
Dividends and Other Restricted Payments | Only applicable in case of default | |
Aggregate Debt Ratio | ≤ 0.60 to 1.00 | |
Consolidated Income Available for Debt to Annual Debt Service Charge | ≥ 1.50 to 1.00 | |
Total Unencumbered Assets to Total Unsecured Debt | ≥ 1.50 to 1.00 | |
Secured Debt Ratio | ≤ 0.40 to 1.00 |
42
Derivative Instruments and Hedging Activities
We are exposed to interest rate risk arising from changes in interest rates on the floating-rate borrowings under our unsecured credit facilities and a certain mortgage. Borrowings pursuant to our unsecured credit facilities and the mortgage bear interest at floating rates based on LIBOR plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense, which will in turn, increase or decrease our net income and cash flow.
We attempt to manage our interest rate risk by entering into interest rate swap agreements to fix the rateswaps. As of interest as a hedge against interest rate fluctuations. These interest rate hedges have staggered maturities up to ten years in duration in order to reduce the exposure to interest rate fluctuations in any one year. TheSeptember 30, 2021, we had 24 interest rate swaps are applied against a pooloutstanding in an aggregate notional amount of debt, which offers flexibility in maintaining our hedge designation concurrent with our ongoing capital market activity. We attempt to limit our total floating rate debt exposure to no more than 5% of total assets, measured at quarter end. To reduce counterparty concentration risk with respect to the interest rate hedges, we diversify the institutions that serve as swap counterparties. No more than 30% of the nominal value of our total hedged debt may be with any one institution, to be measured at the time we enter into an interest rate swap transaction and at quarter end. We may deviate from these policies from time-to-time subject to the approval of the IDC. The interest rate swaps are considered cash flow hedges.$640.0 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable ratevariable-rate borrowings.
We also mitigate The interest rate riskswaps have been designated by strategically adding long-term, fixedus as cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate debt to our capital structure. Duringtransactions for speculative purposes.
Cash Flows
Cash and cash equivalents and restricted cash totaled $20.1 million and $109.0 million at September 30, 2021 and September 30, 2020, respectively. The table below shows information concerning cash flows for the nine months ended September 30, 2017, we added $150 million of unsecured Senior Notes (as defined below) to our capital structure. 2021 and 2020:
|
| For the Nine Months Ended |
| |||||
|
| September 30, |
| |||||
(In thousands) |
| 2021 |
|
| 2020 |
| ||
Net cash provided by operating activities |
| $ | 187,318 |
|
| $ | 132,964 |
|
Net cash (used in) provided by investing activities |
|
| (448,379 | ) |
|
| 16,207 |
|
Net cash provided by (used in) financing activities |
|
| 170,410 |
|
|
| (60,495 | ) |
Decrease in cash and cash equivalents and restricted cash |
| $ | (90,651 | ) |
| $ | 88,676 |
|
The Senior Notes bear interest at a fixed rate of 4.84% per annum, with a 10 year maturity.
The availability of debt to finance commercial real estate can be impactedincrease in net cash provided by economic and other factors that are beyond our control. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet through our investments in real estate with credit-worthy tenants and lease guarantors, and maintaining an appropriate mix of debt and equity capitalization. Specifically, we recognized a 100% collection rate on rentals during 2016, and over a 99% collection rate on rentalsoperating activities during the nine months ended September 30, 2017. Additionally, Moody’s issued an investment grade credit rating of Baa32021 as compared to the Operating Company in March 2016, further evidencing our active management of a conservative capital structure. Moody’s re-affirmed the investment grade credit rating in March 2017. We have arranged our debt facilities to have multiple year terms in order to reduce the risk that short-term real estate financing would not be available to us in any given year. As we grow our real estate portfolio, we also intend to manage our debt maturities to reduce the risk that a significant amount of our debt will mature in any single year in the future. Refer to “Contractual Obligations” below for further details of the maturities on our contractual obligations, including long-term debt.
As of September 30, 2017, the historical cost basis of our real estate investment portfolio totaled $1.9 billion, consisting of investments in 477 properties with rent and interest due from our tenants aggregating $14.7 million per month on a straight-line basis. During the nine months ended September 30, 2017, we closed 14 real estate acquisitions totaling $352.0 million, adding 70 new properties2020, was mainly due to our portfolio. The 70 new properties will provide approximately $2.6 million in monthly rent on a straight-line basis. Substantially all of our cash from operations is generated by our real estate portfolio.
Our primary cash expenditures are the monthly interest payments we make on the debt we use to finance our real estate investment portfolio, asset management and property management fees of servicing the portfolio, acquisition expenses related to the growth of our portfolio, and the general and administrative expenses of operating our business. Since substantially all of our leases are triple-net, our tenants are generally responsible for the maintenance, insurance, and property taxes associated with the properties they lease from us. In certain circumstances, the terms of the lease require us to pay these expenses, however, in most cases we are reimbursed by the tenants. Accordingly, we do not currently anticipate making significant capital expenditures or incurring other significant property costs during the term of a property lease, unless we incur substantial vacancies. To the extent that we have vacant properties, we will incur certain costs to operate and maintain the properties, however, we do not currently expect these costs to be material. For the nine months ended September 30, 2017, we maintained a 100% leased portfolio, with the leases for only two of our properties, representing less than 1% of our annual rental streams (calculated based on NTM Rent), expiring before 2020.
We intend to continue to grow through additional real estate investments. To accomplish this objective, we must continue to identify real estate acquisitions that are consistent with our underwriting guidelines and raise additional future debt and equity capital. We have financed our acquisition of properties using both equity investments as well as a combination of unsecured term, revolving debt, senior unsecured notes, and mortgage loans. The mix of financing sources may change over time based on market conditions and our liquidity needs. We have three outstanding unsecured term loans with an outstanding principal balance of approximately $725.0 million as of September 30, 2017, and a $400.0 million line of credit with $126.5 million of outstanding borrowings as of September 30, 2017.
On April 18, 2017, the Operating Company closed the issuance of unsecured, fixed rate, guaranteed senior promissory notes (“Senior Notes”) with an aggregate principal amount of $150 million. The Senior Notes were issued by the Operating Company and upon issuance, were guaranteed by us and each of the Operating Company’s subsidiaries that guarantee our other unsecured credit facilities. The Senior Notes were issued at par, bear interest at a rate of 4.84% per annum (priced at 240 basis points above the 10 year U.S. Treasury yield at the time of pricing), and mature on April 18, 2027. We used the proceeds from the sale of the Senior Notes to pay down $115 million of the outstanding balance on our existing line of credit (the “Revolver”) at the time of closing and to fund other general corporate purposes, including acquisitions. The financial covenants associated with the Senior Notes are materially consistent with the covenant tables set forth below.
On June 23, 2017, together with the Operating Company, we closed on an $800 million unsecured credit facility (the “Credit Facility”). The Credit Facility contains an accordion feature that can increase the facility size up to a total of $1.0 billion, and includes (i) a $400 million senior unsecured revolving credit facility (the “New Revolver”), (ii) a five and a half year, $250 million senior unsecured delayed draw term loan (the “5.5-Year Term Loan”), and (iii) a seven year, $150 million senior unsecured delayed draw term loan (the “7-Year Term Loan”). The following table summarizes the amounts drawn and available to be drawn on the Credit Facility upon closing (in thousands).
Loan Tranche |
| Amount Drawn |
|
| Amount Available |
|
| Total Capacity |
|
| Maturity Date | |||
New Revolver |
|
| 90,000 |
|
|
| 310,000 |
|
|
| 400,000 |
|
| January 21, 2022 |
5.5-Year Term Loan |
|
| 250,000 |
|
|
| — |
|
|
| 250,000 |
|
| January 23, 2023 |
7-Year Term Loan |
|
| — |
|
|
| 150,000 |
|
|
| 150,000 |
|
| June 21, 2024 |
At closing, we borrowed $250 million under the 5.5-Year Term Loan and drew down $90 million on the New Revolver. We used the proceeds from these borrowings to pay off our $100 million term note (“Term Note 1”), our $185 million term note (“Term Note 2”), the outstanding balance of $5 million on our Revolver, and to pay down $50 million of the outstanding borrowings on our $375 term note (“Term Note 3”). The $50 million payment on Term Note 3 was made via a one-time, non-pro rata payment provision included in our amended and restated Term Note 3 agreement, which was amended and restated simultaneously with the closing of the Credit Facility to align its terms with the Credit Facility. We did not draw down funds from the 7-Year Term Loan at closing. The remaining capacity on the Credit Facility will also be used to partially fund future acquisition activity in our real estate portfolio and for general corporate purposes. Prior to extension options, Term Note 1 and the Revolver were set to mature on June 27, 2017, and Term Note 2 was set to mature on October 11, 2018.
Included in the terms of the Credit Facility and through our amendment and restatement of Term Note 3, we removed the subsidiary guarantees supporting our term notes and Senior Notes.
Our $400 million New Revolver matures on January 21, 2022, with one extension option for an additional five month period through June 21, 2022, subject to certain conditions set forth in the Credit Facility, including payment of an extension fee equal to 0.0625% of the revolving commitments. The rate of interest payable on the New Revolver, at our option, is equal to LIBOR plus a margin. The margin for New Revolver borrowings is adjustable based upon the Operating Company’s credit rating and is between 0.825% and 1.55% per annum. Based on the Operating Company’s current investment grade credit rating of Baa3, the applicable margin for the New Revolver equals 1.2% per annum. Borrowings under the New Revolver are payable interest only during the term,cost savings associated with the principal amount due in full at maturity. As of September 30, 2017, and at closing on June 23, 2017, there were $126.5 million and $90 million, respectively, in outstanding LIBOR borrowings under the New Revolver. As of September 30, 2017, $28 million of the total $126.5 million outstanding New Revolver borrowings were in the form of swingline borrowings, which allow us to draw down funds on the New Revolver immediately upon request. The swingline borrowings are short-term in nature, with a maturity date equal to five business days after draw. As of September 30, 2017, we expect to replace the $28 million in swingline borrowings with New Revolver borrowings. Should the Operating Company lose its investment grade credit rating, the margin would be 1.55% until such time as the Operating Company regains its investment grade credit rating. The current margin on the New Revolver of 1.2% represents a 25 basis point reduction from the margin of 1.45% on the previous Revolver, prior to consideration of the applicable facility fee discussed below. The following table presents the margins on the New Revolver based on credit ratings from S&P or Moody’s.Internalization.
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An applicable facility fee is payable on the amount of the revolving commitments, as defined in the Credit Facility, based on the Operating Company’s credit rating. The initial applicable facility fee equals 0.25% per annum. The previous Revolver contained an unused commitment fee. The following table presents the applicable facility fee on the New Revolver based on credit ratings from S&P or Moody’s.
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Our $250 million 5.5-Year Term Loan matures on January 23, 2023, and was fully drawn as of June 30, 2017. Borrowings under the 5.5-Year Term Loan bear interest at variable rates based on LIBOR plus a margin ranging from 0.90% to 1.75% based on the Operating Company’s credit rating. Based on the Operating Company’s current investment grade credit rating of Baa3, the applicable margin under the 5.5-Year Term Loan equals 1.35% per annum. As compared to the applicable margin for Term Note 1 and Term Note 2 of 1.45% and 1.75%, respectively, the applicable margin of 1.35% on the 5.5-Year Term Loan represents a 10 basis point and 40 basis point reduction, respectively. Borrowings under the 5.5-Year Term Loan are payable interest only during the term, with the principal amount due in full at maturity. The following table presents the margins on the 5.5-Year Term Loan.
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Our $150 million 7-Year Term Loan matures on June 21, 2024. We are permitted to request up to three borrowings under the delayed draw feature of the 7-Year Term Loan, which may be drawn from June 23, 2017, to but excluding June 22, 2018. As of September 30, 2017, we have not drawn upon the 7-Year Term Loan. The rate of interest payable on the 7-Year Term Loan is equal to LIBOR plus a margin. The margin for 7-Year Term Loan borrowings is adjustable based upon the Operating Company’s credit rating and is between 1.5% and 2.45% per annum. Based on the Operating Company’s current investment grade credit rating of Baa3, the initial margin under the 7-Year Term Loan equals 1.9% per annum. A ticking fee is payable on the amount of the commitments for the 7-Year Term Loan, as reduced by the amount of any term loans outstanding under the 7-Year Term Loan, equal to 0.25% per annum. Borrowings under the 7-Year Term Loan are payable interest only during the term, with the principal amount due in full at maturity. The following table presents the margins on the 7-Year Term Loan based on credit ratings from S&P or Moody’s.
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Our $325 million Term Note 3 matures on February 6, 2019, was fully drawn as of September 30, 2017, and provides for two one year extension options, at our option, subject to compliance with all covenants and the payment of a 0.10% fee. The Term Note 3 agreement contains an accordion feature that can increase the note size up to a total of $600 million. Borrowings under Term Note 3 originally bore interest at variable rates based on the one month LIBOR plus a margin. Moody’s assignment of an investment grade credit rating to the Operating Company led to a margin of 1.40% on Term Note 3, effective April 1, 2016. Should the Operating Company lose its investment grade credit rating, the margin would be 1.75% until such time as the Operating Company regains its investment grade credit rating. The following tables present the margins on Term Note 3 based on credit ratings from S&P or Moody’s.
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The Operating Company achieved its investment grade credit rating based on our conservative leverage profile, diversified portfolio, and earnings stability based on the credit-worthiness of our tenants, which we intend to maintain concurrent with our growth objectives. Factors that could negatively impact our credit rating include, but are not limited to: a significant increase in our leverage on a sustained basis; a significant increasecash used in secured debt levels; a significant decline in our unencumbered asset base; weakening of our corporate governance structure; and a significant decline in our portfolio diversification. We have aligned our strategic growth priorities with these factors, as we believe the favorable debt pricing and access to additional sources of debt capital resulting from the investment grade credit rating provides us with an advantageous cost of capital and risk-adjusted return on investment for our stockholders.
We intend to draw down on the $150 million 7-Year Term Loan as we acquire additional real estate as part of our strategic growth initiatives. Additionally, we intend to exercise the extension provisions of the New Revolver and Term Note 3, refinance, or replace the existing borrowings as they become due. The extensions would delay the New Revolver’s maturities until June 2022, and Term Note 3’s maturity until February 2021. We do not intend to make principal payments on these obligations in the foreseeable future, and plan to replace our existing credit facilities with new debt prior to maturity. Additionally, we may be required to increase our borrowing capacity to partially fund future acquisitions. We assess market conditions and the availability and pricing of debt on an ongoing basis, which are critical inputs in our strategic planning and decision making process. While we believe the current market conditions provide our stockholders with an advantageous capitalization structure and risk-adjusted return, we believe our conservative capital structure is appropriate to absorb temporary market fluctuations. Significant adverse market conditions could impact the availability of debt to fund future acquisitions, our ability to recognize growth in earnings and return on investment for stockholders, and our ability to recast the debt facilities at cost-advantageous pricing points. In the event of such conditions, we would plan to revise our capitalization structure and strategic initiatives to maximize return on investment for stockholders. To the extent that we are unable to recast our debt facilities, our cash flows from operations will not be adequate to pay the principal amount of debt, and we may be forced to liquidate properties to satisfy our obligations.
We are subject to various covenants and financial reporting requirements pursuant to the loan agreements we have entered into. The table below summarizes the applicable financial covenants, which are substantially the same across each of our loan agreements. As of September 30, 2017, we were in compliance with all of our covenants. In the event of default, either through default on payments or breach of covenants, we may be prohibited from paying dividends on our common stock above the annual 90% REIT taxable income distribution requirement. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the required distribution amounts.
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In connection with our closing of the Credit Facility and amending and restating Term Note 3, we removed the maximum recourse secured indebtedness ratio, minimum tangible net worth requirement, minimum eligible properties, and maximum permitted investments covenants from our term loan and revolving credit agreements. The new debt covenants are characteristic of investment grade credit facilities within the REIT industry.
We believe our leverage policy and capital structure provides us with several advantages, including the ability to:
create a growing and diversified real estate portfolio;
capitalize on competitive debt pricing;
add value to our stockholders through earnings growth on a growing pool of assets; and
issue unsecured debt having relatively limited negative financial covenants and maintain the distributions necessary to retain our tax-sheltered REIT status in the event of contractual default, which we believe increases our corporate flexibility.
We do not anticipate utilizing mortgage loans as a strategic priority in our capital structure to fund growth. When utilized, mortgage loans typically correspond to a single property or a group of related properties acquired from a single seller. The loans may be further secured by guarantees from us or the Operating Company, provided that we attempt to limit the use of guarantees to the extent possible. The Operating Company may assume debt when conducting a transaction or it may mortgage existing properties. The maturities on our mortgages are staggered from 2017 to 2031. As of September 30, 2017, the aggregate GAAP principal balance of outstanding mortgage loans approximated $57.9 million, net of unamortized debt issuance costs.
As part of acquisitions closed during 2016, we entered into tenant improvement allowances with a balance of $9.5 million at December 31, 2016, included in Accounts payable and other liabilities in the Condensed Consolidated Balance Sheets within this Form 10-Q. During the nine months ended September 30, 2017, we entered into $1.0 million of additional tenant improvement allowances and paid $3.9 million towards the allowances. We expect to pay the $6.6 million balance of tenant improvement allowances within the next twelve months out of cash flows from operations.
As shown in the table below, net cash provided by operatinginvesting activities increased by $20.2 million during the nine months ended September 30, 2017, from $52.1 million for2021 as compared to the nine months ended September 30, 2016. 2020, was mainly due to increased acquisition volume in 2021 offset by decrease in cash paid in connection with the Internalization.
The increasechange in net cash provided by operating(used in) by financing activities is primarily due to the increase in the size of our real estate investment portfolio. Our real estate investing activities have grown in volume as we continue to identify and acquire income-producing, net leased commercial real estate, primarily through sale-leaseback transactions, as a result of increased access to debt and equity capital and favorable investment opportunities. We funded real estate investment activity with a combination of cash from operations, proceeds from the issuance of unsecured debt obligations, and proceeds from the issuance of common stock. We paid cash dividends to our stockholders and non-controlling members of the Operating Company, net of reinvestments through our DRIP, totaling $38.2 million and $31.3 million forduring the nine months ended September 30, 20172021 as compared to the nine months ended September 30, 2020 mainly reflects an increase in net proceeds from equity and 2016, respectively. Cash useddebt offerings in 2021 to fund the increasegrowth in dividends between periods related primarily to the increase in cash provided by our operations. Cash and cash equivalents totaled $13.7 million and $33.0 million at September 30, 2017 and September 30, 2016, respectively.
|
| For the nine months ended |
| |||||
|
| September 30, |
| |||||
(In thousands) |
| 2017 |
|
| 2016 |
| ||
Net cash provided by operating activities |
| $ | 72,365 |
|
| $ | 52,148 |
|
Net cash used in investing activities |
|
| (297,497 | ) |
|
| (360,093 | ) |
Net cash provided by financing activities |
|
| 217,195 |
|
|
| 313,898 |
|
Increase (decrease) in cash and cash equivalents |
| $ | (7,937 | ) |
| $ | 5,953 |
|
Management believes that the cash generated by our operations and our ongoing private offering, our cash and cash equivalents at September 30, 2017, our current borrowing capacity on our New Revolver and three unsecured credit facilities, and our access to long-term debt capital, including through the debt private placement market, will be sufficient to fund our operations for the foreseeable future and allow us to acquire the real estate to meet our strategic objectives.portfolio.
Our leases with tenants of our properties are long-term in nature, with a current weighted average remaining lease term of 13.2 years as of September 30, 2017. To mitigate the impact of inflation on our fixed revenue streams, we have implemented limited escalation clauses in our leases. As of September 30, 2017, all of our leases had contractual lease escalations, with a weighted average of 2.1%. A substantial majority of our leases have fixed annual rent increases, and the remaining portion has annual lease escalations based on increases in the CPI, or periodic escalations over the term of the lease (e.g., a 10% increase every five years). These lease escalations mitigate the risk of fixed revenue streams in the case of an inflationary economic environment, and provide increased return in otherwise stable market conditions. As a majority of our portfolio has fixed lease escalations, there is a risk that inflation could be greater than the contractual rent increases.
Our focus on single-tenant, triple-net leases also shelters us from fluctuations in the cost of services and maintenance as a result of inflation. For an insignificant portion of our portfolio, we have leases that are not triple-net, and therefore we bear certain responsibilities for the maintenance and structural component replacement that may be required in the future. Inflation and increased costs may have an adverse impact to our tenants and their credit-worthiness if the increase in costs are greater than their increase in revenue. In the limited circumstances where we cannot implement a triple-net lease, we attempt to limit our exposure to inflation through the use of warranties and other remedies that reduce the likelihood of a significant capital outlay.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of September 30, 2017.
The following table provides information with respect to our contractual commitments and obligations as of September 30, 20172021 (in thousands). Refer to the discussion in the Liquidity and Capital Resources section above for further discussion over our short and long-term obligations.
Year of |
| Term Loans |
|
| Revolving Credit Facility(a) |
|
| Senior |
|
| Mortgages |
|
| Interest |
|
| Tenant |
|
| Operating |
|
| Total |
| ||||||||
Remainder |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 707 |
|
| $ | 15,127 |
|
| $ | 57 |
|
| $ | 186 |
|
| $ | 16,077 |
|
2022 |
|
| 60,000 |
|
|
| — |
|
|
| — |
|
|
| 2,907 |
|
|
| 59,427 |
|
|
| — |
|
|
| 723 |
|
|
| 123,057 |
|
2023 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,582 |
|
|
| 58,630 |
|
|
| — |
|
|
| 539 |
|
|
| 66,751 |
|
2024 |
|
| 190,000 |
|
|
| — |
|
|
| — |
|
|
| 9,760 |
|
|
| 55,609 |
|
|
| — |
|
|
| 153 |
|
|
| 255,522 |
|
2025 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 20,195 |
|
|
| 52,156 |
|
|
| — |
|
|
| 155 |
|
|
| 72,506 |
|
Thereafter |
|
| 400,000 |
|
|
| — |
|
|
| 850,000 |
|
|
| 56,717 |
|
|
| 137,943 |
|
|
| — |
|
|
| 3,777 |
|
|
| 1,448,437 |
|
Total |
| $ | 650,000 |
|
| $ | — |
|
| $ | 850,000 |
|
| $ | 97,868 |
|
| $ | 378,892 |
|
| $ | 57 |
|
| $ | 5,533 |
|
| $ | 1,982,350 |
|
43
Year of Maturity |
| Term Note 3(1) |
|
| 5.5-Year Term Loan |
|
| New Revolver(2) |
|
| Senior Notes |
|
| Mortgages |
|
| Interest Expense(3) |
|
| Tenant Improvement Allowances(4) |
|
| Total |
| ||||||||
2017 |
| $ | — |
|
| $ | — |
|
| $ | 28,000 |
|
| $ | — |
|
| $ | 677 |
|
| $ | 8,842 |
|
| $ | 6,627 |
|
| $ | 44,146 |
|
2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,829 |
|
|
| 34,915 |
|
|
| — |
|
|
| 37,744 |
|
2019 |
|
| 325,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,036 |
|
|
| 26,907 |
|
|
| — |
|
|
| 354,943 |
|
2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,450 |
|
|
| 25,459 |
|
|
| — |
|
|
| 33,909 |
|
2021 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13,306 |
|
|
| 24,537 |
|
|
| — |
|
|
| 37,843 |
|
Thereafter |
|
| — |
|
|
| 250,000 |
|
|
| 98,500 |
|
|
| 150,000 |
|
|
| 30,274 |
|
|
| 70,467 |
|
|
| — |
|
|
| 599,241 |
|
Total |
| $ | 325,000 |
|
| $ | 250,000 |
|
| $ | 126,500 |
|
| $ | 150,000 |
|
| $ | 58,572 |
|
| $ | 191,127 |
|
| $ | 6,627 |
|
| $ | 1,107,826 |
|
|
|
|
|
|
|
|
|
At September 30, 2017,2021 and December 31, 2020, investment in rental property of $91.3$162.6 million isand $173.5 million, respectively, was pledged as collateral against our mortgages and notes payable.mortgages.
Additionally, as of September 30, 2017, we have twoare a party to three separate Tax Protection Agreements (the “Agreements”)tax protection agreements with the contributing members (the “Protected Members”) of twothree distinct UPREIT transactions conducted in November 2015 and February 2016. Subsequent to September 30, 2017, we entered into a thirdthe Founding Owners’ Tax Protection Agreement in connection with additional Protected Members through one UPREIT transaction conducted in October 2017.the Internalization. The Agreementstax protection agreements require us to pay monetary damagesindemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause a Protected Membersuch beneficiaries to recognize a Protected Gain, as defined ingain that is protected under the Agreements andagreements, subject to certain exceptions. In such an event, we will pay monetary damages to the Protected Members in the amountBased on values as of September 30, 2021, taxable sales of the aggregate federal, state, and local income taxes incurred as a result of the income or gain allocated or recognized by the Protected Member as an outcome of the transaction, subject to certain caps and limitations contained in the Agreements. We are required to allocate to the Protected Members, an amount of nonrecourse liabilities that is at least equal to the Minimum Liability Amount for each Protected Member, as defined in the Agreements. The Minimum Liability Amount and the associated allocation of nonrecourse liabilities are calculated in accordance with applicable tax regulations, are completed at the Operating Company level, and do not represent GAAP accounting. Therefore, there is no impact to the consolidated financial statements included in this Form 10-Q. If the nonrecourse liabilities allocated do not meet the requirement, we will pay monetary damages to the Protected Members in the amount of the aggregate federal, state, and local income taxes incurred as a result of the income or gain allocated or recognized by the Protected Member as an outcome to the default. The maximum aggregate amount we may be liable forproperties would trigger liability under the Agreements isfour agreements of approximately $12.3$22.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded this commitmentthese commitments from the contractual commitments table above.
ResultsIn the normal course of Operations
For the three months ended September 30, 2017 and 2016
Overview
As of September 30, 2017, our real estate investment portfolio had a net book value of $1.9 billion, consisting of investments in 477 property locations in 37 states and various industries. All of our real estate investment portfolio represents commercial real estate properties subject to long-term leases, and all of our owned properties were subject to a lease as of September 30, 2017. During the three months ended September 30, 2017 and 2016, none of our leases with tenants expired, and all of our leasing activity related to our real estate acquisitions.
Revenues
|
| For the three months ended |
|
|
|
|
| |||||
|
| September 30, |
|
| Increase/ |
| ||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental income from operating leases |
| $ | 43,233 |
|
| $ | 34,806 |
|
| $ | 8,427 |
|
Earned income from direct financing leases |
|
| 968 |
|
|
| 1,143 |
|
|
| (175 | ) |
Operating expenses reimbursed from tenants |
|
| 1,995 |
|
|
| 1,056 |
|
|
| 939 |
|
Other income from real estate transactions |
|
| 39 |
|
|
| 5 |
|
|
| 34 |
|
Total revenues |
| $ | 46,235 |
|
| $ | 37,010 |
|
| $ | 9,225 |
|
Total revenues increased by $9.2 million, or 24.9%, to $46.2 million for the three months ended September 30, 2017, compared to $37.0 million for the three months ended September 30, 2016. The growth in revenue period-over-period is primarily attributable to the growth in our real estate portfolio. During the three months ended September 30, 2017,business, we closed seven real estate acquisitions and acquired $159.2 million in real estate, excluding capitalized acquisition costs, comprised of 22 new properties. We capitalized approximately $2.4 million in acquisition expenses and $0.8 million in leasing fees as part of the acquisitions. Additionally, subsequent to September 30, 2016 and for the twelve month period ended September 30, 2017, we closed 22 real estate acquisitions and acquired approximately $489.8 million in real estate comprised of 88 new properties, contributing to the growth in current quarter revenue. The rental rates we receive on sale-leaseback transactions and lease assumptions on theenter into various types of properties we target across the United States vary from transactioncommitments to transaction based on many factors, such as the terms of the lease, each property’spurchase real estate fundamentals,properties. These commitments are generally subject to our customary due diligence process and, the market rents in the area. The initial contractual cash lease payments on acquisitions during the three months ended September 30, 2017, excluding capitalized acquisition expenses, representedaccordingly, a weighted average capitalization rate of 7.5%.
Operating Expenses
|
| For the three months ended |
|
|
|
|
| |||||
|
| September 30, |
|
| Increase/ |
| ||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 15,643 |
|
| $ | 12,114 |
|
| $ | 3,529 |
|
Asset management fees |
|
| 3,844 |
|
|
| 2,789 |
|
|
| 1,055 |
|
Property management fees |
|
| 1,249 |
|
|
| 1,010 |
|
|
| 239 |
|
Acquisition expenses |
|
| — |
|
|
| 2,367 |
|
|
| (2,367 | ) |
Property and operating expense |
|
| 2,009 |
|
|
| 1,184 |
|
|
| 825 |
|
General and administrative |
|
| 1,173 |
|
|
| 598 |
|
|
| 575 |
|
State and franchise tax |
|
| 301 |
|
|
| 71 |
|
|
| 230 |
|
Provision for impairment of investment in rental properties |
|
| 2,608 |
|
|
| — |
|
|
| 2,608 |
|
Total operating expenses |
| $ | 26,827 |
|
| $ | 20,133 |
|
| $ | 6,694 |
|
Depreciation and amortization
Depreciation and amortization increased by $3.5 million, or 29.1%, to $15.6 million for the three months ended September 30, 2017, primarily as a result of the growth in our real estate portfolio. During the three months ended September 30, 2017, we closed seven real estate acquisitions and acquired $159.2 million in real estate, excluding capitalized acquisition costs, comprised of 22 new properties. Additionally, subsequent to September 30, 2016 and for the twelve month period ended September 30, 2017, we closed 22 real estate acquisitions and acquired approximately $489.8 million in real estate comprised of 88 new properties. In addition to the $159.2 million purchase price for acquisitions during the three months ended September 30, 2017, we capitalized $2.4 million in acquisition expenses as the result of adopting ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). The capitalized acquisition expenses are capitalized as part of the cost basis of the underlying tangible and intangible assets acquired, and are depreciated over the respective useful lives. For acquisitions made during 2016, we expensed acquisition costs as incurred. We adopted ASU 2017-01 and the respective accounting for acquisition expenses as of January 1, 2017, on a prospective basis, and therefore, this new accounting standard does not impact acquisition costs previously expensed in 2016.
Asset management fees
Asset management fees increased by $1.1 million, or 37.8%, to $3.8 million for the three months ended September 30, 2017. The Asset Manager receives an annual asset management fee equal to 1% of the aggregate value of our equity on a fully diluted basis, based on the Determined Share Value. The increase in asset management fees during the three months ended September 30, 2017 compared to the comparable period in 2016 is a result of an increase in our outstanding equity on a fully diluted basis and the increase in the Determined Share Value.
The $80.00 per share Determined Share Value in effect as of September 30, 2017, reflected an increase of 3.9% from the $77.00 per share Determined Share Value in effect as of September 30, 2016. Additionally, the weighted average number of shares of our common stock and non-controlling membership units ofspecific conditions must be met before we’re obligated to purchase the Operating Company outstanding increased as the result of continued equity capital investments. For the three months ended September 30, 2017, the weighted average number of shares of our common stock and non-controlling membership units of the Operating Company outstanding was 19.1 million, compared to 15.1 million for the three months ended September 30, 2016. The increase in equity capital was used to partially fund the continued growth in our real estate portfolio.properties.
Acquisition expenses
Acquisition expenses decreased by $2.4 million for the three months ended September 30, 2017. Under the terms of the Asset Management Agreement, we pay the Asset Manager an acquisition fee equal to 1% of the gross purchase price paid for each property we acquire (including properties contributed in exchange for membership units in the Operating Company).
We adopted ASU 2017-01 effective January 1, 2017, and under this new accounting standard, we capitalize acquisition expenses as part of the cost basis of the underlying tangible and intangible assets acquired, as opposed to expensing them as incurred. We adopted ASU 2017-01 on a prospective basis. For the three months ended September 30, 2017, we capitalized $2.4 million in acquisition expenses relating to $159.2 million in acquisitions, which approximated the acquisition expenses recognized during the three months ended September 30, 2016.
Provision for impairment of investment in rental properties
During the three months ended September 30, 2017, we recognized $2.6 million of impairment on our investments in rental properties. We review long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If and when such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. We recognized impairment on four properties whose carrying amounts we determined were not recoverable. In determining the fair value of the assets at the time of measurement, we utilized capitalization rates ranging from 7.25% to 12%, and a weighted average discount rate of 8%.
Other income (loss)
|
| For the three months ended |
|
|
|
|
| |||||
|
| September 30, |
|
| Increase/ |
| ||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred distribution income |
| $ | 187 |
|
| $ | 181 |
|
| $ | 6 |
|
Interest income |
|
| 127 |
|
|
| 4 |
|
|
| 123 |
|
Interest expense |
|
| (9,380 | ) |
|
| (4,576 | ) |
|
| (4,804 | ) |
Cost of debt extinguishment |
|
| (1,404 | ) |
|
| (52 | ) |
|
| (1,352 | ) |
Gain on sale of real estate |
|
| 4,052 |
|
|
| 2,983 |
|
|
| 1,069 |
|
Interest expense
Interest expense increased $4.8 million, or 105%, to $9.4 million for the three months ended September 30, 2017, from $4.6 million for the three months ended September 30, 2016, due primarily to an increase in long-term borrowings used to partially fund the acquisition of properties for our growing real estate investment portfolio. Our total outstanding debt, excluding capitalized debt issuance costs, increased from $831.3 million at September 30, 2016, to $910.1 million at September 30, 2017. Additionally, during the three months ended September 30, 2016, we recognized approximately $3.0 million of interest rate swap ineffectiveness, which resulted in a reduction of interest expense. Ineffectiveness during the three months ended September 30, 2016 was attributable to inconsistencies in certain terms between the interest rate swaps and the loan agreements for the Term Notes and Revolver. The interest rate swaps continued to qualify for hedge accounting, with the effective portion of mark-to-market adjustments included in accumulated other comprehensive income. During the fourth quarter of 2016, we amended the terms of the credit agreements, thereby reversing the impact of the ineffectiveness and rendering a $0 full year 2016 impact to the consolidated income statement. We did not recognize any ineffectiveness on our interest rate swaps during the three months ended September 30, 2017.
Cost of debt extinguishment
The cost of debt extinguishment represents the difference between the price paid to extinguish the debt compared to the carrying value of the debt, plus any unamortized debt issuance costs at the time of extinguishment. To the extent that the price paid to extinguish the debt is greater than the carrying value of debt, we would recognize a loss (cost) on extinguishment. The loss would be increased by the amount of previously capitalized debt issuance costs that remain unamortized at the time of extinguishment. These amounts fluctuate period-over-period based on the variability in the interest rate environment, changes in financial institutions’ credit standards, and our activity in capital markets to manage our leverage position. Cost of debt extinguishment increased by $1.4 million, to $1.4 million for the three months ended September 30, 2017, from $0.1 million for the three months ended September 30, 2016. The fluctuation is a direct result of a $1.4 million prepayment penalty recognized on the extinguishment of a mortgage, with no similar activity during the three months ended September 30, 2016.
Gain on sale of real estate
During the three months ended September 30, 2017, we recognized a $4.1 million gain on the sale of real estate, compared to a gain of $3.0 million for the three months ended September 30, 2016. During the three months ended September 30, 2017 and 2016, we sold four properties and two properties, respectively. Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market.
For the nine months ended September 30, 2017 and 2016
Overview
As of September 30, 2017, our real estate investment portfolio had grown to a net book value of $1.9 billion, consisting of investments in 477 property locations in 37 states and various industries. All of our real estate investment portfolio represents commercial real estate properties subject to long-term leases, and all of our owned properties were subject to a lease as of September 30, 2017. During the nine months ended September 30, 2017 and 2016, none of our leases expired, and all of our leasing activity related to our real estate acquisitions.
Revenues
|
| For the nine months ended |
|
|
|
|
| |||||
|
| September 30, |
|
| Increase/ |
| ||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental income from operating leases |
| $ | 123,890 |
|
| $ | 96,779 |
|
| $ | 27,111 |
|
Earned income from direct financing leases |
|
| 3,175 |
|
|
| 3,406 |
|
|
| (231 | ) |
Operating expenses reimbursed from tenants |
|
| 4,908 |
|
|
| 3,059 |
|
|
| 1,849 |
|
Other income from real estate transactions |
|
| 117 |
|
|
| 176 |
|
|
| (59 | ) |
Total revenues |
| $ | 132,090 |
|
| $ | 103,420 |
|
| $ | 28,670 |
|
Total revenues increased by $28.7 million, or 27.7%, to $132.1 million for the nine months ended September 30, 2017, compared to $103.4 million for the nine months ended September 30, 2016. The growth in revenue year over year is primarily attributable to the growth in our real estate portfolio. During the nine months ended September 30, 2017, we closed 14 real estate acquisitions and acquired $352.0 million in real estate comprised of 70 new properties. We capitalized approximately $6.6 million in acquisition expenses and $2.6 million in leasing fees as part of the acquisitions. Additionally, subsequent to September 30, 2016 and for the three month period ended December 31, 2016, we closed eight real estate acquisitions and acquired approximately $137.8 million in real estate comprised of 17 new properties. The rental rates we receive on sale-leaseback transactions and lease assumptions on the various types of properties we target across the United States vary from transaction to transaction based on many factors, such as the terms of the lease, each property’s real estate fundamentals, and the market rents in the area. The initial contractual cash lease payments on acquisitions during the nine months ended September 30, 2017, excluding capitalized acquisition expenses, represented a weighted average capitalization rate of 7.4%.
Operating Expenses
|
| For the nine months ended |
|
|
|
|
| |||||
|
| September 30, |
|
| Increase/ |
| ||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 44,969 |
|
| $ | 33,273 |
|
| $ | 11,696 |
|
Asset management fees |
|
| 10,666 |
|
|
| 7,770 |
|
|
| 2,896 |
|
Property management fees |
|
| 3,635 |
|
|
| 2,868 |
|
|
| 767 |
|
Acquisition expenses |
|
| — |
|
|
| 8,256 |
|
|
| (8,256 | ) |
Property and operating expense |
|
| 4,710 |
|
|
| 3,005 |
|
|
| 1,705 |
|
General and administrative |
|
| 3,297 |
|
|
| 1,951 |
|
|
| 1,346 |
|
State and franchise tax |
|
| 511 |
|
|
| 181 |
|
|
| 330 |
|
Provision for impairment of investment in rental properties |
|
| 2,608 |
|
|
| — |
|
|
| 2,608 |
|
Total operating expenses |
| $ | 70,396 |
|
| $ | 57,304 |
|
| $ | 13,092 |
|
Depreciation and amortization
Depreciation and amortization increased by $11.7 million, or 35.2%, to $45.0 million for the nine months ended September 30, 2017, primarily as a result of the growth in our real estate portfolio. During the nine months ended September 30, 2017, we acquired $352.0 million in real estate comprised of 70 new properties. In addition to the $352.0 million purchase price for acquisitions during the nine months ended September 31, 2017, we capitalized $6.6 million in acquisition expenses as the result of adopting ASU 2017-01. The capitalized acquisition expenses are capitalized as part of the cost basis of the underlying tangible and intangible assets acquired, and are depreciated over their respective useful lives. For acquisitions made during 2016, we expensed acquisition costs as incurred. We adopted ASU 2017-01 and the respective accounting for acquisition expenses as of January 1, 2017, on a prospective basis, and therefore, this new accounting standard does not impact acquisition costs previously expensed in 2016.
Asset management fees
Asset management fees increased by $2.9 million, or 37.3%, to $10.7 million for the nine months ended September 30, 2017. The Asset Manager receives an annual asset management fee equal to 1% of the aggregate value of our equity on a fully diluted basis based on the Determined Share Value. The increase in asset management fees during 2016 is a result of an increase in the equity on a fully diluted basis and the increase in the Determined Share Value.
The $80.00 per share Determined Share Value in effect as of September 30, 2017, reflected an increase of 3.9% from the $77.00 per share Determined Share Value in effect as of September 30, 2016. Additionally, the weighted average number of shares of our common stock and non-controlling membership units of the Operating Company outstanding increased as the result of continued equity capital investments. For the nine months ended September 30, 2017, the weighted average number of shares of our common stock and non-controlling membership units of the Operating Company outstanding was 18.1 million compared to 14.2 million for the nine months ended September 30, 2016. The increase in equity capital was used to partially fund the continued growth in our real estate portfolio.
Acquisition expenses
Acquisition expenses decreased by $8.3 million for the nine months ended September 30, 2017. Under the terms of the Asset Management Agreement, we pay the Asset Manager an acquisition fee equal to 1% of the gross purchase price paid for each property we acquire (including properties contributed in exchange for membership units in the Operating Company).
We adopted ASU 2017-01 effective January 1, 2017, and under this new accounting standard, we capitalize acquisition expenses as part of the cost basis of the underlying tangible and intangible assets acquired, as opposed to expensing them as incurred. We adopted ASU 2017-01 on a prospective basis. For the nine months ended September 30, 2017, we capitalized $6.6 million in acquisition expenses relating to $352.0 million in acquisitions. The $1.7 million decrease in acquisition expenses incurred during the comparable periods relates to a decrease in acquisition activity. During the nine months ended September 30, 2016, we acquired $381.0 million in real estate.
Property and operating expense
Property and operating expense increased by $1.7 million, or 56.7%, to $4.7 million for the nine months ended September 30, 2017. The increase is attributable to an increase in the number of properties we own, whereby we are responsible for engaging a third party property manager to manage the respective ongoing property maintenance. These expenses are paid by us and reimbursed by the tenant under the terms of the respective leases. There was a corresponding increase in the operating expenses reimbursed by tenants revenue balance.
General and administrative
General and administrative expenses increased by $1.3 million, or 69.0% to $3.3 million for the nine months ended September 30, 2017. The increase is primarily attributable to increased fees for costs and services associated with becoming a public reporting entity in accordance with Section 12(g) of the Exchange Act.
Provision for impairment of investment in rental properties
During the nine months ended September 30, 2017, we recognized $2.6 million of impairment on our investments in rental properties. We review long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If and when such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. We recognized impairment on four properties whose carrying amounts we determined were not recoverable. In determining the fair value of the assets at the time of measurement, we utilized capitalization rates ranging from 7.25% to 12%, and a weighted average discount rate of 8%.
Other income (loss)
|
| For the nine months ended |
|
|
|
|
| |||||
|
| September 30, |
|
| Increase/ |
| ||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
Other revenue (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred distribution income |
| $ | 550 |
|
| $ | 531 |
|
| $ | 19 |
|
Interest income |
|
| 354 |
|
|
| 9 |
|
|
| 345 |
|
Interest expense |
|
| (25,182 | ) |
|
| (24,166 | ) |
|
| (1,016 | ) |
Cost of debt extinguishment |
|
| (5,019 | ) |
|
| (105 | ) |
|
| (4,914 | ) |
Gain on sale of real estate |
|
| 10,332 |
|
|
| 4,089 |
|
|
| 6,243 |
|
Interest expense
Interest expense increased $1.0 million, or 4.2%, to $25.2 million for the nine months ended September 30, 2017, from $24.2 million for the nine months ended September 30, 2016, due primarily to an increase in long-term borrowings used to partially fund the acquisition of properties for our growing real estate investment portfolio. Our total outstanding debt, excluding capitalized debt issuance costs, increased from $831.3 million at September 30, 2016, to $910.1 million at September 30, 2017.
The increase in outstanding debt was slightly offset by $2.2 million in ineffectiveness recognized on interest rate swaps during the nine months ended September 30, 2016 that was not recognized during the nine months ended September 30, 2017. Ineffectiveness during the nine months ended September 30, 2016 was attributable to inconsistencies in certain terms between the interest rate swaps and the loan agreements for the Term Notes and Revolver. The interest rate swaps continued to qualify for hedge accounting, with the effective portion of mark-to-market adjustments included in accumulated other comprehensive income. During the fourth quarter of 2016, we amended the terms of the credit agreements, thereby reversing the impact of the ineffectiveness and rendering a $0 full year 2016 impact to the consolidated income statement. The increase in interest expense was also offset by a $1.2 million decrease in interest expense during the nine months ended September 30, 2017 related to the termination of an interest rate swap that occurred concurrent with the paydown of a mortgage.
Cost of debt extinguishment
The cost of debt extinguishment represents the difference between the price paid to extinguish the debt compared to the carrying value of the debt, plus any unamortized debt acquisition costs at the time of extinguishment. To the extent that the price paid to extinguish the debt is greater than the carrying value of debt, we would recognize a loss (cost) on extinguishment. The loss would be increased by the amount of previously capitalized debt acquisition costs that remain unamortized at the time of extinguishment. These amounts fluctuate period-over-period based on the variability in the interest rate environment, changes in financial institutions’ credit standards, and our activity in capital markets to manage our leverage position. Cost of debt extinguishment increased by $4.9 million, to $5.0 million for the nine months ended September 30, 2017, from $0.1 million for the nine months ended September 30, 2016. The fluctuation is a direct result of the $800 million Credit Facility we closed on June 23, 2017, prior to quarter end, together with the corresponding extinguishment of the Revolver, Term Note 1, and Term Note 2, with no similar activity during the nine months ended September 30, 2016.
Gain on sale of real estate
During the nine months ended September 30, 2017, we recognized a $10.3 million gain on the sale of real estate, compared to a gain of $4.1 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2017 and 2016 we sold ten properties and four properties, respectively. Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market.
Net Income and Non-GAAP Measures (FFO and AFFO)
Our reported results and net earnings per dilutive share are presented in accordance with GAAP. We also disclose FFO and AFFO each of which are non-GAAP measures. We believe the use of FFO and AFFO are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs. FFO and AFFO should not be considered alternatives to net income as a performance measure or to cash flows from operations, as reported on our statement of cash flows, or as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures.
We compute FFO in accordance with the standards established by the 2002 White Paper on FFO approved by the Board of Governors of Nareit, the National Association of Real Estate Investment Trusts (“NAREIT”). NAREITworldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. To derive AFFO,Adjusted Funds From Operations (“AFFO”), we modify the NAREITNareit computation of FFO to include other adjustments to GAAP net income related to certain non-cash and non-recurring revenues and expenses, including straight-line rents, the change in fair value of our earnout liability, cost of debt extinguishments, acquisition expenses, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, realized gains or losses on foreign currency transactions, internalization expenses, stock-based compensation, severance, extraordinary items, and other specified non-cash items. We believe that such items are not a result of normal operations and thus we believe excluding such items assists management and investors in distinguishing whether changes in our operations are due to growth or decline of operations at our properties or from other factors.
Our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market rentalsrental rates over time. Our leases do not include significant front-loading or back-loading of payments, or significant rent-free periods. Therefore, we find it useful to evaluate rent on a contractual basis as it allows for comparison of existing rental rates to market rental rates. Additionally,In situations where we exclude transaction costsgranted short-term rent deferrals as a result of the COVID-19 pandemic, and such deferrals were probable of collection and expected to be repaid within a short term, we continued to recognize the same amount of GAAP lease revenues each period. Consistent with GAAP lease revenues, the short-term deferrals associated with acquiring real estate subject to existing leases, includingCOVID-19, and the corresponding payments, did not impact our AFFO.
We further exclude the change in fair value of our earnout liability, lease termination fees, costs or gains recorded on the extinguishment of debt, non-cash interest expense and gains, the amortization of debt issuance costs, net mortgage premiums, and lease intangibles, realized gains and losses on foreign currency transactions, internalization expenses, stock-based compensation and severance, as well as acquisition expenses paid to our Asset Manager that are based on a percentage of the gross acquisition purchase price. We exclude these costs from AFFO because they are upfront expenses that are recognized in conjunction with an acquisition, and therefore,items are not indicative of ongoing operational results of the portfolio. We believe excluding acquisition expenses provides investors a view of the performance of our portfolio over time. In connection with our adoption of ASU 2017-01, effective January 1, 2017 and on a prospective basis, we capitalize all acquisition expenses as part of the cost-basis of the tangible and intangible assets acquired. Therefore, effective January 1, 2017, we will no longer adjust for acquisition expenses in our AFFO computation. We also exclude the amortization of debt issuance costs and net mortgage premiums as they are not indicative of ongoing operational results of the portfolio.results. We use AFFO as a measure of our performance when we formulate corporate goals.
FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers, primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is a useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.
Neither the SEC ornor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate FFO and AFFO. In the future, the SEC, NAREITNareit, or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of FFO and AFFO accordingly.
Net Income, FFO, and AFFO for the three months ended September 30, 2017 and 2016
44
The following table presents ourreconciles net income (which is the most comparable GAAP measure) to FFO and AFFO:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
(in thousands, except per share data) |
| September 30, |
|
| June 30, |
|
| September 30, |
|
| September 30, |
| ||||
Net income |
| $ | 30,522 |
|
| $ | 22,820 |
|
| $ | 77,302 |
|
| $ | 38,657 |
|
Real property depreciation and amortization |
|
| 36,656 |
|
|
| 31,202 |
|
|
| 98,548 |
|
|
| 102,452 |
|
Gain on sale of real estate |
|
| (1,220 | ) |
|
| (3,838 | ) |
|
| (9,791 | ) |
|
| (9,725 | ) |
Provision for impairment on investment in rental properties |
|
| 25,989 |
|
|
| — |
|
|
| 28,001 |
|
|
| 17,399 |
|
FFO |
| $ | 91,947 |
|
| $ | 50,184 |
|
| $ | 194,060 |
|
| $ | 148,783 |
|
Capital improvements/reserves |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,662 |
|
Straight-line rent adjustment |
|
| (3,434 | ) |
|
| (4,979 | ) |
|
| (13,045 | ) |
|
| (14,706 | ) |
Lease termination fee |
|
| (35,000 | ) |
|
| — |
|
|
| (35,000 | ) |
|
| — |
|
Adjustment to provision for credit losses |
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| (142 | ) |
Cost of debt extinguishment |
|
| 242 |
|
|
| — |
|
|
| 368 |
|
|
| 414 |
|
Amortization of debt issuance costs |
|
| 962 |
|
|
| 956 |
|
|
| 2,832 |
|
|
| 2,528 |
|
Amortization of net mortgage premiums |
|
| (34 | ) |
|
| (37 | ) |
|
| (106 | ) |
|
| (106 | ) |
Loss (gain) on interest rate swaps and other non-cash interest expense |
|
| 85 |
|
|
| (42 | ) |
|
| 2 |
|
|
| (125 | ) |
Amortization of lease intangibles |
|
| (940 | ) |
|
| (641 | ) |
|
| (2,309 | ) |
|
| 32 |
|
Internalization expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,523 |
|
Stock-based compensation |
|
| 924 |
|
|
| 951 |
|
|
| 3,644 |
|
|
| 796 |
|
Severance |
|
| — |
|
|
| 32 |
|
|
| 1,275 |
|
|
| 26 |
|
Change in fair value of earnout liability |
|
| 1,059 |
|
|
| 5,604 |
|
|
| 5,539 |
|
|
| (8,506 | ) |
Other expenses (income) |
|
| 25 |
|
|
| (4 | ) |
|
| 11 |
|
|
| 22 |
|
AFFO |
| $ | 55,836 |
|
| $ | 52,024 |
|
| $ | 157,270 |
|
| $ | 134,201 |
|
EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre
We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. EBITDA is a measure commonly used in our industry. We believe that this ratio provides investors and analysts with a measure of our performance that includes our operating results unaffected by the differences in capital structures, capital investment cycles and useful life of related assets compared to other companies in our industry. We compute EBITDAre in accordance with the definition adopted by Nareit, as EBITDA excluding gains (loss) from the sales of depreciable property and provisions for impairment on investment in real estate. We believe EBITDA and EBITDAre are useful to investors and analysts because they provide important supplemental information about our operating performance exclusive of certain non-cash and other costs. EBITDA and EBITDAre are not measures of financial performance under GAAP, and our non-GAAP FFOEBITDA and AFFOEBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA and EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.
We are focused on a disciplined and targeted acquisition strategy, together with active asset management that includes selective sales of properties. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, each discussed further below, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with our lenders and rating agencies regarding our credit rating. As we fund new acquisitions using our unsecured Revolving Credit Facility, our leverage profile and Net Debt will be immediately impacted by current quarter acquisitions. However, the full benefit of EBITDAre from newly acquired properties will not be received in the same quarter in which the properties are acquired. Additionally, EBITDAre for the three months ended September 30, 2017quarter includes amounts generated by properties that have been sold during the quarter. Accordingly, the variability in EBITDAre caused by the timing of our acquisitions and 2016. Our measures of FFO and AFFO are computed on the basis of amounts attributable to both us and non-controlling interests. As the non-controlling interests share indispositions can temporarily distort our net income on a one-for-one basis, the basic and diluted per share amounts are the same.
|
| For the three months ended |
|
|
|
|
| |||||
|
| September 30, |
|
| Increase/ |
| ||||||
(in thousands, except per share data) |
| 2017 |
|
| 2016 |
|
| Decrease |
| |||
Net income |
| $ | 12,990 |
|
| $ | 15,417 |
|
| $ | (2,427 | ) |
Net earnings per diluted share |
|
| 0.68 |
|
|
| 1.02 |
|
|
| (0.34 | ) |
FFO |
|
| 27,189 |
|
|
| 24,548 |
|
|
| 2,641 |
|
FFO per diluted share |
|
| 1.42 |
|
|
| 1.63 |
|
|
| (0.21 | ) |
AFFO |
|
| 24,813 |
|
|
| 20,476 |
|
|
| 4,337 |
|
AFFO per diluted share |
|
| 1.30 |
|
|
| 1.36 |
|
|
| (0.06 | ) |
Diluted WASO(1) |
|
| 19,147 |
|
|
| 15,074 |
|
|
|
|
|
|
|
Net income
Net income decreased by $2.4 million, or 15.7%, to $13.0 million for the three months ended September 30, 2017, comparedmost recently completed quarter (i) to $15.4 million for the three months ended September 30, 2016. Net earnings per diluted share decreased by $0.34 during the same period, down to $0.68 per share. The decrease in net income is primarily attributable to $2.6 million of asset impairment charges recognized during the three months ended September 30, 2017, with no impairment recognized during the three months ended September 30, 2016. The decrease in net income was partially offset by our investments in real estate properties. During the three months ended September 30, 2017, we closed seven real estaterecalculate as if all acquisitions and acquired $159.2 million in real estate, excluding capitalized acquisition costs, comprised of 22 new properties. Additionally, subsequent to September 30, 2016 and fordispositions had occurred at the twelve month period ended September 30, 2017, we closed 22 real estate acquisitions and acquired approximately $489.8 million in real estate comprised of 88 new properties.
The fluctuation in net income was also impacted by acquisition expenses. During the three months ended September 30, 2016 we recognized $2.4 million in acquisition expenses. We adopted ASU 2017-01 effective January 1, 2017, and under this new accounting standard, we capitalize acquisition expenses as partbeginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either non-cash, such as cost basis of debt extinguishments or the underlying assets acquired, as opposedchange in fair value of our earnout liability, or that we believe are one time, or unusual in nature because they relate to expensing them as incurred. We adopted ASU 2017-01 on a prospective basis. Forunique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the three months ended September 30, 2017, we capitalized $2.4 million in acquisition expenses relatingfuture, and (iii) to $159.2 million in acquisitions. As such, net income foreliminate the three months ended September 30, 2016 was impacted by acquisition expenses, however, net income for the three months ended September 30, 2017 was not. The impact of capitalizing acquisition expenses during the three months ended September 30, 2017 was partially offset by increased depreciation expense relating to the capitalized costs.
The fluctuation in net income for the three months ended September 30, 2017 was also impacted by a $4.1 million gain on the sale of real estate, representing a $1.1 million increase as compared to the three months ended September 30, 2016.
Earnings per share were further impacted by a 4.1 million increase in the diluted weighted average number of shares of our common stock outstanding aslease termination fees and other items that are not a result of ongoing equity raises.
FFO
FFO increasednormal operations. We then annualize quarterly Adjusted EBITDAre by $2.6 million, or 10.8%,multiplying it by four (“Annualized Adjusted EBITDAre”). You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to $27.2 millionbe inaccurate. Our actual reported EBITDAre for the three months ended September 30, 2017, comparedfuture periods may be significantly different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to $24.5 million for the three months ended September 30, 2016. FFO per diluted share decreased by $0.21 during the same periodsimilarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to $1.42 per share. The increase in FFO is primarily driven by increased revenue year over year as a result of growth in our real estate investment portfolio, as discussed for net income above. Additionally, we added back $2.6 million of asset impairment charges recognized during the three months ended September 30, 2017, which were not recognized during the three months ended September 30, 2016.or cash flows from operating activities determined in accordance with GAAP.
Consistent with the decrease in net earnings per diluted share, the increase in FFO was more than offset by a 4.1 million increase in the diluted weighted average number of shares of our common stock outstanding as a result of ongoing equity raises.
AFFO
AFFO increased by $4.3 million, or 21.2%, to $24.8 million for the three months ended September 30, 2017, compared to $20.5 million for the three months ended September 30, 2016. AFFO per diluted share decreased by $0.06 during the same period to $1.30 per diluted share.45
The period-over-period growth in AFFO was $1.7 million greater than the comparable growth in FFO, primarily as a result of a $3.0 million gain on interest rate swaps and other non-cash interest expense recognized during the three months ended September 30, 2016, which is subtracted from FFO in the AFFO calculation. We did not recognize a gain or loss on interest rate swaps and other non-cash interest expense during the three months ended September 30, 2017. Additionally, AFFO during the three months ended September 30, 2017 was reduced by $1.4 million of debt extinguishment costs, compared to $0.1 million of debt extinguishment costs recognized during the three months ended September 30, 2016. These increases were partially offset by a reduction in the addback for acquisition expenses. During the three months ended September 30, 2016, we added back $2.4 million in acquisition expenses in our AFFO calculation. For the three months ended September 30, 2017, we capitalized all acquisition expenses to the cost basis of the real estate acquired. The capitalized acquisition expenses, beginning in 2017, result in increased depreciation expenses, which is an add-back in the FFO computation. Accordingly, our capitalization of acquisition expenses has no net impact to AFFO.
Consistent with the decrease in net earnings per diluted share, the increase in AFFO was more than offset by a 4.1 million increase in the diluted weighted average number of shares of our common stock outstanding as a result of ongoing equity raises.
Net Income, FFO, and AFFO for the nine months ended September 30, 2017 and 2016
The following table presents ourreconciles net income (which is the most comparable GAAP measure) to EBITDA, EBITDAre, and our non-GAAP FFOAdjusted EBITDAre. Information is also presented with respect to Annualized EBITDAre and AFFO forAnnualized Adjusted EBITDAre:
|
| For the Three Months Ended |
| |||||
(in thousands) |
| September 30, |
|
| June 30, |
| ||
Net income |
| $ | 30,522 |
|
| $ | 22,820 |
|
Depreciation and amortization |
|
| 36,682 |
|
|
| 31,225 |
|
Interest expense |
|
| 15,611 |
|
|
| 15,430 |
|
Income taxes |
|
| 473 |
|
|
| 301 |
|
EBITDA |
| $ | 83,288 |
|
| $ | 69,776 |
|
Provision for impairment of investment in rental properties |
|
| 25,989 |
|
|
| — |
|
Gain on sale of real estate |
|
| (1,220 | ) |
|
| (3,838 | ) |
EBITDAre |
| $ | 108,057 |
|
| $ | 65,938 |
|
Adjustment for current quarter acquisition activity (a) |
|
| 3,534 |
|
|
| 2,761 |
|
Adjustment for current quarter disposition activity (b) |
|
| (1,387 | ) |
|
| (353 | ) |
Adjustment to exclude change in fair value of earnout liability |
|
| 1,059 |
|
|
| 5,604 |
|
Adjustment exclude write-off of accrued rental income |
|
| 1,496 |
|
|
| — |
|
Adjustment to exclude cost of debt extinguishments |
|
| 242 |
|
|
| — |
|
Adjustment to exclude lease termination fee |
|
| (35,000 | ) |
|
| — |
|
Adjusted EBITDAre |
| $ | 78,001 |
|
| $ | 73,950 |
|
Annualized EBITDAre |
| $ | 432,221 |
|
| $ | 263,761 |
|
Annualized Adjusted EBITDAre |
| $ | 311,998 |
|
| $ | 295,808 |
|
We define Net Debt as gross debt (total reported debt plus deferred financing costs) less cash and 2016. Our measurescash equivalents and restricted cash. We believe that the presentation of FFONet Debt to Annualized EBITDAre and AFFO are computed on the basis of amounts attributableNet Debt to both usAnnualized Adjusted EBITDAre is useful to investors and non-controlling interests. As the non-controlling interests share in our net income on a one-for-one basis, the basicanalysts because these ratios provide information about gross debt less cash and diluted per share amounts are the same.
|
| For the nine months ended |
|
|
|
|
| |||||
|
| September 30, |
|
| Increase/ |
| ||||||
(in thousands, except per share data) |
| 2017 |
|
| 2016 |
|
| Decrease |
| |||
Net income |
| $ | 42,729 |
|
| $ | 26,474 |
|
| $ | 16,255 |
|
Net earnings per diluted share |
|
| 2.36 |
|
|
| 1.87 |
|
|
| 0.49 |
|
FFO |
|
| 79,974 |
|
|
| 55,658 |
|
|
| 24,316 |
|
FFO per diluted share |
|
| 4.43 |
|
|
| 3.93 |
|
|
| 0.50 |
|
AFFO |
|
| 72,946 |
|
|
| 57,093 |
|
|
| 15,853 |
|
AFFO per diluted share |
|
| 4.04 |
|
|
| 4.03 |
|
|
| 0.01 |
|
Diluted WASO |
|
| 18,069 |
|
|
| 14,154 |
|
|
|
|
|
Net income
Net income increased by $16.3 million, or 61.4%,cash equivalents, which could be used to $42.7 million for the nine months ended September 30, 2017,repay debt, compared to $26.5 million for the nine months ended September 30, 2016. Net earnings per diluted share increased by $0.49 during the same period, up to $2.36 per share. The increaseour performance as measured using EBITDAre, and is used in net incomecommunications with lenders and earnings per share is attributable to accretive investments in real estate properties made during 2017, coupled with the annualized revenue streams from the real estate investments made during the nine months ended September 30, 2016. We added $352.0 million and $381.0 million in real estate investments during the nine months ended September 30, 2017 and 2016, respectively.
In increase in net income was also impacted by acquisition expenses. During the nine months ended September 30, 2016 we recognized $8.3 million in acquisition expenses. We adopted ASU 2017-01 effective January 1, 2017, and under this new accounting standard, we capitalize acquisition expenses as part of the cost basis of the underlying assets acquired, as opposed to expensing them as incurred. We adopted ASU 2017-01 on a prospective basis. For the nine months ended September 30, 2017, we capitalized $6.6 million in acquisition expenses relating to $352.0 million in acquisitions. As such, net income for the nine months ended September 30, 2016 was impacted by acquisition expenses, however, net income for the nine months ended September 30, 2017 was not. The impact of capitalizing acquisition expenses during the nine months ended September 30, 2017 was partially offset by increased depreciation expense relating to the capitalized costs.
The increase in net income for the nine months ended September 30, 2016 was also impacted by a $10.3 million gain on the sale of real estate, representing a $6.2 million increase as compared to the nine months ended September 30, 2016.
The increase in net income in the earnings per share computation was partially offset by a 3.9 million increase in the diluted weighted average number of shares ofrating agencies regarding our common stock outstanding as a result of ongoing equity raises.
FFO
FFO increased by $24.3 million, or 43.7%, to $80.0 million for the nine months ended September 30, 2017, compared to $55.7 million for the nine months ended September 30, 2016. FFO per diluted share increased by $0.50 during the same period to $4.43 per share. The increase in FFO is primarily driven by increased revenue period-over-period as the result of growth in our real estate investment portfolio. We added $352.0 million in real estate investments during the nine months ended September 30, 2017. Growth in FFO per diluted share was less than growth in net earnings per diluted share primarily as a result of a $10.3 million gain on sale of real estate recognized in net income during the nine months ended September 30, 2017, which was adjusted and excluded in the FFO computation.
AFFO
AFFO increased by $15.9 million, or 27.8%, to $72.9 million for the nine months ended September 30, 2017, compared to $57.1 million for the nine months ended September 30, 2016. AFFO per diluted share increased by $0.01 during the same period to $4.04 per diluted share.
AFFO per diluted share growth of $0.01 as compared to FFO per diluted share growth of $0.50 was primarily impacted by acquisition expenses. During the nine months ended September 30, 2016, we recognized $8.3 million in acquisition expenses that were added back to FFO in computing AFFO. For the nine months ended September 30, 2017, we capitalized all acquisition expenses to the cost basis of the real estate acquired. The capitalized acquisition expenses, beginning in 2017, result in increased depreciation expenses, which is an add-back in the FFO computation. AFFO per diluted share growth as compared to FFO per diluted share growth was also impacted by the (gain) loss on interest rate swaps and other non-cash interest expense. During the nine months ended September 30, 2016, we recognized an add-back of $2.2 million, compared to a deduction of $1.3 million for the nine months ended September 30, 2017. These impacts were offset by a $4.9 million increase in the add-back for the cost of debt extinguishment. During the nine months ended September 30, 2017 we recognized $5.0 million in debt extinguishment costs, compared to $0.1 million for the nine months ended September 30, 2016.
Reconciliation of Non-GAAP Measures
credit rating. The following table reconciles total debt (which is a reconciliationthe most comparable GAAP measure) to Net Debt, and presents the ratio of net incomeNet Debt to FFOAnnualized EBITDAre and AFFO for the three and nine months ended September 30, 2017 and 2016. Also presented is information regarding distributions paidNet Debt to common stockholders and non-controlling interests and the weighted average number of shares of our common stock and non-controlling membership units of the Operating Company used for the basic and diluted computation per share:Annualized Adjusted EBITDAre, respectively:
(in thousands) |
| September 30, |
|
| June 30, |
| ||
Debt |
|
|
|
|
|
| ||
Revolving Credit Facility |
| $ | — |
|
| $ | — |
|
Unsecured term loans, net |
|
| 646,458 |
|
|
| 910,994 |
|
Senior unsecured notes, net |
|
| 843,665 |
|
|
| 472,637 |
|
Mortgages, net |
|
| 97,530 |
|
|
| 105,748 |
|
Debt issuance costs |
|
| 10,215 |
|
|
| 6,625 |
|
Gross Debt |
|
| 1,597,868 |
|
|
| 1,496,004 |
|
Cash and cash equivalents |
|
| (16,182 | ) |
|
| (78,987 | ) |
Restricted cash |
|
| (3,895 | ) |
|
| (8,021 | ) |
Net Debt |
| $ | 1,577,791 |
|
| $ | 1,408,996 |
|
Net Debt to Annualized EBITDAre |
| 3.65x |
|
| 5.34x |
| ||
Net Debt to Annualized Adjusted EBITDAre |
| 5.06x |
|
| 4.76x |
|
46
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
(in thousands, except per share data) |
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net income |
| $ | 12,990 |
|
| $ | 15,417 |
|
| $ | 42,729 |
|
| $ | 26,474 |
|
Real property depreciation and amortization |
|
| 15,643 |
|
|
| 12,114 |
|
|
| 44,969 |
|
|
| 33,273 |
|
Gain on sale of real estate |
|
| (4,052 | ) |
|
| (2,983 | ) |
|
| (10,332 | ) |
|
| (4,089 | ) |
Asset impairment |
|
| 2,608 |
|
|
| — |
|
|
| 2,608 |
|
|
| — |
|
FFO |
| $ | 27,189 |
|
| $ | 24,548 |
|
| $ | 79,974 |
|
| $ | 55,658 |
|
Capital improvements / reserves |
|
| (49 | ) |
|
| (49 | ) |
|
| (147 | ) |
|
| (147 | ) |
Straight line rent adjustment |
|
| (4,520 | ) |
|
| (3,759 | ) |
|
| (12,585 | ) |
|
| (9,761 | ) |
Cost of debt extinguishment |
|
| 1,404 |
|
|
| 52 |
|
|
| 5,019 |
|
|
| 105 |
|
Amortization of debt issuance costs |
|
| 486 |
|
|
| 456 |
|
|
| 1,343 |
|
|
| 1,279 |
|
Amortization of net mortgage premiums |
|
| 205 |
|
|
| (48 | ) |
|
| 135 |
|
|
| (143 | ) |
(Gain) Loss on interest rate swaps and other non-cash interest expense |
|
| — |
|
|
| (2,991 | ) |
|
| (1,280 | ) |
|
| 2,219 |
|
Amortization of lease intangibles |
|
| 99 |
|
|
| (100 | ) |
|
| 487 |
|
|
| (373 | ) |
Acquisition expenses |
|
| — |
|
|
| 2,367 |
|
|
| — |
|
|
| 8,256 |
|
AFFO |
| $ | 24,813 |
|
| $ | 20,476 |
|
| $ | 72,946 |
|
| $ | 57,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted WASO |
|
| 19,147 |
|
|
| 15,074 |
|
|
| 18,069 |
|
|
| 14,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic and diluted |
| $ | 0.68 |
|
| $ | 1.02 |
|
| $ | 2.36 |
|
| $ | 1.87 |
|
FFO per diluted share |
|
| 1.42 |
|
|
| 1.63 |
|
|
| 4.43 |
|
|
| 3.93 |
|
AFFO per diluted share |
| $ | 1.30 |
|
| $ | 1.36 |
|
| $ | 4.04 |
|
| $ | 4.03 |
|
Critical AccountingAccounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements,Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statementsCondensed Consolidated Financial Statements requires management to make estimates and judgmentsassumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Management basesexpenses as well as other disclosures in the financial statements. On an ongoing basis, management evaluates its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actualassumptions; however, actual results may differ from these estimates under differentand assumptions, or conditions.which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, “Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We believe there have been no significant changes during the nine months ended September 30, 20172021, to the items that we disclosed as our critical accounting policies and estimates under Item 2. “Financial Information - Management’s Discussion and Analysis of Financial Condition and Results of Operations,”in our 2020 Annual Report on Form 10.10-K.
Impact of Recent Accounting Pronouncements
For information on the impact of recent accounting pronouncements on our business, see Note 2 of the notesNotes to the condensed consolidated financial statementsCondensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks, one of the most predominant of which is a change in interest rate risk arising from changesrates. Increases in interest rates on the floating rate indebtednesscan result in increased interest expense under our unsecured credit facilitiesRevolving Credit Facility and certain mortgages. Borrowings pursuant to our unsecured credit facilities and floating-rate mortgages bear interest at floating rates based on LIBOR plus the applicable margin. Accordingly, fluctuationsother variable-rate debt. Increases in market interest rates may increase or decrease ourcan also result in increased interest expense which will in turn, increase or decreasewhen our net incomefixed rate debt matures and cash flow.
needs to be refinanced. We attempt to manage a portion of our interest rate risk by entering into long-term fixed rate debt or by entering into interest rate swap agreements. Our interest rate risk management strategy is intended to stabilize cash flow requirements by maintaining interest rate swap agreementsswaps to convert certain variable ratevariable-rate debt to a fixed rate. As of September 30, 2017, we had 24 interest rate swap agreements outstanding, with an aggregate notional amount of $640 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable rate borrowings. The interest rate swaps have been designated by us as effective cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes.
The table below summarizes the terms of the current swap agreements relating to Further information concerning our unsecured credit facilities. Several of the interest rate swaps agreements set forthcan be found in Note 11 in our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q.
Our fixed-rate debt includes our Senior Unsecured Notes, mortgages, and variable-rate debt converted to a fixed rate with the use of interest rate swaps. Our fixed-rate debt and outstanding interest rate swaps had carrying values and fair values of approximately $1.6 billion and $1.7 billion, respectively, as of September 30, 2021. Changes in market interest rates impact the fair value of our fixed-rate debt and interest rate swaps, but they have no impact on interest incurred or on cash flows. For instance, if interest rates were to increase 1%, and the fixed-rate debt balance were to remain constant, we would expect the fair value of our debt to decrease, similar to how the price of a bond decreases as interest rates rise. A 1% increase in market interest rates would have resulted in a decrease in the table below were enteredfair value of our fixed-rate debt and interest rate swaps of approximately $99.6 million as of September 30, 2021.
Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on LIBOR plus an applicable margin, and totaled $657.5 million as of September 30, 2021, of which $640.0 million was swapped to a fixed rate by our use of interest rate swaps. Taking into account the effect of our interest rate swaps, a 1% increase in conjunction with previous secured and unsecured borrowings that were retired and the swapsinterest would have since been reapplieda corresponding $0.2 million increase in support of the current unsecured credit facilities.interest expense annually, while a 1% decrease in interest would have a corresponding $0.1 million decrease in interest expense annually, due to certain interest rate floors on our variable-rate debt.
Counterparty |
| Maturity Date |
| Fixed Rate |
|
| Variable Rate Index |
| Notional Amount |
|
| Fair Value |
| |||
Bank of America, N.A. |
| November-23 |
|
| 2.80% |
|
| 1 month LIBOR |
| $ | 25,000,000 |
|
|
| (1,177,353 | ) |
Bank of Montreal |
| July-24 |
|
| 1.16% |
|
| 1 month LIBOR |
|
| 40,000,000 |
|
|
| 2,146,861 |
|
Bank of Montreal |
| January-25 |
|
| 1.91% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| 192,803 |
|
Bank of Montreal |
| July-25 |
|
| 2.32% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (489,600 | ) |
Bank of Montreal |
| January-26 |
|
| 1.92% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| 297,340 |
|
Bank of Montreal |
| January-26 |
|
| 2.05% |
|
| 1 month LIBOR |
|
| 40,000,000 |
|
|
| 84,117 |
|
Bank of Montreal |
| December-26 |
|
| 2.33% |
|
| 1 month LIBOR |
|
| 10,000,000 |
|
|
| (175,375 | ) |
Capital One, N.A. |
| December-21 |
|
| 1.05% |
|
| 1 month LIBOR |
|
| 15,000,000 |
|
|
| 486,922 |
|
Capital One, N.A. |
| December-24 |
|
| 1.58% |
|
| 1 month LIBOR |
|
| 15,000,000 |
|
|
| 459,406 |
|
Capital One, N.A. |
| January-26 |
|
| 2.08% |
|
| 1 month LIBOR |
|
| 35,000,000 |
|
|
| 38,960 |
|
Capital One, N.A. |
| July-26 |
|
| 1.32% |
|
| 1 month LIBOR |
|
| 35,000,000 |
|
|
| 2,289,026 |
|
Manufacturers & Traders Trust Co. |
| September-22 |
|
| 2.83% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (1,149,860 | ) |
Manufacturers & Traders Trust Co. |
| November-23 |
|
| 2.65% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (1,023,132 | ) |
Regions Bank |
| March-18 |
|
| 1.77% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (46,329 | ) |
Regions Bank |
| March-19 |
|
| 1.91% |
|
| 3 month LIBOR |
|
| 25,000,000 |
|
|
| (105,943 | ) |
Regions Bank |
| May-20 |
|
| 2.12% |
|
| 1 month LIBOR |
|
| 50,000,000 |
|
|
| (561,657 | ) |
Regions Bank |
| March-22 |
|
| 2.43% |
|
| 3 month LIBOR |
|
| 25,000,000 |
|
|
| (550,191 | ) |
Regions Bank |
| December-23 |
|
| 1.18% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| 1,177,710 |
|
SunTrust Bank |
| April-24 |
|
| 1.99% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (63,116 | ) |
SunTrust Bank |
| April-25 |
|
| 2.20% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (331,624 | ) |
SunTrust Bank |
| July-25 |
|
| 1.99% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| 71,593 |
|
SunTrust Bank |
| January-26 |
|
| 1.93% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| 248,334 |
|
Wells Fargo Bank, N.A. |
| February-21 |
|
| 2.39% |
|
| 1 month LIBOR |
|
| 35,000,000 |
|
|
| (738,635 | ) |
Wells Fargo Bank, N.A. |
| October-24 |
|
| 2.72% |
|
| 1 month LIBOR |
|
| 15,000,000 |
|
|
| (706,367 | ) |
With the exception of our interest rate swap transactions, we have not engaged in transactions in derivative financial instruments or derivative commodity instruments.
As of September 30, 2017,2021, our financial instruments were not exposed to significant market risk due to foreign currency exchange risk.
47
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of and for the quarter ended September 30, 2017,2021, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.
Changes in Internal Control overOver Financial Reporting
There werehave been no changes toin our internal control over financial reporting that occurred during the quarter ended September 30, 2017,2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
48
Part II – OTHEROTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are subject to various lawsuits, claims, and other legal proceedings and claims that arise in the ordinary course of our business. These mattersWe are generally covered by insurance or are subjectnot currently a party to our right to be indemnified by our tenantslegal proceedings that we include inbelieve would reasonably be expected to have material adverse effect on our leases. Management isbusiness, financial condition, or results of operations. We are not aware of any material pending legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject, nor are we aware of any such legal proceedings contemplated by government agencies.
Item 1A. Risk Factors.
There have been no material changes from the risk factors set forth in our 2020 Annual Report on Form 10-K for the Form 10.year ended December 31, 2020.
Sales of Common Stock
In December 2007, we commenced our ongoing private offering of shares of our common stock. The following table provides information regarding the sale of shares of our common stock pursuant to our ongoing private offering during the nine months ended September 30, 2017 (in thousands, except year and Determined Share Value amounts).
Month |
| Year |
| Common Shares Sold |
|
| Determined Share Value – Common Shares (1) |
|
| Total Proceeds – Common Shares Sold |
|
| Common Shares DRIP |
|
| Determined Share Value – DRIP(2) |
|
| Total Proceeds – Common Share DRIP(3) |
|
| Total Proceeds |
| |||||||
January |
| 2017 |
|
| 413 |
|
| $ | 77 |
|
| $ | 31,827 |
|
|
| 38 |
|
| $ | 75 |
|
| $ | 2,836 |
|
| $ | 34,663 |
|
February |
| 2017 |
|
| 270 |
|
|
| 79 |
|
|
| 21,314 |
|
|
| 39 |
|
|
| 75 |
|
|
| 2,934 |
|
|
| 24,248 |
|
March |
| 2017 |
|
| 368 |
|
|
| 79 |
|
|
| 28,946 |
|
|
| 39 |
|
|
| 77 |
|
|
| 3,071 |
|
|
| 32,017 |
|
April |
| 2017 |
|
| 234 |
|
|
| 79 |
|
|
| 18,462 |
|
|
| 41 |
|
|
| 77 |
|
|
| 3,166 |
|
|
| 21,628 |
|
May |
| 2017 |
|
| 291 |
|
|
| 80 |
|
|
| 23,242 |
|
|
| 42 |
|
|
| 78 |
|
|
| 3,266 |
|
|
| 26,508 |
|
June |
| 2017 |
|
| 352 |
|
|
| 80 |
|
|
| 28,064 |
|
|
| 42 |
|
|
| 79 |
|
|
| 3,319 |
|
|
| 31,383 |
|
July |
| 2017 |
|
| 220 |
|
|
| 80 |
|
|
| 17,601 |
|
|
| 44 |
|
|
| 78 |
|
|
| 3,394 |
|
|
| 20,995 |
|
August |
| 2017 |
|
| 343 |
|
|
| 80 |
|
|
| 27,455 |
|
|
| 45 |
|
|
| 78 |
|
|
| 3,501 |
|
|
| 30,956 |
|
September |
| 2017 |
|
| 297 |
|
|
| 80 |
|
|
| 23,676 |
|
|
| 45 |
|
|
| 78 |
|
|
| 3,544 |
|
|
| 27,220 |
|
TOTAL |
|
|
|
| 2,788 |
|
|
|
|
|
| $ | 220,587 |
|
|
| 375 |
|
|
|
|
|
| $ | 29,031 |
|
| $ | 249,618 |
|
|
|
|
|
|
|
None of the shares of our common stock set forth in the table above were registered under the Securities Act in reliance upon the exemption from registration under the Securities Act provided by Rule 506(c) under Regulation D promulgated under the Securities Act. All of the shares of our common stock set forth in the table above were sold to persons who represented to us in writing that they qualified as an “Accredited Investor” as such term is defined by Regulation D promulgated under the Securities Act, and provided us with additional documentation to assist us in verifying such person’s status as accredited investors.
Issuances of Membership Units
In connection with property acquisitions that are structured as UPREIT transactions, the owner of a property will transfer its interest in the property to the Operating Company in exchange for membership units in the Operating Company. During June 2017 we issued 103,478 membership units in the Operating Company in exchange for property in the amount of $8.3 million. There were no other membership unit issuances during the nine months ended September 30, 2017.
None of the membership units in the Operating Company discussed above were registered under the Securities Act in reliance upon the exemption from registration under the Securities Act provided by Rule 506(c) under Regulation D promulgated under the Securities Act. All of the membership units in the Operating Company discussed above were sold to persons who represented to us in writing that they qualified as an Accredited Investor, as such term is defined by Regulation D promulgated under the Securities Act, and provided us with additional documentation to assist us in verifying such person’s status as accredited investors.
Repurchases of Equity Securities and Use of Proceeds from Registered Securities.
During the three months ended September 30, 2017, we fulfilled repurchase requests and repurchased shares of our common stock pursuant to our share redemption program as follows. None.
Item 3. Defaults Upon Senior Securities.
Period |
| Total Number of Shares Requested to be Redeemed (1) |
|
| Total Number of Shares Redeemed |
|
| Average Price Paid Per Share (2) |
|
| Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program | |||
July 2017 |
|
| — |
|
|
| — |
|
| $ | — |
|
| (3) |
August 2017 |
|
| — |
|
|
| — |
|
| $ | — |
|
| (3) |
September 2017 |
|
| 23,374 |
|
|
| 23,374 |
|
| $ | 77.36 |
|
| (3) |
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
49
Item 6. Exhibits
|
|
|
|
|
|
None.
Not applicable.
Not applicable.
Description | |||
|
| ||
3.1 | |||
| |||
3.2 | |||
| |||
3.4 | |||
3.5 | |||
4.1 | |||
4.2 | |||
| |||
| |||
| |||
| |||
|
| ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
|
|
|
* Filed herewith.
SIGNATURES† In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BROADSTONE NET LEASE, INC. | ||
Date: November | /s/ Christopher J. Czarnecki | |
Christopher J. Czarnecki | ||
Chief Executive Officer and President | ||
Date: November | /s/ Ryan M. Albano | |
Ryan M. Albano | ||
Executive Vice President and Chief Financial Officer |
51
56