UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
|
☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017,March 31, 2023, or
|
|
☐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 18,491,182.216187,204,038 shares of the Registrant’s common stock, $0.001Registrants’ Common Stock, $0.00025 par value per share, outstanding as of November 13, 2017.May 1, 2023.
BROADSTONE NET LEASE, INC.
TABLE OF CONTENTS
Page | ||
1 | ||
Item 1. | 1 | |
1 | ||
Condensed Consolidated Statements of Income and Comprehensive Income | 2 | |
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) | 3 | |
4 | ||
Notes to the Condensed Consolidated Financial Statements (Unaudited) | 5 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
| ||
| ||
22 | ||
22 | ||
23 | ||
30 | ||
| ||
|
| |
| ||
| ||
| 41 | |
| ||
| ||
| ||
Item 3. |
| |
Item 4. |
| |
| ||
Item 1. |
| |
Item 1A. |
| |
Item 2. |
| |
Item 3. |
| |
Item 4. |
| |
Item 5. |
| |
Item 6. |
|
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)
|
| September 30, |
|
| December 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| March 31, |
|
| December 31, |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Accounted for using the operating method, net of accumulated depreciation |
| $ | 1,891,708 |
|
| $ | 1,637,700 |
| ||||||||
Accounted for using the operating method: |
|
|
|
|
|
| ||||||||||
Land |
| $ | 760,142 |
|
| $ | 768,667 |
| ||||||||
Land improvements |
|
| 337,296 |
|
|
| 340,385 |
| ||||||||
Buildings and improvements |
|
| 3,866,952 |
|
|
| 3,888,756 |
| ||||||||
Equipment |
|
| 10,422 |
|
|
| 10,422 |
| ||||||||
Total accounted for using the operating method |
|
| 4,974,812 |
|
|
| 5,008,230 |
| ||||||||
Less accumulated depreciation |
|
| (558,410 | ) |
|
| (533,965 | ) | ||||||||
Accounted for using the operating method, net |
|
| 4,416,402 |
|
|
| 4,474,265 |
| ||||||||
Accounted for using the direct financing method |
|
| 41,612 |
|
|
| 47,271 |
|
|
| 26,947 |
|
|
| 27,045 |
|
Accounted for using the sales-type method |
|
| 571 |
|
|
| 571 |
| ||||||||
Investment in rental property, net |
|
| 1,933,320 |
|
|
| 1,684,971 |
|
|
| 4,443,920 |
|
|
| 4,501,881 |
|
|
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents |
|
| 13,698 |
|
|
| 21,635 |
|
|
| 15,412 |
|
|
| 21,789 |
|
Restricted cash |
|
| 925 |
|
|
| 1,468 |
| ||||||||
Accrued rental income |
|
| 47,766 |
|
|
| 36,577 |
|
|
| 142,031 |
|
|
| 135,666 |
|
Tenant and other receivables, net |
|
| 1,120 |
|
|
| 355 |
|
|
| 2,004 |
|
|
| 1,349 |
|
Tenant and capital reserves |
|
| 897 |
|
|
| 767 |
| ||||||||
Prepaid expenses and other assets |
|
| 699 |
|
|
| 260 |
|
|
| 15,456 |
|
|
| 49,661 |
|
Notes receivable |
|
| 6,527 |
|
|
| 6,527 |
| ||||||||
Investment in related party |
|
| 10,000 |
|
|
| 10,000 |
| ||||||||
Interest rate swap, assets |
|
| 7,493 |
|
|
| 9,598 |
|
|
| 45,490 |
|
|
| 63,390 |
|
Goodwill |
|
| 339,769 |
|
|
| 339,769 |
| ||||||||
Intangible lease assets, net |
|
| 205,469 |
|
|
| 168,121 |
|
|
| 317,478 |
|
|
| 329,585 |
|
Debt issuance costs – unsecured revolver, net |
|
| 3,139 |
|
|
| 446 |
| ||||||||
Debt issuance costs – unsecured revolving credit facility, net |
|
| 5,542 |
|
|
| 6,013 |
| ||||||||
Leasing fees, net |
|
| 13,046 |
|
|
| 11,329 |
|
|
| 8,766 |
|
|
| 8,506 |
|
Total assets |
| $ | 2,244,099 |
|
| $ | 1,952,054 |
|
| $ | 5,335,868 |
|
| $ | 5,457,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Liabilities and equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Unsecured revolver |
| $ | 126,500 |
|
| $ | 102,000 |
| ||||||||
Mortgages and notes payable, net |
|
| 57,883 |
|
|
| 106,686 |
| ||||||||
Unsecured term notes, net |
|
| 721,907 |
|
|
| 657,891 |
| ||||||||
Interest rate swap, liabilities |
|
| 7,119 |
|
|
| 10,217 |
| ||||||||
Unsecured revolving credit facility |
| $ | 108,330 |
|
| $ | 197,322 |
| ||||||||
Mortgages, net |
|
| 85,853 |
|
|
| 86,602 |
| ||||||||
Unsecured term loans, net |
|
| 895,006 |
|
|
| 894,692 |
| ||||||||
Senior unsecured notes, net |
|
| 844,744 |
|
|
| 844,555 |
| ||||||||
Accounts payable and other liabilities |
|
| 18,426 |
|
|
| 17,396 |
|
|
| 46,090 |
|
|
| 47,547 |
|
Due to related parties |
|
| 1,688 |
|
|
| 364 |
| ||||||||
Tenant improvement allowances |
|
| 6,627 |
|
|
| 9,490 |
| ||||||||
Dividends payable |
|
| 54,515 |
|
|
| 54,460 |
| ||||||||
Accrued interest payable |
|
| 4,880 |
|
|
| 1,602 |
|
|
| 9,654 |
|
|
| 7,071 |
|
Intangible lease liabilities, net |
|
| 66,303 |
|
|
| 47,871 |
|
|
| 59,359 |
|
|
| 62,855 |
|
Total liabilities |
|
| 1,011,333 |
|
|
| 953,517 |
|
|
| 2,103,551 | �� |
|
| 2,195,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Commitments and contingencies (See Note 16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Broadstone Net Lease, Inc. stockholder’s equity: |
|
|
|
|
|
|
|
| ||||||||
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding |
|
| - |
|
|
| - |
| ||||||||
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: |
|
|
|
|
|
| ||||||||||
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.00025 par value; 500,000 shares authorized, 187,203 and 186,114 shares issued |
|
| 47 |
|
|
| 47 |
| ||||||||
Additional paid-in capital |
|
| 1,253,431 |
|
|
| 1,009,431 |
|
|
| 3,434,534 |
|
|
| 3,419,395 |
|
Subscriptions receivable |
|
| (470 | ) |
|
| (9,790 | ) | ||||||||
Cumulative distributions in excess of retained earnings |
|
| (112,725 | ) |
|
| (89,960 | ) |
|
| (398,890 | ) |
|
| (386,049 | ) |
Accumulated other comprehensive income |
|
| (40 | ) |
|
| 2,092 |
|
|
| 43,516 |
|
|
| 59,525 |
|
Total Broadstone Net Lease, Inc. stockholders’ equity |
|
| 1,140,214 |
|
|
| 911,788 |
| ||||||||
Total Broadstone Net Lease, Inc. stockholders' equity |
|
| 3,079,207 |
|
|
| 3,092,918 |
| ||||||||
Non-controlling interests |
|
| 92,552 |
|
|
| 86,749 |
|
|
| 153,110 |
|
|
| 169,587 |
|
Total equity |
|
| 1,232,766 |
|
|
| 998,537 |
|
|
| 3,232,317 |
|
|
| 3,262,505 |
|
Total liabilities and equity |
| $ | 2,244,099 |
|
| $ | 1,952,054 |
|
| $ | 5,335,868 |
|
| $ | 5,457,609 |
|
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 |
| |||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2023 |
|
| 2022 |
| ||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
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 |
| $ | 118,992 |
|
| $ | 93,841 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 15,643 |
|
|
| 12,114 |
|
|
| 44,969 |
|
|
| 33,273 |
|
|
| 41,784 |
|
|
| 34,290 |
|
Asset management fees |
|
| 3,844 |
|
|
| 2,789 |
|
|
| 10,666 |
|
|
| 7,770 |
| ||||||||
Property management fees |
|
| 1,249 |
|
|
| 1,010 |
|
|
| 3,635 |
|
|
| 2,868 |
| ||||||||
Acquisition expenses |
|
| - |
|
|
| 2,367 |
|
|
| - |
|
|
| 8,256 |
| ||||||||
Property and operating expense |
|
| 2,009 |
|
|
| 1,184 |
|
|
| 4,710 |
|
|
| 3,005 |
|
|
| 5,886 |
|
|
| 5,044 |
|
General and administrative |
|
| 1,173 |
|
|
| 598 |
|
|
| 3,297 |
|
|
| 1,951 |
|
|
| 10,416 |
|
|
| 8,828 |
|
State and franchise tax |
|
| 301 |
|
|
| 71 |
|
|
| 511 |
|
|
| 181 |
| ||||||||
Provision for impairment of investment in rental properties |
|
| 2,608 |
|
|
| - |
|
|
| 2,608 |
|
|
| - |
|
|
| 1,473 |
|
|
| — |
|
Total operating expenses |
|
| 26,827 |
|
|
| 20,133 |
|
|
| 70,396 |
|
|
| 57,304 |
|
|
| 59,559 |
|
|
| 48,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Operating income |
|
| 19,408 |
|
|
| 16,877 |
|
|
| 61,694 |
|
|
| 46,116 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Preferred distribution income |
|
| 187 |
|
|
| 181 |
|
|
| 550 |
|
|
| 531 |
| ||||||||
Interest income |
|
| 127 |
|
|
| 4 |
|
|
| 354 |
|
|
| 9 |
|
|
| 162 |
|
|
| — |
|
Interest expense |
|
| (9,380 | ) |
|
| (4,576 | ) |
|
| (25,182 | ) |
|
| (24,166 | ) |
|
| (21,139 | ) |
|
| (16,896 | ) |
Cost of debt extinguishment |
|
| (1,404 | ) |
|
| (52 | ) |
|
| (5,019 | ) |
|
| (105 | ) | ||||||||
Gain on sale of real estate |
|
| 4,052 |
|
|
| 2,983 |
|
|
| 10,332 |
|
|
| 4,089 |
|
|
| 3,415 |
|
|
| 1,196 |
|
Income taxes |
|
| (479 | ) |
|
| (412 | ) | ||||||||||||||||
Other expenses |
|
| (18 | ) |
|
| (1,126 | ) | ||||||||||||||||
Net income |
|
| 12,990 |
|
|
| 15,417 |
|
|
| 42,729 |
|
|
| 26,474 |
|
|
| 41,374 |
|
|
| 28,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income attributable to non-controlling interests |
|
| (1,042 | ) |
|
| (1,459 | ) |
|
| (3,460 | ) |
|
| (2,600 | ) |
|
| (2,070 | ) |
|
| (1,683 | ) |
Net income attributable to Broadstone Net Lease, Inc. |
| $ | 11,948 |
|
| $ | 13,958 |
|
| $ | 39,269 |
|
| $ | 23,874 |
|
| $ | 39,304 |
|
| $ | 26,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Basic |
|
| 17,617 |
|
|
| 13,647 |
|
|
| 16,607 |
|
|
| 12,738 |
|
|
| 186,130 |
|
|
| 163,809 |
|
Diluted |
|
| 19,147 |
|
|
| 15,074 |
|
|
| 18,069 |
|
|
| 14,154 |
|
|
| 196,176 |
|
|
| 174,288 |
|
Net Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net earnings per share attributable to common stockholders |
|
|
|
|
|
| ||||||||||||||||||
Basic and diluted |
| $ | 0.68 |
|
| $ | 1.02 |
|
| $ | 2.36 |
|
| $ | 1.87 |
|
| $ | 0.21 |
|
| $ | 0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Comprehensive income |
|
|
|
|
|
| ||||||||||||||||||
Net income |
| $ | 12,990 |
|
| $ | 15,417 |
|
| $ | 42,729 |
|
| $ | 26,474 |
|
| $ | 41,374 |
|
| $ | 28,441 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other comprehensive income |
|
|
|
|
|
| ||||||||||||||||||
Change in fair value of interest rate swaps |
|
| 283 |
|
|
| 1,280 |
|
|
| (1,448 | ) |
|
| (20,551 | ) |
|
| (17,899 | ) |
|
| 34,961 |
|
Realized loss on interest rate swaps |
|
| - |
|
|
| - |
|
|
| (873 | ) |
|
| - |
|
|
| 522 |
|
|
| 659 |
|
Comprehensive income |
|
| 13,273 |
|
|
| 16,697 |
|
|
| 40,408 |
|
|
| 5,923 |
|
|
| 23,997 |
|
|
| 64,061 |
|
Comprehensive income attributable to non-controlling interests |
|
| (1,046 | ) |
|
| (1,581 | ) |
|
| (3,271 | ) |
|
| (443 | ) |
|
| (1,200 | ) |
|
| (3,790 | ) |
Comprehensive income attributable to Broadstone Net Lease, Inc. |
| $ | 12,227 |
|
| $ | 15,116 |
|
| $ | 37,137 |
|
| $ | 5,480 |
|
| $ | 22,797 |
|
| $ | 60,271 |
|
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
(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 |
|
| Additional |
|
| Cumulative |
|
| Accumulated |
|
| Non- |
|
| Total |
| ||||||
Balance, January 1, 2023 |
| $ | 47 |
|
| $ | 3,419,395 |
|
| $ | (386,049 | ) |
| $ | 59,525 |
|
| $ | 169,587 |
|
| $ | 3,262,505 |
|
Net income |
|
| — |
|
|
| — |
|
|
| 39,304 |
|
|
| — |
|
|
| 2,070 |
|
|
| 41,374 |
|
Issuance of 259 shares of common stock under equity incentive plan |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Offering costs, discounts, and commissions |
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2 | ) |
Stock-based compensation, net of zero shares |
|
| — |
|
|
| 1,879 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,879 |
|
Retirement of 66 shares of common stock under equity incentive plan |
|
| — |
|
|
| (1,175 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,175 | ) |
Conversion of 896 OP units to 896 shares of common stock |
|
| — |
| �� |
| 14,897 |
|
|
| — |
|
|
| — |
|
|
| (14,897 | ) |
|
| — |
|
Distributions declared ($0.275 per share and OP Unit) |
|
| — |
|
|
| — |
|
|
| (52,145 | ) |
|
| — |
|
|
| (2,742 | ) |
|
| (54,887 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (17,003 | ) |
|
| (896 | ) |
|
| (17,899 | ) |
Realized loss on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 496 |
|
|
| 26 |
|
|
| 522 |
|
Adjustment to non-controlling interests |
|
| — |
|
|
| (460 | ) |
|
| — |
|
|
| 498 |
|
|
| (38 | ) |
|
| — |
|
Balance, March 31, 2023 |
| $ | 47 |
|
| $ | 3,434,534 |
|
| $ | (398,890 | ) |
| $ | 43,516 |
|
| $ | 153,110 |
|
| $ | 3,232,317 |
|
|
| 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 |
|
|
| Common |
|
| Additional |
|
| Cumulative |
|
| Accumulated |
|
| Non- |
|
| Total |
| ||||||
Balance, January 1, 2022 |
| $ | 41 |
|
| $ | 2,924,168 |
|
| $ | (318,476 | ) |
| $ | (28,441 | ) |
| $ | 163,846 |
|
| $ | 2,741,138 |
|
Net income |
|
| — |
|
|
| — |
|
|
| 26,758 |
|
|
| — |
|
|
| 1,683 |
|
|
| 28,441 |
|
Issuance of 6,427 shares of common stock |
|
| 1 |
|
|
| 136,825 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 136,826 |
|
Offering costs, discounts, and commissions |
|
| — |
|
|
| (2,218 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,218 | ) |
Stock-based compensation, net of one share |
|
| — |
|
|
| 929 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 929 |
|
Retirement of 59 shares of common stock under equity incentive plan |
|
| — |
|
|
| (1,301 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,301 | ) |
Distributions declared ($0.265 per share and OP Unit) |
|
| — |
|
|
| — |
|
|
| (45,270 | ) |
|
| — |
|
|
| (2,845 | ) |
|
| (48,115 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 32,893 |
|
|
| 2,068 |
|
|
| 34,961 |
|
Realized loss on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 620 |
|
|
| 39 |
|
|
| 659 |
|
Adjustment to non-controlling interests |
|
| — |
|
|
| (1,843 | ) |
|
| — |
|
|
| (45 | ) |
|
| 1,888 |
|
|
| — |
|
Balance, March 31, 2022 |
| $ | 42 |
|
| $ | 3,056,560 |
|
| $ | (336,988 | ) |
| $ | 5,027 |
|
| $ | 166,679 |
|
| $ | 2,891,320 |
|
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 Flows
(Unaudited)
(in thousands)
|
| For the nine months ended |
| |||||||||||||
|
| September 30, |
|
| For the Three Months Ended |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2023 |
|
| 2022 |
| ||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net income |
| $ | 42,729 |
|
| $ | 26,474 |
|
| $ | 41,374 |
|
| $ | 28,441 |
|
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
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 |
|
| 45,456 |
|
|
| 32,900 |
|
|
| 39,093 |
|
|
| 33,132 |
|
Provision for impairment of investment in rental properties |
|
| 2,608 |
|
|
| - |
|
|
| 1,473 |
|
|
| — |
|
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 | ) | ||||||||
Amortization of debt issuance costs and original issuance discount charged to interest expense |
|
| 960 |
|
|
| 830 |
| ||||||||
Stock-based compensation expense |
|
| 1,879 |
|
|
| 929 |
| ||||||||
Straight-line rent, direct financing and sales-type lease adjustments |
|
| (6,980 | ) |
|
| (3,584 | ) | ||||||||
Gain on sale of real estate |
|
| (3,415 | ) |
|
| (1,196 | ) | ||||||||
Other non-cash items |
|
| 325 |
|
|
| 306 |
|
|
| 350 |
|
|
| 2,275 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Tenant and other receivables |
|
| (237 | ) |
|
| 286 |
|
|
| 262 |
|
|
| 150 |
|
Prepaid expenses and other assets |
|
| (440 | ) |
|
| (630 | ) |
|
| 215 |
|
|
| 804 |
|
Accounts payable and other liabilities |
|
| 897 |
|
|
| 5,870 |
|
|
| (3,418 | ) |
|
| (6,049 | ) |
Accrued interest payable |
|
| 3,278 |
|
|
| 134 |
|
|
| 2,583 |
|
|
| 3,372 |
|
Net cash provided by operating activities |
|
| 72,365 |
|
|
| 52,148 |
|
|
| 74,376 |
|
|
| 59,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Acquisition of rental property accounted for using the operating method |
|
| (345,789 | ) |
|
| (367,654 | ) |
|
| (5,319 | ) |
|
| (211,902 | ) |
Acquisition of rental property accounted for using the direct financing method |
|
| (3,546 | ) |
|
| (544 | ) | ||||||||
Capital expenditures and improvements |
|
| (3,871 | ) |
|
| (7,525 | ) |
|
| (15,583 | ) |
|
| (778 | ) |
Proceeds from disposition of rental property, net |
|
| 55,296 |
|
|
| 15,608 |
|
|
| 50,410 |
|
|
| 5,020 |
|
Increase in tenant and capital reserves |
|
| (130 | ) |
|
| (43 | ) | ||||||||
Decrease in restricted cash |
|
| 543 |
|
|
| 65 |
| ||||||||
Net cash used in investing activities |
|
| (297,497 | ) |
|
| (360,093 | ) | ||||||||
Change in deposits on investments in rental property |
|
| 125 |
|
|
| (18 | ) | ||||||||
Net cash provided by (used in) investing activities |
|
| 29,633 |
|
|
| (207,678 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
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 | ) | ||||||||
Proceeds from issuance of common stock, net of $170 and $2,132 offering |
|
| (170 | ) |
|
| 134,412 |
| ||||||||
Principal payments on mortgages and unsecured term loans |
|
| (736 | ) |
|
| (60,700 | ) | ||||||||
Borrowings on unsecured revolving credit facility |
|
| 29,000 |
|
|
| 250,783 |
| ||||||||
Repayments on unsecured revolving credit facility |
|
| (118,000 | ) |
|
| (88,000 | ) | ||||||||
Cash distributions paid to stockholders |
|
| (32,533 | ) |
|
| (26,060 | ) |
|
| (51,844 | ) |
|
| (43,503 | ) |
Cash distributions paid to non-controlling interests |
|
| (5,669 | ) |
|
| (5,275 | ) |
|
| (2,989 | ) |
|
| (2,845 | ) |
Debt issuance and extinguishment costs paid |
|
| (9,889 | ) |
|
| (622 | ) |
|
| — |
|
|
| (3,795 | ) |
Net cash provided by financing activities |
|
| 217,195 |
|
|
| 313,898 |
| ||||||||
Net cash (used in) provided by financing activities |
|
| (144,739 | ) |
|
| 186,352 |
| ||||||||
Net (decrease) increase in cash and cash equivalents and restricted cash |
|
| (40,730 | ) |
|
| 37,778 |
| ||||||||
Cash and cash equivalents and restricted cash at beginning of period |
|
| 60,040 |
|
|
| 27,769 |
| ||||||||
Cash and cash equivalents and restricted cash at end of period |
| $ | 19,310 |
|
| $ | 65,547 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net (decrease) increase in cash and cash equivalents |
|
| (7,937 | ) |
|
| 5,953 |
| ||||||||
Reconciliation of cash and cash equivalents and restricted cash |
|
|
|
|
|
| ||||||||||
Cash and cash equivalents at beginning of period |
|
| 21,635 |
|
|
| 27,050 |
|
| $ | 21,789 |
|
| $ | 21,669 |
|
Restricted cash at beginning of period |
|
| 38,251 |
|
|
| 6,100 |
| ||||||||
Cash and cash equivalents and restricted cash at beginning of period |
| $ | 60,040 |
|
| $ | 27,769 |
| ||||||||
|
|
|
|
|
|
| ||||||||||
Cash and cash equivalents at end of period |
| $ | 13,698 |
|
| $ | 33,003 |
|
| $ | 15,412 |
|
| $ | 54,103 |
|
Restricted cash at end of period |
|
| 3,898 |
|
|
| 11,444 |
| ||||||||
Cash and cash equivalents and restricted cash at end of period |
| $ | 19,310 |
|
| $ | 65,547 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Broadstone Net Lease, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Unaudited)
(in thousands)
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. The Corporation leases properties to retail, healthcare, industrial, and other commercial businesses 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 of September 30, 2017, the Corporation owned a diversified portfolio of 477 individual net leased commercial properties located in 37 states throughout the continental United States.
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 interests in the Operating Company are held by members who acquired their interest by contributing property to the Operating Company in exchange for membership units ofnot owned by the Operating Company.Corporation are referred to as OP Units or non-controlling interests. 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 Partnership Real Estate Investment Trustumbrella partnership real estate investment trust (“UPREIT”).
The Corporation, operatesthe OP, and its consolidated subsidiaries are collectively referred to as the “Company.” The Corporation’s common stock was listed on the New York Stock Exchange under the directionsymbol “BNL” in 2020. The Corporation focuses on investing in income-producing, net leased commercial properties, primarily in the United States.
The Company leases industrial, healthcare, restaurant, retail, and office commercial properties under long-term lease agreements. At March 31, 2023, the Company owned a diversified portfolio of its board of directors (the “Board of Directors”), which is responsible for801 individual commercial properties with 794 properties located in 44 U.S. states and seven properties located in four Canadian provinces.
The following table summarizes the managementoutstanding equity and controleconomic ownership interest 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 is a wholly-owned subsidiary of the Manager and all of the Corporation’s officers are employees of the Manager. Accordingly, both the Manager and the Asset Manager are related parties of the Corporation. OP:
|
| March 31, 2023 |
|
| December 31, 2022 |
| ||||||||||||||||||
(in thousands) |
| Shares of |
|
| OP Units |
|
| Total Diluted |
|
| Shares of |
|
| OP Units |
|
| Total Diluted |
| ||||||
Ownership interest |
|
| 187,203 |
|
|
| 9,309 |
|
|
| 196,512 |
|
|
| 186,114 |
|
|
| 10,205 |
|
|
| 196,319 |
|
Percent ownership of OP |
|
| 95.3 | % |
|
| 4.7 | % |
|
| 100.0 | % |
|
| 94.8 | % |
|
| 5.2 | % |
|
| 100.0 | % |
Refer to Note 314 for further discussion over related parties and related party transactions.regarding the calculation of weighted average shares outstanding.
5
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 CorporationCompany has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2016,2022, included in the Company’s Amendment No. 2 to its Registration Statement2022 Annual Report on Form 10,10-K, filed with the SEC on June 29, 2017 (the “Form 10”).February 23, 2023. 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 fair value of long-lived assets the provision forand goodwill utilized in impairment assessments, the depreciable lives of rental property, the amortizable lives of intangible assets and liabilities, the allowance for doubtful accounts, the fair valueprobability of assumed debtcollecting outstanding and notes payables,future lease payments, and the fair value of the Company’s interest rate swap agreements and the determination of any uncertain tax positions.agreements. Accordingly, actual results may differ from those estimates.
6
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 long-lived asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the long-lived 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 long-lived asset or asset group exceeds theits fair value of the asset or asset group. A significant judgementvalue. Significant judgment is made as to determine if and when impairment should be taken, if our strategy, or one or moretaken. The Company’s assessment of impairment as of March 31, 2023 and 2022 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, no 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.
Inputs used in establishing fair value for impaired 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 charge, resulting primarily from changes in the Company’s long-term hold strategy, with respect to the individual property:
|
| For the Three Months Ended |
| |||||
(in thousands, except number of properties) |
| 2023 |
|
| 2022 |
| ||
Number of properties |
|
| 1 |
|
|
| — |
|
Impairment charge |
| $ | 1,473 |
|
| $ | — |
|
Restricted Cash
DuringRestricted cash generally includes escrow funds the three months ended September 30, 2017 we recorded impairmentCompany maintains pursuant to the terms of $2,608 based on our considerationcertain mortgages, lease agreements, and proceeds from the sale of properties under Section 1031 of the factors detailed above. In determining the fair valueInternal Revenue Code of the assets at the time of measurement, we utilized capitalization rates ranging from 7.25% to 12%1986, as amended (the “Code”), and a weighted average discount rate of 8%.
The Company has reduced the carrying value of the impaired real estateis reported within Prepaid expenses and other 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 terms 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 end of the lease term, (ii) lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is greater than or equal to 75% of the underlying property’s estimated useful life, or (iv) the present value of the future minimum lease payments (excluding executory costs) is greater than or equal to 90% of the fair value of the leased property. If one or more of these criteria are met, 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 income 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:
|
| March 31, |
|
| December 31, |
| ||
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Escrow funds and other |
| $ | 3,898 |
|
| $ | 4,812 |
|
1031 exchange proceeds |
|
| — |
|
|
| 33,439 |
|
|
| $ | 3,898 |
|
| $ | 38,251 |
|
Rent Received in Advance
Rent received in advance represents tenant rent 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 agreements with tenants, a significant majority of which 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 loss 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.following:
(in thousands) |
| March 31, |
|
| December 31, |
| ||
Rent received in advance |
| $ | 20,549 |
|
| $ | 18,783 |
|
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 policies 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 Condensed Consolidated Statements of Income and Comprehensive Income (Loss). If the insurance/tenant recovery is less than the amount of accelerated depreciation recognized, the Company will recognize a net loss in the Condensed Consolidated Statements of Income 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 up to the amount of the accelerated depreciation, and will account for the excess as 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.7
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 value of the Operating Company. Such adjustments are recorded to Additional paid-in capital as a reallocation of Non-controlling interests 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.Recurring Fair Value Measurements
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 to the fair value of the assets or liabilities. Level 3 includes assets and liabilities whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
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)9):
|
| September 30, 2017 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swaps, assets |
| $ | 7,493 |
|
| $ | - |
|
| $ | 7,493 |
|
| $ | - |
|
Interest rate swap, liabilities |
|
| (7,119 | ) |
|
| - |
|
|
| (7,119 | ) |
|
| - |
|
|
| $ | 374 |
|
| $ | - |
|
| $ | 374 |
|
| $ | - |
|
|
| March 31, 2023 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swap, assets |
| $ | 45,490 |
|
| $ | — |
|
| $ | 45,490 |
|
| $ | — |
|
|
| December 31, 2022 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swap, assets |
| $ | 63,390 |
|
| $ | — |
|
| $ | 63,390 |
|
| $ | — |
|
|
| 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 (see Note 7), recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historicalrecent market risk premiums for loans of comparable quality, current LIBOR, US treasuryLondon Interbank Offered Rate (“LIBOR”), Secured Overnight Financing Rate (“SOFR”), Canadian Dollar Offered Rate (“CDOR”), 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, unsecured term loans, and senior unsecured notes 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) |
| March 31, |
|
| December 31, |
| ||
Carrying amount |
| $ | 1,944,323 |
|
| $ | 2,034,076 |
|
Fair value |
|
| 1,761,422 |
|
|
| 1,841,381 |
|
Non-recurring Fair Value Measurements
The Company’s non-recurring fair value measurements for the three months ended September 30, 2017at March 31, 2023 and December 31, 2022 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.
8
3. Acquisitions of Rental Property
The Company did not have any assets measured at fair valueclosed on a nonrecurring basis at December 31, 2016.
Taxes Collected From Tenants and Remitted to Governmental Authorities
Substantially all 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. The Company records such expenses on a net basis. Forfollowing acquisition during the three months ended September 30, 2017 and 2016, the Company’s tenants, pursuant to their lease obligations, have made direct payment for property taxes to the taxing authorities of approximately $2,448 and $1,609, respectively. For the nine months ended September 30, 2017 and 2016, the Company’s tenants, pursuant to their lease obligations, have made direct payment for property taxes to the taxing authorities of approximately $13,405 and $11,176, respectively.March 31, 2023:
In some situations, the Company may collect property taxes from its tenants and remit those taxes to governmental authorities. Taxes collected from tenants and remitted to governmental authorities are presented on a gross basis, where revenue of $608 and $551 is included in Operating expenses reimbursed from tenants and expense of $885 and $718 is included in Property and operating expenses in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended September 30, 2017 and 2016, respectively. Taxes collected from tenants were $1,787 and $1,379, while taxes remitted to governmental authorities were $2,084 and $1,442 for the nine months ended September 30, 2017 and 2016, respectively.
Recently Adopted Accounting Standards
(in thousands, except number of properties) Number of Real Estate Date Property Type Properties Acquisition Price March 14, 2023 Retail 1 $ 5,221 (a)In January 2017, the Financial Accounting Standards Boards (“FASB”) issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which changes the definition of a business to exclude acquisitions where substantially all of the fair value 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. As a result of the adoption, the Company
Other Recently Issued Accounting Standards
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows—Restricted Cash. ASU 2016-18 requires that the statement of cash flows explain the change during the period 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 reconciling 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, for interim and annual periods beginning after December 15, 2017, with 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, including 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 periods beginning after December 15, 2017, with early adoption permitted. The Company has assessed the impact 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. 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 evaluate the impact of this guidance until it becomes effective.
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets. This new guidance is required to be adopted concurrently with the amendments in ASU 2014-09. 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 need 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.
3. Related-Party Transactions
Property Management Agreement
The Corporation and the Operating Company have entered into a property management agreement (the “Property Management Agreement”) with the Manager, a related party in which certain officers and directors of the Corporation have either a direct or indirect ownership interest. Under the terms of the Property Management Agreement, the Manager manages and coordinates certain aspects of the leasing of the Company’s rental property.
In exchange for various services provided under the Property Management Agreement, 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 up to the prime rate plus 1.00% in exchange for any advances to the Operating Company, 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 termination 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), the Corporation will be required to pay to the Manager 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 date 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 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 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 Agreement for the three and nine months ended September 30, 2017 and 2016 are as follows:
|
|
|
| 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 |
|
Included in management fees are $1,688 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 related to the Property Management Agreement and the Asset Management Agreement are paid for in cash within the Company’s normal payment cycle for vendors.
Legal Services
The Company retains the legal services 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 VNN for the three and nine months ended September 30, 2016:
(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 |
|
|
|
4. Acquisitions
The Company closed on the following acquisitions during the ninethree months ended September 30, 2017:March 31, 2022:
(in thousands, except number of properties) |
| Number of |
|
| Real Estate |
|
| ||||
Date |
| Property Type |
| Properties |
|
| Acquisition Price |
|
| ||
January 7, 2022 |
| Retail |
|
| 2 |
|
| $ | 2,573 |
|
|
February 10, 2022 |
| Industrial |
|
| 1 |
|
|
| 21,733 |
|
|
February 15, 2022 |
| Retail |
|
| 1 |
|
|
| 1,341 |
|
|
February 28, 2022 |
| Industrial |
|
| 1 |
|
|
| 5,678 |
|
|
March 4, 2022 |
| Retail |
|
| 6 |
|
|
| 79,061 |
|
|
March 31, 2022 |
| Restaurant |
|
| 16 |
|
|
| 99,587 |
|
|
|
|
|
|
| 27 |
|
| $ | 209,973 |
| (b) |
(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 following acquisitions during the nine months ended September 30, 2016:
(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 completed real estate acquisitions:
|
| For the Three Months Ended |
| |||||
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Land |
| $ | 781 |
|
| $ | 54,784 |
|
Land improvements |
|
| 360 |
|
|
| 5,410 |
|
Buildings and improvements |
|
| 3,890 |
|
|
| 142,269 |
|
Acquired in-place leases(c) |
|
| 501 |
|
|
| 16,037 |
|
Acquired below-market lease (d) |
|
| (166 | ) |
|
| (76 | ) |
Non-real estate liabilities assumed |
|
| — |
|
|
| (6,440 | ) |
|
| $ | 5,366 |
|
| $ | 211,984 |
|
|
| 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 |
|
|
|
|
|
|
|
The above acquisitions were funded using a combination of available cash on hand and proceeds from the Company’s unsecured revolving line of credit.credit facility borrowings. All of thereal estate acquisitions closed during the ninethree months ended September 30, 2017March 31, 2023, and 2022, 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.
Subsequent to September 30, 2017, the Company closed on the following acquisitions (see Note 17):
(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.capitalized.
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 |
|
5.4. Sale of Real Estate
The Company closed on the following sales of real estate, none of which qualified as discontinued operations, duringoperations:
|
| For the Three Months Ended |
| |||||
(in thousands, except number of properties) |
| 2023 |
|
| 2022 |
| ||
Number of properties disposed |
|
| 3 |
|
|
| 1 |
|
Aggregate sale price(a) |
| $ | 51,874 |
|
| $ | 5,212 |
|
Aggregate carrying value |
|
| (46,995 | ) |
|
| (3,824 | ) |
Additional sales expenses |
|
| (1,464 | ) |
|
| (192 | ) |
Gain on sale of real estate |
| $ | 3,415 |
|
| $ | 1,196 |
|
9
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
(in thousands, except number of properties) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Number of properties disposed |
|
| 4 |
|
|
| 2 |
|
|
| 10 |
|
|
| 4 |
|
Aggregate sale price |
| $ | 27,725 |
|
| $ | 12,345 |
|
| $ | 58,170 |
|
| $ | 16,095 |
|
Aggregate carrying value |
|
| 22,335 |
|
|
| 9,163 |
|
|
| 44,984 |
|
|
| 11,519 |
|
Additional sales expenses |
|
| 1,338 |
|
|
| 199 |
|
|
| 2,854 |
|
|
| 487 |
|
Gain on sale of real estate |
|
| 4,052 |
|
|
| 2,983 |
|
|
| 10,332 |
|
|
| 4,089 |
|
6.5. 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,March 31, 2023, the Company had 462801 real estate properties,789 of which were leased under leases that have been classified as operating leases and 15, nine that have been classified as direct financing leases.leases, one that has been classified as a sales-type lease, and two that were vacant. Of the 15nine leases classified as direct financing leases five, three include land portions which are accounted for as operating leases (see Revenue Recognition within Note 2). Substantially allleases. The sales-type lease includes a land portion which is accounted for as an operating lease. Most leases have initial terms of 10 to 20 years and provide for minimum rentals as defined in ASC 840, Leases. In addition, theyears. The Company’s leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/Consumer Price Index (“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 yearmultiple-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 are as follows at September 30, 2017 and December 31, 2016:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2017 |
|
| 2016 |
| ||
Land |
| $ | 300,633 |
|
| $ | 288,276 |
|
Land improvements |
|
| 185,776 |
|
|
| 162,341 |
|
Buildings |
|
| 1,530,429 |
|
|
| 1,283,322 |
|
Tenant improvements |
|
| 9,656 |
|
|
| 8,665 |
|
Equipment |
|
| 519 |
|
|
| 799 |
|
|
|
| 2,027,013 |
|
|
| 1,743,403 |
|
Less accumulated depreciation |
|
| (135,305 | ) |
|
| (105,703 | ) |
|
| $ | 1,891,708 |
|
| $ | 1,637,700 |
|
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 |
| |||||
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Depreciation |
| $ | 31,157 |
|
| $ | 26,658 |
|
Estimated minimum future rental receipts requiredlease payments to be received under non-cancelable operating leases with tenants at September 30, 2017March 31, 2023 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 2023 |
| $ | 291,129 |
|
2024 |
|
| 389,055 |
|
2025 |
|
| 386,026 |
|
2026 |
|
| 381,109 |
|
2027 |
|
| 363,946 |
|
Thereafter |
|
| 3,044,506 |
|
|
| $ | 4,855,771 |
|
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.
10
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) |
| March 31, |
|
| December 31, |
| ||
Undiscounted estimated lease payments to be received |
| $ | 37,492 |
|
| $ | 38,268 |
|
Estimated unguaranteed residual values |
|
| 14,547 |
|
|
| 14,547 |
|
Unearned revenue |
|
| (24,967 | ) |
|
| (25,645 | ) |
Reserve for credit losses |
|
| (125 | ) |
|
| (125 | ) |
Net investment in direct financing leases |
| $ | 26,947 |
|
| $ | 27,045 |
|
|
| 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, 2017March 31, 2023 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 2023 |
| $ | 2,337 |
|
2024 |
|
| 3,171 |
|
2025 |
|
| 3,285 |
|
2026 |
|
| 3,357 |
|
2027 |
|
| 3,426 |
|
Thereafter |
|
| 21,916 |
|
|
| $ | 37,492 |
|
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.
The following table summarizes amounts reported as Lease revenues, net on the Condensed Consolidated Statements of Income and Comprehensive Income:
|
| For the Three Months Ended |
| |||||
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Contractual rental amounts billed for operating leases |
| $ | 98,102 |
|
| $ | 84,396 |
|
Adjustment to recognize contractual operating lease billings on a |
|
| 7,370 |
|
|
| 5,021 |
|
Net write-offs of accrued rental income |
|
| (105 | ) |
|
| (1,326 | ) |
Variable rental amounts earned |
|
| 341 |
|
|
| 186 |
|
Earned income from direct financing leases |
|
| 691 |
|
|
| 723 |
|
Interest income from sales-type leases |
|
| 14 |
|
|
| 14 |
|
Operating expenses billed to tenants |
|
| 5,075 |
|
|
| 4,735 |
|
Other income from real estate transactions |
|
| 7,392 |
| (a) |
| 42 |
|
Adjustment to revenue recognized for uncollectible rental |
|
| 112 |
|
|
| 50 |
|
Total lease revenues, net |
| $ | 118,992 |
|
| $ | 93,841 |
|
7.11
6. Intangible Assets and Liabilities
The following is a summary of intangible assets and liabilities and related accumulated amortization:
(in thousands) |
| March 31, |
|
| December 31, |
| ||
Lease intangibles: |
|
|
|
|
|
| ||
Acquired above-market leases |
| $ | 45,740 |
|
| $ | 45,740 |
|
Less accumulated amortization |
|
| (19,138 | ) |
|
| (18,436 | ) |
Acquired above-market leases, net |
|
| 26,602 |
|
|
| 27,304 |
|
Acquired in-place leases |
|
| 428,535 |
|
|
| 436,401 |
|
Less accumulated amortization |
|
| (137,659 | ) |
|
| (134,120 | ) |
Acquired in-place leases, net |
|
| 290,876 |
|
|
| 302,281 |
|
Total intangible lease assets, net |
| $ | 317,478 |
|
| $ | 329,585 |
|
Acquired below-market leases |
| $ | 101,249 |
|
| $ | 105,059 |
|
Less accumulated amortization |
|
| (41,890 | ) |
|
| (42,204 | ) |
Intangible lease liabilities, net |
| $ | 59,359 |
|
| $ | 62,855 |
|
Leasing fees |
| $ | 14,911 |
|
| $ | 14,430 |
|
Less accumulated amortization |
|
| (6,145 | ) |
|
| (5,924 | ) |
Leasing fees, net |
| $ | 8,766 |
|
| $ | 8,506 |
|
Amortization of intangible lease assets and liabilities was as follows:
(in thousands) |
|
|
| For the Three Months Ended |
| |||||
Intangible |
| Financial Statement Presentation |
| 2023 |
|
| 2022 |
| ||
Acquired in-place leases and leasing fees |
| Depreciation and amortization |
| $ | 10,588 |
|
| $ | 7,601 |
|
Above-market and below-market leases |
| Lease revenues, net |
|
| 2,694 |
|
|
| 1,161 |
|
For the three months ended March 31, 2023, amortization at September 30, 2017 and December 31, 2016:
|
| 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 |
|
Amortization expense for acquired in-place leases and feesincludes $0.9 million of accelerated amortization resulting from early lease terminations. There was $3,043 and $2,318no accelerated amortization 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. Amortization of acquired above-market and below-market leases, net, was a (decrease) increase in rental income of $(99) and $100 for the three months ended September 30, 2017 and 2016, respectively, and $(487) and $373 for the nine months ended September 30, 2017 and 2016, respectively. March 31, 2022.
Estimated future amortization of intangible assets and liabilities at September 30, 2017March 31, 2023 is as follows:
(in thousands) |
|
|
| |
Remainder of 2023 |
| $ | 20,694 |
|
2024 |
|
| 26,913 |
|
2025 |
|
| 25,781 |
|
2026 |
|
| 24,619 |
|
2027 |
|
| 22,876 |
|
Thereafter |
|
| 146,002 |
|
|
| $ | 266,885 |
|
12
(in thousands) |
|
|
|
|
Remainder of 2017 |
| $ | 3,273 |
|
2018 |
|
| 12,224 |
|
2019 |
|
| 11,439 |
|
2020 |
|
| 11,330 |
|
2021 |
|
| 11,278 |
|
Thereafter |
|
| 102,667 |
|
|
| $ | 152,211 |
|
8.7. Unsecured Credit Agreements
2017 Unsecured Revolving Credit and Term Loan Agreement
On June 23, 2017, the Corporation and the Operating Company entered into an $800,000 unsecured Revolving Credit and Term Loan Agreement (“Credit Agreement”) with Manufacturers & Traders Trust Company (“M&T Bank”), as Administrative Agent, four participating banks as Joint Lead Arrangers and Joint Bookrunners, four participating banks as Co-Syndication Agents, and four participating banks, as Co-Documentation Agents. The Credit Agreement consists of a $400,000 senior unsecured revolving credit facility (“Revolver”), a $250,000 senior unsecured delayed draw term loan (“5.5-Year Term Loan”), and a $150,000 senior unsecured delayed draw term loan (“7-Year Term Loan”). 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 Agreement were used to repay the Company’s existing unsecured revolving credit facility and term notes with M&T 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 of the Company, subject to certain conditions set forth in the agreement and payment of a 0.0625% fee on the revolving commitments. Borrowings on the Revolver bear interest at variable rates based on LIBOR plus a margin based on the Operating Company’s investment grade credit rating ranging between 0.825% and 1.55% per annum. The initial applicable facility fee on the Revolver is 0.25% 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 margin 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 current credit rating of Baa3, the applicable margin under the Revolver, 5.5-Year Term Loan, 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 amount 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.
2015 Unsecured Term Loan Agreement
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 |
|
|
|
|
| |||||
(in thousands, except interest rates) |
| March 31, |
|
| December 31, |
|
| Interest |
| Maturity | ||
Unsecured revolving |
| $ | 108,330 |
|
| $ | 197,322 |
|
| Applicable reference |
| Mar. 2026 |
Unsecured term loans: |
|
|
|
|
|
|
|
|
|
| ||
2026 Unsecured Term Loan |
|
| 400,000 |
|
|
| 400,000 |
|
| one-month LIBOR |
| Feb. 2026 |
2027 Unsecured Term Loan |
|
| 200,000 |
|
|
| 200,000 |
|
| one-month adjusted SOFR |
| Aug. 2027 |
2029 Unsecured Term Loan |
|
| 300,000 |
|
|
| 300,000 |
|
| one-month adjusted SOFR |
| Aug. 2029 |
Total unsecured term loans |
|
| 900,000 |
|
|
| 900,000 |
|
|
|
|
|
Unamortized debt issuance costs, net |
|
| (4,994 | ) |
|
| (5,308 | ) |
|
|
|
|
Total unsecured term loans, net |
|
| 895,006 |
|
|
| 894,692 |
|
|
|
|
|
Senior unsecured notes: |
|
|
|
|
|
|
|
|
|
| ||
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 |
|
|
| 375,000 |
|
| 2.60% |
| Sep. 2031 |
Total senior unsecured notes |
|
| 850,000 |
|
|
| 850,000 |
|
|
|
|
|
Unamortized debt issuance costs and |
|
| (5,256 | ) |
|
| (5,445 | ) |
|
|
|
|
Total senior unsecured notes, net |
|
| 844,744 |
|
|
| 844,555 |
|
|
|
|
|
Total unsecured debt, net |
| $ | 1,848,080 |
|
| $ | 1,936,569 |
|
|
|
|
|
|
| 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, 2017March 31, 2023 and December 31, 2016,2022, a balance of $34.5 million and $123.5 million was subject to the one-month SOFR of 4.8% and 4.36%, respectively. The remaining balance includes $100 million CAD borrowings remeasured to $73.8 million USD, at March 31, 2023 and December 31, 2022, respectively, and was subject to the one-month CDOR of 4.95% and 4.74%, respectively.
At March 31, 2023, the weighted average interest rate on all outstanding borrowings was 2.96%5.03%, exclusive of interest rate swap agreements.
The Company is subject to various financial and 2.14%, respectively.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 debt to annual debt service charge, total unencumbered assets to total unsecured debt, and secured debt ratio, among others. As of March 31, 2023, and for all periods presented, 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.
For the three months ended March 31, 2022, the Company incurred $3.8 million in debt issuance costs associated with the unsecured revolving credit facility. The Company did not incur debt issuance costs during the three months ended March 31, 2023.
Debt issuance costs wereand original issuance discounts are amortized and recorded as interesta component of Interest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) of $486 and $403 for the three months ended September 30, 2017 and 2016, respectively, and $1,343 and $1,279 for the nine months ended September 30, 2017 and 2016, respectively.
For the nine months ended September 30, 2017, the Company paid $8,344 inIncome. The following table summarizes debt issuance costs associated with the Senior Notes, the Credit Agreement with M&T as Administrative Agent,cost and the Amended and Restated Term Loan Agreement with SunTrust Bank. 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 is deemed to be new debt, a modification of existing debt, or an extinguishment of existing debt. Debtoriginal issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred. Based on this assessment, $5,443 of the debt issuance costs were related to new debt and therefore have been deferred and are being amortized over the term of the associated debt. The remaining $2,901 of debt issuance costs was associated with lenders whose commitments under the new agreements have been determined to be an extinguishment and such debt issuance costs were expensed as a component of the cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the nine months ended September 30, 2017. Additionally, $654 of unamortized debt issuance costs were expensed and included in cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the nine months ended September 30, 2017.discount amortization:
|
| For the Three Months Ended |
| |||||
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Debt issuance costs and original issuance discount amortization |
| $ | 986 |
|
| $ | 856 |
|
13
8. Mortgages
9. 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 |
| March 31, |
|
| December 31, |
|
|
| ||
Lender |
| (Month/Year) |
| (Month/Year) |
| Rate |
| 2023 |
|
| 2022 |
|
|
| ||
Wilmington Trust National Association |
| Apr-19 |
| Feb-28 |
| 4.92% |
| $ | 45,187 |
|
| $ | 45,516 |
|
| (a) (b) (c) (d) |
Wilmington Trust National Association |
| Jun-18 |
| Aug-25 |
| 4.36% |
|
| 19,043 |
|
|
| 19,150 |
|
| (a) (b) (c) (e) |
PNC Bank |
| Oct-16 |
| Nov-26 |
| 3.62% |
|
| 16,566 |
|
|
| 16,675 |
|
| (b) (c) |
Aegon |
| Apr-12 |
| Oct-23 |
| 6.38% |
|
| 5,197 |
|
|
| 5,413 |
|
| (b) (f) |
Total mortgages |
|
|
|
|
|
|
|
| 85,993 |
|
|
| 86,754 |
|
|
|
Debt issuance costs, net |
|
|
|
|
|
|
|
| (140 | ) |
|
| (152 | ) |
|
|
Mortgages, net |
|
|
|
|
|
|
| $ | 85,853 |
|
| $ | 86,602 |
|
|
|
At March 31, 2016:
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2017,2023, investment in rental property of $91,326 is$142.4 million 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)7) at September 30, 2017March 31, 2023 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 2023 |
| $ | 6,820 |
|
2024 |
|
| 2,260 |
|
2025 |
|
| 20,195 |
|
2026 |
|
| 525,173 |
|
2027 |
|
| 351,597 |
|
Thereafter |
|
| 1,038,278 |
|
|
| $ | 1,944,323 |
|
Certain of the Company’s mortgage and note payable agreementsmortgages 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.
10.14
9. 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. 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 ratevariable-rate borrowings.
In order to reduce counterparty concentration risk, the Company diversifies the institutions that serve as swap counterparties. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes the risk exposure by limiting counterparties to only major banks who meet established credit and capital guidelines.
The following is a summary of the Company’s outstanding interest rate swap agreements at September 30, 2017:agreements:
(in thousands, except interest rates) |
|
|
|
|
|
| March 31, 2023 |
|
| December 31, 2022 |
|
| |||||||||||||
Counterparty |
| Maturity Date |
| Fixed |
|
| Variable Rate Index |
| Notional |
|
| Fair |
|
| Notional |
|
| Fair |
|
| |||||
Wells Fargo Bank, N.A. |
| October 2024 |
|
| 2.72 | % |
| one-month LIBOR |
| $ | 15,000 |
|
| $ | 367 |
|
| $ | 15,000 |
|
| $ | 477 |
|
|
Capital One, National Association |
| December 2024 |
|
| 1.58 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| 656 |
|
|
| 15,000 |
|
|
| 815 |
|
|
Bank of Montreal |
| January 2025 |
|
| 1.91 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 991 |
|
|
| 25,000 |
|
|
| 1,239 |
|
|
Truist Financial Corporation |
| April 2025 |
|
| 2.20 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 920 |
|
|
| 25,000 |
|
|
| 1,169 |
|
|
Bank of Montreal |
| July 2025 |
|
| 2.32 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 904 |
|
|
| 25,000 |
|
|
| 1,162 |
|
|
Truist Financial Corporation |
| July 2025 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 1,082 |
|
|
| 25,000 |
|
|
| 1,358 |
|
|
Truist Financial Corporation |
| December 2025 |
|
| 2.30 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 991 |
|
|
| 25,000 |
|
|
| 1,279 |
|
|
Bank of Montreal |
| January 2026 |
|
| 1.92 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 1,238 |
|
|
| 25,000 |
|
|
| 1,547 |
|
|
Bank of Montreal |
| January 2026 |
|
| 2.05 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| 1,848 |
|
|
| 40,000 |
|
|
| 2,332 |
|
|
Capital One, National Association |
| January 2026 |
|
| 2.08 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| 1,579 |
|
|
| 35,000 |
|
|
| 2,007 |
|
|
Truist Financial Corporation |
| January 2026 |
|
| 1.93 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 1,233 |
|
|
| 25,000 |
|
|
| 1,542 |
|
|
Capital One, National Association |
| April 2026 |
|
| 2.68 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| 451 |
|
|
| 15,000 |
|
|
| 625 |
|
|
Capital One, National Association |
| July 2026 |
|
| 1.32 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| 2,506 |
|
|
| 35,000 |
|
|
| 3,042 |
|
|
Bank of Montreal |
| December 2026 |
|
| 2.33 | % |
| one-month LIBOR |
|
| 10,000 |
|
|
| 439 |
|
|
| 10,000 |
|
|
| 584 |
|
|
Bank of Montreal |
| December 2026 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 1,394 |
|
|
| 25,000 |
|
|
| 1,773 |
|
|
Toronto-Dominion Bank |
| March 2027 |
|
| 2.46 | % |
| one-month CDOR |
|
| 14,766 |
| (a) |
| 555 |
|
|
| 14,764 |
| (a) |
| 765 |
|
|
Wells Fargo Bank, N.A. |
| April 2027 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 762 |
|
|
| 25,000 |
|
|
| 1,129 |
|
|
Bank of Montreal |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 1,184 |
|
|
| 25,000 |
|
|
| 1,628 |
|
|
Capital One, National Association |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 1,154 |
|
|
| 25,000 |
|
|
| 1,605 |
|
|
Wells Fargo Bank, N.A. |
| January 2028 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 75,000 |
|
|
| 3,516 |
|
|
| 75,000 |
|
|
| 4,854 |
|
|
Bank of Montreal |
| May 2029 |
|
| 2.09 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 1,736 |
|
|
| 25,000 |
|
|
| 2,295 |
|
|
Regions Bank |
| May 2029 |
|
| 2.11 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 1,693 |
|
|
| 25,000 |
|
|
| 2,244 |
|
|
Regions Bank |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 1,802 |
|
|
| 25,000 |
|
|
| 2,357 |
|
|
U.S. Bank National Association |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 1,816 |
|
|
| 25,000 |
|
|
| 2,377 |
|
|
Regions Bank |
| August 2029 |
|
| 2.58 | % |
| one-month SOFR |
|
| 100,000 |
|
|
| 3,582 |
|
|
| 100,000 |
|
|
| 5,782 |
|
|
Toronto-Dominion Bank |
| August 2029 |
|
| 2.58 | % |
| one-month SOFR |
|
| 45,000 |
|
|
| 1,671 |
|
|
| 45,000 |
|
|
| 2,674 |
|
|
U.S. Bank National Association |
| August 2029 |
|
| 2.65 | % |
| one-month SOFR |
|
| 15,000 |
|
|
| 494 |
|
|
| 15,000 |
|
|
| 826 |
|
|
U.S. Bank National Association |
| August 2029 |
|
| 2.58 | % |
| one-month SOFR |
|
| 100,000 |
|
|
| 3,637 |
|
|
| 100,000 |
|
|
| 5,861 |
|
|
U.S. Bank National Association |
| August 2029 |
|
| 1.35 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 2,823 |
|
|
| 25,000 |
|
|
| 3,419 |
|
|
Regions Bank |
| March 2032 |
|
| 2.69 | % |
| one-month CDOR |
|
| 14,766 |
| (a) |
| 601 |
|
|
| 14,764 |
| (a) |
| 1,092 |
|
|
U.S. Bank National Association |
| March 2032 |
|
| 2.70 | % |
| one-month CDOR |
|
| 14,766 |
| (a) |
| 609 |
|
|
| 14,764 |
| (a) |
| 1,107 |
|
|
Bank of Montreal |
| March 2034 |
|
| 2.81 | % |
| one-month CDOR |
|
| 29,532 |
| (a) |
| 1,256 |
|
|
| 29,530 |
| (a) |
| 2,424 |
|
|
|
|
|
|
|
|
|
|
| $ | 973,830 |
|
| $ | 45,490 |
|
| $ | 973,822 |
|
| $ | 63,390 |
|
|
15
(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 ofAt March 31, 2023, 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 2.18%.
|
| 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 | ) |
|
| Amount of (Loss) Gain |
|
| Reclassification from |
|
| Total Interest Expense |
| |||||
|
| Recognized in |
|
| Accumulated Other |
|
| Presented in the Condensed |
| |||||
|
| Accumulated Other |
|
| Comprehensive Income |
|
| Consolidated Statements of |
| |||||
(in thousands) |
| Comprehensive |
|
|
|
| Amount of |
|
| Income and Comprehensive |
| |||
For the Three Months Ended March 31, |
| Income |
|
| Location |
| Income Gain (Loss) |
|
| Income |
| |||
2023 |
| $ | (17,899 | ) |
| Interest expense |
| $ | 4,997 |
|
| $ | 21,139 |
|
2022 |
|
| 34,961 |
|
| Interest expense |
|
| (3,865 | ) |
|
| 16,896 |
|
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 income to Interest expense during the next twelve months are estimated to be $3,460. The Company is exposed to credit risk in the eventa gain of non-performance by the counterparties of the swaps. The Company minimizes this risk exposure by limiting counterparties to major banks who meet established credit and capital guidelines.$21.5 million.
11.10. Non-Controlling Interests
The following table summarizes OP Units exchanged for shares of common stock:
Under the Company’s UPREIT structure, entities and individuals can contribute their properties to the Operating Company in exchange for membership interests in the Operating Company. Properties contributed as part of UPREIT transactions during the nine months ended September 30, 2017 and 2016 were valued at $8,278 and $7,190, respectively, which represents the estimated fair value of the properties contributed, less any assumed debt.
|
| For the Three Months Ended |
| |||||
(in thousands) |
| 2023 |
|
| 2022 |
| ||
OP Units exchanged for shares of common stock |
|
| 896 |
|
|
| — |
|
Value of units exchanged |
| $ | 14,897 |
|
| $ | — |
|
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.
12.11. Credit Risk Concentrations
The Company maintained bank balances that, at times, exceeded the federally insured limit during the ninethree months ended September 30, 2017.March 31, 2023. 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 byamounts based on the Managerfinancial position 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%capitalization of the Company’s total operating expenses forbanks.
For the three months ended September 30, 2017March 31, 2023 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 five institutions that comprise 32%, 20%, 16%, 10%, and 10% of total mortgages and notes payable at September 30, 2017. The Company has mortgages and notes payable with four institutions that comprise 20%, 18%, 12%, and 11% of total mortgages and notes payable at December 31, 2016. For the three and nine months ended September 30, 2017 and 2016,2022, the Company had no individual tenants or common franchises that accounted for more than 10%10% of total revenues.Lease revenues, net, excluding lease termination fees.
12. Equity
13. EquityAt-the-Market Program
General
Pursuant to the Corporation’s Articles of Incorporation (the “Charter”The Company established an at-the-market common equity offering program (“ATM Program”), the Corporation is authorized to issue an aggregate of 100,000 shares of capital stock, consisting of 80,000 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,through which it may, amend the Charter from time to time, publicly offer and sell shares of common stock having an aggregate gross sales price of up to increase or decrease$400.0 million. The ATM Program provides for forward sale agreements, enabling the aggregate numberCompany to set the price of shares of capital stock orupon pricing 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 stockholder pursuant to the Maryland General Corporation Law. The common stock has no preferences or preemptive, conversion or exchange rights.
Pursuant to limited liability company agreement of the Operating Company, each outstanding membership unit of the Operating Company is convertible into one share of the Corporation’s common stock, subject to the terms and conditions set forth in the Operating Company’s operating agreement.
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 tooffering, while delaying 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 privilegesreceipt of such shares of preferred stock.the net proceeds. As of September 30, 2017 and DecemberMarch 31, 2016, no shares2023, the Company has $145.4 million of available capacity under the Corporation’s preferred stock were issued and outstanding.ATM Program.
The following table presents information about the Company’s ATM Program activity:
|
| For the Three Months Ended |
| |||||
(in thousands, except per share amounts) |
| 2023 |
|
| 2022 |
| ||
Number of common shares issued |
|
| — |
|
|
| 6,273 |
|
Weighted average sale price per share |
| $ | — |
|
| $ | 21.82 |
|
Net proceeds |
| $ | — |
|
| $ | 134,326 |
|
Gross proceeds |
|
| — |
|
|
| 136,544 |
|
Share RedemptionRepurchase Program
In 2009,On March 14, 2023, the Company’s Board of Directors approved a share redemptionstock repurchase program (“Share Redemption(the “Repurchase Program”), which authorized the Company to repurchase up to $150.0 million of the Company’s common stock. These purchases could be made in the open market or through private transactions from time to time over the 12-month time period following authorization, depending on prevailing market conditions and applicable legal and regulatory requirements. The timing, manner, price and amount of any repurchases of common stock under which the Corporation may repurchaseRepurchase Program will be determined at the Company's discretion, using available cash resources. During the three months ended March 31, 2023, no shares of its outstandingthe Company’s common stock were repurchased under the program.
16
13. Stock-Based Compensation
Restricted Stock Awards
During the three months ended March 31, 2023 and 2022, the Company awarded 259,099 and 142,045 shares of restricted stock awards (“RSAs”), respectively, to officers and employees under the Company's equity incentive plan. The holder of RSAs is generally entitled at all times on and after December 31, 2009.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 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 RSAs vest over a one year-, three-, or four-year period from the original investment date of the grant and are subject to certain exceptions as set forththe holder’s continued service through the applicable vesting dates and in accordance with the Share Redemption Program. Under the Share Redemption Program, the Corporation is not obligated to repurchase shares and, notwithstanding any other termterms of the Share Redemption Program,individual award agreements. The weighted average per share value of awards granted during the Board of Directors or IDC may reject anythree months ended March 31, 2023 and 2022, were $17.75 and $21.66, respectively, which were based on the market price per 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 byCompany’s common stock on 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.grant date.
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 redemptionspresents information about the Company’s RSAs:
|
| For the Three Months Ended |
| |||||
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Compensation cost |
| $ | 1,728 |
|
| $ | 610 |
|
Dividends declared on unvested RSAs |
|
| 136 |
|
|
| 97 |
|
Fair value of shares vested during the period |
|
| 2,864 |
|
|
| 3,209 |
|
As of March 31, 2023, there was $7.3 million of unrecognized compensation costs related to the unvested restricted shares, which is expected to be recognized over a weighted average period of 3.0 years.
The following table presents information about the Company’s restricted stock activity:
|
| For the Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
(in thousands, except per share amounts) |
| Number of Shares |
|
| Weighted Average |
|
| Number of Shares |
|
| Weighted Average |
| ||||
Unvested at beginning of period |
|
| 396 |
|
| $ | 20.36 |
|
|
| 372 |
|
| $ | 19.62 |
|
Granted |
|
| 259 |
|
|
| 17.75 |
|
|
| 142 |
|
|
| 21.66 |
|
Vested |
|
| (160 | ) |
|
| 20.36 |
|
|
| (146 | ) |
|
| 19.80 |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| 26.41 |
|
Unvested at end of period |
|
| 495 |
|
|
| 19.00 |
|
|
| 367 |
|
|
| 20.33 |
|
Performance-based Restricted Stock Units
During the three months ended March 31, 2023 and 2022, the Company issued target grants of 186,481 and 121,883 performance-based restricted stock units (“PRSUs”), respectively, under the Share Redemption Program forCompany's equity incentive plan to the threeofficers of the Company. The awards are non-vested restricted stock units where the vesting percentages and nine months ended September 30, 2017 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, pursuantultimate 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 which the Corporation’s stockholders and holdersrTSR of membership unitspeer companies, as identified in the Operating Company (other thangrant agreements, over a three-year period, and 50% based on the Corporation), may elect to have cash distributions reinvested in additional sharesrTSR of the Corporation’s common stock. Cash distributions will be reinvested in additional shares ofCompany’s common stock pursuantas compared to the DRIP atrTSR of the MSCI US REIT Index over a perthree year measurement period. Vesting percentages range 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 target number of units is based on achieving a rTSR equal to the 55th percentile of the peer companies and MSCI US REIT Index. The grant date fair value of the PRSUs was measured using a Monte Carlo simulation model based on assumptions including share price equal to 98%volatility, among others.
The following table presents compensation cost recognized on the Company’s PRSUs:
|
| For the Three Months Ended |
| |||||
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Compensation cost |
| $ | 151 |
|
| $ | 319 |
|
17
As of the Determined Share Value asMarch 31, 2023, there was $5.8 million of the applicable distribution date. The Corporation may amend the DRIP at any time upon written notice to each participant at least 10 days priorunrecognized compensation costs related to the effective dateunvested PRSUs, which is expected to be recognized over a weighted average period of 2.6 years.
The following table presents information about the amendment. The Corporation may terminate the DRIP upon written notice to each participant at least 30 days prior to the effective date of the termination. At September 30, 2017 and December 31, 2016, a total of 1,451 and 1,076, shares of commonCompany’s performance-based restricted stock respectively, have been issued under the DRIP.unit activity:
|
| For the Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
(in thousands, except per share amounts) |
| Number of Shares |
|
| Weighted Average |
|
| Number of Shares |
|
| Weighted Average |
| ||||
Unvested at beginning of period |
|
| 233 |
|
| $ | 26.27 |
|
|
| 110 |
|
| $ | 24.40 |
|
Granted |
|
| 186 |
|
|
| 23.78 |
|
|
| 122 |
|
|
| 27.93 |
|
Vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| (61 | ) |
|
| 26.80 |
|
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 358 |
|
|
| 25.01 |
|
|
| 232 |
|
|
| 26.25 |
|
14. Earnings per Share
TheThe 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 |
| ||||||||||
|
| 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 |
|
For the Three Months Ended (in thousands, except per share amounts) 2023 2022 Basic earnings: Net earnings attributable to Broadstone Net Lease, Inc. common $ 39,304 $ 26,758 Less: earnings allocated to unvested restricted shares (136 ) (97 ) Net earnings used to compute basic earnings per common share $ 39,168 $ 26,661 Diluted earnings: Net earnings used to compute basic earnings per share $ 39,168 $ 26,661 Net earnings attributable to non-controlling interests 2,070 1,683 Net earnings used to compute diluted earnings per common share $ 41,238 $ 28,344 Weighted average number of common shares outstanding 186,561 164,179 Less: weighted average unvested restricted shares (a) (431 ) (370 ) Weighted average number of common shares outstanding used in 186,130 163,809 Effects of restricted stock units (b) 220 156 Effects of convertible membership units (c) 9,826 10,323 Weighted average number of common shares outstanding used in 196,176 174,288 Basic earnings per share $ 0.21 $ 0.16 Diluted earnings per share $ 0.21 $ 0.16 In
March 31,
shareholders
basic earnings per common share
diluted earnings per common share
18
15. Supplemental Cash Flow Disclosures
Cash paid for interest was $20,364$17.1 million and $16,430$12.0 million for the ninethree months ended September 30, 2017March 31, 2023 and 2016,2022, respectively. Cash paid for state income and franchise taxes was $751$0.4 million and $323$0.5 million for the ninethree months ended September 30, 2017March 31, 2023 and 2016,2022, respectively.
The following are non-cash transactions and have been excluded from the accompanying Condensed Consolidated Statements of Cash Flows:
DuringAt March 31, 2023, the nine months ended September 30, 2017 and 2016, 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, membershipconverted 896,349 OP units in the Operating Company in exchange for property contributed in UPREIT transactions valued at $8,278$14.9 million to 896,349 shares of common stock.
At September 30, 2017 and 2016,2022, dividend amounts declared and accrued but not yet paid amounted to $8,099$54.5 million and $6,303,$47.7 million, respectively.
In connection with fire damage incurred at three properties during the nine months ended September 30, 2017,At March 31, 2023 and 2022, the Company recognized $2,857 in insurance recovery receivables which were a reductionadjusted the carrying value of Non-controlling interests to depreciation expense forreflect their share of the associated real estate assets.
16. 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 cost 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 part of acquisitions closed during 2016March 31, 2023 and one acquisition closed in 2017,2022, the Company assumed fourhad commitments to fund building expansions of $8.2 million and $17.4 million, respectively, in exchange for increases in rent contractually scheduled to commence simultaneously upon funding.
The Company is a party to three separate leasetax protection agreements with the contributing members of two distinct UPREIT transactions and to a tax protection agreement in connection with the Company's internalization. The tax protection agreements require the Company to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the tax protection agreement entered into in connection with the Company’s internalization, the entire Company, in a taxable transaction that provided forwould cause such beneficiaries to recognize a totalgain that is protected under the agreements, subject to certain exceptions. The Company is required to allocate an amount of $11,464nonrecourse liabilities to each beneficiary that is 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 Decemberassociated allocation of nonrecourse liabilities are calculated in accordance with applicable tax regulations, are completed at the OP level, and do not represent GAAP accounting. Therefore, there is no impact to the Condensed Consolidated Financial Statements. Based on values as of March 31, 2016, payments2023, taxable sales of $3,863 and $974, respectively, have been made for work completedthe applicable properties would trigger liability under these allowances,the agreements of approximately $20.4 million. Based on information available, the Company does not believe that the events resulting in a total tenant improvement allowance of $6,627 and $9,490 at September 30, 2017 and December 31, 2016, respectively.
During the nine months ended September 30, 2017, three properties helddamages as detailed above have occurred or are likely to occur in the Company’sforeseeable future.
In the normal course of business, the Company enters into various types of commitments to purchase real estate portfolio incurred lossesproperties. These commitments are generally subject to the Company’s customary due to fire damage. Management anticipates that the proceeds received from insurance will exceed the book value of the property destroyed,diligence process and, accordingly, a gainnumber of specific conditions must be met before the Company is obligated to purchase the properties.
Obligations Under Leases
In October 2022, the Company executed a ten year lease for its new corporate office space that commences in 2023, the timing of which depends on insurance settlement maythe satisfaction of certain conditions set forth in the lease. Upon commencement, the total expected future lease payments would be recorded in a future period upon receipt of funds.$8.9 million.
19
17. Subsequent Events
Subsequent to September 30, 2017,On April 14, 2023, 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.totaling $54.0 million.
Subsequent to September 30, 2017, 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 of rental property and associated intangible assets and liabilities (see Note 4), and assumed $11,933 of liabilities.
On November 7, 2017,April 27, 2023, the Board of Directors declared a quarterly distribution of $0.415$0.28 per share on the Corporation’sCompany’s common stock and approved a distributionOP Units for the second quarter of $0.415 per membership unit of the Operating Company for monthly distributions through January 2018. The distributions are2023, which will be payable on or priorbefore July 14, 2023 to stockholders and OP unitholders of record as of June 30, 2023.
Subsequent to March 31, 2023, the Company paid down $14 million, and borrowed $44 million on the unsecured revolving credit facility, the proceeds of which were used for general corporate purposes.
Through May 4, 2023, the Company sold three properties with an aggregate carrying value of approximately $19.6 million for total proceeds of $42.4 million. The Company incurred additional expenses related to the 15thsales of the following month to the Corporation’s common stockholdersapproximately $1.0 million, resulting in a gain on sale of real estate of approximately $21.8 million.
20
Item 2. Management’s Discussion and the Operating Company’s unit holdersAnalysis of record on the last dayFinancial Condition and Results 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 “we,“BNL,” “us,“we,” “our,“us,”“our,” and “our company”“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, 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 Statement2022 Annual Report on Form 10,10-K, as filed with the SEC on June 29, 2017 (the “Form 10”).February 23, 2023. The “Risk Factors” of our 2022 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.
Regulation FD Disclosures
We use any of the following to comply with our disclosure obligations under Regulation FD: U.S. Securities and Exchange Commission (“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 information on the website is not incorporated by reference in this Quarterly Report.
21
Explanatory Note and Certain Defined Terms
Unless the context otherwise requires, the following terms and phrases are used throughout this MD&A as described below:
Overview
We are an externally managedinternally-managed real estate investment trust (“REIT”), formed as a Maryland corporation in 2007 to acquire that acquires, owns, and holdmanages primarily single-tenant commercial real estate properties throughout the United States that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the properties’ operators under long-term leases. industrial, healthcare, restaurant, retail, and office property types. As of March 31, 2023, our portfolio includes 801 properties, with 794 properties located in 44 U.S. states and seven properties located in four Canadian provinces.
We focus on investing in real estate that is operated by acreditworthy single tenant which istenants in industries characterized by positive business drivers and trends. We target properties that are an integral part of the tenant’s business. Our diversified portfolio of real estate includes retail properties, such as quick servicetenants’ businesses 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 lookare therefore opportunities to engage in asecure long-term lease relationship.net leases. Through long-term net leases, our tenants are able to retain operational control of their criticalstrategically important locations, while conservingallocating their debt and equity capital to fund their fundamentalcore business operations.operations rather than real estate ownership.
We elected to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginningABR.
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 NetSignificant Remaining Lease LLC (the “Operating Company”)Term
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 units in the Operating Company 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. For the nine months ended September 30, 2017, 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 ofMarch 31, 2023, 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 $159.2 million, excluding capitalized acquisition expenses, adding 22 new properties at aportfolio was approximately 99.4% leased with an ABR weighted average initial cash capitalization rate of 7.7%. The properties acquired had a weighted average lease term of 13.0 years at the time of acquisition and weighted average annual rent increases of 1.8%.
Received $79.2 million in investments from new and existing stockholders during the three months ended 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 accordance 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 commercial properties located in the United States either directly from our credit-worthy tenants in sale-leaseback transactions, where they sell us their properties 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. Our real estate portfolio as of September 30, 2017, is reflective of our Investment Policy, with a focus on properties in growth markets with at least ten years of lease term remaining that will achieve financial returns on equity of greater than 10%, net of fees, provided that all acquisitions must have a minimum remaining lease term of sevenapproximately 10.8 years, and aexcluding renewal options.
fundamental value and characteristics of the underlying real estate,
creditworthiness of 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 at the time of acquisition, rent growth, and a property’s potential for appreciation.22
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.March 31, 2023. 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.$389.5 million as of March 31, 2023.
Industry Diversification by % of NTM RentProperty Type
23
Property Type |
| # Properties |
| ABR |
| ABR as a % of |
| Square Feet |
| SF as a % of |
Industrial |
|
|
|
|
|
|
|
|
|
|
Manufacturing |
| 79 |
| $64,375 |
| 16.5% |
| 12,142 |
| 31.1% |
Distribution & Warehouse |
| 47 |
| 51,610 |
| 13.3% |
| 9,459 |
| 24.2% |
Food Processing |
| 33 |
| 44,215 |
| 11.4% |
| 5,442 |
| 13.9% |
Flex and R&D |
| 7 |
| 17,666 |
| 4.5% |
| 1,457 |
| 3.7% |
Cold Storage |
| 4 |
| 12,827 |
| 3.3% |
| 933 |
| 2.4% |
Industrial Services |
| 22 |
| 10,891 |
| 2.8% |
| 587 |
| 1.5% |
Untenanted |
| 1 |
| — |
| — |
| 122 |
| 0.3% |
Industrial Total |
| 193 |
| 201,584 |
| 51.8% |
| 30,142 |
| 77.1% |
Healthcare |
|
|
|
|
|
|
|
|
|
|
Clinical |
| 52 |
| 27,181 |
| 7.0% |
| 1,091 |
| 2.8% |
Healthcare Services |
| 30 |
| 11,118 |
| 2.9% |
| 496 |
| 1.3% |
Animal Health Services |
| 27 |
| 10,846 |
| 2.8% |
| 405 |
| 1.0% |
Surgical |
| 12 |
| 10,475 |
| 2.7% |
| 329 |
| 0.9% |
Life Science |
| 9 |
| 7,901 |
| 2.0% |
| 549 |
| 1.4% |
Healthcare Total |
| 130 |
| 67,521 |
| 17.4% |
| 2,870 |
| 7.4% |
Restaurant |
|
|
|
|
|
|
|
|
|
|
Casual Dining |
| 101 |
| 27,341 |
| 7.0% |
| 673 |
| 1.7% |
Quick Service Restaurants |
| 146 |
| 25,027 |
| 6.4% |
| 499 |
| 1.3% |
Restaurant Total |
| 247 |
| 52,368 |
| 13.4% |
| 1,172 |
| 3.0% |
Retail |
|
|
|
|
|
|
|
|
|
|
General Merchandise |
| 132 |
| 24,714 |
| 6.3% |
| 1,865 |
| 4.8% |
Automotive |
| 68 |
| 12,628 |
| 3.2% |
| 777 |
| 2.0% |
Home Furnishings |
| 13 |
| 7,147 |
| 1.8% |
| 797 |
| 2.0% |
Child Care |
| 2 |
| 731 |
| 0.3% |
| 20 |
| 0.1% |
Retail Total |
| 215 |
| 45,220 |
| 11.6% |
| 3,459 |
| 8.9% |
Office |
|
|
|
|
|
|
|
|
|
|
Strategic Operations |
| 5 |
| 9,912 |
| 2.5% |
| 615 |
| 1.6% |
Corporate Headquarters |
| 7 |
| 8,389 |
| 2.2% |
| 408 |
| 0.9% |
Call Center |
| 3 |
| 4,478 |
| 1.1% |
| 346 |
| 0.8% |
Untenanted |
| 1 |
| — |
| — |
| 46 |
| 0.3% |
Office Total |
| 16 |
| 22,779 |
| 5.8% |
| 1,415 |
| 3.6% |
Total |
| 801 |
| $389,472 |
| 100.0% |
| 39,058 |
| 100.0% |
24
|
| |||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
|
| ||||
|
| |||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
|
Geographic Diversification by %Tenant
Tenant |
| Property Type |
| # Properties |
| ABR |
| ABR as a % |
| Square Feet |
| SF as a % |
Roskam Baking Company, LLC* |
| Food Processing |
| 7 |
| $15,605 |
| 4.0% |
| 2,250 |
| 5.8% |
AHF, LLC* |
| Distribution & Warehouse/Manufacturing |
| 8 |
| 9,377 |
| 2.4% |
| 2,284 |
| 5.8% |
Jack's Family Restaurants LP* |
| Quick Service Restaurants |
| 43 |
| 7,309 |
| 1.9% |
| 147 |
| 0.4% |
Joseph T. Ryerson & Son, Inc |
| Distribution & Warehouse |
| 11 |
| 6,491 |
| 1.7% |
| 1,537 |
| 3.9% |
Red Lobster Hospitality & Red Lobster Restaurants LLC* |
| Casual Dining |
| 19 |
| 6,178 |
| 1.6% |
| 157 |
| 0.4% |
Axcelis Technologies, Inc. |
| Flex and R&D |
| 1 |
| 6,126 |
| 1.6% |
| 417 |
| 1.1% |
J. Alexander's, LLC* |
| Casual Dining |
| 16 |
| 6,115 |
| 1.6% |
| 131 |
| 0.3% |
Hensley & Company* |
| Distribution & Warehouse |
| 3 |
| 5,989 |
| 1.5% |
| 577 |
| 1.5% |
Dollar General Corporation |
| General Merchandise |
| 60 |
| 5,962 |
| 1.5% |
| 562 |
| 1.4% |
BluePearl Holdings, LLC** |
| Animal Health Services |
| 13 |
| 5,591 |
| 1.4% |
| 166 |
| 0.5% |
Total Top 10 Tenants |
|
|
| 181 |
| 74,743 |
| 19.2% |
| 8,228 |
| 21.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outback Steakhouse of Florida LLC*1 |
| Casual Dining |
| 22 |
| 5,365 |
| 1.4% |
| 140 |
| 0.4% |
Tractor Supply Company |
| General Merchandise |
| 21 |
| 5,349 |
| 1.4% |
| 417 |
| 1.1% |
Big Tex Trailer Manufacturing Inc.* |
| Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters |
| 17 |
| 5,056 |
| 1.3% |
| 1,302 |
| 3.3% |
Krispy Kreme Doughnut Corporation |
| Quick Service Restaurants/ |
| 27 |
| 5,034 |
| 1.3% |
| 156 |
| 0.4% |
Salm Partners, LLC* |
| Food Processing |
| 2 |
| 4,592 |
| 1.2% |
| 368 |
| 0.9% |
Nestle' Dreyer's Ice Cream Company2 |
| Cold Storage |
| 1 |
| 4,543 |
| 1.2% |
| 309 |
| 0.8% |
Carvana, LLC* |
| Industrial Services |
| 2 |
| 4,510 |
| 1.2% |
| 230 |
| 0.6% |
Klosterman Bakery* |
| Food Processing |
| 11 |
| 4,500 |
| 1.2% |
| 549 |
| 1.4% |
Arkansas Surgical Hospital |
| Surgical |
| 1 |
| 4,476 |
| 1.0% |
| 129 |
| 0.3% |
American Signature, Inc. |
| Home Furnishings |
| 6 |
| 4,309 |
| 1.0% |
| 474 |
| 1.2% |
Total Top 20 Tenants |
|
|
| 291 |
| $122,477 |
| 31.4% |
| 12,302 |
| 31.5% |
1 Tenant's properties include 20 Outback Steakhouse restaurants and two Carrabba's Italian Grill restaurants.
2 Nestle's ABR excludes $1.6 million of NTM Rentrent paid under a sub-lease for an additional property, which will convert to a prime lease no later than August 2024.
* Subject to a master lease.
**Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.
25
Diversification by Brand
Brand |
| Property Type |
| # Properties |
| ABR |
| ABR as a % |
| Square Feet |
| SF as a % |
Roskam Baking Company, LLC* |
| Food Processing |
| 7 |
| $15,605 |
| 4.0% |
| 2,250 |
| 5.8% |
AHF Products* |
| Distribution & Warehouse/ |
| 8 |
| 9,377 |
| 2.4% |
| 2,284 |
| 5.8% |
Jack's Family Restaurants* |
| Quick Service Restaurants |
| 43 |
| 7,309 |
| 1.9% |
| 147 |
| 0.4% |
Ryerson |
| Distribution & Warehouse |
| 11 |
| 6,491 |
| 1.7% |
| 1,537 |
| 3.9% |
Red Lobster* |
| Casual Dining |
| 19 |
| 6,178 |
| 1.6% |
| 157 |
| 0.4% |
Axcelis |
| Flex and R&D |
| 1 |
| 6,126 |
| 1.6% |
| 417 |
| 1.1% |
Hensley* |
| Distribution & Warehouse |
| 3 |
| 5,989 |
| 1.5% |
| 577 |
| 1.5% |
Dollar General |
| General Merchandise |
| 60 |
| 5,962 |
| 1.5% |
| 562 |
| 1.4% |
BluePearl Veterinary Partners** |
| Animal Health Services |
| 13 |
| 5,591 |
| 1.5% |
| 165 |
| 0.4% |
Bob Evans Farms*1 |
| Casual Dining/Food Processing |
| 21 |
| 5,391 |
| 1.5% |
| 281 |
| 0.7% |
Total Top 10 Brands |
|
|
| 186 |
| 74,019 |
| 19.0% |
| 8,377 |
| 21.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tractor Supply Co. |
| General Merchandise |
| 21 |
| 5,349 |
| 1.4% |
| 417 |
| 1.1% |
Big Tex Trailers* |
| Automotive/Distribution & |
| 17 |
| 5,056 |
| 1.3% |
| 1,302 |
| 3.3% |
Krispy Kreme |
| Quick Service Restaurants/ |
| 27 |
| 5,034 |
| 1.3% |
| 156 |
| 0.4% |
Outback Steakhouse* |
| Casual Dining |
| 20 |
| 4,641 |
| 1.2% |
| 126 |
| 0.3% |
Salm Partners, LLC* |
| Food Processing |
| 2 |
| 4,592 |
| 1.2% |
| 368 |
| 0.9% |
Nestle' |
| Cold Storage |
| 1 |
| 4,543 |
| 1.2% |
| 309 |
| 0.8% |
Carvana* |
| Industrial Services |
| 2 |
| 4,510 |
| 1.2% |
| 230 |
| 0.6% |
Klosterman Baking Company* |
| Food Processing |
| 11 |
| 4,500 |
| 1.2% |
| 549 |
| 1.4% |
Arkansas Surgical Hospital |
| Surgical |
| 1 |
| 4,476 |
| 1.1% |
| 129 |
| 0.3% |
Wendy's |
| Quick Service Restaurants |
| 29 |
| 4,325 |
| 1.1% |
| 84 |
| 0.2% |
Total Top 20 Brands |
|
|
| 317 |
| $121,045 |
| 31.1% |
| 12,047 |
| 30.7% |
1Brand includes one BEF Foods, Inc. property and 20 Bob Evans Restaurants, LLC properties.
* Subject to a master lease.
** Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.
Diversification by Industry
Industry |
| # Properties |
| ABR |
| ABR as a % |
| Square Feet ('000s) |
| SF as a % |
Healthcare Facilities |
| 104 |
| $53,183 |
| 13.7% |
| 2,062 |
| 5.3% |
Restaurants |
| 250 |
| 53,141 |
| 13.6% |
| 1,214 |
| 3.1% |
Packaged Foods & Meats |
| 29 |
| 38,843 |
| 10.0% |
| 4,713 |
| 12.1% |
Distributors |
| 27 |
| 15,962 |
| 4.1% |
| 2,695 |
| 6.9% |
Auto Parts & Equipment |
| 43 |
| 15,623 |
| 4.0% |
| 2,676 |
| 6.9% |
Specialty Stores |
| 31 |
| 14,078 |
| 3.6% |
| 1,338 |
| 3.4% |
Food Distributors |
| 7 |
| 13,799 |
| 3.5% |
| 1,712 |
| 4.4% |
Home Furnishing Retail |
| 18 |
| 12,684 |
| 3.3% |
| 1,858 |
| 4.8% |
Specialized Consumer Services |
| 49 |
| 12,672 |
| 3.3% |
| 728 |
| 1.9% |
Metal & Glass Containers |
| 8 |
| 10,114 |
| 2.6% |
| 2,206 |
| 5.6% |
General Merchandise Stores |
| 96 |
| 9,640 |
| 2.5% |
| 880 |
| 2.3% |
Industrial Machinery |
| 20 |
| 9,408 |
| 2.4% |
| 1,949 |
| 5.0% |
Forest Products |
| 8 |
| 9,377 |
| 2.4% |
| 2,284 |
| 5.8% |
Healthcare Services |
| 18 |
| 9,299 |
| 2.4% |
| 515 |
| 1.3% |
Aerospace & Defense |
| 6 |
| 7,565 |
| 1.9% |
| 746 |
| 1.9% |
Other (39 industries) |
| 85 |
| 104,084 |
| 26.7% |
| 11,258 |
| 28.7% |
Untenanted properties |
| 2 |
| — |
| — |
| 224 |
| 0.6% |
Total |
| 801 |
| $389,472 |
| 100.0% |
| 39,058 |
| 100.0% |
26
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 |
| 72 |
| $38,037 |
| 9.8% |
| 3,621 |
| 9.3% |
|
| WA |
| 15 |
| 4,330 |
| 1.1% |
| 150 |
| 0.4% |
MI |
| 55 |
| 32,555 |
| 8.4% |
| 3,811 |
| 9.8% |
|
| LA |
| 4 |
| 3,407 |
| 0.9% |
| 194 |
| 0.5% |
IL |
| 32 |
| 24,165 |
| 6.2% |
| 2,424 |
| 6.2% |
|
| MS |
| 11 |
| 3,320 |
| 0.9% |
| 430 |
| 1.1% |
WI |
| 35 |
| 21,792 |
| 5.6% |
| 2,163 |
| 5.5% |
|
| NE |
| 6 |
| 3,175 |
| 0.8% |
| 509 |
| 1.3% |
CA |
| 13 |
| 18,827 |
| 4.8% |
| 1,718 |
| 4.4% |
|
| MD |
| 4 |
| 3,052 |
| 0.8% |
| 293 |
| 0.7% |
OH |
| 47 |
| 18,680 |
| 4.8% |
| 1,728 |
| 4.4% |
|
| SC |
| 13 |
| 2,937 |
| 0.8% |
| 308 |
| 0.8% |
FL |
| 42 |
| 16,411 |
| 4.2% |
| 844 |
| 2.2% |
|
| IA |
| 4 |
| 2,804 |
| 0.7% |
| 622 |
| 1.6% |
IN |
| 32 |
| 15,843 |
| 4.1% |
| 1,906 |
| 4.9% |
|
| NM |
| 9 |
| 2,734 |
| 0.7% |
| 107 |
| 0.3% |
MN |
| 21 |
| 15,396 |
| 4.0% |
| 2,500 |
| 6.4% |
|
| CO |
| 4 |
| 2,501 |
| 0.6% |
| 126 |
| 0.3% |
TN |
| 50 |
| 15,150 |
| 3.9% |
| 1,103 |
| 2.8% |
|
| UT |
| 3 |
| 2,432 |
| 0.6% |
| 280 |
| 0.7% |
NC |
| 37 |
| 14,023 |
| 3.6% |
| 1,435 |
| 3.7% |
|
| CT |
| 2 |
| 1,767 |
| 0.5% |
| 55 |
| 0.1% |
AL |
| 53 |
| 12,151 |
| 3.1% |
| 873 |
| 2.2% |
|
| MT |
| 7 |
| 1,582 |
| 0.4% |
| 43 |
| 0.1% |
GA |
| 33 |
| 11,535 |
| 3.0% |
| 1,576 |
| 4.0% |
|
| DE |
| 4 |
| 1,167 |
| 0.3% |
| 133 |
| 0.3% |
AZ |
| 9 |
| 10,876 |
| 2.8% |
| 909 |
| 2.3% |
|
| ND |
| 2 |
| 954 |
| 0.2% |
| 28 |
| 0.1% |
PA |
| 22 |
| 9,677 |
| 2.5% |
| 1,836 |
| 4.7% |
|
| VT |
| 2 |
| 420 |
| 0.1% |
| 24 |
| 0.1% |
NY |
| 26 |
| 9,268 |
| 2.4% |
| 680 |
| 1.7% |
|
| WY |
| 1 |
| 307 |
| 0.1% |
| 21 |
| 0.1% |
KY |
| 24 |
| 8,465 |
| 2.2% |
| 900 |
| 2.3% |
|
| NV |
| 1 |
| 268 |
| 0.1% |
| 6 |
| 0.0% |
MA |
| 4 |
| 8,232 |
| 2.1% |
| 744 |
| 1.9% |
|
| OR |
| 1 |
| 136 |
| 0.0% |
| 9 |
| 0.0% |
OK |
| 22 |
| 8,107 |
| 2.1% |
| 987 |
| 2.5% |
|
| SD |
| 1 |
| 81 |
| 0.0% |
| 9 |
| 0.0% |
AR |
| 11 |
| 7,722 |
| 2.0% |
| 283 |
| 0.7% |
|
| Total U.S. |
| 794 |
| $381,406 |
| 97.9% |
| 38,628 |
| 98.9% |
MO |
| 12 |
| 6,119 |
| 1.6% |
| 1,138 |
| 2.9% |
|
| BC |
| 2 |
| 4,584 |
| 1.2% |
| 253 |
| 0.6% |
KS |
| 11 |
| 5,638 |
| 1.4% |
| 648 |
| 1.7% |
|
| ON |
| 3 |
| 2,126 |
| 0.5% |
| 101 |
| 0.3% |
VA |
| 17 |
| 5,479 |
| 1.4% |
| 204 |
| 0.5% |
|
| AB |
| 1 |
| 999 |
| 0.3% |
| 51 |
| 0.1% |
WV |
| 17 |
| 4,975 |
| 1.3% |
| 884 |
| 2.3% |
|
| MB |
| 1 |
| 357 |
| 0.1% |
| 25 |
| 0.1% |
NJ |
| 3 |
| 4,909 |
| 1.3% |
| 366 |
| 1.1% |
|
| Total Canada |
| 7 |
| $8,066 |
| 2.1% |
| 430 |
| 1.1% |
|
|
|
|
|
|
|
|
|
|
|
|
| Grand Total |
| 801 |
| $389,472 |
| 100.0% |
| 39,058 |
| 100.0% |
27
Our Leases
We typically lease our properties pursuant to long-term net leases with initial terms of 10 years or more that often have renewal options. Substantially all of our leases are triple-net,net, meaning that our tenants are responsible for the maintenance, insurance, and property taxesgenerally obligated to pay all expenses associated with the leased property (such as real estate taxes, insurance, maintenance, repairs, and capital costs). In scenarios where we lease multiple properties theyto a single tenant (multi-site tenants), we seek to use master lease from us. Since inceptionstructures on an all-or-none basis. When we acquire properties associated with a tenant that has an existing master lease structure with us, we seek to add the new properties to the existing master lease structure to strengthen the existing lease with such tenant. As of March 31, 2023, master leases contributed to 69.3% of the ABR associated with multi-site tenants (409 of our 676 properties) and at September 30, 2017,41.2% of our overall ABR (409 of our 801 properties).
As of March 31, 2023, approximately 99.4% of our portfolio, representing all but two of our properties, was subject to a lease. Because substantially all of our properties are subject to 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. As of September 30, 2017,March 31, 2023, 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. Less than 5%10.8 years. Approximately 3% 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% of our rental revenue is from leases that expire during 2030 and thereafter. As of September 30, 2017, not more than 10% of our rental revenue is from leases that expire in any single year in the decade between 2020 and 2030. The following chart sets forth our lease expirations based upon the terms of ourthe leases in place as of September 30, 2017.March 31, 2023.
28
The following table presents certain information based on lease expirations by year. Amounts are in thousands, except for number of properties.
Expiration Year |
| # Properties |
| # Leases |
| ABR |
| ABR as a % of |
| Square Feet |
| SF as a % of |
2023 |
| 5 |
| 7 |
| $4,497 |
| 1.2% |
| 504 |
| 1.3% |
2024 |
| 9 |
| 9 |
| 10,640 |
| 2.7% |
| 1,239 |
| 3.2% |
2025 |
| 19 |
| 22 |
| 6,905 |
| 1.8% |
| 385 |
| 1.0% |
2026 |
| 34 |
| 35 |
| 17,235 |
| 4.4% |
| 1,150 |
| 2.9% |
2027 |
| 29 |
| 30 |
| 24,166 |
| 6.2% |
| 2,079 |
| 5.3% |
2028 |
| 36 |
| 36 |
| 24,220 |
| 6.2% |
| 2,262 |
| 5.8% |
2029 |
| 72 |
| 73 |
| 22,541 |
| 5.8% |
| 2,724 |
| 7.0% |
2030 |
| 101 |
| 101 |
| 54,479 |
| 14.0% |
| 5,110 |
| 13.1% |
2031 |
| 33 |
| 33 |
| 8,640 |
| 2.2% |
| 805 |
| 2.1% |
2032 |
| 62 |
| 63 |
| 31,896 |
| 8.2% |
| 3,469 |
| 8.9% |
2033 |
| 50 |
| 50 |
| 18,888 |
| 4.8% |
| 1,593 |
| 4.1% |
2034 |
| 33 |
| 33 |
| 6,305 |
| 1.6% |
| 409 |
| 1.0% |
2035 |
| 19 |
| 19 |
| 13,966 |
| 3.6% |
| 2,021 |
| 5.2% |
2036 |
| 87 |
| 87 |
| 26,485 |
| 6.8% |
| 2,931 |
| 7.5% |
2037 |
| 23 |
| 23 |
| 17,111 |
| 4.4% |
| 1,124 |
| 2.9% |
2038 |
| 36 |
| 36 |
| 9,573 |
| 2.5% |
| 725 |
| 1.9% |
2039 |
| 10 |
| 10 |
| 6,858 |
| 1.8% |
| 798 |
| 2.0% |
2040 |
| 31 |
| 31 |
| 5,784 |
| 1.5% |
| 312 |
| 0.8% |
2041 |
| 40 |
| 40 |
| 20,875 |
| 5.4% |
| 1,731 |
| 4.4% |
2042 |
| 59 |
| 59 |
| 43,758 |
| 11.2% |
| 4,813 |
| 12.3% |
Thereafter |
| 11 |
| 11 |
| 14,650 |
| 3.7% |
| 2,650 |
| 6.7% |
Untenanted properties |
| 2 |
| — |
| — |
| — |
| 224 |
| 0.6% |
Total |
| 801 |
| 808 |
| $389,472 |
| 100.0% |
| 39,058 |
| 100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of our leases provide for periodic contractual rent escalations. As of March 31, 2023, leases contributing 97.3% of our ABR provided for increases in future ABR, generally ranging from 1.5% to 3.0% annually, with an ABR weighted average annual minimum increase equal to 2.0% of base rent. Generally, our rent escalators increase rent on specified dates by a fixed percentage. Our escalations provide us with a source of organic revenue growth and a measure of inflation protection. Additional information on lease escalation frequency and weighted average annual escalation rates as of March 31, 2023 is displayed below:
Lease Escalation Frequency |
| % of ABR |
| Weighted Average Annual Minimum Increase (a) |
Annually |
| 80.3% |
| 2.2% |
Every 2 years |
| 0.1% |
| 1.8% |
Every 3 years |
| 2.2% |
| 3.1% |
Every 4 years |
| 1.0% |
| 2.4% |
Every 5 years |
| 7.2% |
| 1.7% |
Other escalation frequencies |
| 6.5% |
| 1.6% |
Flat |
| 2.7% |
| — |
Total/Weighted Average (b) |
| 100.0% |
| 2.0% |
29
The escalation provisions of our leases (by percentage of ABR) as of March 31, 2023, are displayed in the following chart:
Results of Operations
The following discussion includes the results of our operations for the periods presented.
Three Months Ended March 31, 2023 Compared to Three Months Ended December 31, 2022
Lease Maturity Schedule,Revenues, net
|
| For the Three Months Ended | |||||||||||||
|
| March 31, |
| December 31, |
| Increase/(Decrease) | |||||||||
(in thousands) |
| 2023 |
| 2022 |
| $ |
| % | |||||||
Contractual rental amounts billed for operating leases |
| $ | 98,102 |
|
| $ | 96,208 |
|
| $ | 1,894 |
|
| 2.0 | % |
Adjustment to recognize contractual operating lease |
|
| 7,370 |
|
|
| 6,897 |
|
|
| 473 |
|
| 6.9 | % |
Net write-offs of accrued rental income |
|
| (105 | ) |
|
| — |
|
|
| (105 | ) |
| (100.0) | % |
Variable rental amounts earned |
|
| 341 |
|
|
| 721 |
|
|
| (380 | ) |
| (52.7) | % |
Earned income from direct financing leases |
|
| 691 |
|
|
| 693 |
|
|
| (2 | ) |
| (0.3) | % |
Interest income from sales-type leases |
|
| 14 |
|
|
| 14 |
|
|
| — |
|
| 0.0 | % |
Operating expenses billed to tenants |
|
| 5,075 |
|
|
| 5,720 |
|
|
| (645 | ) |
| (11.3) | % |
Other income from real estate transactions |
|
| 7,392 |
|
|
| 2,019 |
|
|
| 5,373 |
|
| > 100.0 | % |
Adjustment to revenue recognized for uncollectible |
|
| 112 |
|
|
| (138 | ) |
|
| 250 |
|
| > (100.0) | % |
Total Lease revenues, net |
| $ | 118,992 |
|
| $ | 112,134 |
|
| $ | 6,858 |
|
| 6.1 | % |
The increase in Lease revenues, net was primarily attributable to $7.5 million of lease termination income recognized in the first quarter of 2023 as Other income from real estate transactions, associated with the early lease termination and sale of an office property for total proceeds of $39.5 million. The timing and amount of lease termination income varies from period to period. The increase was also attributable to full revenue from property investments made during the fourth quarter of 2022, as well as the partial revenue from property investments made during the first quarter of 2023. As we acquire properties throughout the period, the full benefit of lease revenues from newly acquired properties will not be realized in the quarter of acquisition. During the fourth quarter of 2022, we invested $310.3 million, excluding capitalized acquisition costs, in 18 properties at a weighted average initial cash capitalization rate of 6.7%, the full benefit of which we realized during the first quarter of 2023. During the first quarter of 2023, we invested $20.0 million, excluding capitalized acquisition costs, in three properties at a weighted average initial cash capitalization rate of 7.0%, the full benefit of which we anticipate will be realized during the second quarter of 2023.
30
Operating Expenses
|
| For the Three Months Ended |
| ||||||
|
| March 31, |
| December 31, |
| Increase/(Decrease) |
| ||
(in thousands) |
| 2023 |
| 2022 |
| $ |
| % |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $41,784 |
| $45,605 |
| $(3,821) |
| (8.4) | % |
Property and operating expense |
| 5,886 |
| 6,397 |
| (511) |
| (8.0) | % |
General and administrative |
| 10,416 |
| 9,318 |
| 1,098 |
| 11.8 | % |
Provision for impairment of investment in rental properties |
| 1,473 |
| — |
| 1,473 |
| > 100.0 | % |
Total operating expenses |
| $59,559 |
| $61,320 |
| $(1,761) |
| (2.9) | % |
Depreciation and amortization
The decrease in depreciation and amortization for the three months ended March 31, 2023 was primarily due to accelerated amortization of in-place lease intangibles associated with an early lease termination and simultaneous sale of an office property during the quarter, partially offset by %growth in our real estate portfolio.
Provision for impairment of NTM Rentinvestment in rental properties
During the three months ended March 31, 2023 we recognized $1.5 million of impairment on our investments in rental properties due to change in our long-term hold strategy for one property. During the three months ended December 31, 2022, we did not recognize any impairment on our investments in rental properties. The following table presents the lease expirations by year, including the number of tenants and properties with leases expiring, the square footage covered by the leases expiring, the NTM Rent, and the percentage of NTM Rentimpairment charges for the leases expiring. Late payments, non-payments or other unscheduled payments are not considered in the NTM Rent amounts. 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. Amounts are in thousands, except the number of tenants and properties.three months ended March 31, 2023:
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:
|
|
| ||||
|
|
|
| |||
|
|
|
| |||
|
|
|
| |||
|
|
|
| |||
|
|
|
|
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 | |||||||||||||
|
| March 31, |
| December 31, |
| Increase/(Decrease) | |||||||||
(in thousands) |
| 2023 |
| 2022 |
| $ |
| % | |||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| $ | 162 |
|
| $ | 40 |
|
| $ | 122 |
|
| > 100 | % |
Interest expense |
|
| (21,139) |
|
|
| (23,773) |
|
|
| (2,634) |
|
| (11.1) | % |
Cost of debt extinguishment |
|
| — |
|
|
| (77) |
|
|
| (77) |
|
| (100.0) | % |
Gain on sale of real estate |
|
| 3,415 |
|
|
| 10,625 |
|
|
| (7,210) |
|
| (67.9) | % |
Income taxes |
|
| (479) |
|
|
| (105) |
|
|
| 374 |
|
| > 100 | % |
Other expenses |
|
| (18) |
|
|
| (751) |
|
|
| (733) |
|
| (97.6) | % |
Interest expense
The decrease in interest expense reflects a decrease in our weighted average outstanding borrowings during the three months ended March 31, 2023 compared to during the three months ended December 31, 2022.
Gain on sale of real estate
Our Investment Policy providesrecognition of a gain or loss on the Asset Managersale 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 March 31, 2023, we recognized a gain of $3.4 million on the sale of three properties, compared to a gain of $10.6 million on the sale of three properties during the three months ended December 31, 2022. Our proactive asset management strategy includes selectively selling properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives.
Net income and Net earnings per diluted share
|
| For the Three Months Ended | ||||||
|
| March 31, |
| December 31, |
| Increase/(Decrease) | ||
(in thousands, except per share data) |
| 2023 |
| 2022 |
| $ |
| % |
Net income |
| $41,374 |
| $36,773 |
| $4,601 |
| 12.5% |
Net earnings per diluted share |
| 0.21 |
| 0.20 |
| 0.01 |
| 5.0% |
31
The increase in net income is primarily attributable to a $6.9 million increase in lease revenue associated with incremental lease termination fees and growth in our real estate portfolio, a $3.8 million decrease in depreciation and amortization, and a $2.6 million decrease in interest expense, partially offset by a $7.2 million decrease in gain on sale of real estate and a $1.5 million increase in impairment of investment in rental properties.
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.
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Lease Revenues, net
|
| For the Three Months Ended | |||||||||||||
|
| March 31, |
| Increase/(Decrease) | |||||||||||
(in thousands) |
| 2023 |
| 2022 |
| $ |
| % | |||||||
Contractual rental amounts billed for operating leases |
| $ | 98,102 |
|
| $ | 84,396 |
|
| $ | 13,706 |
|
| 16.2 | % |
Adjustment to recognize contractual operating lease |
|
| 7,370 |
|
|
| 5,021 |
|
|
| 2,349 |
|
| 46.8 | % |
Net write-offs of accrued rental income |
|
| (105 | ) |
|
| (1,326 | ) |
|
| 1,221 |
|
| 92.1 | % |
Variable rental amounts earned |
|
| 341 |
|
|
| 186 |
|
|
| 155 |
|
| 83.3 | % |
Earned income from direct financing leases |
|
| 691 |
|
|
| 723 |
|
|
| (32 | ) |
| (4.4) | % |
Interest income from sales-type leases |
|
| 14 |
|
|
| 14 |
|
|
| — |
|
| 0.0 | % |
Operating expenses billed to tenants |
|
| 5,075 |
|
|
| 4,735 |
|
|
| 340 |
|
| 7.2 | % |
Other income from real estate transactions |
|
| 7,392 |
|
|
| 42 |
|
|
| 7,350 |
|
| > 100.0 | % |
Adjustment to revenue recognized for uncollectible |
|
| 112 |
|
|
| 50 |
|
|
| 62 |
|
| > 100.0 | % |
Total Lease revenues, net |
| $ | 118,992 |
|
| $ | 93,841 |
|
| $ | 25,151 |
|
| 26.8 | % |
The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through property acquisitions closed since March 31, 2022. During the twelve months ended March 31, 2023, we invested $716.6 million, excluding capitalized acquisition costs, in 63 properties at a weighted average initial cash capitalization rate of 6.6%. The increase is also attributable to an increase in lease termination income.
Operating Expenses
|
| For the Three Months Ended |
| ||||||
|
| March 31, |
| Increase/(Decrease) |
| ||||
(in thousands) |
| 2023 |
| 2022 |
| $ |
| % |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $41,784 |
| $34,290 |
| $7,494 |
| 21.9 | % |
Property and operating expense |
| 5,886 |
| 5,044 |
| 842 |
| 16.7 | % |
General and administrative |
| 10,416 |
| 8,828 |
| 1,588 |
| 18.0 | % |
Provision for impairment of investment in rental properties |
| 1,473 |
| — |
| 1,473 |
| > 100.0 | % |
Total operating expenses |
| $59,559 |
| $48,162 |
| $11,397 |
| 23.7 | % |
Depreciation and amortization
The increase in depreciation and amortization for the three months ended March 31, 2023 was primarily due to growth in our real estate portfolio.
General and administrative
The increase in general and administrative expense for the three months ended March 31, 2023 was primarily due to increased stock-based compensation expense associated with an additional grant to employees in February 2022, a change in director compensation to include grants of restricted stock awards beginning in 2022, and accelerated amortization of stock-based compensation in connection with the authority to make any acquisition or saledeparture of any property or groupour previous chief executive officer during the first quarter of related2023.
32
Provision for impairment of investment in rental properties involving up to $50
During the three months ended March 31, 2023, we recognized $1.5 million for any single or portfolio transaction, $75 million per cumulative tenant concentration, or $100 million per cumulative brand concentrationof impairment 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 withrental properties. There was no impairment recognized during 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, commensurate with our 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.
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 ninethree months ended September 30, 2017, we added $150 million of unsecured Senior Notes (as defined below) to our capital structure. The Senior Notes bear interest at a fixed of 4.84% per annum, with a 10 year maturity. We strategically used this channel of long-term, fixed rate debt capital 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 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.March 31, 2022. 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 Valueimpairment charges for the periods presented above account forthree months ended March 31, 2023:
(in thousands, except number of properties) | ||
Number of properties | 1 | |
Carrying value prior to impairment charge | $4,236 | |
Fair value | 2,763 | |
Impairment charge | $1,473 |
The timing and amount of impairment fluctuates from period to period depending on the inherent imprecisionspecific facts and circumstances.
Other income (expenses)
|
| For the Three Months Ended | |||||||||||||
|
| March 31, |
| Increase/(Decrease) | |||||||||||
(in thousands) |
| 2023 |
| 2022 |
| $ |
| % | |||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| $ | 162 |
|
| $ | — |
|
| $ | 162 |
|
| 100.0 | % |
Interest expense |
|
| (21,139) |
|
|
| (16,896) |
|
|
| 4,243 |
|
| 25.1 | % |
Gain on sale of real estate |
|
| 3,415 |
|
|
| 1,196 |
|
|
| 2,219 |
|
| > 100.0 | % |
Income taxes |
|
| (479) |
|
|
| (412) |
|
|
| 67 |
|
| 16.3 | % |
Other income (expenses) |
|
| (18) |
|
|
| (1,126) |
|
|
| (1,108) |
|
| (98.4) | % |
Interest expense
The increase in interest expense reflects an increase in our weighted average cost of borrowings combined with increased average outstanding borrowings during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Since March 31, 2022, we increased total outstanding borrowings by $141.8 million to partially fund our acquisitions. Of our $1.9 billion of total outstanding indebtedness, approximately $34.4 million, or 1.8%, is variable and therefore subject to the impact of fluctuations in interest rates.
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 valuation estimates. In February 2018,real estate market. During the IDC will reviewthree months ended March 31, 2023, we recognized a gain of $3.4 million on the NAV calculations assale of Decemberthree properties, compared to a gain of $1.2 million on the sale of one property during the three months ended March 31, 2017, and will assess2022. Our proactive asset management strategy includes determining whether adjustments to the current Determined Share Value of $81.00 are appropriate.
The following table provides a breakdown of the major componentssell any of our estimated NAVproperties where we believe the risk profile has changed and NAVbecome misaligned with our then current risk-adjusted return objectives.
Other income (expenses)
The decrease in other expenses during the three months ended March 31, 2023 was primarily due to a $0.01 million unrealized foreign exchange loss recognized on the quarterly remeasurement of our $100 million CAD revolver borrowings, compared to a $1.1 million unrealized foreign exchange loss recognized during the three months ended March 31, 2022.
Net income and Net earnings per diluted share amounts as
|
| For the Three Months Ended | ||||||
|
| March 31, |
| Increase/(Decrease) | ||||
(in thousands, except per share data) |
| 2023 |
| 2022 |
| $ |
| % |
Net income |
| $41,374 |
| $28,441 |
| $12,933 |
| 45.5% |
Net earnings per diluted share |
| 0.21 |
| 0.16 |
| 0.05 |
| 31.3% |
The increase in net income is primarily due to revenue growth of September 30, 2017$25.2 million, $2.2 million increase on gain on sale of real estate 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$1.1 million decrease in foreign exchange loss. These factors were partially offset by a $7.5 million increase in depreciation and amortization, a $4.2 million increase in interest expense, a $1.5 million increase in general and administrative expense, and a $1.5 million increase in impairment of investment in rental property, by property type,properties.
GAAP net income includes items such as gain or loss on sale 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.provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons.
Distributions and Distribution Reinvestment33
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, 2017 and 2016, including the source of distributions and a comparison against FFO (in thousands).
|
| 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 |
|
For the nine months ended September 30, 2017 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.
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 program during the three and nine months ended September 30, 2017. We did not defer or reject any redemption requests during this period. Please refer to Item 11. “Description of Registrant’s Securities to Be Registered” of our Form 10 for additional discussion of our share redemption program.
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 rating the Operating Company received in Marchratings of 2016‘BBB’ from S&P Global Ratings (“S&P”) and re-affirmed in March‘Baa2’ from Moody’s Investors Service (“Moody’s”). We manage our leverage profile using a ratio of 2017. The actual leverage ratio will vary over time but may not exceed 50% without the approval of the IDC. As of September 30, 2017, the leverage ratio was approximately 36.5% of the market valueNet Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our assets. Fromability to repay debt and a management perspectiverelative measure of leverage, and is used in communications with the creditlenders and with rating agencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As of March 31, 2023, we also consider our leverage position ashad total debt outstanding of $1.9 billion, Net Debt of $1.9 billion, and a multipleNet Debt to Annualized Adjusted EBITDAre ratio of Earnings Before Interest Taxes Depreciation5.1x.
Net Debt and Amortization (“EBITDA”),Annualized Adjusted EBITDAre are non-GAAP financial measures, and Annualized Adjusted EBITDAre is calculated based upon EBITDA, EBITDAre, and Adjusted EBITDAre, each of which is also 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.
34
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 gains, 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.
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 and interest payments on our outstanding debt, to pay distributions, to fund our acquisitions that are under control or expected to close within a short time period, and to pay for commitments to fund tenant improvements and revenue generating capital expenditures. We do not currently anticipate making significant capital expenditures or incurring other significant property costs, including as a result of inflationary pressures in the contextcurrent economic environment, 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 flow expectations and projections. Furthermore, given the significance ofcash equivalents balances and net cash provided by operating activities, supplemented by borrowings under our growth over the past two years, adding $352.0 million in investments during the nine months ended September 30, 2017, $518.8 million in investments during 2016, and $550.1 million in investments during 2015, coupled withRevolving Credit Facility. We intend to match fund our continued strategic growth initiatives, historical EBITDA may not provide investorsacquisitions with an adequate picture of the contractual cash in-flows associated with these investments. Our investments are typically made throughout the year, 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 inclusive of our focus on debt-to-market value metrics.
Our equity capital for our real estate acquisition activity is provided from the proceeds of our ongoing private offering, including distributions reinvested through our DRIP. During the three and nine months ended September 30, 2017, we raised $79.2 million and $249.6 million, respectively, in equity capital to be used in our acquisition activities, including distributions reinvested through our DRIP and properties exchanged for membership units in the Operating Company through UPREIT transactions. We seek to maintain an appropriate balancemix of debt and equity capital. We use cash on hand and borrowings under our Revolving Credit Facility to initially fund acquisitions, which are subsequently repaid or replaced with proceeds from our equity and debt capital markets activities.
As detailed in the contractual obligations table below, we have approximately $63.4 million of expected obligations due throughout the remainder of 2023, primarily consisting of $56.6 million of interest expense due and $6.8 million of mortgage maturities. We expect our cash provided by operating activities, as discussed below, will be sufficient to pay for our current obligations including interest expense on our borrowings. We expect to repay the maturing mortgage with available cash on hand generated from our results of operations or borrowings under our Revolving Credit Facility.
Long-term Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds necessary to repay debt and invest in additional revenue generating properties. We expect to source debt capital from unsecured term loans from commercial banks, revolving credit facilities, private placement senior unsecured notes, and public bond offerings.
The source and mix of our debt capital in the future will be impacted by market conditions as well as our overall leverage policy, while maintaining acontinued focus on increasing core value for existing stockholders (achieved via share appreciationlengthening 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 earnings growth).managing our exposure to interest rate risk. As of March 31, 2023, we have $891.7 million of available capacity under our Revolving Credit Facility.
We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital is provided through unsecured term notes, revolvingmay 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 mix of debt facilities, and senior unsecured notes.equity 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.
35
Equity Capital Resources
Our equity capital is primarily provided through our at-the-market common equity offering program (“ATM Program”), as well as follow-on equity offerings. Under the terms of our ATM Program we enter into mortgagesmay, from time to time, publicly offer and notes payable as ancillary business transactions onsell shares of our common stock having an as-needed basis.
To reduce our exposure to variable rate debt, the Operating Company enters into interest rate swap agreements to fix the rateaggregate gross sales price of interest as a hedge against interest rate fluctuations. These interest rate hedges have staggered maturities up to ten years in duration in order$400 million. The ATM Program provides for forward sale agreements, enabling us to reduceset the exposure to interest rate fluctuations in any one year. The interest rate swaps are applied against a poolprice 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%shares upon pricing the offering while delaying the issuance of total assets, measured at quarter end. To reduce counterparty concentration risk with respect toshares and the interest rate hedges, we diversify the institutions that serve as swap counterparties. No more than 30%receipt of the nominal valuenet proceeds. We did not raise any equity on our ATM Program during the quarter, and have approximately $145.4 million of capacity remaining on the ATM Program as of March 31, 2023.
Our public offerings have been used to repay debt, fund acquisitions, and for other general corporate purposes.
As we continue to invest in accretive real estate properties, we expect to balance our total hedged debt may be with any one institution,and equity capitalization, while maintaining a Net Debt to be measuredAnnualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of follow-on equity offerings and the ATM Program.
Unsecured Indebtedness as of March 31, 2023
The following table sets forth our outstanding revolving credit facility, unsecured term loans and senior unsecured notes at the time we enter into an interest rate swap transaction and at quarter end. We may deviate from these policies from time-to-timeMarch 31, 2023.
(in thousands, except interest rates) |
| Outstanding |
|
| Interest |
| Maturity | |
Unsecured revolving credit facility |
| $ | 108,330 |
|
| Applicable reference rate + 0.85% (a) |
| Mar. 2026 |
Unsecured term loans: |
|
|
|
|
|
|
| |
2026 Unsecured Term Loan |
|
| 400,000 |
|
| one-month LIBOR + 1.00% |
| Feb. 2026 |
2027 Unsecured Term Loan |
|
| 200,000 |
|
| one-month adjusted SOFR + 0.95% |
| Aug. 2027 |
2029 Unsecured Term Loan |
|
| 300,000 |
|
| one-month adjusted SOFR + 1.25% |
| Aug. 2029 |
Total unsecured term loans |
|
| 900,000 |
|
|
|
|
|
Unamortized debt issuance costs, net |
|
| (4,994 | ) |
|
|
|
|
Total unsecured term loans, net |
|
| 895,006 |
|
|
|
|
|
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 |
|
|
|
|
|
Unamortized debt issuance costs and |
|
| (5,256 | ) |
|
|
|
|
Total senior unsecured notes, net |
|
| 844,744 |
|
|
|
|
|
Total unsecured debt, net |
| $ | 1,848,080 |
|
|
|
|
|
Debt Covenants
We also mitigate interest rate risk by strategically adding long-term, fixed rate debt to our capital structure. During the nine months ended September 30, 2017, we added $150 million of unsecured Senior Notes (as defined below) to our capital structure. 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 impacted 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 rentals during the nine months ended September 30, 2017. Additionally, Moody’s issued an investment grade credit rating of Baa3 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 properties 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, 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.
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
|
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.
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
|
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.
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
|
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.
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
|
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.
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
|
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 increase 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,our debt facilities, which are substantially the same across each of our loan agreements.summarized below. As of September 30, 2017,March 31, 2023, we believe we were in compliance with all of our covenants.covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be prohibitedrestricted from paying dividends onto our common stock above the annual 90%stockholders in excess of dividends required to maintain our REIT taxable income distribution requirement.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 distribution amounts.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 |
| |||||
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 |
|
|
|
|
|
|
|
|
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:36
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 operating activities increased by $20.2 million during the nine months ended September 30, 2017, from $52.1 million for the nine months ended September 30, 2016. The increase in cash provided by operating 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 for the nine months ended September 30, 2017 and 2016, respectively. Cash used to fund the increase 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.
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, 2017March 31, 2023 (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 |
| Revolving Credit |
| Mortgages |
| Term Loans |
| Senior |
| Interest |
| Total |
Remainder |
| $— |
| $6,820 |
| $— |
| $— |
| $56,620 |
| $63,440 |
2024 |
| — |
| 2,260 |
| — |
| — |
| 74,944 |
| 77,204 |
2025 |
| — |
| 20,195 |
| — |
| — |
| 77,162 |
| 97,357 |
2026 |
| 108,330 |
| 16,843 |
| 400,000 |
| — |
| 56,444 |
| 581,617 |
2027 |
| — |
| 1,597 |
| 200,000 |
| 150,000 |
| 42,483 |
| 394,080 |
Thereafter |
| — |
| 38,278 |
| 300,000 |
| 700,000 |
| 64,133 |
| 1,102,411 |
Total |
| $108,330 |
| $85,993 |
| $900,000 |
| $850,000 |
| $371,786 |
| $2,316,109 |
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,March 31, 2023 investment in rental property of $91.3$142.4 million iswas pledged as collateral against our mortgages and notes payable.mortgages.
Additionally, as of September 30, 2017, we haveare a party to two separate Tax Protection Agreements (the “Agreements”)tax protection agreements with the contributing members (the “Protected Members”) of two distinct UPREIT transactions conducted in November 2015 and February 2016. Subsequent to September 30, 2017, we entered into a third Tax Protection Agreementtax 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 tax protection agreement entered into in connection with our internalization, 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 March 31, 2023, 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 isthree agreements of approximately $12.3$20.4 million. Based on information available, we do not believe that the events resulting in damagesliability 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’s real estate fundamentals, 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, represented 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 of 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.
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 the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of depreciated real estate assets, depreciation and amortization expense from real estate assets, and impairment charges related to previously depreciated real estate assets. To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to certain non-cash revenues and expenses, including straight-line rents, 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, 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 rents that increase over the term of the lease to compensate us for anticipated increases in market rentals 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, we exclude transaction costs associated with acquiring real estate subject to existing leases, including the amortization of lease intangibles, 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, 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. 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 or any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO and AFFO. In the future, the SEC, NAREIT 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
The following table presents our net income and our non-GAAP FFO and AFFO for the three months ended September 30, 2017 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 in 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, compared 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 estate acquisitionsThese commitments are generally subject to our customary due diligence process 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.
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 part of the cost basis of the underlying assets acquired, as opposed to expensing them as incurred. We adopted ASU 2017-01 onaccordingly, 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. As such, net income for 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 as a result of ongoing equity raises.specific conditions must be met before we are obligated to purchase the properties.
FFODerivative Instruments and Hedging Activities
FFO increased by $2.6 million, or 10.8%, to $27.2 million for the three months ended September 30, 2017, compared to $24.5 million for the three months ended September 30, 2016. FFO per diluted share decreased by $0.21 during the same period 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.
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.
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 our net income and our non-GAAP FFO and AFFO for the nine months ended September 30, 2017 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 in our net income on a one-for-one basis, the basic 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%, to $42.7 million for the nine months ended September 30, 2017, 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 increase in net income 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 of 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
The following is a reconciliation of net income to FFO and AFFO for the three and nine months ended September 30, 2017 and 2016. Also presented is information regarding distributions paid 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:
|
| 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 |
|
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases 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. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no significant changes during the nine months ended September 30, 2017 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 Form 10.
Impact of Recent Accounting Pronouncements
For information on the impact of recent accounting pronouncements on our business, see Note 2 of the notes to the condensed consolidated financial statements included in this Form 10-Q.
We are exposed to interest rate risk arising from changes in interest rates on the floating rate indebtednessfloating-rate borrowings under our unsecured credit facilities and certain mortgages.facilities. Borrowings pursuant to our unsecured credit facilities and floating-rate mortgages bear interest at floating rates based on SOFR, LIBOR, or CDOR plus thean 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 a portion of ourthe interest rate risk on variable rate borrowings by entering into interest rate swap agreements. Ourswaps. As of March 31, 2023, we had 32 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. As of September 30, 2017, we had 24 interest rate swap agreementsswaps outstanding with an aggregate notional amount of $640$973.8 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. 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.
In addition, we own investments in Canada, and as a result are subject to risk from the effects of exchange rate movements in the Canadian dollar, which may affect future costs and cash flows. We funded a significant portion of our Canadian investments through Canadian dollar borrowings under our Revolving Credit Facility, which is intended to act as a natural hedge against our Canadian dollar investments. The Canadian dollar revolving borrowings are remeasured each reporting period, with the unrealized foreign currency gains and losses flowing through earnings. These unrealized foreign currency gains and losses do not impact our cash flows from operations until settled, and are expected to directly offset the changes in the value of our net investments as a result of changes in the Canadian dollar. Our Canadian investments are recorded at their historical exchange rates, and therefore are not impacted by changes in the value of the Canadian dollar.
37
Cash Flows
Cash and cash equivalents and restricted cash totaled $19.3 million and $65.5 million at March 31, 2023 and March 31, 2022, respectively. The table below summarizesshows information concerning cash flows for the termsthree months ended March 31, 2023 and 2022:
|
| For the Three Months Ended | ||
|
| March 31, |
| March 31, |
(In thousands) |
| 2023 |
| 2022 |
Net cash provided by operating activities |
| $74,376 |
| $59,104 |
Net cash provided by (used in) investing activities |
| 29,633 |
| (207,678) |
Net cash (used in) provided by financing activities |
| (144,739) |
| 186,352 |
(Decrease) increase in cash and cash equivalents and restricted cash |
| $(40,730) |
| $37,778 |
The increase in net cash provided by operating activities during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, was mainly due to growth in our real estate portfolio and associated incremental net lease revenues.
The increase in cash provided by investing activities during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, was mainly due to decreased acquisition volume during the three months ended March 31, 2023 as well as increased disposition volume during the three months ended March 31, 2023.
The increase in net cash used in financing activities during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, mainly reflects an increased repayments on the unsecured revolving credit facility and increased distributions paid to shareholders.
Non-GAAP Measures
FFO, Core FFO, and AFFO
We compute Funds From Operations (“FFO”) in accordance with the standards established by the Board of Governors of Nareit, the worldwide 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. 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 (losses) 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 compute Core Funds From Operations (“Core FFO”) by adjusting FFO, as defined by Nareit, to exclude certain GAAP income and expense amounts that we believe are infrequently recurring, unusual in nature, or not related to its core real estate operations, including write-offs or recoveries of accrued rental income, lease termination fees, gain on insurance recoveries, cost of debt extinguishments, unrealized and realized gains or losses on foreign currency transactions, severance and executive transition costs, and other extraordinary items. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of our peers, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis.
We compute Adjusted Funds From Operations (“AFFO”), by adjusting Core FFO for certain non-cash revenues and expenses, including straight-line rents, 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, stock-based compensation, and other specified non-cash items. We believe that 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. We use AFFO as a measure of our performance when we formulate corporate goals, and is a factor in determining management compensation. 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.
38
Specific to our adjustment for straight-line rents, our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market rental 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.
FFO, Core FFO, and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO, Core FFO, and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.
Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate Core FFO and AFFO. In the future, the SEC, Nareit 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 Core FFO and AFFO accordingly.
The following table reconciles net income (which is the most comparable GAAP measure) to FFO, Core FFO, and AFFO:
|
| For the Three Months Ended | ||||
(in thousands, except per share data) |
| March 31, |
| December 31, |
| March 31, |
Net income |
| $41,374 |
| $36,773 |
| $28,441 |
Real property depreciation and amortization |
| 41,745 |
| 45,570 |
| 34,259 |
Gain on sale of real estate |
| (3,415) |
| (10,625) |
| (1,196) |
Provision for impairment on investment in rental properties |
| 1,473 |
| — |
| — |
FFO |
| $81,177 |
| $71,718 |
| $61,504 |
Net write-offs of accrued rental income |
| 297 |
| — |
| 1,326 |
Lease termination fees |
| (7,500) |
| (1,678) |
| — |
Gain on insurance recoveries |
| — |
| (341) |
| — |
Cost of debt extinguishment |
| — |
| 77 |
| — |
Severance and executive transition costs (a) |
| 481 |
| — |
| 120 |
Other expenses (b) |
| 18 |
| 751 |
| 1,126 |
Core FFO |
| $74,473 |
| $70,527 |
| $64,076 |
Straight-line rent adjustment |
| (7,271) |
| (6,826) |
| (4,934) |
Amortization of debt issuance costs |
| 986 |
| 988 |
| 856 |
Amortization of net mortgage premiums |
| (26) |
| (26) |
| (27) |
Loss on interest rate swaps and other non-cash interest |
| 522 |
| 522 |
| 659 |
Amortization of lease intangibles |
| (2,691) |
| (1,308) |
| (1,158) |
Stock-based compensation |
| 1,492 |
| 1,503 |
| 929 |
Deferred taxes |
| — |
| 204 |
| — |
AFFO |
| $67,485 |
| $65,584 |
| $60,401 |
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 (losses) 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 EBITDA and EBITDAre 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.
39
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 swap agreements relatingquarter 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 quarter 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 dispositions can temporarily distort our leverage ratios. We adjust EBITDAre (“Adjusted EBITDAre”) for the most recently completed quarter (i) to recalculate as if all acquisitions and dispositions had occurred at the beginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either non-cash, such as cost of debt extinguishments, realized or unrealized gains and losses on foreign currency transactions, or gains on insurance recoveries, or that we believe are one time, or unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future, and (iii) to eliminate the impact of lease termination fees and other items that are not a result of normal operations. We then annualize quarterly Adjusted EBITDAre by 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 be inaccurate. Our actual reported EBITDAre for future 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 similarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.
The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA, EBITDAre, and Adjusted EBITDAre. Information is also presented with respect to Annualized EBITDAre and Annualized Adjusted EBITDAre:
|
| For the Three Months Ended | ||||
(in thousands) |
| March 31, |
| December 31, |
| March 31, |
Net income |
| $41,374 |
| $36,773 |
| $28,441 |
Depreciation and amortization |
| 41,784 |
| 45,606 |
| 34,290 |
Interest expense |
| 21,139 |
| 23,773 |
| 16,896 |
Income taxes |
| 479 |
| 105 |
| 412 |
EBITDA |
| $104,776 |
| $106,257 |
| $80,039 |
Provision for impairment of investment in rental properties |
| 1,473 |
| — |
| — |
Gain on sale of real estate |
| (3,415) |
| (10,625) |
| (1,196) |
EBITDAre |
| $102,834 |
| $95,632 |
| $78,843 |
Adjustment for current quarter acquisition activity (a) |
| 406 |
| 1,283 |
| 3,225 |
Adjustment for current quarter disposition activity (b) |
| (365) |
| (440) |
| (79) |
Adjustment to exclude non-recurring and other expenses (c) |
| (1,023) |
| — |
| — |
Adjustment to exclude gain on insurance recoveries |
| — |
| (341) |
| — |
Adjustment excludes net write-offs of accrued rental income |
| 297 |
| — |
| 1,326 |
Adjustment to exclude realized / unrealized foreign exchange (gain) loss |
| 18 |
| 796 |
| 1,125 |
Adjustment to exclude cost of debt extinguishments |
| — |
| 77 |
| — |
Adjustment to exclude lease termination fees |
| (7,500) |
| (1,678) |
| — |
Adjusted EBITDAre |
| $94,667 |
| $95,329 |
| $84,440 |
Annualized EBITDAre |
| $411,336 |
| $382,528 |
| $315,375 |
Annualized Adjusted EBITDAre |
| $378,668 |
| $381,315 |
| $337,759 |
40
Net Debt, Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre
We define Net Debt as gross debt (total reported debt plus debt issuance costs) less cash and cash equivalents and restricted cash. We believe that the presentation of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre is useful to investors and analysts because these ratios provide information about gross debt less cash and cash equivalents, which could be used to repay debt, compared to our unsecuredperformance as measured using EBITDAre, and is used in communications with lenders and rating agencies regarding our credit facilities. Severalrating. The following table reconciles total debt (which is the most comparable GAAP measure) to Net Debt, and presents the ratio of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre, respectively:
(in thousands) |
| March 31, |
| December 31, |
| March 31, |
Debt |
|
|
|
|
|
|
Unsecured revolving credit facility |
| $108,330 |
| $197,322 |
| $266,118 |
Unsecured term loans, net |
| 895,006 |
| 894,692 |
| 586,884 |
Senior unsecured notes, net |
| 844,744 |
| 844,555 |
| 843,990 |
Mortgages, net |
| 85,853 |
| 86,602 |
| 96,141 |
Debt issuance costs |
| 10,390 |
| 10,905 |
| 9,419 |
Gross Debt |
| 1,944,323 |
| 2,034,076 |
| 1,802,552 |
Cash and cash equivalents |
| (15,412) |
| (21,789) |
| (54,103) |
Restricted cash |
| (3,898) |
| (38,251) |
| (11,444) |
Net Debt |
| $1,925,013 |
| $1,974,036 |
| $1,737,005 |
Net Debt to Annualized EBITDAre |
| 4.7x |
| 5.2x |
| 5.5x |
Net Debt to Annualized Adjusted EBITDAre |
| 5.1x |
| 5.2x |
| 5.1x |
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as other disclosures in the financial statements. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, 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 three months ended March 31, 2023, to the items that we disclosed as our critical accounting policies and estimates in our 2022 Annual Report on Form 10-K.
Impact of Recent Accounting Pronouncements
For information on the impact of recent accounting pronouncements on our business, see Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
41
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to certain market risks, one of the most predominant of which is a change in interest rates. Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variable-rate debt. Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced. We attempt to manage interest rate risk by entering into long-term fixed rate debt, entering into interest rate swaps to convert certain variable-rate debt to a fixed rate, and staggering our debt maturities. We have designated the interest rate swaps agreements set forthas cash flow hedges for accounting purposes and they are reported at fair value. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. Further information concerning our interest rate swaps can be found in Note 9 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 had a carrying value and fair value of approximately $1.9 billion and $1.7 billion, respectively, as of March 31, 2023. Changes in market interest rates impact the fair value of our fixed-rate debt, 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 of approximately $72.2 million as of March 31, 2023.
Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on the applicable reference rate plus an applicable margin, and totaled $1.0 billion as of March 31, 2023, of which $973.8 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 or decrease in conjunction with previous secured and unsecured borrowings that were retired and the swapsinterest rates would have since been reapplieda corresponding $0.3 million increase or decrease in support of the current unsecured credit facilities.interest expense annually.
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.
AsForeign Currency Exchange Rate Risk
We own investments in Canada, and as a result are subject to risk from the effects of September 30, 2017,exchange rate movements in the Canadian dollar, which may affect future costs and cash flows. We funded a significant portion of our financial instruments were not exposedCanadian investments through Canadian dollar borrowings under our Revolving Credit Facility, which is intended to significant marketact as a natural hedge against our Canadian dollar investments. To the extent that currency fluctuations increase or decrease rental revenues, as translated to U.S. dollars, the change in debt service (comprised of interest payments), as translated to U.S. dollars, will partially offset the effect of fluctuations in revenue and, to some extent, mitigate the risk due tofrom changes in foreign currency exchange risk.rates. We believe the foreign currency exchange rate risk on the remaining cash flows is immaterial.
Additionally, our Canadian dollar revolving borrowings are remeasured each reporting period, with the unrealized foreign currency gains and losses flowing through earnings. These unrealized foreign currency gains and losses do not impact our cash flows from operations until settled, and are expected to directly offset the changes in the value of our net investments as a result of changes in the Canadian dollar. Our Canadian investments are recorded at their historical exchange rates, and therefore are not impacted by changes in the value of the Canadian dollar.
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,March 31, 2023, 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,March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 2022 Annual Report on Form 10-K for the Form 10.year ended December 31, 2022.
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.
DuringOn March 14, 2023, the three months ended September 30, 2017, we fulfilledCompany’s Board of Directors approved a stock repurchase requestsprogram (the “Repurchase Program”), which authorized the Company to repurchase up to $150.0 million of the Company’s common stock. These purchases could be made in the open market or through private transactions from time to time over the 12-month time period following authorization, depending on prevailing market conditions and repurchasedapplicable legal and regulatory requirements. The timing, manner, price and amount of any repurchases of common stock under the Repurchase Program may be determined by us in our discretion, using available cash resources. No shares of ourthe Company’s common stock pursuant to our share redemption program as follows. were repurchased under the program.
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.
43
Item 6. Exhibits
|
|
|
|
|
|
None.
Not applicable.
Not applicable.
Description | |||
|
| ||
3.1 | |||
| |||
3.2 | |||
3.3 | |||
3.4 | |||
3.5 | |||
4.1 | |||
4.2 | |||
4.3 | |||
10.1 | |||
10.2 | Director Compensation and Stock Ownership Policy, effective as of May 5, 2022 | ||
10.3 | |||
| |||
10.5 | |||
10.6 | |||
10.7 | |||
10.8 | |||
10.9 | |||
10.10 |
44
10.11 | ||
10.12 | ||
10.13 | ||
10.14 | ||
10.15 | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
| ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.25 | ||
10.26 | ||
10.27 | ||
10.28 |
45
10.29+ | ||
10.30+* | ||
10.31+ | ||
10.32+* | ||
10.33+* | ||
10.34+* | ||
10.35 | ||
10.36 | ||
10.37 | ||
21.1* | ||
31.1* | ||
| ||
| ||
| ||
|
| |
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) |
|
|
|
|
+ Management contract or compensatory plan or arrangement.
† 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.
46
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: | /s/ | |
| ||
Chief Executive Officer | ||
Date: | /s/ | |
| ||
Executive Vice President and Chief Financial Officer |
47
56