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 SeptemberJune 30, 2017,2020, or
☐ | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 000-55774
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
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
None |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 18,491,182.216 26,858,342.567 shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of November 13, 2017.August 1, 2020.
BROADSTONE NET LEASE, INC.
TABLE OF CONTENTS
| Page | |
1 | ||
Item 1. | 1 | |
| 1 | |
| Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited) | 2 |
| Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity (Unaudited) | 3 |
|
| |
| Notes to the Condensed Consolidated Financial Statements (Unaudited) |
|
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
| |
32 | ||
|
| |
33 | ||
38 | ||
38 | ||
|
| |
47 | ||
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| |
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| |
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| |
| ||
| ||
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| |
| 49 | |
49 | ||
51 | ||
Item 3. |
| |
Item 4. | 52 | |
53 | ||
Item 1. | 53 | |
Item 1A. | 53 | |
Item 2. | 53 | |
Item 3. |
| |
Item 4. |
| |
Item 5. |
| |
Item 6. | 55 |
Part I. FINANCIALFINANCIAL INFORMATION
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)
|
| September 30, |
|
| December 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounted for using the operating method, net of accumulated depreciation |
| $ | 1,891,708 |
|
| $ | 1,637,700 |
|
| $ | 3,346,792 |
|
| $ | 3,415,400 |
|
Accounted for using the direct financing method |
|
| 41,612 |
|
|
| 47,271 |
|
|
| 30,953 |
|
|
| 41,890 |
|
Investment in rental property, net |
|
| 1,933,320 |
|
|
| 1,684,971 |
|
|
| 3,377,745 |
|
|
| 3,457,290 |
|
|
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents |
|
| 13,698 |
|
|
| 21,635 |
|
|
| 9,241 |
|
|
| 12,455 |
|
Restricted cash |
|
| 925 |
|
|
| 1,468 |
| ||||||||
Accrued rental income |
|
| 47,766 |
|
|
| 36,577 |
|
|
| 90,545 |
|
|
| 84,534 |
|
Tenant and other receivables, net |
|
| 1,120 |
|
|
| 355 |
|
|
| 5,045 |
|
|
| 934 |
|
Tenant and capital reserves |
|
| 897 |
|
|
| 767 |
| ||||||||
Prepaid expenses and other assets |
|
| 699 |
|
|
| 260 |
|
|
| 9,819 |
|
|
| 12,613 |
|
Notes receivable |
|
| 6,527 |
|
|
| 6,527 |
| ||||||||
Investment in related party |
|
| 10,000 |
|
|
| 10,000 |
| ||||||||
Interest rate swap, assets |
|
| 7,493 |
|
|
| 9,598 |
|
|
| — |
|
|
| 2,911 |
|
Goodwill |
|
| 339,769 |
|
|
| — |
| ||||||||
Intangible lease assets, net |
|
| 205,469 |
|
|
| 168,121 |
|
|
| 298,741 |
|
|
| 331,894 |
|
Debt issuance costs – unsecured revolver, net |
|
| 3,139 |
|
|
| 446 |
| ||||||||
Debt issuance costs – unsecured revolving credit facility, net |
|
| 1,782 |
|
|
| 2,380 |
| ||||||||
Leasing fees, net |
|
| 13,046 |
|
|
| 11,329 |
|
|
| 11,368 |
|
|
| 12,847 |
|
Total assets |
| $ | 2,244,099 |
|
| $ | 1,952,054 |
|
| $ | 4,144,055 |
|
| $ | 3,917,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity |
|
|
|
|
|
|
|
| ||||||||
Unsecured revolver |
| $ | 126,500 |
|
| $ | 102,000 |
| ||||||||
Liabilities, mezzanine equity and equity |
|
|
|
|
|
|
|
| ||||||||
Unsecured revolving credit facility |
| $ | 248,300 |
|
| $ | 197,300 |
| ||||||||
Mortgages and notes payable, net |
|
| 57,883 |
|
|
| 106,686 |
|
|
| 109,512 |
|
|
| 111,793 |
|
Unsecured term notes, net |
|
| 721,907 |
|
|
| 657,891 |
|
|
| 1,673,092 |
|
|
| 1,672,081 |
|
Interest rate swap, liabilities |
|
| 7,119 |
|
|
| 10,217 |
|
|
| 85,678 |
|
|
| 24,471 |
|
Earnout liability |
|
| 37,975 |
|
|
| — |
| ||||||||
Accounts payable and other liabilities |
|
| 18,426 |
|
|
| 17,396 |
|
|
| 25,550 |
|
|
| 37,377 |
|
Due to related parties |
|
| 1,688 |
|
|
| 364 |
| ||||||||
Tenant improvement allowances |
|
| 6,627 |
|
|
| 9,490 |
| ||||||||
Accrued interest payable |
|
| 4,880 |
|
|
| 1,602 |
|
|
| 4,144 |
|
|
| 3,594 |
|
Intangible lease liabilities, net |
|
| 66,303 |
|
|
| 47,871 |
|
|
| 83,157 |
|
|
| 92,222 |
|
Total liabilities |
|
| 1,011,333 |
|
|
| 953,517 |
|
|
| 2,267,408 |
|
|
| 2,138,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (See Note 16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity |
|
|
|
|
|
|
|
| ||||||||
Common stock, 781 shares issued and outstanding at June 30, 2020 |
|
| 66,376 |
|
|
| — |
| ||||||||
Non-controlling interests |
|
| 112,159 |
|
|
| — |
| ||||||||
Total mezzanine equity |
|
| 178,535 |
|
|
| — |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadstone Net Lease, Inc. stockholder’s equity: |
|
|
|
|
|
|
|
| ||||||||
Broadstone Net Lease, Inc. stockholders' 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 |
| ||||||||
Common stock, $0.001 par value; 80,000 shares authorized, 26,077 and 26,001 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively |
|
| 26 |
|
|
| 26 |
| ||||||||
Additional paid-in capital |
|
| 1,253,431 |
|
|
| 1,009,431 |
|
|
| 1,899,751 |
|
|
| 1,895,935 |
|
Subscriptions receivable |
|
| (470 | ) |
|
| (9,790 | ) | ||||||||
Cumulative distributions in excess of retained earnings |
|
| (112,725 | ) |
|
| (89,960 | ) |
|
| (229,531 | ) |
|
| (208,261 | ) |
Accumulated other comprehensive income |
|
| (40 | ) |
|
| 2,092 |
| ||||||||
Accumulated other comprehensive loss |
|
| (78,613 | ) |
|
| (20,086 | ) | ||||||||
Total Broadstone Net Lease, Inc. stockholders’ equity |
|
| 1,140,214 |
|
|
| 911,788 |
|
|
| 1,591,633 |
|
|
| 1,667,614 |
|
Non-controlling interests |
|
| 92,552 |
|
|
| 86,749 |
|
|
| 106,479 |
|
|
| 111,406 |
|
Total equity |
|
| 1,232,766 |
|
|
| 998,537 |
|
|
| 1,698,112 |
|
|
| 1,779,020 |
|
Total liabilities and equity |
| $ | 2,244,099 |
|
| $ | 1,952,054 |
| ||||||||
Total liabilities, mezzanine equity and equity |
| $ | 4,144,055 |
|
| $ | 3,917,858 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 June 30, |
|
| For the six months ended June 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
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 |
| $ | 80,371 |
|
| $ | 69,053 |
|
| $ | 158,602 |
|
| $ | 137,483 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 15,643 |
|
|
| 12,114 |
|
|
| 44,969 |
|
|
| 33,273 |
|
|
| 39,921 |
|
|
| 25,287 |
|
|
| 71,140 |
|
|
| 49,597 |
|
Asset management fees |
|
| 3,844 |
|
|
| 2,789 |
|
|
| 10,666 |
|
|
| 7,770 |
|
|
| — |
|
|
| 5,318 |
|
|
| 2,461 |
|
|
| 10,438 |
|
Property management fees |
|
| 1,249 |
|
|
| 1,010 |
|
|
| 3,635 |
|
|
| 2,868 |
|
|
| — |
|
|
| 1,935 |
|
|
| 1,275 |
|
|
| 3,820 |
|
Acquisition expenses |
|
| - |
|
|
| 2,367 |
|
|
| - |
|
|
| 8,256 |
| ||||||||||||||||
Property and operating expense |
|
| 2,009 |
|
|
| 1,184 |
|
|
| 4,710 |
|
|
| 3,005 |
|
|
| 4,190 |
|
|
| 3,252 |
|
|
| 8,305 |
|
|
| 7,642 |
|
General and administrative |
|
| 1,173 |
|
|
| 598 |
|
|
| 3,297 |
|
|
| 1,951 |
|
|
| 5,700 |
|
|
| 1,389 |
|
|
| 11,542 |
|
|
| 2,492 |
|
State and franchise tax |
|
| 301 |
|
|
| 71 |
|
|
| 511 |
|
|
| 181 |
| ||||||||||||||||
Provision for impairment of investment in rental properties |
|
| 2,608 |
|
|
| - |
|
|
| 2,608 |
|
|
| - |
|
|
| 534 |
|
|
| — |
|
|
| 2,667 |
|
|
| 1,017 |
|
Total operating expenses |
|
| 26,827 |
|
|
| 20,133 |
|
|
| 70,396 |
|
|
| 57,304 |
|
|
| 50,345 |
|
|
| 37,181 |
|
|
| 97,390 |
|
|
| 75,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
| 11 |
|
|
| — |
|
|
| 20 |
|
|
| 1 |
|
Interest expense |
|
| (9,380 | ) |
|
| (4,576 | ) |
|
| (25,182 | ) |
|
| (24,166 | ) |
|
| (19,513 | ) |
|
| (16,732 | ) |
|
| (40,504 | ) |
|
| (32,560 | ) |
Cost of debt extinguishment |
|
| (1,404 | ) |
|
| (52 | ) |
|
| (5,019 | ) |
|
| (105 | ) |
|
| — |
|
|
| (8 | ) |
|
| (22 | ) |
|
| (721 | ) |
Gain on sale of real estate |
|
| 4,052 |
|
|
| 2,983 |
|
|
| 10,332 |
|
|
| 4,089 |
|
|
| 1,046 |
|
|
| 2,787 |
|
|
| 8,665 |
|
|
| 4,187 |
|
Income taxes |
|
| (402 | ) |
|
| (305 | ) |
|
| (951 | ) |
|
| (748 | ) | ||||||||||||||||
Internalization expenses |
|
| (389 | ) |
|
| (272 | ) |
|
| (1,594 | ) |
|
| (272 | ) | ||||||||||||||||
Change in fair value of earnout liability |
|
| 6,321 |
|
|
| — |
|
|
| 2,144 |
|
|
| — |
| ||||||||||||||||
Other losses |
|
| (2 | ) |
|
| — |
|
|
| (24 | ) |
|
| — |
| ||||||||||||||||
Net income |
|
| 12,990 |
|
|
| 15,417 |
|
|
| 42,729 |
|
|
| 26,474 |
|
|
| 17,098 |
|
|
| 17,342 |
|
|
| 28,946 |
|
|
| 32,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net income attributable to non-controlling interests |
|
| (1,042 | ) |
|
| (1,459 | ) |
|
| (3,460 | ) |
|
| (2,600 | ) |
|
| (1,745 | ) |
|
| (1,208 | ) |
|
| (2,777 | ) |
|
| (2,292 | ) |
Net income attributable to Broadstone Net Lease, Inc. |
| $ | 11,948 |
|
| $ | 13,958 |
|
| $ | 39,269 |
|
| $ | 23,874 |
|
| $ | 15,353 |
|
| $ | 16,134 |
|
| $ | 26,169 |
|
| $ | 30,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 17,617 |
|
|
| 13,647 |
|
|
| 16,607 |
|
|
| 12,738 |
|
|
| 26,856 |
|
|
| 23,204 |
|
|
| 26,691 |
|
|
| 22,770 |
|
Diluted |
|
| 19,147 |
|
|
| 15,074 |
|
|
| 18,069 |
|
|
| 14,154 |
|
|
| 29,912 |
|
|
| 24,941 |
|
|
| 29,482 |
|
|
| 24,507 |
|
Net Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Basic and diluted |
| $ | 0.68 |
|
| $ | 1.02 |
|
| $ | 2.36 |
|
| $ | 1.87 |
|
| $ | 0.57 |
|
| $ | 0.70 |
|
| $ | 0.98 |
|
| $ | 1.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 12,990 |
|
| $ | 15,417 |
|
| $ | 42,729 |
|
| $ | 26,474 |
|
| $ | 17,098 |
|
| $ | 17,342 |
|
| $ | 28,946 |
|
| $ | 32,364 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Change in fair value of interest rate swaps |
|
| 283 |
|
|
| 1,280 |
|
|
| (1,448 | ) |
|
| (20,551 | ) |
|
| (6,056 | ) |
|
| (23,178 | ) |
|
| (64,118 | ) |
|
| (35,802 | ) |
Realized loss on interest rate swaps |
|
| - |
|
|
| - |
|
|
| (873 | ) |
|
| - |
| ||||||||||||||||
Comprehensive income |
|
| 13,273 |
|
|
| 16,697 |
|
|
| 40,408 |
|
|
| 5,923 |
| ||||||||||||||||
Comprehensive income attributable to non-controlling interests |
|
| (1,046 | ) |
|
| (1,581 | ) |
|
| (3,271 | ) |
|
| (443 | ) | ||||||||||||||||
Comprehensive income attributable to Broadstone Net Lease, Inc. |
| $ | 12,227 |
|
| $ | 15,116 |
|
| $ | 37,137 |
|
| $ | 5,480 |
| ||||||||||||||||
Realized gain on interest rate swaps |
|
| (41 | ) |
|
| (41 | ) |
|
| (83 | ) |
|
| (122 | ) | ||||||||||||||||
Comprehensive income (loss) |
|
| 11,001 |
|
|
| (5,877 | ) |
|
| (35,255 | ) |
|
| (3,560 | ) | ||||||||||||||||
Comprehensive (income) loss attributable to non-controlling interests |
|
| (1,123 | ) |
|
| 409 |
|
|
| 2,897 |
|
|
| 242 |
| ||||||||||||||||
Comprehensive income (loss) attributable to Broadstone Net Lease, Inc. |
| $ | 9,878 |
|
| $ | (5,468 | ) |
| $ | (32,358 | ) |
| $ | (3,318 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 Stock |
|
| Additional Paid-in Capital |
|
| Subscriptions Receivable |
|
| Cumulative Distributions in Excess of Retained Earnings |
|
| Accumulated Other Comprehensive (Loss)/Income |
|
| Non-controlling Interests |
|
| Total |
| |||||||
Balance, January 1, 2017 |
| $ | 15 |
|
| $ | 1,009,431 |
|
| $ | (9,790 | ) |
| $ | (89,960 | ) |
| $ | 2,092 |
|
| $ | 86,749 |
|
| $ | 998,537 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 39,269 |
|
|
| - |
|
|
| 3,460 |
|
|
| 42,729 |
|
Issuance of 3,163 shares of common stock, net |
|
| 3 |
|
|
| 249,942 |
|
|
| 9,320 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 259,265 |
|
Other offering costs |
|
| - |
|
|
| (1,144 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,144 | ) |
Issuance of 103 membership units |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 8,278 |
|
|
| 8,278 |
|
Distributions declared ($0.410 per share January 2017, $0.415 per share February through September 2017) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (62,034 | ) |
|
| - |
|
|
| (5,719 | ) |
|
| (67,753 | ) |
Change in fair value of interest rate swap agreements |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,328 | ) |
|
| (120 | ) |
|
| (1,448 | ) |
Realized loss on interest rate swap agreements |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (804 | ) |
|
| (69 | ) |
|
| (873 | ) |
Conversion of 1 membership unit to 1 share of common stock |
|
| - |
|
|
| 27 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (27 | ) |
|
| - |
|
Redemption of 62 shares of common stock |
|
| - |
|
|
| (4,825 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4,825 | ) |
Balance, September 30, 2017 |
| $ | 18 |
|
| $ | 1,253,431 |
|
| $ | (470 | ) |
| $ | (112,725 | ) |
| $ | (40 | ) |
| $ | 92,552 |
|
| $ | 1,232,766 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash FlowsStockholders’ Equity and Mezzanine Equity
(Unaudited)
(in thousands)thousands, except per share amounts)
|
| For the nine months ended |
| |||||
|
| September 30, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 42,729 |
|
| $ | 26,474 |
|
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization including intangibles associated with investment in rental property |
|
| 45,456 |
|
|
| 32,900 |
|
Provision for impairment of investment in rental properties |
|
| 2,608 |
|
|
| - |
|
Amortization of debt issuance costs charged to interest expense |
|
| 1,478 |
|
|
| 1,136 |
|
Straight-line rent and financing lease adjustments |
|
| (12,505 | ) |
|
| (9,736 | ) |
Cost of debt extinguishment |
|
| 5,019 |
|
|
| 105 |
|
(Gain) on sale of real estate |
|
| (10,332 | ) |
|
| (4,089 | ) |
Non-cash interest expense |
|
| (1,349 | ) |
|
| 2,219 |
|
Repayment of interest rate swap, liability |
|
| (1,965 | ) |
|
| - |
|
Leasing fees paid |
|
| (2,597 | ) |
|
| (2,827 | ) |
Other non-cash items |
|
| 325 |
|
|
| 306 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Tenant and other receivables |
|
| (237 | ) |
|
| 286 |
|
Prepaid expenses and other assets |
|
| (440 | ) |
|
| (630 | ) |
Accounts payable and other liabilities |
|
| 897 |
|
|
| 5,870 |
|
Accrued interest payable |
|
| 3,278 |
|
|
| 134 |
|
Net cash provided by operating activities |
|
| 72,365 |
|
|
| 52,148 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Acquisition of rental property accounted for using the operating method |
|
| (345,789 | ) |
|
| (367,654 | ) |
Acquisition of rental property accounted for using the direct financing method |
|
| (3,546 | ) |
|
| (544 | ) |
Capital expenditures and improvements |
|
| (3,871 | ) |
|
| (7,525 | ) |
Proceeds from disposition of rental property, net |
|
| 55,296 |
|
|
| 15,608 |
|
Increase in tenant and capital reserves |
|
| (130 | ) |
|
| (43 | ) |
Decrease in restricted cash |
|
| 543 |
|
|
| 65 |
|
Net cash used in investing activities |
|
| (297,497 | ) |
|
| (360,093 | ) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net |
|
| 229,698 |
|
|
| 186,013 |
|
Redemptions of common stock |
|
| (4,825 | ) |
|
| (6,487 | ) |
Borrowings on unsecured term notes |
|
| 400,000 |
|
|
| 95,000 |
|
Principal payments on mortgages and notes payable and unsecured term notes |
|
| (384,087 | ) |
|
| (9,171 | ) |
Borrowings on unsecured revolver |
|
| 220,000 |
|
|
| 226,500 |
|
Repayments on unsecured revolver |
|
| (195,500 | ) |
|
| (146,000 | ) |
Cash distributions paid to stockholders |
|
| (32,533 | ) |
|
| (26,060 | ) |
Cash distributions paid to non-controlling interests |
|
| (5,669 | ) |
|
| (5,275 | ) |
Debt issuance and extinguishment costs paid |
|
| (9,889 | ) |
|
| (622 | ) |
Net cash provided by financing activities |
|
| 217,195 |
|
|
| 313,898 |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
| (7,937 | ) |
|
| 5,953 |
|
Cash and cash equivalents at beginning of period |
|
| 21,635 |
|
|
| 27,050 |
|
Cash and cash equivalents at end of period |
| $ | 13,698 |
|
| $ | 33,003 |
|
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Cumulative Distributions in Excess of Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Non- controlling Interests |
|
| Total Stockholders' Equity |
|
|
| Mezzanine Equity Common Stock |
|
| Mezzanine Equity Non-controlling Interests |
|
| Total Mezzanine Equity |
| |||||||||
Balance, January 1, 2020 |
| $ | 26 |
|
| $ | 1,895,935 |
|
| $ | (208,261 | ) |
| $ | (20,086 | ) |
| $ | 111,406 |
|
| $ | 1,779,020 |
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Cumulative effect of accounting change (see Note 2) |
|
| — |
|
|
| — |
|
|
| (323 | ) |
|
| — |
|
|
| — |
|
|
| (323 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income |
|
| — |
|
|
| — |
|
|
| 10,816 |
|
|
| — |
|
|
| 710 |
|
|
| 11,526 |
|
|
|
| — |
|
|
| 322 |
|
|
| 322 |
|
Issuance of 73 shares of common stock and 781 shares of mezzanine equity common stock |
|
| — |
|
|
| 6,097 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,097 |
|
|
|
| 66,376 |
|
|
| — |
|
|
| 66,376 |
|
Issuance of 1,320 mezzanine non-controlling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| 112,159 |
|
|
| 112,159 |
|
Adjustment to carrying value of mezzanine equity non-controlling interests |
|
| — |
|
|
| (2,416 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,416 | ) |
|
|
| — |
|
|
| 2,416 |
|
|
| 2,416 |
|
Distributions declared ($0.44 per share January 2020 through March 2020) |
|
| — |
|
|
| — |
|
|
| (35,299 | ) |
|
| — |
|
|
| (2,100 | ) |
|
| (37,399 | ) |
|
|
| — |
|
|
| (1,161 | ) |
|
| (1,161 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (53,014 | ) |
|
| (3,472 | ) |
|
| (56,486 | ) |
|
|
| — |
|
|
| (1,576 | ) |
|
| (1,576 | ) |
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (38 | ) |
|
| (2 | ) |
|
| (40 | ) |
|
|
| — |
|
|
| (2 | ) |
|
| (2 | ) |
Balance, March 31, 2020 |
| $ | 26 |
|
| $ | 1,899,616 |
|
| $ | (233,067 | ) |
| $ | (73,138 | ) |
| $ | 106,542 |
|
| $ | 1,699,979 |
|
|
| $ | 66,376 |
|
| $ | 112,158 |
|
| $ | 178,534 |
|
Net income |
|
| — |
|
|
| — |
|
|
| 15,353 |
|
|
| — |
|
|
| 992 |
|
|
| 16,345 |
|
|
|
| — |
|
|
| 753 |
|
|
| 753 |
|
Issuance of three shares of common stock |
|
| — |
|
|
| 232 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 232 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Adjustment to carrying value of mezzanine equity non-controlling interests |
|
| — |
|
|
| (97 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (97 | ) |
|
|
| — |
|
|
| 97 |
|
|
| 97 |
|
Distributions declared ($0.44 per share in April 2020) |
|
| — |
|
|
| — |
|
|
| (11,817 | ) |
|
| — |
|
|
| (701 | ) |
|
| (12,518 | ) |
|
|
| — |
|
|
| (581 | ) |
|
| (581 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,438 | ) |
|
| (351 | ) |
|
| (5,789 | ) |
|
|
| — |
|
|
| (267 | ) |
|
| (267 | ) |
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (37 | ) |
|
| (3 | ) |
|
| (40 | ) |
|
|
| — |
|
|
| (1 | ) |
|
| (1 | ) |
Balance, June 30, 2020 |
| $ | 26 |
|
| $ | 1,899,751 |
|
| $ | (229,531 | ) |
| $ | (78,613 | ) |
| $ | 106,479 |
|
| $ | 1,698,112 |
|
|
| $ | 66,376 |
|
| $ | 112,159 |
|
| $ | 178,535 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity
(Unaudited)
(in thousands, except per share amounts)
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Subscriptions Receivable |
|
| Cumulative Distributions in Excess of Retained Earnings |
|
| Accumulated Other Comprehensive Income |
|
| Non- controlling Interests |
|
| Total Stockholders' Equity |
|
|
| Mezzanine Equity Common Stock |
|
| Mezzanine Equity Non-controlling Interests |
|
| Total Mezzanine Equity |
| ||||||||||
Balance, January 1, 2019 |
| $ | 22 |
|
| $ | 1,557,421 |
|
| $ | — |
|
| $ | (155,150 | ) |
| $ | 14,806 |
|
| $ | 111,821 |
|
| $ | 1,528,920 |
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13,938 |
|
|
| — |
|
|
| 1,084 |
|
|
| 15,022 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 883 shares of common stock |
|
| 1 |
|
|
| 75,099 |
|
|
| (225 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 74,875 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Other offering costs |
|
| — |
|
|
| (300 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (300 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Distributions declared ($0.43 per share January 2019, $0.44 per share February through March 2019) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (29,635 | ) |
|
| — |
|
|
| (2,348 | ) |
|
| (31,983 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,713 | ) |
|
| (911 | ) |
|
| (12,624 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (75 | ) |
|
| (6 | ) |
|
| (81 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Redemption of 21 shares of common stock |
|
| — |
|
|
| (1,803 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,803 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance, March 31, 2019 |
| $ | 23 |
|
| $ | 1,630,417 |
|
| $ | (225 | ) |
| $ | (170,847 | ) |
| $ | 3,018 |
|
| $ | 109,640 |
|
| $ | 1,572,026 |
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16,134 |
|
|
| — |
|
|
| 1,208 |
|
|
| 17,342 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 892 shares of common stock |
|
| 1 |
|
|
| 76,004 |
|
|
| 225 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 76,230 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Other offering costs |
|
| — |
|
|
| (300 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (300 | ) |
|
|
| — |
|
|
| — |
|
|
|
|
|
Distributions declared ($0.44 per share April through June 2019) |
| �� | — |
|
|
| — |
|
|
| — |
|
|
| (30,934 | ) |
|
| — |
|
|
| (2,297 | ) |
|
| (33,231 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (21,564 | ) |
|
| (1,614 | ) |
|
| (23,178 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (38 | ) |
|
| (3 | ) |
|
| (41 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Redemption of 38 shares of common stock |
|
| — |
|
|
| (3,210 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,210 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance, June 30, 2019 |
| $ | 24 |
|
| $ | 1,702,911 |
|
| $ | — |
|
| $ | (185,647 | ) |
| $ | (18,584 | ) |
| $ | 106,934 |
|
| $ | 1,605,638 |
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
| For the six months ended June 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 28,946 |
|
| $ | 32,364 |
|
Adjustments to reconcile net income including non-controlling interests to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization including intangibles associated with investment in rental property |
|
| 71,020 |
|
|
| 48,142 |
|
Provision for impairment of investment in rental properties |
|
| 2,667 |
|
|
| 1,017 |
|
Amortization of debt issuance costs charged to interest expense |
|
| 1,637 |
|
|
| 1,079 |
|
Straight-line rent and financing lease adjustments |
|
| (7,757 | ) |
|
| (10,383 | ) |
Cost of debt extinguishment |
|
| 22 |
|
|
| 721 |
|
Gain on sale of real estate |
|
| (8,665 | ) |
|
| (4,187 | ) |
Change in fair value of earnout liability |
|
| (2,144 | ) |
|
| — |
|
Leasing fees paid |
|
| — |
|
|
| (435 | ) |
Adjustment to provision for credit losses |
|
| (127 | ) |
|
| — |
|
Other non-cash items |
|
| 228 |
|
|
| 185 |
|
Changes in assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
Tenant and other receivables |
|
| (4,111 | ) |
|
| 897 |
|
Prepaid expenses and other assets |
|
| (235 | ) |
|
| (16 | ) |
Accounts payable and other liabilities |
|
| (2,573 | ) |
|
| 2,534 |
|
Accrued interest payable |
|
| 550 |
|
|
| (7,199 | ) |
Net cash provided by operating activities |
|
| 79,458 |
|
|
| 64,719 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Acquisition of rental property accounted for using the operating method, net of mortgages assumed of $0 and $49,782 in 2020 and 2019, respectively |
|
| — |
|
|
| (153,858 | ) |
Cash paid for Internalization |
|
| (30,861 | ) |
|
| — |
|
Capital expenditures and improvements |
|
| (3,824 | ) |
|
| (1,543 | ) |
Proceeds from disposition of rental property, net |
|
| 45,423 |
|
|
| 33,632 |
|
Change in deposits on investments in rental property |
|
| — |
|
|
| 875 |
|
Net cash provided by (used in) investing activities |
|
| 10,738 |
|
|
| (120,894 | ) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net |
|
| 131 |
|
|
| 120,190 |
|
Redemptions of common stock |
|
| — |
|
|
| (5,013 | ) |
Cash paid for deferred offering costs |
|
| (1,055 | ) |
|
| — |
|
Borrowings on mortgages, notes payable and unsecured term notes, net of mortgages assumed of $0 and $49,782 in 2020 and 2019, respectively |
|
| 60,000 |
|
|
| 300,000 |
|
Principal payments on mortgages, notes payable and unsecured term notes |
|
| (152,533 | ) |
|
| (307,672 | ) |
Borrowings on unsecured revolving credit facility |
|
| 192,000 |
|
|
| 55,800 |
|
Repayments on unsecured revolving credit facility |
|
| (141,000 | ) |
|
| (73,300 | ) |
Cash distributions paid to stockholders |
|
| (52,779 | ) |
|
| (29,572 | ) |
Cash distributions paid to non-controlling interests |
|
| (5,307 | ) |
|
| (4,627 | ) |
Debt issuance and extinguishment costs paid |
|
| (122 | ) |
|
| (5,902 | ) |
Net cash (used in) provided by financing activities |
|
| (100,665 | ) |
|
| 49,904 |
|
Net decrease in cash and cash equivalents and restricted cash |
|
| (10,469 | ) |
|
| (6,271 | ) |
Cash and cash equivalents and restricted cash at beginning of period |
|
| 20,311 |
|
|
| 18,989 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 9,842 |
|
| $ | 12,718 |
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash and cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
| $ | 12,455 |
|
| $ | 18,612 |
|
Restricted cash at beginning of period |
|
| 7,856 |
|
|
| 377 |
|
Cash and cash equivalents and restricted cash at beginning of period |
| $ | 20,311 |
|
| $ | 18,989 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
| $ | 9,241 |
|
| $ | 10,288 |
|
Restricted cash at end of period |
|
| 601 |
|
|
| 2,430 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 9,842 |
|
| $ | 12,718 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Broadstone Net Lease, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(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.properties, primarily in the United States. The Corporation leases properties toindustrial, healthcare, restaurant, office, retail, healthcare, industrial, and other commercial businessesproperties under long-term lease agreements. Properties are generally leased on a triple-net basis such that tenants pay all operating expenses relating to the property, including, but not limited to, property taxes, insurance, maintenance, repairs, and capital costs, during the lease term. As of SeptemberAt June 30, 2017,2020, the Corporation owned a diversified portfolio of 477632 individual net leased commercial properties located in 3741 states throughout the continental United States.States and one property in British Columbia, Canada.
Broadstone Net Lease, LLC (the “Operating Company”Corporation’s operating company, or the “OP”), is the entity through which the Corporation conducts its business and owns (either directly or through subsidiaries) all of the Corporation’s properties. At September 30, 2017 and December 31, 2016, the Corporation owned economic interests of 92.3% and 91.4%, respectively, in the Operating Company. The Corporation is also the sole managing member of the Operating Company.OP. The remaining interestsmembership units in the Operating CompanyOP (“OP Units”), which are referred to as non-controlling interests, are held by members who acquired their interest by contributing propertyreal estate properties or other assets to the Operating CompanyOP in exchange for membership units of the Operating Company.OP Units. 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, the OP, and its consolidated subsidiaries are collectively referred to as the “Company”. The following table summarizes the outstanding equity and economic ownership interest of the Corporation and the OP:
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||
(in thousands) |
| Shares of Common Stock |
|
| OP Units |
|
| Total Diluted Shares |
|
| Shares of Common Stock |
|
| OP Units |
|
| Total Diluted Shares |
| ||||||
Permanent equity |
|
| 26,077 |
|
|
| 1,737 |
|
|
| 27,814 |
|
|
| 26,001 |
|
|
| 1,737 |
|
|
| 27,738 |
|
Mezzanine equity |
|
| 781 |
|
|
| 1,320 |
|
|
| 2,101 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
|
| 26,858 |
|
|
| 3,057 |
|
|
| 29,915 |
|
|
| 26,001 |
|
|
| 1,737 |
|
|
| 27,738 |
|
Percent Ownership of OP |
|
| 89.8 | % |
|
| 10.2 | % |
|
| 100.0 | % |
|
| 93.7 | % |
|
| 6.3 | % |
|
| 100.0 | % |
Refer to Note 14 for further discussion regarding the weighted average shares outstanding.
The Corporation operates under the direction of its board of directors (the “Board of Directors”), which is responsible for the management and control of the Company’s affairs. ThePrior to February 7, 2020, the Corporation iswas externally managed by Broadstone Real Estate, LLC (“BRE”) 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 boardBoard of directors’Directors’ direction, oversight, and approval. The Asset Manager iswas a wholly-ownedwholly owned subsidiary of the ManagerBRE and all of the Corporation’s officers arewere employees of the Manager.BRE. Accordingly, both the ManagerBRE and the Asset Manager arewere related parties of the Corporation.Company. Refer to Note 3 for further discussion overconcerning related parties and related party transactions.
On February 7, 2020, the Corporation, the OP, BRE, and certain of their respective subsidiaries and affiliates, completed through a series of mergers (the “Mergers”) the internalization of the external management functions previously performed for the Corporation and the OP by BRE and the Asset Manager (such transactions, collectively, the “Internalization”). Upon consummation of the Internalization, the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP and the Company became internally managed. Upon Internalization, the prior Property Management Agreement and Asset Management Agreement were terminated. The Internalization was not considered a “Termination Event” under the terms of the agreements and therefore no fees were paid under them as a result of the Internalization. The Internalization consisted of the acquisition of BRE in accordance with the definitive merger agreement (the “Merger Agreement”). Refer to Note 4 for further discussion regarding the Internalization, including the associated payments related thereto.
2. Summary of Significant Accounting Policies
Interim Information
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and Article 10 of the SEC’sSecurities and Exchange Commission’s (“SEC”) Regulation S-X. Accordingly, the Corporation has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2016,2019, included in the Company’s Amendment No. 2 to its Registration Statement2019 Annual Report on Form 10,10-K, filed with the SEC on June 29, 2017 (the “Form 10”).February 27, 2020. 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).
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, it qualifies for the exemption from providing certain disclosure requirements associated with investments in VIEs.
The portion of the Operating CompanyOP not owned by the Corporation is presented as non-controlling interests as of and during the periods presented.
Basis of Accounting
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP.
Use of Estimates
The preparation of consolidated financial statementsCondensed Consolidated Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include, but are not limited to, the allocation of purchase price between investment in rental propertytangible and intangible assets acquired and liabilities assumed, the value of long-lived assets and goodwill, the provision for impairment, the depreciable lives of rental property, the amortizable lives of intangible assets and liabilities, the allowanceprovisions for doubtful accounts,uncollectible rent and credit losses, the fair value of the earnout liability, the fair value of assumed debt and notes payables,payable, the fair value of the Company’s interest rate swap agreements, and the determination of any uncertain tax positions. Accordingly, actual results may differ from those estimates.
We reviewThe Company reviews long-lived assets, other than goodwill, to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. Such cash flows include factors such as expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. An impairment loss is measured as the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. A significant judgementjudgment is made as to if and when impairment should be taken, if our strategy, or one or moretaken. The Company’s assessment of impairment as of June 30, 2020 was based on the most current information available to the Company. Based upon current market conditions resulting from the COVID-19 pandemic (see Note 18), 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 those properties, the Company believes that their carrying amounts are recoverable and therefore, under applicable GAAP guidance, 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 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.
During the three and six months ended SeptemberJune 30, 2017 we2020 and 2019, the Company recorded impairment charges of $2,608$534 and $0, and $2,667 and $1,017, respectively.
Restricted Cash
Restricted cash includes escrow funds the Company maintains pursuant to the terms of certain mortgages, notes payable, and lease agreements, and undistributed proceeds from the sale of properties under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), and is reported within Prepaid expenses and other assets in the Condensed Consolidated Balance Sheets.
Restricted cash consisted of the following:
|
| June 30, |
|
| December 31, |
| ||
(in thousands) |
| 2020 |
|
| 2019 |
| ||
Escrow funds and other |
| $ | 601 |
|
| $ | 2,311 |
|
Undistributed 1031 proceeds |
|
| — |
|
|
| 5,545 |
|
|
| $ | 601 |
|
| $ | 7,856 |
|
Revenue Recognition
The Company accounts for leases in accordance with ASC 842, Leases. The Company commences revenue recognition on its leases based on our considerationa number of factors, including the initial determination that the contract is or contains a lease. Generally, all of the factors detailed above. In determiningCompany’s property related contracts are or contain leases, and therefore revenue is recognized when the fair valuelessee takes possession of or controls the physical use of the assets atleased assets. In most instances this occurs on the lease commencement date. At the time of measurement, we utilized capitalization rates ranging from 7.25% to 12%, and a weighted average discount rate of 8%.
The Company has reduced the carrying value of the impaired real estate assets to the estimated fair value as detailed below:
|
| September 30, 2017 |
| |||||||||
(in thousands) |
| Carrying Amount |
|
| Allocation of Impairment |
|
| Net Carrying Amount |
| |||
Investments in rental property accounted for using the operating method, net of accumulated depreciation |
| $ | 16,159 |
|
| $ | (2,401 | ) |
| $ | 13,758 |
|
Intangible lease assets, net |
|
| 1,263 |
|
|
| (204 | ) |
|
| 1,059 |
|
Leasing fees, net |
|
| 123 |
|
|
| (16 | ) |
|
| 107 |
|
Intangible lease liabilities, net |
|
| (101 | ) |
|
| 13 |
|
|
| (88 | ) |
|
| $ | 17,444 |
|
| $ | (2,608 | ) |
| $ | 14,836 |
|
Revenue Recognition
Atlease assumption or at the inception of a new lease, arrangement, including new leases that arise from amendments, the Company assesses the terms and conditions of the lease to determine the proper lease classification.
Certain of the Company’s leases require tenants to pay rent based upon a percentage of the property’s net sales (“percentage rent”) or contain rent escalators indexed to future changes in the Consumer Price Index (“CPI”). Lease income associated with such provisions is considered variable lease income and is not included in the initial measurement of the lease receivable, or in the calculation of straight-line rent revenue. Such amounts are recognized as income when the amounts are determinable.
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 afterat the end of the lease term, (ii) the lessee has a bargain purchase option during or at the end of the lease term,that is reasonably expected to be exercised, (iii) the lease term is greater than or equal to 75%for a major part of the underlying property’s estimated usefuleconomic life orof the leased property, (iv) the present value of the future minimum lease payments (excluding executory costs)and any residual value guaranteed by the lessee that is greater thannot already reflected in the lease payments equals or equal to 90%exceeds substantially all of the fair value of the leased property.property, and (v) the leased property is of such a specialized nature that it is expected to have no future alternative use to the Company at the end of the lease term. 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 iswill generally accounted forbe classified as a sales-type lease, unless the lease contains a residual value guarantee from a third party other than the lessee, in which case it would be classified as a direct financing lease. Consistent with ASC 840, Leases, iflease under certain circumstances.
The Company accounts for the fairright to use land as a separate lease component, unless the accounting effect of doing so would be insignificant. Determination of significance requires management judgment. In determining whether the accounting effect of separately reporting the land component from other components for its real estate leases is significant, the Company assesses: (i) whether separating the land component impacts the classification of any lease component, (ii) the value of the land component is 25% or morein the context of the total fair value ofoverall contract, and (iii) whether the leased property,right to use the land is considered separately fromcoterminous with the building for purposes of applyingrights to use the lease term and minimum lease payments criterion in (iii) and (iv) above.other assets.
Revenue recognition methods for operating leases, and direct financing leases, and sales-type 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 and collectability of the lease payments is probable, 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. If the Company determines that collectability of the lease payments is not probable, the Company records an adjustment to Lease revenues to reduce cumulative income recognized since lease commencement to the amount of cash collected from the lessee. Future revenue recognition is limited to amounts paid by the lessee.
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, theThe net investment in the direct financing lease represents receivables for the sum of future minimum lease payments to be received and the estimated residual value of the leased property, less the unamortized unearned income.income (which represents the difference between undiscounted cash flows and discounted cash flows). 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.
Rental property accounted for under sales-type leases – For leases accounted for as sales-type leases, the Company records selling profit arising from the lease at inception, along with the net investment in the lease. The Company leases assets through the assumption of existing leases or through sale-leaseback transactions, and records such assets at their fair value at the time of acquisition, which in most cases coincides with lease inception. As a result, the Company does not generally recognize selling profit on sales-type leases. The net investment in the sales-type lease represents receivables for the sum of future lease payments and the estimated unguaranteed residual value of the leased property, each measured at net present value. Interest income is recorded over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases.
Certain of the Company’s lease contracts contain nonlease components (e.g., charges for management fees, common area maintenance, and reimbursement of third-party maintenance expenses) in addition to lease components (i.e., monthly rental charges). Services related to nonlease components are provided over the same period of time as, and billed in the same manner as, monthly rental charges. The Company elected to apply the practical expedient available under ASC 842, for all classes of assets, not to separate the lease components from the nonlease components when accounting for operating leases. Since the lease component is the predominant component under each of these leases, combined revenues from both the lease and nonlease components are reported as Lease revenues, net in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
Refer below to the Recently Adopted Accounting Standards section of this Note regarding a question and answer document released by the Financial Accounting Standards Board (“FASB”) with guidance on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic.
Rent Received in Advance
Rent received in advance represents tenant payments received prior to itsthe contractual due date, and is included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets. RentsRent received in advance was $6,845 and $7,566 at September 30, 2017 and December 31, 2016, respectively.is as follows:
Property Loss and Insurance Recoveries
(in thousands) |
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Rent received in advance |
| $ | 11,360 |
|
| $ | 13,368 |
|
Provision for Uncollectible Rent
Property losses, whether full or partial,In accordance with ASC 842, provisions for uncollectible rent 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 terms 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 lossrecorded as an acceleration of depreciation and evaluates whether all or a portion of the property loss can be offset by the recognition of insurance recoveries.
Under the terms of the lease agreements with tenants, in the case of full or partial loss to a property the tenant has an obligation to restore/rebuild the premises as nearly as possible to its value, condition and character immediately prior to such event. To mitigate the risk of loss, the Company requires tenants to maintain general liability insurance policiesLease revenues, net on the replacement value of the properties. Based on these considerations, the Company follows the guidance in ASC 605-40, Classification of Insurance Recoveries, for the conversion of nonmonetary assets (i.e., the properties) to monetary assets (i.e., insurance recoveries or tenant recoveries). Under ASC 605-40, once probable of receipt, the Company recognizes an insurance/tenant recovery receivable in Tenant and other receivables, net, in the Condensed Consolidated Balance Sheet, with a corresponding offset to the accelerated depreciation recognized in theaccompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss). IfThe following table summarizes the insurance/tenant recovery is less thanchanges in the provision for uncollectible rent:
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Beginning balance |
| $ | 1,033 |
|
| $ | — |
|
| $ | — |
|
| $ | 2,086 |
|
Provision for uncollectible rent |
|
| 1,190 |
|
|
| — |
|
|
| 2,223 |
|
|
| 440 |
|
Write-offs |
|
| (1 | ) |
|
| — |
|
|
| (1 | ) |
|
| (2,526 | ) |
Ending balance |
| $ | 2,222 |
|
| $ | — |
|
| $ | 2,222 |
|
| $ | — |
|
Goodwill
Goodwill represents the excess of the amount paid over the fair value of accelerated depreciation recognized, the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and is assigned to one or more reporting units. The Company’s reporting unit is the same as its reportable segment. Goodwill has an indefinite life and is therefore not amortized. The Company evaluates goodwill for impairment when an event occurs or circumstances change that indicate the carrying value may not be recoverable, or at least annually. The Company will recognizeadopt an annual goodwill testing date during the fourth quarter of 2020.
Deferred Initial Public Offering Costs
The Company has incurred certain costs in connection with its anticipated initial public offering (“IPO”). The Company capitalizes such deferred IPO costs, which primarily consist of direct, incremental legal, professional, accounting and other third-party fees. The deferred IPO costs will be offset against IPO proceeds upon the consummation of an offering. Should the planned IPO be abandoned, the deferred IPO costs will be expensed immediately as a net losscharge to operating expenses in the Condensed Consolidated StatementsStatement 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.
Non-controlling Interests
Non-controlling interests represents the membership interests held in the Operating Company of 7.7% and 8.6% at SeptemberAt June 30, 20172020 and December 31, 2016,2019, deferred IPO costs were $1,282 and $668, respectively, by third parties which are accounted for as a separate component of equity.
The Company periodically adjustsand were included within Prepaid expenses and other assets on 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.Balance Sheets.
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, 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 three-tier fair value hierarchy, which requires an entity to maximizeprioritizes the use of observable inputs and minimize the use of unobservable inputs whenused in measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices that are available in active markets for identical assets or liabilities. The types of financial instruments included in Level 1 are marketable, available-for-sale equity securities that are traded in an active exchange market.
Level 2 – Pricing inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Instruments included in this category are derivative contracts whose value is determined using a pricing model with inputs (such as yield curves and credit spreads) that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant 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):
|
| 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 |
|
| $ | - |
|
|
| 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,Prepaid expenses and other assets, Tenant and other receivables, Notes receivable,net, Accrued interest payable, and Accounts payable and other liabilities, approximates their fair values due to their short termshort-term nature.
Recurring Fair Value Measurements
The Company measures and records its interest rate swap assets and liabilities (see Note 11) and earnout liability at fair value, and discloses the fair value of its long-term debt, on a recurring basis.
Earnout Liability – In connection with the Internalization, the Company recognized an earnout liability that will be due and payable to the former owners of BRE if certain milestones are achieved during specified periods of time following the closing of the Internalization (the “Earnout Periods”) related to either (a) the 40-day dollar volume-weighted average price of a share of the Company’s common stock (“VWAP per REIT Share”), following the completion of an IPO of the Company’s common stock, or (b) the Company’s adjusted funds from operations (“AFFO”) per share, prior to the completion of an IPO (see Note 4).
The Company utilizes third-party valuation experts to assist in estimating the fair value of the earnout liability, and develops estimates by considering weighted-average probabilities of likely outcomes, and using a Monte Carlo simulation and discounted cash flow analysis. These estimates require the Company to make various assumptions about the timing of an IPO, share price volatility, and net asset prices, each of which are unobservable and are considered Level 3 inputs in the fair value hierarchy. A change in these inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date. As shown in the tables below, the Company’s weighted average expected IPO date upon close of the Internalization was April 15, 2020, with a range from March 2020 to May 2020. Due to the subsequent market dislocation and uncertainty presented by the COVID-19 pandemic late in the first quarter of 2020, management determined that it was not prudent to pursue an IPO at that time. As a result of recent improvement in market conditions, as of June 30, 2020, management revised its weighted average expected IPO date to October 21, 2020, with a range of September 2020 to February 2021. The Company anticipates commencing its IPO when market conditions allow, which may be before October 21, 2020. To the extent the expected IPO date advances, there would be a corresponding increase in the earnout liability’s fair value given the earnout’s fixed time horizon. Peer share price volatilities are used to estimate the Company’s expected share price volatility, and the Company’s corresponding ability to achieve the earnout targets. An increase in peer share price volatility would result in an increase in the earnout liability’s fair value. An increase in the Company’s estimated net asset value per diluted share would result in an increase in the earnout liability’s fair value.
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of February 7, 2020, the transaction date.
Significant Unobservable Inputs |
| Weighted Average Assumption Used |
|
| Range | |
Expected IPO date |
| April 15, 2020 |
|
| March 2020 through May 2020 | |
Peer stock price volatility |
| 20.0% |
|
| 16.22% to 23.09% | |
Company's net asset value per diluted share |
| $ | 85.21 |
|
| (a) |
(a) | The Company’s net asset value per diluted share is primarily based on the fair value of its real estate investment portfolio, together with the fair value of its other assets and liabilities. The fair value of the Company’s real estate investment portfolio as of the measurement date was determined using market capitalization rates that ranged between 6.05% and 7.09%. |
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of June 30, 2020.
Significant Unobservable Inputs |
| Weighted Average Assumption Used |
|
| Range | |
Expected IPO date |
| October 21, 2020 |
|
| September 2020 through February 2021 | |
Peer stock price volatility |
| 35.0% |
|
| 25.67% to 58.92% | |
Company's net asset value per diluted share |
| $ | 71.06 |
|
| (b) |
(b) | The Company’s net asset value per diluted share is primarily based on the fair value of its real estate investment portfolio, together with the fair value of its other assets and liabilities. The fair value of the Company’s real estate investment portfolio as of the measurement date was determined using market capitalization rates that ranged between 6.11% and 7.17%. |
The following table presents a reconciliation of the change in the earnout liability during the three and six months ended June 30, 2020:
|
| For the three months ended |
|
| For the six months ended |
| ||
(in thousands) |
| June 30, 2020 |
|
| June 30, 2020 |
| ||
Beginning balance |
| $ | 44,296 |
|
| $ | — |
|
Allocation of Internalization purchase price at February 7, 2020 |
|
| — |
|
|
| 40,119 |
|
Change in fair value subsequent to Internalization |
|
| (6,321 | ) |
|
| (2,144 | ) |
Ending balance |
| $ | 37,975 |
|
| $ | 37,975 |
|
The decrease in the earnout liability fair value between March 31, 2020 and June 30, 2020 is primarily a result of a decrease in the estimated net asset value per share assumption used, partially offset by an increase in peer stock price volatility, both of which are attributable to changes in economic circumstances impacting global equity markets.
The balances of assets and liabilities measured at fair value on a recurring basis are as follows:
|
| June 30, 2020 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swap, liabilities |
| $ | (85,678 | ) |
| $ | — |
|
| $ | (85,678 | ) |
| $ | — |
|
Earnout liability |
|
| (37,975 | ) |
|
| — |
|
|
| — |
|
|
| (37,975 | ) |
|
| December 31, 2019 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swap, assets |
| $ | 2,911 |
|
| $ | — |
|
| $ | 2,911 |
|
| $ | — |
|
Interest rate swap, liabilities |
|
| (24,471 | ) |
|
| — |
|
|
| (24,471 | ) |
|
| — |
|
Long-term Debt – The fair value of the Company’s debt was estimated using Level 2 and Level 3 inputs based on recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current LIBOR, US treasuryLondon Interbank Offered Rate (“LIBOR”), U.S. Treasury obligation interest rates, and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect the Company’s judgment as to the approximate current lending rates for loans or groups of loans with similar maturities and assumes that the debt is outstanding through maturity. Market information, as available, or present value techniques were utilized to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist on specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.
The following table summarizes the carrying amount reported on the Condensed Consolidated Balance Sheets and the Company’s estimate of the fair value of the Company’s MortgageMortgages and notes payable, net, 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 to the carrying amount of such debt of $910,072 and $869,524 on the Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, respectively.revolving credit facility:
As disclosed under the Long-lived Asset Impairment Charges section of Note 2, the
(in thousands) |
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Carrying amount |
| $ | 2,038,172 |
|
| $ | 1,989,451 |
|
Fair value |
|
| 2,172,559 |
|
|
| 2,047,860 |
|
Non-recurring Fair Value Measurements
The Company’s non-recurring fair value measurements for the three months ended Septemberat June 30, 20172020 and December 31, 2019 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.
Right-of-Use Assets and Lease Liabilities
The Company is a lessee under non-cancelable operating leases associated with its corporate headquarters and other office spaces as well as with leases of land (“ground leases”). The Company records right-of-use assets and lease liabilities associated with these leases. The lease liability is equal to the net present value of the future payments to be made under the lease, discounted using estimates based on observable market factors. The right-of-use asset is generally equal to the lease liability plus initial direct costs associated with the leases. The Company includes in the recognition of the right-of-use asset and lease liability those renewal periods that are reasonably certain to be exercised, based on the facts and circumstances that exist at lease inception. Amounts associated with percentage rent provisions are considered variable lease costs and are not included in the initial measurement of the right-of-use asset or lease liability. The Company has made an accounting policy election, applicable to all asset types, to not separate lease from nonlease components when allocating contract consideration related to operating leases.
Right-of-use assets and lease liabilities associated with operating leases were included in the accompanying Condensed Consolidated Balance Sheets as follows:
|
|
|
| June 30, |
|
| December 31, |
| ||
(in thousands) |
| Financial Statement Presentation |
| 2020 |
|
| 2019 |
| ||
Right-of-use assets |
| Prepaid expenses and other assets |
| $ | 3,313 |
|
| $ | 1,614 |
|
Lease liabilities |
| Accounts payable and other liabilities |
|
| 2,924 |
|
|
| 1,209 |
|
Earnout Liability
The Company’s earnout liability is payable in a combination of cash, common shares, and OP Units, in the same proportion as the initial consideration paid in the Internalization (see Note 4). The common shares and OP Units payable under the arrangement will be subject to a redemption rights agreement, whereby holders of the common shares and OP Units will have the right to require the Company to repurchase any or all of the common shares or OP Units if an IPO has not occurred on or before December 31, 2020 (see discussion of the redemption rights agreement in Note 4). The common shares and OP Units are deemed to be freestanding financial instruments that, at inception, embody an obligation to repurchase the Company’s common shares and OP Units, and therefore have been classified as liabilities together with the cash portion of the earnout. The fair value of the earnout liability at the time of the Internalization was recorded in Earnout liability on the Condensed Consolidated Balance Sheets as part of the purchase price allocation. The fair value of the earnout liability is remeasured each reporting period, with changes recorded as Change in fair value of earnout liability in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
Mezzanine Equity
The Company issued common shares and OP Units as base consideration for the Internalization, each of which were subject to a redemption rights agreement, where the common shares (“mezzanine equity common stock”) and OP Units (“mezzanine equity non-controlling interests”) are economically equivalent to the permanent equity classified common shares and OP Units with the exception of certain contingent redemption rights that are not yet exercisable as of June 30, 2020 (see discussion of redemption rights agreement in Note 4). The Company presents the mezzanine equity common stock and mezzanine equity non-controlling interests as mezzanine equity in the Condensed Consolidated Balance Sheets as they are redeemable outside the Company’s control.
The Company subsequently records mezzanine equity common stock at redemption value each reporting period, with changes in carrying value recorded as a component of Additional paid-in capital on the Condensed Consolidated Balance Sheets.
The Company subsequently records mezzanine equity non-controlling interests at the greater of (i) carrying amount, increased or decreased for the non-controlling interests’ share of net income or loss, dividends and comprehensive income or loss or (ii) redemption value. Changes in carrying value of mezzanine equity non-controlling interests are recorded as a component of Additional paid-in capital on the Condensed Consolidated Balance Sheets.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses which changed how entities measure credit losses for most financial assets. Financial assets that are measured at amortized cost are required to be presented at the net amount expected to be collected with a provision for credit losses deducted from the amortized cost basis. The guidance requires an entity to utilize broader information in estimating the expected credit loss, including forecasted information. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses which clarified that operating lease receivables recorded by lessors are explicitly excluded from the scope of this guidance. ASU 2016-13 and ASU 2018-09 (collectively, “ASC 326”) were effective January 1, 2020, under a modified retrospective application. The new guidance applies to the Company’s investments in direct financing leases. Due to the nature of its activities, the Company’s lease portfolio has historically not included a significant number of direct financing leases, and as a result the adoption of ASC 326 did not have any assets measured ata material impact on its
financial statements. In connection with the adoption of ASC 326, the Company recorded a provision for credit losses of $323 with an offsetting cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2020.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments under ASU 2018-13 remove, add, and modify certain disclosure requirements on fair value measurements in ASC 820. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company adopted the new standard on a nonrecurringprospective basis at December 31, 2016.on January 1, 2020. The modifications and new disclosures required by the new standard primarily relate to disclosures concerning recurring Level 3 fair value measurements.
Taxes Collected From TenantsIn April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Remitted to Governmental Authorities
Substantially allHedging, and Topic 825, Financial Instruments which clarified and improved guidance within the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The Company assessed the impact of the Company’schanges to Topic 326 in connection with its adoption of ASU 2016-13 discussed above. The provisions of ASU 2019-04 relating to Topics 815 and 825 relate to clarifying the provisions of existing guidance that are not applicable to the Company.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting affected by reference rate reform if certain criteria are met. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, are triple-net, which providederivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the lessees are responsible forindex upon which future hedged transactions will be based matches the paymentindex on the corresponding derivatives. Application of all property operating expenses, including property taxes, maintenance and insurance.these expedients preserves the presentation of derivatives consistent with past presentation. The Company records such expensescontinues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) that focused on the application of lease accounting guidance to lease concessions provided as a net basis. Forresult of the three months ended September 30, 2017COVID-19 pandemic. Under ASC 842, economic relief that was agreed to or negotiated outside of the original lease agreement is typically considered a lease modification, in which case both the lessee and 2016,lessor would be required to apply the respective modification frameworks. However, if the lessee was entitled to the economic relief because of either contractual or legal rights, the relief would be accounted for outside of the modification framework. Although the original lease modification guidance in ASC 842 remains appropriate to address routine lease modifications, the Lease Modification Q&A established a different framework to account for certain lease concessions granted in response to the COVID-19 pandemic, if certain criteria have been met. The Lease Modification Q&A allows the Company to make an accounting policy election to account for COVID-19 related lease concessions as either a lease modification or a negative variable adjustment to rental revenue. Such election is required to be applied consistently to leases with similar characteristics and similar circumstances. Refer to Note 18, COVID-19 Pandemic regarding information on COVID-19 related concessions and the associated impact on the Company’s tenants, pursuant to their lease obligations, have made direct payment for property taxes to the taxing authoritiesresults of approximately $2,448operations.
Reclassifications
The Company reclassified $305 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$748 of approximately $13,405 and $11,176, respectively.
In some situations, the Company may collect propertyIncome 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 revenuecomponent of $608 and $551 is included in Operating expenses reimbursed from tenants and expenseto a component of $885 and $718 is included in Property and operating expenses inOther income (expenses), on the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended SeptemberJune 30, 2017 and 2016, respectively. Taxes collected2019, respectively, to conform with the current period presentation. The reclassification is a change from tenants were $1,787 and $1,379, while taxes remittedone acceptable presentation to governmental authorities were $2,084 and $1,442 for the nine months ended September 30, 2017 and 2016, respectively.another acceptable presentation.
Recently Adopted Accounting Standards
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. Asreclassified $272 of Internalization expenses from General and administrative expenses to a resultcomponent of the adoption, the Company capitalized $6,583 of acquisition costs in connection with investments in real estate closed during the nine months ended September 30, 2017 that qualified as asset acquisitions under the adopted guidance.
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 amountsincome (expenses) 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 StatementStatements of Cash Flows is applicableIncome and Comprehensive Income (Loss) for the three and six months ended June 30, 2019, to conform with 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.current period presentation. 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 2014-09reclassification is a comprehensive new revenue recognition model requiring a companychange from one acceptable presentation 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.another acceptable presentation.
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
Prior to the Internalization on February 7, 2020, BRE, a related party in which certain directors of the Corporation had either a direct or indirect ownership interest, and the Asset Manager were considered to be related parties.
Property Management Agreement
The Corporation and the Operating Company have entered intoOP were parties to a property management agreement (the(as amended, 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.BRE. Under the terms of the Property Management Agreement, the Manager managesBRE managed and coordinatescoordinated certain aspects of the leasing of the Company’sCorporation’s rental property.
In exchange for various services provided under the Property Management Agreement, BRE received certain fees and other compensation as follows:
(i) | 3% of gross rentals collected each month from the rental property for property management services (other than one property, which called for 5% of gross rentals under the Property Management Agreement); and |
(ii) | Re-leasing fees for existing rental property equal to one month’s rent for a new lease with an existing tenant and two months’ rent for a new lease with a new tenant. |
Upon completion of 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 ofInternalization, 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.was terminated and there will be no future property management fees payable to BRE. The Corporation’s Independent Directors Committee (“IDC”) has approved the renewal ofInternalization was not considered a “Termination Event” under the Property Management Agreement, through December 31, 2018. If the Corporation terminates the Property Management Agreement priorso no fees were payable to any renewal term or the IDC terminates the agreement within 30 days followingBRE as a change in controlresult of the Manager (as defined in Property Management Agreement),Internalization. See Note 4 for further discussion regarding the Corporation will be required to pay toInternalization, including 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.associated payments related thereto.
Asset Management Agreement
The Corporation and the Operating Company have entered intoOP were parties to an asset management agreement (the(as amended, the “Asset Management Agreement”) with the Asset Manager, a wholly-owned subsidiarysingle member limited liability company of which BRE was the Manager,sole member, and therefore a related party in which certain officers and directors of the Company haveCorporation had an indirect ownership interest. Under the terms of the Asset Management Agreement, the Asset Manager iswas responsible for, among other things, the Corporation’s acquisition, initial leasing, and disposition strategies, financing activities, and providing support to the IDCCorporation’s Independent Directors Committee (“IDC”) for its valuation functions and other duties. The Asset Manager also designatesnominated 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 annualwas compensated as follows:
(i) | a quarterly asset management fee equal to 0.25% of the aggregate value of common stock, based on the per share value as determined by the IDC each quarter, on a fully diluted basis as if all interests in the OP had been converted into shares of the Corporation’s common stock; |
(ii) | 0.5% of the proceeds from future equity closings as reimbursement for offering, marketing, and brokerage expenses; |
(iii) | 1% of the gross purchase price paid for each rental property acquired (other than acquisitions described in (iv) below), including any property contributed in exchange for membership interests in the OP; |
(iv) | 2% of the gross purchase price paid for each rental property acquired in the event that the acquisition of a rental property required a new lease (as opposed to the assumption of an existing lease), such as a sale-leaseback transaction; |
(v) | 1% of the gross sale price received for each rental property disposition; and |
(vi) | 1% of the Aggregate Consideration, as defined in the Asset Management Agreement, received in connection with a disposition event, as defined in the Asset Management Agreement. |
Upon completion of the Internalization, the Asset Management Agreement was terminated and there will be no future 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, compensationfees payable to the Asset Manager for any quarter will be deferred in whole or in part at any time duringManager. The Internalization was not considered a rolling 12 month period when cumulative distributions are below $3.50 per share. Any deferred compensation“Termination Event” 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 compensationso no fees were payable 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,as 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 mattersresult of the Corporation and Operating Company.
The Asset Management Agreement includes various other fees paid toInternalization. See Note 4 for further discussion regarding the Asset Manager in exchange for services provided underInternalization, including the agreement, as noted in the table below.associated payments related thereto.
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 arewere as follows:
|
|
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||||
(in thousands) |
|
|
| September 30, |
|
| September 30, |
|
|
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||||||||||||
Type of Fee |
| Financial Statement Presentation |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| Financial Statement Presentation |
| 2020(a) |
|
| 2019 |
|
| 2020(a) |
|
| 2019 |
| ||||||||
Asset management fee |
| Asset management fees |
| $ | 3,844 |
|
| $ | 2,789 |
|
| $ | 10,666 |
|
| $ | 7,770 |
|
| Asset management fees |
| $ | — |
|
| $ | 5,318 |
|
| $ | 2,461 |
|
| $ | 10,438 |
|
Property management fee |
| Property management fees |
|
| 1,249 |
|
|
| 1,010 |
|
|
| 3,635 |
|
|
| 2,868 |
|
| Property management fees |
|
| — |
|
|
| 1,935 |
|
|
| 1,275 |
|
|
| 3,820 |
|
Total management fee expense |
|
|
|
| 5,093 |
|
|
| 3,799 |
|
|
| 14,301 |
|
|
| 10,638 |
|
|
|
|
| — |
|
|
| 7,253 |
|
|
| 3,736 |
|
|
| 14,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing fee |
| Additional paid-in capital |
|
| 342 |
|
|
| 318 |
|
|
| 1,144 |
|
|
| 976 |
| ||||||||||||||||||
Marketing fee (offering costs) |
| Additional paid-in capital |
|
| — |
|
|
| 300 |
|
|
| — |
|
|
| 600 |
| ||||||||||||||||||
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 |
|
| Capitalized as a component of assets acquired |
|
| — |
|
|
| 1,275 |
|
|
| — |
|
|
| 2,005 |
|
Leasing fee |
| Leasing fees, net |
|
| 801 |
|
|
| 797 |
|
|
| 2,597 |
|
|
| 2,827 |
| ||||||||||||||||||
Leasing fee and re-leasing fees |
| Leasing fees, net |
|
| — |
|
|
| 177 |
|
|
| — |
|
|
| 435 |
| ||||||||||||||||||
Disposition fee |
| Gain on sale of real estate |
|
| 219 |
|
|
| 23 |
|
|
| 522 |
|
|
| 61 |
|
| Gain on sale of real estate |
|
| — |
|
|
| 238 |
|
|
| 109 |
|
|
| 351 |
|
Total management fees |
|
|
| $ | 8,046 |
|
| $ | 6,291 |
|
| $ | 22,084 |
|
| $ | 18,312 |
|
|
|
| $ | — |
|
| $ | 9,243 |
|
| $ | 3,845 |
|
| $ | 17,649 |
|
(a) | Fees were payable under the Property Management Agreement and Asset Management Agreement from January 1, 2020 through February 6, 2020. The Internalization was effective February 7, 2020. |
Included in
There were no unpaid management fees are $1,688 and $364 of unpaid fees recorded in Due to related parties on the Condensed Consolidated Balance Sheets at SeptemberJune 30, 20172020 and December 31, 2016, respectively.2019. All fees related to the Property Management Agreement and the Asset Management Agreement arewere paid for in cash within the Company’s normal payment cycle for vendors.
Legal ServicesTax Protection Agreement
TheUpon closing of the Internalization, the Company retainsentered into an agreement with Amy L. Tait, the legal servicesCompany’s founder, and certain members of Vaisey Nicholson & Nearpass, PLLCher family (“VNN”Founding Owners”), formerlypursuant to which the OP agreed to indemnify the Founding Owners against the applicable income tax liabilities resulting from the sale, exchange, transfer or other disposal of the assets of BRE that the Company acquired in the Internalization, through February 7, 2030, or the Company’s failure to allocate specific types of the OP’s indebtedness to the Founding Owners (the “Founding Owners’ Tax Protection Agreement”). The maximum amount the Company may be liable for under the Founding Owners’ Tax Protection Agreement is $10,000.
Earnout Consideration
In connection with the Internalization, the Company incurred a related party. One former minority partnercontingent liability that would be payable to certain members of VNNthe Company’s Board of Directors and employees who had previously been owners and/or employees of BRE, upon the occurrence of certain events (see Note 4). The fair value of the earnout liability was $37,975 as of June 30, 2020.
Related Party Lease
In connection with the Internalization, the Company assumed the lease agreement relating to the Company’s principal executive office with Clinton Asset Holdings Associates, L.P., an affiliated third party, approximately 1.6% of which is an immediate family member to aindirectly owned by the Company’s Chairman and member of the Board of Directors. The lease of 24,072 square feet of office space expires on August 31, 2023, and contains two five-year renewal options. The annual rent for 2020 is approximately $547, with 2% annual increases thereafter. See further discussion in Note 16.
4. Internalization
On February 7, 2020, the Company completed the Internalization and the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the Company and an indirect minority ownerOP.
The consideration paid at closing of the Manager. Beginning January 2017,Internalization is summarized in the family member was no longerfollowing table:
(in thousands) |
|
|
|
|
Issuance of 781 shares of common stock |
| $ | 66,376 |
|
Issuance of 1,320 OP Units |
|
| 112,159 |
|
Cash |
|
| 30,981 |
|
Base consideration |
|
| 209,516 |
|
Initial estimate of fair value of earnout liability |
|
| 40,119 |
|
Total consideration |
| $ | 249,635 |
|
The Company may be required to pay additional earnout consideration of up to $75,000 payable in four tranches of $10,000, $15,000, $25,000, and $25,000 if certain milestones related to either (a) the 40-day VWAP per REIT Share, following the completion of an ownerIPO, or partner(b) the Company’s AFFO per share, prior to the completion of VNN and therefore, prospectively, VNNan IPO, (each, an “Earnout Trigger”) are achieved during the Earnout Periods. The consideration will no longer be deemedconsist of a related party. Legal services obtained from VNN are mainly for acquisition and dispositioncombination of real estate related matters, as well as general counsel regarding property management and financing. The IDC has reviewed the billings and other aspectscash, shares of the relationship between VNNCompany’s common stock, and OP Units, based on the same proportions paid in the base consideration.
The earnout tranches, applicable 40-day VWAP of a REIT Share and AFFO per share, and the Company. The Company utilizes the services of other outside legal counselapplicable Earnout Periods are 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:follows:
(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 |
|
(in thousands, except per share amounts) |
| If the Company has completed an IPO |
| If the Company has not completed an IPO | ||||
Earnout Tranche(a) |
| 40-Day VWAP of a REIT Share |
| Applicable Earnout Period |
| AFFO per Share |
| Applicable Earnout Period |
$10,000 |
| $90.00 |
| The two-year period beginning on the earlier of (i) the IPO closing date or (ii) December 31, 2020. |
| $5.85 |
| The two-year period consisting of the calendar years ended December 31, 2020 and December 31, 2021. |
$15,000 |
| $95.00 |
| The two-year period beginning on the earlier of (i) the IPO closing date or (ii) December 31, 2020. |
| $5.95 |
| The two-year period consisting of the calendar years ended December 31, 2020 and December 31, 2021. |
$25,000 |
| $97.50 |
| The four-year period beginning on the date that is exactly one year after the earnout period begins for the first and second tranches above. |
| $6.30 |
| The four-year period consisting of the calendar years ended December 31, 2021, December 31, 2022, December 31, 2023 and December 31, 2024. |
$25,000 |
| $100.00 |
| The four-year period beginning on the date that is exactly one year after the earnout period begins for the first and second tranches above. |
| $6.70 |
| The four-year period consisting of the calendar years ended December 31, 2021, December 31, 2022, December 31, 2023 and December 31, 2024. |
(a) |
|
4. Acquisitions
The Company closed on the following acquisitions during the nine months ended September 30, 2017:
(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) |
|
|
Should all earnout milestones be met, an additional 272 shares of common stock and an additional 465 OP Units would be issued, in addition to the payment of $12,349 in cash. As of the Internalization date, the Company estimated that the earnout liability had a fair value of $40,119, of which approximately $33,511 related to the potential issuance of common shares and OP Units and approximately $6,608 related to the potential payment of cash. The Company closed onwill estimate the following acquisitionsfair value of the earnout liability at each reporting date during the ninecontingency period and record any changes in estimated fair value in its Condensed Consolidated Statement of Income and Comprehensive Income (Loss).
Redemption Rights Agreement
The mezzanine equity common stock and mezzanine equity non-controlling interests issued in connection with the Internalization are economically equivalent to permanent equity common shares and OP Units with the exception of certain contingent redemption rights that are not yet exercisable as of June 30, 2020. If an IPO does not occur on or before December 31, 2020, then each holder of mezzanine equity common stock and mezzanine equity non-controlling interests shall have the right to require the Company to repurchase any or all of such holder’s shares and OP Units at a price equal to the greater of (i) the initial fair value of $85 of the common shares or OP Units at the date of the Internalization or (ii) the current fair value of such common shares or OP Units, as adjusted for interest and distributions. Such repurchases can occur during the period from January 1, 2021 until the earlier of 12 months ended Septemberthereafter or the date of an IPO; provided that the period shall not begin on January 1, 2021 if the Company, in connection with an IPO, shall have filed a registration statement with the SEC that has not been withdrawn as of January 1, 2021 (but the period shall begin immediately upon any such withdrawal and then continue until the earlier of 12 months thereafter or until the occurrence of an IPO); provided, further, that the period shall begin no later than July 1, 2021 (even if such registration statement shall not have been withdrawn as of July 1, 2021) and in such event shall continue until the earlier of twelve (12) months thereafter or the occurrence of an IPO. The Merger Agreement did not provide that the completion of an IPO is a condition to the closing of the Internalization. Subsequent to June 30, 2016:2020, such repurchase rights have been irrevocably waived by each of the named executive officers.
(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 |
|
issuance of such earnout shares until the earlier of 12 months thereafter or the occurrence of an IPO; provided, further, that such period shall not begin on such date of issuance if the Company, in connection with an IPO, shall have filed a registration statement with the SEC that has not been withdrawn as of such date of issuance (but such period shall begin immediately upon any such withdrawal and then continue until the earlier of 12 months thereafter or the occurrence of an IPO; provided, further, that such period shall begin no later than six months after such date of issuance (even if such registration statement shall not have been withdrawn as of such date) and in such event shall continue until the earlier of 12 months thereafter or the occurrence of an IPO.
Allocation of Purchase Price
The Internalization was accounted for as a business combination and accordingly, the Company allocated the purchase price of these propertiesutilizing the acquisition method to the relative fair value of the real estaterecord assets acquired and liabilities assumed. assumed at their estimated fair values.
The allocation of the purchase price has not been finalized and is based upon preliminary estimates of these fair values, which is the best available information at the current time. The final determination of the fair values of the assets and liabilities will be based on the actual valuations of the tangible and intangible assets and liabilities that existed as of the date of completion of the acquisition, including the valuation of the earnout liability. The Company expects to finalize the valuations during the measurement period, not to exceed one year from the date of the Internalization. Consequently, amounts preliminarily allocated to identifiable tangible and intangible assets and liabilities could change.
The following table summarizes the Company’s preliminary allocation of the purchase price allocationassociated with the Internalization:
(in thousands) |
|
|
|
|
Prepaid expenses and other assets |
| $ | 1,336 |
|
Right-of-use assets |
|
| 1,898 |
|
Goodwill |
|
| 339,769 |
|
Accounts payable and other liabilities |
|
| (986 | ) |
Operating lease liabilities |
|
| (1,898 | ) |
Debt |
|
| (90,484 | ) |
|
| $ | 249,635 |
|
In connection with the Internalization, the Company recorded goodwill of $339,769 as a result of the consideration exceeding the fair value of the net liabilities acquired. Goodwill represents the synergies and costs savings expected from the acquired management functions and the Company’s ability to generate additional portfolio growth on a lower cost structure than when it was externally managed. The Company does not expect that the goodwill will be deductible for acquisitions completed duringtax purposes.
In connection with the nine months ended September 30, 2017Internalization, the Company assumed $90,484 of debt which was subsequently repaid through a combination of borrowings under its Revolving Credit Facility (as defined below) and 2016, discussed above, excluding non-real estate liabilities assumed of $1,000entering into a new $60,000 term loan agreement (see Note 9).
The Company incurred $389 and $1,594 in non-recurring costs associated with the Internalization during the three and ninesix months ended SeptemberJune 30, 2017:
|
| 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. All of the acquisitions closed during the nine months ended September 30, 2017 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 ninesix months ended SeptemberJune 30, 20162019, which were incurred and included in Acquisitionclassified as Internalization expenses in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss). From
The effect of the dateInternalization has been reflected in the Company’s operating results beginning on February 7, 2020. No incremental revenues were recorded as a result of acquisition through September 30, 2016, the Company recorded revenues of $5,173 and $8,515 forInternalization. Subsequent to the Internalization, during the three and ninesix months ended SeptemberJune 30, 2016,2020, the Company incurred $4,572 and $8,234, respectively, in expenses as a result of being internalized. Such amounts include general and administrative expenses associated with the Company’s performance of functions previously performed by BRE and the Asset Manager (primarily employee related costs), as well as interest expense associated with the borrowings related to the properties acquired and accounted for as business combinations, and recognized net incomeInternalization. These expenses do not include the Internalization expenses discussed above, or amounts recorded to reflect changes in the fair value 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):earnout liability.
(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 following pro forma information summarizes selected financial information from the Company’s combined results of operations, excludingas if the impactInternalization had occurred on January 1, 2019. These results contain certain adjustments totaling $389 and $6,137 of one-time acquisition costs,income, respectively, for the three and six months ended June 30, 2020 and $7,343 and $13,973 of income, respectively, for the acquisitions accounted for as business combinations, for which financial information was available, are included in the following condensedthree and six months ended June 30, 2019. These pro forma adjustments reflect the elimination of Internalization expenses and asset management, property management, and disposition fees between the Company and BRE and the Asset Manager in historic financial information as if these acquisitions had been completed as ofresults, and adjustments to reflect incremental interest expense associated with the beginning of the comparable prior annual period priorborrowing related to the acquisition date. The following condensedInternalization. This 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 comparativeinformational purposes only, and aremay not necessarilybe indicative of what the Company’s actual results of operations would have been had the acquisitionsInternalization occurred at the beginning of the periods presented,period, nor are they necessarily indicativedoes it purport to represent the results of future operating results.operations.
The condensed pro forma financial information areis as follows for the three and ninesix months ended SeptemberJune 30, 2016:
2020 and 2019:
|
| For the three months ended |
|
| For the nine months ended |
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||||
(in thousands) |
| September 30, 2016 |
|
| September 30, 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||
Revenues |
| $ | 39,290 |
|
| $ | 117,175 |
|
| $ | 80,371 |
|
| $ | 69,053 |
|
| $ | 158,602 |
|
| $ | 137,483 |
|
Net income |
|
| 18,394 |
|
|
| 38,088 |
|
|
| 17,487 |
|
|
| 19,026 |
|
|
| 31,340 |
|
|
| 36,964 |
|
5. Acquisitions of Rental Property
The Company did not complete any acquisitions of rental property during the six months ended June 30, 2020. The Company closed on the following acquisitions of rental property during the six months ended June 30, 2019:
(in thousands, except number of properties) |
| Number of |
|
| Real Estate |
|
| ||||
Date |
| Property Type |
| Properties |
|
| Acquisition Price |
|
| ||
January 31, 2019 |
| Healthcare |
|
| 1 |
|
| $ | 4,747 |
|
|
March 12, 2019 |
| Industrial |
|
| 1 |
|
|
| 10,217 |
|
|
March 15, 2019 |
| Retail |
|
| 10 |
|
|
| 13,185 |
|
|
March 19, 2019 |
| Retail |
|
| 14 |
|
|
| 19,128 |
|
|
March 26, 2019 |
| Industrial |
|
| 1 |
|
|
| 25,801 |
|
|
April 30, 2019 |
| Industrial |
|
| 1 |
|
|
| 76,000 |
| (a) |
May 21, 2019 |
| Retail |
|
| 2 |
|
|
| 6,500 |
|
|
May 31, 2019 |
| Retail |
|
| 1 |
|
|
| 3,192 |
|
|
June 7, 2019 |
| Office |
|
| 1 |
|
|
| 30,589 |
|
|
June 26, 2019 |
| Industrial |
|
| 2 |
|
|
| 11,180 |
|
|
|
|
|
|
| 34 |
|
| $ | 200,539 |
| (b) |
(a) | In conjunction with this acquisition, the Company assumed a mortgage with a principal balance of $49,782 with an interest rate of 4.92% and a maturity date of February 2028 (see Note 10). |
(b) | Acquisition price does not include capitalized acquisition costs of $5,030. |
The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation for completed real estate acquisitions:
(in thousands) |
| For the six months ended June 30, 2019 |
| |
Land |
| $ | 13,339 |
|
Land improvements |
|
| 16,758 |
|
Buildings and improvements |
|
| 154,107 |
|
Acquired in-place leases(c) |
|
| 19,942 |
|
Acquired above-market leases(d) |
|
| 2,281 |
|
Acquired below-market leases(e) |
|
| (858 | ) |
Mortgage payable |
|
| (49,782 | ) |
|
| $ | 155,787 |
|
(c) | The weighted average amortization period for acquired in-place leases is 15 years for acquisitions completed during the six months ended June 30, 2019. |
(d) | The weighted average amortization period for acquired above-market leases is 17 years for acquisitions completed during the six months ended June 30, 2019. |
(e) | The weighted average amortization period for acquired below-market leases is 12 years for acquisitions completed during the six months ended June 30, 2019. |
The above acquisitions were funded using a combination of available cash on hand, borrowings under the Company’s Revolving Credit Facility, and proceeds from equity issuances. All real estate acquisitions closed during the six months ended June 30, 2019, qualified as asset acquisitions and, as such, acquisition costs have been capitalized.
The Company closed on the following sales of real estate, none of which qualified as discontinued operations, during the three and nine months ended September 30, 2017 and 2016:operations:
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||||||||||||
(in thousands, except number of properties) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Number of properties disposed |
|
| 4 |
|
|
| 2 |
|
|
| 10 |
|
|
| 4 |
|
|
| 3 |
|
|
| 5 |
|
|
| 13 |
|
|
| 9 |
|
Aggregate sale price |
| $ | 27,725 |
|
| $ | 12,345 |
|
| $ | 58,170 |
|
| $ | 16,095 |
|
| $ | 10,538 |
|
| $ | 23,809 |
|
| $ | 47,723 |
|
| $ | 35,100 |
|
Aggregate carrying value |
|
| 22,335 |
|
|
| 9,163 |
|
|
| 44,984 |
|
|
| 11,519 |
|
|
| (8,994 | ) |
|
| (20,233 | ) |
|
| (36,758 | ) |
|
| (29,445 | ) |
Additional sales expenses |
|
| 1,338 |
|
|
| 199 |
|
|
| 2,854 |
|
|
| 487 |
|
|
| (498 | ) |
|
| (789 | ) |
|
| (2,300 | ) |
|
| (1,468 | ) |
Gain on sale of real estate |
|
| 4,052 |
|
|
| 2,983 |
|
|
| 10,332 |
|
|
| 4,089 |
|
| $ | 1,046 |
|
| $ | 2,787 |
|
| $ | 8,665 |
|
| $ | 4,187 |
|
6.7. Investment in Rental Property and Lease Arrangements
The Company generally leases its investment rental property to established tenants.tenants in the industrial, healthcare, restaurant, office, retail, and other industries. At SeptemberJune 30, 2017,2020, the Company had 462615 real estate properties which were leased under leases that have been classified as operating leases and 1511 that have been classified as direct financing leases. Of the 1511 leases classified as direct financing leases, fivethree include land portions which are accounted for as operating leases (see Revenue Recognition within Note 2). Substantially all 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/CPI, or increases in the tenant’s sales volume. Generally, the tenant istenants are also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and maintain property and liability insurance coverage. The leases also typically provide for one or more multiple year renewal options, at the election of the tenant, and are subject to generally the same terms and conditions as the initial lease.
Investment in Rental Property – Accounted for Using the Operating Method
Rental property subject to non-cancelable operating leases with tenants arewas as follows at September 30, 2017 and December 31, 2016:follows:
|
| September 30, |
|
| December 31, |
| ||||||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||
Land |
| $ | 300,633 |
|
| $ | 288,276 |
|
| $ | 545,984 |
|
| $ | 548,911 |
|
Land improvements |
|
| 185,776 |
|
|
| 162,341 |
|
|
| 276,542 |
|
|
| 275,470 |
|
Buildings |
|
| 1,530,429 |
|
|
| 1,283,322 |
| ||||||||
Tenant improvements |
|
| 9,656 |
|
|
| 8,665 |
| ||||||||
Buildings and improvements |
|
| 2,825,327 |
|
|
| 2,850,571 |
| ||||||||
Equipment |
|
| 519 |
|
|
| 799 |
|
|
| 11,873 |
| �� |
| 11,492 |
|
|
|
| 2,027,013 |
|
|
| 1,743,403 |
|
|
| 3,659,726 |
|
|
| 3,686,444 |
|
Less accumulated depreciation |
|
| (135,305 | ) |
|
| (105,703 | ) |
|
| (312,934 | ) |
|
| (271,044 | ) |
|
| $ | 1,891,708 |
|
| $ | 1,637,700 |
|
| $ | 3,346,792 |
|
| $ | 3,415,400 |
|
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 June 30, |
|
| For the six months ended June 30, |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Depreciation |
| $ | 23,560 |
|
| $ | 19,532 |
|
| $ | 47,075 |
|
| $ | 38,285 |
|
Estimated minimum future rental receipts requiredlease payments to be received under non-cancelable operating leases with tenants at SeptemberJune 30, 20172020 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 2020 |
| $ | 142,216 |
|
2021 |
|
| 289,046 |
|
2022 |
|
| 291,422 |
|
2023 |
|
| 294,357 |
|
2024 |
|
| 290,202 |
|
Thereafter |
|
| 2,229,760 |
|
|
| $ | 3,537,003 |
|
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, such 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.
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:
|
| September 30, |
|
| December 31, |
| ||||||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||
Minimum lease payments to be received |
| $ | 78,837 |
|
| $ | 90,447 |
| ||||||||
Undiscounted estimated lease payments to be received |
| $ | 49,524 |
|
| $ | 72,753 |
| ||||||||
Estimated unguaranteed residual values |
|
| 19,758 |
|
|
| 22,335 |
|
|
| 16,049 |
|
|
| 20,358 |
|
Less unearned revenue |
|
| (56,983 | ) |
|
| (65,511 | ) | ||||||||
Unearned income |
|
| (34,424 | ) |
|
| (51,221 | ) | ||||||||
Reserve for credit losses |
|
| (196 | ) |
|
| — |
| ||||||||
Net investment in direct financing leases |
| $ | 41,612 |
|
| $ | 47,271 |
|
| $ | 30,953 |
|
| $ | 41,890 |
|
Minimum future rental receipts requiredUndiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at SeptemberJune 30, 20172020 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 2020 |
| $ | 1,622 |
|
2021 |
|
| 3,304 |
|
2022 |
|
| 3,368 |
|
2023 |
|
| 3,433 |
|
2024 |
|
| 3,493 |
|
Thereafter |
|
| 34,304 |
|
|
| $ | 49,524 |
|
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 (Loss):
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Contractual rental amounts billed for operating leases |
| $ | 67,342 |
|
| $ | 60,294 |
|
| $ | 140,170 |
|
| $ | 118,713 |
|
Adjustment to recognize contractual operating lease billings on a straight-line basis |
|
| 8,276 |
|
|
| 5,269 |
|
|
| 9,941 |
|
|
| 10,440 |
|
Variable rental amounts earned |
|
| 51 |
|
|
| — |
|
|
| 74 |
|
|
| — |
|
Adjustment to revenue recognized for uncollectible rental amounts billed |
|
| (1,190 | ) |
|
| — |
|
|
| (2,223 | ) |
|
| (440 | ) |
Total operating lease rental revenues |
|
| 74,479 |
|
|
| 65,563 |
|
|
| 147,962 |
|
|
| 128,713 |
|
Earned income from direct financing leases |
|
| 855 |
|
|
| 1,004 |
|
|
| 1,842 |
|
|
| 2,009 |
|
Operating expenses billed to tenants |
|
| 4,335 |
|
|
| 2,486 |
|
|
| 8,067 |
|
|
| 6,761 |
|
Other income from real estate transactions |
|
| 702 |
|
|
| — |
|
|
| 731 |
|
|
| — |
|
Total Lease revenues, net |
| $ | 80,371 |
|
| $ | 69,053 |
|
| $ | 158,602 |
|
| $ | 137,483 |
|
7.8. Intangible Assets and Liabilities
The following is a summary of intangible assets and liabilities and related accumulated amortization at September 30, 2017 and December 31, 2016:amortization:
|
| September 30, |
|
| December 31, |
| ||||||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||
Lease intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired above-market leases |
| $ | 57,922 |
|
| $ | 45,490 |
|
| $ | 55,242 |
|
| $ | 62,136 |
|
Less accumulated amortization |
|
| (8,047 | ) |
|
| (4,940 | ) |
|
| (17,981 | ) |
|
| (17,433 | ) |
Acquired above-market leases, net |
|
| 49,875 |
|
|
| 40,550 |
|
|
| 37,261 |
|
|
| 44,703 |
|
Acquired in-place leases |
|
| 177,044 |
|
|
| 141,676 |
|
|
| 334,590 |
|
|
| 349,645 |
|
Less accumulated amortization |
|
| (21,450 | ) |
|
| (14,105 | ) |
|
| (73,110 | ) |
|
| (62,454 | ) |
Acquired in-place leases, net |
|
| 155,594 |
|
|
| 127,571 |
|
|
| 261,480 |
|
|
| 287,191 |
|
Total intangible lease assets, net |
| $ | 205,469 |
|
| $ | 168,121 |
|
| $ | 298,741 |
|
| $ | 331,894 |
|
|
|
|
|
|
|
|
|
| ||||||||
Acquired below-market leases |
| $ | 75,038 |
|
| $ | 54,062 |
|
| $ | 107,645 |
|
| $ | 113,862 |
|
Less accumulated amortization |
|
| (8,735 | ) |
|
| (6,191 | ) |
|
| (24,488 | ) |
|
| (21,640 | ) |
Intangible lease liabilities, net |
| $ | 66,303 |
|
| $ | 47,871 |
|
| $ | 83,157 |
|
| $ | 92,222 |
|
|
|
|
|
|
|
|
|
| ||||||||
Leasing fees |
| $ | 15,543 |
|
| $ | 13,279 |
|
| $ | 15,796 |
|
| $ | 17,013 |
|
Less accumulated amortization |
|
| (2,497 | ) |
|
| (1,950 | ) |
|
| (4,428 | ) |
|
| (4,166 | ) |
Leasing fees, net |
| $ | 13,046 |
|
| $ | 11,329 |
|
| $ | 11,368 |
|
| $ | 12,847 |
|
Amortization expense for acquired in-place leasesof intangible lease assets and feesliabilities was $3,043 and $2,318 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.as follows:
(in thousands) |
|
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||
Intangible |
| Financial Statement Presentation |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Acquired in-place leases and leasing fees |
| Depreciation and amortization |
| $ | 16,339 |
|
| $ | 5,755 |
|
| $ | 24,034 |
|
| $ | 11,312 |
|
Above-market and below-market leases |
| Lease revenues, net |
|
| (1,016 | ) |
|
| 720 |
|
|
| 124 |
|
|
| 1,460 |
|
Estimated future amortization of intangible assets and liabilities at SeptemberJune 30, 20172020 is as follows:
(in thousands) |
|
|
|
|
Remainder of 2017 |
| $ | 3,273 |
|
2018 |
|
| 12,224 |
|
2019 |
|
| 11,439 |
|
2020 |
|
| 11,330 |
|
2021 |
|
| 11,278 |
|
Thereafter |
|
| 102,667 |
|
|
| $ | 152,211 |
|
(in thousands) |
|
|
|
|
Remainder of 2020 |
| $ | 11,480 |
|
2021 |
|
| 22,648 |
|
2022 |
|
| 22,100 |
|
2023 |
|
| 21,773 |
|
2024 |
|
| 21,007 |
|
Thereafter |
|
| 127,944 |
|
|
| $ | 226,952 |
|
8.9. 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 |
|
|
|
|
|
|
| |||||
|
| 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 |
|
|
|
|
|
|
|
|
| Outstanding Balance |
|
|
|
|
|
|
| |||||
(in thousands, except interest rates) |
| June 30, 2020 |
|
| December 31, 2019 |
|
| Interest Rate(c) |
|
| Maturity Date | |||
2020 Unsecured Term Loan(a) |
| $ | 240,000 |
|
| $ | 300,000 |
|
| one-month LIBOR + 1.25% |
|
| Feb. 2021(d) | |
Unsecured Revolving Credit and Term Loan Agreement(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility |
|
| 248,300 |
|
|
| 197,300 |
|
| one-month LIBOR + 1.20% |
|
| Jan. 2022 | |
2023 Unsecured Term Loan |
|
| 265,000 |
|
|
| 265,000 |
|
| one-month LIBOR + 1.35% |
|
| Jan. 2023 | |
2024 Unsecured Term Loan |
|
| 190,000 |
|
|
| 190,000 |
|
| one-month LIBOR + 1.25% |
|
| Jun. 2024 | |
|
|
| 703,300 |
|
|
| 652,300 |
|
|
|
|
|
|
|
2022 Unsecured Term Loan(a) |
|
| 60,000 |
|
|
| — |
|
| one-month LIBOR + 1.25% |
|
| Feb. 2022 | |
2026 Unsecured Term Loan(a) |
|
| 450,000 |
|
|
| 450,000 |
|
| one-month LIBOR + 1.85% |
|
| Feb. 2026 | |
Senior Notes(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
| 150,000 |
|
|
| 150,000 |
|
| 4.84% |
|
| Apr. 2027 | |
Series B |
|
| 225,000 |
|
|
| 225,000 |
|
| 5.09% |
|
| Jul. 2028 | |
Series C |
|
| 100,000 |
|
|
| 100,000 |
|
| 5.19% |
|
| Jul. 2030 | |
|
|
| 475,000 |
|
|
| 475,000 |
|
|
|
|
|
|
|
Total |
|
| 1,928,300 |
|
|
| 1,877,300 |
|
|
|
|
|
|
|
Debt issuance costs, net(b) |
|
| (6,908 | ) |
|
| (7,919 | ) |
|
|
|
|
|
|
|
| $ | 1,921,392 |
|
| $ | 1,869,381 |
|
|
|
|
|
|
|
(a) | The Company believes it was in compliance with all financial covenants for all periods presented. |
(b) |
|
| Amounts presented include debt issuance costs, net, related to the unsecured term notes and senior notes only. |
(c) | At June 30, 2020 and December 31, 2019, one-month LIBOR was 0.16% and 1.76%, respectively. |
(d) |
|
|
|
|
|
On February 7, 2020, the Company entered into a $60,000 term loan agreement maturing on February 28, 2022 (the “2022 Unsecured Term Loan”) with JP Morgan Chase, N.A. as administrative agent. The 2022 Unsecured Term Loan was fully funded at closing and used to repay a portion of the debt assumed by the Company as part of the Internalization. Borrowings under the 2022 Unsecured Term Loan are subject to interest only payments at variable rates equal to LIBOR plus a margin based upon the Company’s credit rating, ranging between 0.85% and 1.65% per annum. Based on the Company’s current credit rating the applicable margin was 1.25% as of June 30, 2020.
At SeptemberJune 30, 2017 and December 31, 2016,2020, the weighted average interest rate on all outstanding borrowings was 2.96% and 2.14%2.45%, respectively.
Debt issuance costs were amortized and recorded asexclusive of interest expense inrate swap agreements. In addition, the accompanying Condensed Consolidated StatementsRevolving Credit Facility is subject to a facility fee 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.0.25% per annum.
For the ninesix months ended SeptemberJune 30, 2017,2019, the Company paid $8,344$5,229 in debt issuance costs associated with the Senior Notes, the Credit Agreement with M&T as Administrative Agent,2026 Unsecured Term Loan and the AmendedUnsecured Revolving Credit and Restated Term Loan Agreement with SunTrust Bank.Agreement. For each separate debt instrument, on a lender by lender basis, in accordance with ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction iswas deemed to be new debt, a modification of existing debt, or an extinguishment of existing debt. Debt issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred. Based on this assessment, $5,443$5,229 of the debt issuance costs incurred during the six months ended June 30, 2019, were deemed to be related to the issuance of new debt, or the modification of existing debt, and therefore have been deferred and are being amortized over the term of the associated debt. The remaining $2,901Additionally, $215 of debt issuance costs was associated with lenders whose commitments under the new agreements have been determined to be an extinguishment and suchunamortized debt issuance costs were expensed as a component ofduring the costsix months ended June 30, 2019, 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. Additionally, $654 of unamortized debt.
Debt issuance costs were expensed and included in costare amortized as a component of debt extinguishmentinterest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the nine months ended September 30, 2017.. The following table summarizes debt issuance cost amortization:
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Debt issuance costs amortization |
| $ | 821 |
|
| $ | 597 |
|
| $ | 1,709 |
|
| $ | 1,150 |
|
9.The Company is subject to various financial and operational covenants and financial reporting requirements pursuant to its unsecured credit agreements. These covenants require the Company to maintain certain financial ratios, including leverage, fixed charge coverage, and debt service coverage, among others. As of June 30, 2020, the Company believes it was in compliance with all of its loan covenants. The Company’s continued compliance with these covenants depends on many factors and could be impacted by current or future economic conditions associated with the COVID-19 pandemic (see Note 18), and thus there are no assurances that the Company will continue to be in compliance with its 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.
10. Mortgages and Notes Payable
The Company’s mortgages and notes payable consist of the following at September 30, 2017 and December 31, 2016:following:
|
|
| Origination |
| Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
(in thousands, except interest rates) | (in thousands, except interest rates) | (in thousands, except interest rates) |
| Date |
| Date |
| Interest |
|
| June 30, |
|
| December 31, |
|
|
| |||||||||||||||||||||
|
|
| Origination Date |
| Maturity Date |
|
|
|
|
| September 30, |
|
| December 31, |
|
|
| |||||||||||||||||||||
Lender | Lender |
| (Month/Year) |
| (Month/Year) |
| Interest Rate |
|
| 2017 |
|
| 2016 |
|
|
| Lender |
| (Month/Year) |
| (Month/Year) |
| Rate |
|
| 2020 |
|
| 2019 |
|
|
| ||||||
(1) | M&T Bank |
| Dec-10 |
| Apr-20 |
| 1 month LIBOR+1.90% |
|
| $ | - |
|
| $ | 21,335 |
|
| (b) (f) (g) | Wilmington Trust National Association |
| Apr-19 |
| Feb-28 |
| 4.92% |
|
| $ | 48,512 |
|
| $ | 49,065 |
|
| (a) (b) (c) (k) | ||
(2) | Sun Life |
| Mar-12 |
| Oct-21 |
|
| 5.13% |
|
|
| 11,763 |
|
|
| 12,036 |
|
| (b) (i) | Wilmington Trust National Association |
| Jun-18 |
| Aug-25 |
| 4.36% |
|
|
| 20,134 |
|
|
| 20,318 |
|
| (a) (b) (c) (j) | |
(3) | Aegon |
| Apr-12 |
| Oct-23 |
|
| 6.38% |
|
|
| 9,330 |
|
|
| 9,804 |
|
| (b) (j) | PNC Bank |
| Oct-16 |
| Nov-26 |
| 3.62% |
|
|
| 17,693 |
|
|
| 17,885 |
|
| (b) (c) | |
(4) | Legg Mason Mortgage Capital Corporation |
| Aug-10 |
| Aug-22 |
|
| 7.06% |
|
|
| 5,900 |
|
|
| 6,538 |
|
| (b) (e) | Sun Life |
| Mar-12 |
| Oct-21 |
| 5.13% |
|
|
| 10,681 |
|
|
| 10,888 |
|
| (b) (f) | |
(5) | Columbian Mutual Life Insurance Company |
| Aug-10 |
| Sep-25 |
|
| 7.00% |
|
|
| 1,510 |
|
|
| 1,538 |
|
| (b) (c) (d) | Aegon |
| Apr-12 |
| Oct-23 |
| 6.38% |
|
|
| 7,419 |
|
|
| 7,788 |
|
| (b) (g) | |
(6) | Symetra Financial |
| Mar-11 |
| Apr-31 |
|
| 6.34% |
|
|
| 1,015 |
|
|
| 1,036 |
|
| (a) (b) | M&T Bank |
| Oct-17 |
| Aug-21 |
| one - month LIBOR+3% |
|
|
| 4,842 |
|
|
| 4,913 |
|
| (b) (d) (h) (i) | |
(7) | Note holders |
| Dec-08 |
| Dec-23 |
|
| 6.25% |
|
|
| 750 |
|
|
| 750 |
|
| (d) | Note holders |
| Dec-08 |
| Dec-23 |
| 6.25% |
|
|
| 591 |
|
|
| 750 |
|
| (d) | |
(8) | Standard Insurance Co. |
| Jul-10 |
| Aug-30 |
|
| 6.75% |
|
|
| 585 |
|
|
| 597 |
|
| (b) (c) (d) (h) | Standard Insurance Co. |
| Jul-10 |
| Aug-30 |
| 6.75% |
|
|
| — |
|
|
| 544 |
|
| (b) (c) (d) (e) | |
| Siemens Financial Services, Inc. |
| Sep-10 |
| Sep- 20 |
|
| 5.47% |
|
|
| 5,869 |
|
|
| 6,010 |
|
| (a) (b) |
|
|
|
|
|
|
|
|
|
|
| 109,872 |
|
|
| 112,151 |
|
|
|
(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 |
|
|
|
|
|
|
|
|
|
| (360 | ) |
|
| (358 | ) |
|
|
| Debt issuance costs, net |
|
|
|
|
|
|
|
|
|
| (689 | ) |
|
| (838 | ) |
|
|
|
|
|
|
|
|
|
|
|
| $ | 109,512 |
|
| $ | 111,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 57,883 |
|
| $ | 106,686 |
|
|
|
(a) | Non-recourse debt includes the indemnification/guaranty of the Corporation and/or |
(b) | Debt secured by related rental property and lease rents. |
(c) | Debt secured by guaranty of the |
(d) | Debt secured by guaranty of the Corporation. |
(e) |
|
|
|
|
|
| The interest rate represents the initial interest |
| Mortgage was assumed in March 2012 as part of an UPREIT transaction. The debt was |
| Mortgage was assumed in April 2012 as part of the acquisition of the related property. The debt was |
(h) | The Company entered into an interest rate swap agreement in connection with the mortgage note, as further described in Note 11. |
(i) | Mortgage was assumed in October 2017 as part of an UPREIT transaction. The debt was recorded at fair value at the time of the assumption. |
| Mortgage was assumed in |
|
|
At SeptemberJune 30, 2017,2020, investment in rental property of $91,326 is$175,714 was pledged as collateral against the Company’s mortgages and notes payable.
The Companyfollowing table summarizes the mortgages extinguished six and four mortgages totaling $46,804 and $8,199, duringby 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,Company:
(in thousands, except number of mortgages) |
| For the six months ended June 30, 2020 |
|
| For the year ended December 31, 2019 |
| ||
Number of mortgages |
| 1 |
|
| 4 |
| ||
Outstanding balance of mortgages |
| $ | 541 |
|
| $ | 13,905 |
|
The following table summarizes 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.mortgage extinguishment:
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Cost of mortgage extinguishment |
| $ | — |
|
| $ | 8 |
|
| $ | 22 |
|
| $ | 506 |
|
Estimated future principal payments to be made under the above mortgage and note payable agreements, and the Company’s unsecured credit agreements (see Note 8)9) at SeptemberJune 30, 20172020 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 2020 |
| $ | 1,614 |
|
2021 |
|
| 258,006 |
|
2022 |
|
| 311,207 |
|
2023 |
|
| 273,173 |
|
2024 |
|
| 192,260 |
|
Thereafter |
|
| 1,001,912 |
|
|
| $ | 2,038,172 |
|
Certain of the Company’s mortgage and note payable agreements provide for prepayment fees and can be terminated under certain events of default as defined under the related agreements whichagreements. These prepayment fees are not reflected as part of the table above.
10.
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.
The following is a summary of the Company’s outstanding interest rate swap agreements at September 30, 2017:agreements:
(in thousands, except interest rates) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands, except interest rates) |
|
|
|
|
|
|
|
|
|
|
| Fair Value |
|
| ||||||
Counterparty |
| Maturity Date |
| Fixed Rate |
|
| Variable Rate Index |
| Notional Amount |
|
| Fair Value |
|
| Maturity Date |
| Fixed Rate |
|
| Variable Rate Index |
| Notional Amount |
|
| June 30, 2020 |
|
| December 31, 2019 |
|
| |||||||
Bank of America, N.A. |
| November 2023 |
|
| 2.80% |
|
| LIBOR 1 month |
| $ | 25,000 |
|
| $ | (1,177 | ) |
| November 2023 |
|
| 2.80 | % |
| one-month LIBOR |
| $ | 25,000 |
|
| $ | (2,194 | ) |
| $ | (1,136 | ) |
|
Bank of Montreal |
| July 2024 |
|
| 1.16% |
|
| LIBOR 1 month |
|
| 40,000 |
|
|
| 2,147 |
|
| July 2024 |
|
| 1.16 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| (1,635 | ) |
|
| 740 |
|
|
Bank of Montreal |
| January 2025 |
|
| 1.91% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| 193 |
|
| January 2025 |
|
| 1.91 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,988 | ) |
|
| (402 | ) |
|
Bank of Montreal |
| July 2025 |
|
| 2.32% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| (490 | ) |
| July 2025 |
|
| 2.32 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,688 | ) |
|
| (970 | ) |
|
Bank of Montreal |
| January 2026 |
|
| 1.92% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| 297 |
|
| January 2026 |
|
| 1.92 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,346 | ) |
|
| (448 | ) |
|
Bank of Montreal |
| January 2026 |
|
| 2.05% |
|
| LIBOR 1 month |
|
| 40,000 |
|
|
| 84 |
|
| January 2026 |
|
| 2.05 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| (4,040 | ) |
|
| (1,014 | ) |
|
Bank of Montreal |
| December 2026 |
|
| 2.33% |
|
| LIBOR 1 month |
|
| 10,000 |
|
|
| (175 | ) |
| December 2026 |
|
| 2.33 | % |
| one-month LIBOR |
|
| 10,000 |
|
|
| (1,328 | ) |
|
| (460 | ) |
|
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 |
| |||||||||||||||||||||
Bank of Montreal |
| December 2026 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,760 | ) |
|
| (577 | ) |
| ||||||||||||||||
Bank of Montreal |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,760 | ) |
|
| (1,306 | ) |
| ||||||||||||||||
Bank of Montreal |
| May 2029 |
|
| 2.09 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,633 | ) |
|
| (799 | ) |
| ||||||||||||||||
Capital One, National Association |
| December 2021 |
|
| 1.05 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (213 | ) |
|
| 143 |
|
| ||||||||||||||||
Capital One, National Association |
| December 2024 |
|
| 1.58 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (935 | ) |
|
| 10 |
|
| ||||||||||||||||
Capital One, National Association |
| January 2026 |
|
| 2.08 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (3,549 | ) |
|
| (911 | ) |
| ||||||||||||||||
Capital One, National Association |
| April 2026 |
|
| 2.68 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (2,102 | ) |
|
| (944 | ) |
| ||||||||||||||||
Capital One, National Association |
| July 2026 |
|
| 1.32 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (2,182 | ) |
|
| 720 |
|
| ||||||||||||||||
Capital One, National Association |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,738 | ) |
|
| (1,278 | ) |
| ||||||||||||||||
M&T Bank |
| August 2021 |
|
| 1.02 | % |
| one-month LIBOR |
|
| 4,841 |
|
|
| (46 | ) |
|
| 41 |
| (a), (b) | ||||||||||||||||
M&T Bank |
| September 2022 |
|
| 2.83% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| (1,150 | ) |
| September 2022 |
|
| 2.83 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,490 | ) |
|
| (862 | ) |
|
M&T Bank |
| November 2023 |
|
| 2.65% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| (1,023 | ) |
| November 2023 |
|
| 2.65 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,125 | ) |
|
| (1,038 | ) |
|
Regions Bank |
| March 2018 |
|
| 1.77% |
|
| LIBOR 1 month |
|
| 25,000 |
|
|
| (46 | ) |
| May 2020 |
|
| 2.12 | % |
| one-month LIBOR |
|
| 50,000 |
|
|
| — |
|
|
| (104 | ) |
|
Regions Bank |
| March 2019 |
|
| 1.91% |
|
| LIBOR 3 month |
|
| 25,000 |
|
|
| (106 | ) |
| December 2023 |
|
| 1.18 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (962 | ) |
|
| 376 |
|
|
Regions Bank |
| May 2020 |
|
| 2.12% |
|
| LIBOR 1 month |
|
| 50,000 |
|
|
| (562 | ) |
| May 2029 |
|
| 2.11 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,753 | ) |
|
| (827 | ) |
|
Regions Bank |
| March 2022 |
|
| 2.43% |
|
| LIBOR 3 month |
|
| 25,000 |
|
|
| (550 | ) |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,579 | ) |
|
| (651 | ) |
|
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 |
| |||||||||||||||||||||
Truist Financial Corporation |
| April 2024 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,749 | ) |
|
| (451 | ) |
| ||||||||||||||||
Truist Financial Corporation |
| April 2025 |
|
| 2.20 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,403 | ) |
|
| (781 | ) |
| ||||||||||||||||
Truist Financial Corporation |
| July 2025 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,244 | ) |
|
| (524 | ) |
| ||||||||||||||||
Truist Financial Corporation |
| December 2025 |
|
| 2.30 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,848 | ) |
|
| (993 | ) |
| ||||||||||||||||
Truist Financial Corporation |
| January 2026 |
|
| 1.93 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,339 | ) |
|
| (458 | ) |
| ||||||||||||||||
U.S. Bank National Association |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,553 | ) |
|
| (681 | ) |
| ||||||||||||||||
U.S. Bank National Association |
| August 2029 |
|
| 1.35 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,021 | ) |
|
| 881 |
|
| ||||||||||||||||
Wells Fargo Bank, N.A. |
| February 2021 |
|
| 2.39 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (466 | ) |
|
| (302 | ) |
| ||||||||||||||||
Wells Fargo Bank, N.A. |
| October 2024 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (1,642 | ) |
|
| (795 | ) |
| ||||||||||||||||
Wells Fargo Bank, N.A. |
| February 2021 |
|
| 2.39% |
|
| LIBOR 1 month |
|
| 35,000 |
|
|
| (739 | ) |
| April 2027 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (4,075 | ) |
|
| (1,845 | ) |
|
Wells Fargo Bank, N.A. |
| October 2024 |
|
| 2.72% |
|
| LIBOR 1 month |
|
| 15,000 |
|
|
| (706 | ) |
| January 2028 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 75,000 |
|
|
| (11,292 | ) |
|
| (3,914 | ) |
|
|
|
|
|
|
|
|
|
|
| $ | 640,000 |
|
| $ | 374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (85,678 | ) |
| $ | (21,560 | ) |
|
The fair value of the interest rate swaps are reported on the Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 as follows:
|
| 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 | ) |
(a) | Notional amount at December 31, 2019 was $4,912. |
(b) | Interest rate swap was assumed in October 2017 as part of an UPREIT transaction. |
The total lossamounts recognized, and the location of the loss in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss), from converting from variable rates to fixed rates under these agreements iswere as follows for the three months ended September 30, 2017 and 2016:follows:
|
| Effective Portion |
|
| Ineffective Portion |
| ||||||
(in thousands) |
| Location of Loss Reclassified from Accumulated Other Comprehensive Income into Income |
| Amount of Loss Reclassified from Accumulated Other Comprehensive Income into Income |
|
| Location of Loss Recognized in Income on Derivatives |
| Amount of Gain Recognized in Income on Derivatives |
| ||
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
| Interest expense |
| $ | 448 |
|
| Interest expense |
| $ | - |
|
2016 |
| Interest expense |
|
| 2,426 |
|
| Interest expense |
|
| (2,991 | ) |
|
|
|
|
|
| Reclassification from |
|
| Total Interest Expense |
| ||||
|
| Amount of Loss |
|
| Accumulated Other |
|
| Presented in the |
| |||||
|
| Recognized in |
|
| Comprehensive Loss |
|
| Consolidated Statements of |
| |||||
(in thousands) |
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
| |||
For the three months ended June 30, |
| Comprehensive Loss |
|
| Location |
| (Loss) Gain |
|
| Income (Loss) |
| |||
2020 |
| $ | (6,056 | ) |
| Interest expense |
| $ | (3,416 | ) |
| $ | 19,513 |
|
2019 |
|
| (23,178 | ) |
| Interest expense |
|
| 778 |
|
|
| 16,732 |
|
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 |
|
|
|
|
|
|
| Reclassification from |
|
| Total Interest Expense |
| ||||
|
| Amount of Loss |
|
| Accumulated Other |
|
| Presented in the |
| |||||
|
| Recognized in |
|
| Comprehensive Loss |
|
| Consolidated Statements of |
| |||||
(in thousands) |
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
| |||
For the six months ended June 30, |
| Comprehensive Loss |
|
| Location |
| (Loss) Gain |
|
| Income (Loss) |
| |||
2020 |
| $ | (64,118 | ) |
| Interest expense |
| $ | (4,301 | ) |
| $ | 40,504 |
|
2019 |
|
| (35,802 | ) |
| Interest expense |
|
| 1,614 |
|
|
| 32,560 |
|
Ineffectiveness of $2,219 for the nine months ended September 30, 2017 was attributable to inconsistencies in certain terms between the interest rate swaps and the credit agreements. The interest rate swaps continued to qualify for hedge accounting, with the effective portion of mark-to-market adjustments included in Accumulated other comprehensive income. During the fourth quarter of 2016, the Company amended the terms of the credit agreements, thereby reversing the impact of the ineffectiveness and rendering a $0 full year 2016 impact to the Condensed Consolidated Statement of Income and Comprehensive Income (Loss).
Amounts related to the interest rate swaps expected to be reclassified out of Accumulated other comprehensive incomeloss to Interest expense during the next twelve months are estimated to be $3,460.a loss of $16,221. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes thisthe risk exposure by limiting counterparties to major banks who meet established credit and capital guidelines.
11. Non-Controlling Interests
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.
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. Credit Risk Concentrations
The Company maintained bank balances that, at times, exceeded the federally insured limit during the ninesix months ended SeptemberJune 30, 2017.2020. 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.
ThePrior to the Internalization on February 7, 2020, the Company’s rental property iswas managed by the ManagerBRE and the Asset Manager as described in Note 3. Management fees and expense reimbursements paid to the ManagerBRE and Asset Manager represent 21%represented 0% and 26%4% of the Company’s total operating expenses for the three and six months ended SeptemberJune 30, 20172020, respectively, and 2016, and 21% and 25%19% of the Company’s total operating expenses for the ninethree and six months ended SeptemberJune 30, 2017 and 2016,2019, respectively. These amounts do not include acquisition fees paid to the Asset Manager that were capitalized (see Note 3). The Company has mortgages and notes payable with fivethree institutions that comprise 32%, 20%comprised 62%, 16%, 10%, and 10% of total mortgages and notes payable at SeptemberJune 30, 2017. The Company has mortgages2020 and notes payable with four institutions that comprise 20%, 18%, 12%, and 11% of total mortgages and notes payable at December 31, 2016.2019. For the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company had no individual tenants or common franchises that accounted for more than 10% of total revenues.
13. Equity
General
Pursuant to the Corporation’s Articles of Incorporation (the “Charter”), 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, may amend the Charter from time to time to increase or decrease the aggregate number of shares of capital stock or the number of shares of capital stock of any class or series that the Corporation has authority to issue.
Common Stock
The shares of the Corporation’s common stock entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Board of Directors in accordance with the Maryland General Corporation Law and to all rights of a 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 to the issuance of such shares of preferred stock, the Board of Directors shall have the power from time to time to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares of preferred stock. As of September 30, 2017 and December 31, 2016, no shares of the Corporation’s preferred stock were issued and outstanding.
Share Redemption Program
In 2009, the Board of Directors approved a share redemption program (“Share Redemption Program”) under which the Corporation may repurchase shares of its outstanding common stock after December 31, 2009. The Board of Directors approved and adopted an amended and restatedCompany’s Share Redemption Program was terminated effective February 10, 2020, and as of June 28, 2017.
Under the Share Redemption Program, stockholders may request that the Corporation redeem shares after one year from the original investment date, subject to certain exceptions as set forth in the Share Redemption Program. Under the Share Redemption Program, the Corporation is not obligated to repurchase shares and, notwithstanding any other term of the Share Redemption Program, the Board of Directors or IDC may reject any share redemption request made by any stockholder at any time. Shares held for more than 12 months, but less than five years, will be redeemed at a purchase price equal to 95% of the current share value established from time-to-time by the IDC (the “Determined Share Value”), and shares held for five years or more will be redeemed at a purchase price equal to 100% of the current Determined Share Value, subject to certain exemptions as set forth in the Share Redemption Program.
Total shares redeemed pursuant to the Share Redemption Program in any quarter may not exceed 1% of the total number of shares outstanding at the beginning of the calendar year plus 50% of the total number of any additional shares issuedresult there were no redemptions 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 uponsix months ended June 30, days’ notice to the Corporation’s stockholders.
2020. The following table summarizes redemptions under the Company’s Share Redemption Program for the three and nine months ended September 30, 2017 and 2016:Program:
|
| 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 |
| ||||||||||||
(in thousands, except number of redemptions) |
| For the three months ended June 30, 2019 |
|
| For the six months ended June 30, 2019 |
| ||||||||||||||||||
Number of redemptions requested |
| 16 |
|
| 29 |
| ||||||||||||||||||
Number of shares |
| 23 |
|
| 45 |
|
| 62 |
|
| 87 |
|
| 38 |
|
| 59 |
| ||||||
Aggregate redemption price |
| $ | 1,808 |
|
| $ | 3,427 |
|
| $ | 4,825 |
|
| $ | 6,487 |
|
| $ | 3,210 |
|
| $ | 5,013 |
|
Distribution Reinvestment Plan
The Corporation hashad adopted the DRIP,a Distribution Reinvestment Plan (“DRIP”), pursuant to which the Corporation’s stockholders and holders of membership units in the Operating CompanyOP Units (other than the Corporation), maycould elect to have cash distributions reinvested in additional shares of the Corporation’s common stock. Cash distributions will be reinvested in additional shares of common stock pursuant to theThe DRIP at a per share price equal to 98% of the Determined Share Value as of the applicable distribution date. The Corporation may amend the DRIP at any time upon written notice to each participant at leastwas terminated effective February 10, days prior to the effective date of the amendment. The Corporation may terminate the DRIP upon written notice to each participant at least2020. At June 30, days prior to the effective date of the termination. At September 30, 20172020 and December 31, 2016,2019, a total of 1,4513,075 and 1,076,3,005 shares of common stock, respectively, have been issued under the DRIP.
The following table summarizes the components used in the calculation of basic and diluted earnings per share (“EPS”):
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||||||||||||
(in thousands, except per share) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Broadstone Net Lease, Inc. |
| $ | 11,948 |
|
| $ | 13,958 |
|
| $ | 39,269 |
|
| $ | 23,874 |
|
| $ | 15,353 |
|
| $ | 16,134 |
|
| $ | 26,169 |
|
| $ | 30,072 |
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Broadstone Net Lease, Inc. |
| $ | 11,948 |
|
| $ | 13,958 |
|
| $ | 39,269 |
|
| $ | 23,874 |
|
| $ | 15,353 |
|
| $ | 16,134 |
|
| $ | 26,169 |
|
| $ | 30,072 |
|
Net earnings attributable to non-controlling interests |
|
| 1,042 |
|
|
| 1,459 |
|
|
| 3,460 |
|
|
| 2,600 |
|
|
| 1,745 |
|
|
| 1,208 |
|
|
| 2,777 |
|
|
| 2,292 |
|
|
| $ | 12,990 |
|
| $ | 15,417 |
|
| $ | 42,729 |
|
| $ | 26,474 |
|
| $ | 17,098 |
|
| $ | 17,342 |
|
| $ | 28,946 |
|
| $ | 32,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
| 26,856 |
|
|
| 23,204 |
|
|
| 26,691 |
|
|
| 22,770 |
|
Effects of convertible membership units |
|
| 1,530 |
|
|
| 1,427 |
|
|
| 1,462 |
|
|
| 1,416 |
|
|
| 3,056 |
|
|
| 1,737 |
|
|
| 2,791 |
|
|
| 1,737 |
|
Weighted average number of common shares outstanding used in diluted earnings per share |
|
| 19,147 |
|
|
| 15,074 |
|
|
| 18,069 |
|
|
| 14,154 |
|
|
| 29,912 |
|
|
| 24,941 |
|
|
| 29,482 |
|
|
| 24,507 |
|
Basic and diluted net earnings per common share |
| $ | 0.68 |
|
| $ | 1.02 |
|
| $ | 2.36 |
|
| $ | 1.87 |
|
| $ | 0.57 |
|
| $ | 0.70 |
|
| $ | 0.98 |
|
| $ | 1.32 |
|
In the table above, outstanding membership units in the Operating CompanyOP Units are included in the diluted earnings per share calculation. However, because such membership unitsOP Units would also require that the share of the Operating CompanyOP income attributable to such membership unitsOP Units also be added back to net income, there is no effect on EPS.
15. Supplemental Cash Flow Disclosures
Cash paid for interest was $20,364$38,400 and $16,430$38,802 for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Cash paid for state income and franchise taxes was $751$945 and $323$422 for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
The following are non-cash transactions and have been excluded from the accompanying Condensed Consolidated Statements of Cash Flows:
During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Corporation issued 37569 and 284358 shares, respectively, of the Corporation’s common stock with a value of approximately $29,031$5,733 and $20,659,$30,008, respectively, under the terms of the DRIP (see Note 13).
During the ninesix months ended SeptemberJune 30, 2017 and 2016,2020, the Operating Company issued 103shares of common stock and 97, respectively, membership units inOP Units, with a total value of approximately $178,535, and earnout consideration with a fair value of $40,119 as consideration for the Operating Company in exchange for property contributed in UPREIT transactions valued at $8,278Internalization and $7,190, respectivelyassumed $90,484 of debt (see Note 11)4).
During the six months ended June 30, 2020, the Company adjusted the carrying value of mezzanine equity non-controlling interests by $2,513, with an offset to additional paid-in capital (see Note 2).
At SeptemberJune 30, 2017 and 2016,2019, dividend amounts declared and accrued but not yet paid amounted to $8,099$11,119.
During the six months ended June 30, 2020, the Company executed lease modifications that resulted in the lease classification changing from direct financing lease to operating lease for four properties. At the modification date, the net investment in the original lease, and $6,303, respectively.therefore the carrying value of the assets recognized, amounted to $9,055.
In connection with fire damage incurred at three propertiesreal estate transactions conducted during the ninesix months ended SeptemberJune 30, 2017,2019, the Company recognized $2,857accepted tenant improvement allowances of $1,727 in insurance recovery receivables which wereexchange for a reduction to depreciation expensethe cash paid for the associated real estate assets.
Upon adoption of ASC 326 on January 1, 2020, described in Note 2, the Company recorded a transition adjustment to record a provision for credit losses associated with its net investment in direct financing leases of $323, with an equal amount recorded as a reduction in retained earnings. The provision for credit losses is included as a component of Investment in rental property, net accounted for using the direct financing method on the Condensed Consolidated Balance Sheets.
Upon adoption of ASC 842 on January 1, 2019, the Company recorded right-of-use assets of $1,687 and lease liabilities of $1,261 associated with ground leases where it is the lessee. The right-of-use asset was recorded net of a straight-line rent liability of $7 and ground lease intangible asset, net of $432 as of the date of adoption.
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 costcosts and damages related to environmental matters. The Company is not aware of any non-compliance, liability, claim, or other environmental condition that would have a material effect on its consolidated financial position, results of operations, or liquidity.
As partBalances associated with tenant improvement allowances are included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets as follows:
(in thousands) |
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Tenant improvement allowances |
| $ | 2,208 |
|
| $ | 2,706 |
|
The Company is a party to three separate tax protection agreements with the contributing members of acquisitions closed during 2016three distinct UPREIT transactions and one acquisition closedto the Founding Owners’ Tax Protection Agreement in 2017,connection with the Internalization (see Note 3). The tax protection agreements require the Company assumed four separate leaseto indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, or in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. Based on values as of June 30, 2020, taxable sales of the applicable properties would trigger liability under the Agreements of approximately $22,300. Based on information available, the Company does not believe that provided for a total of $11,464 in tenant improvement allowances. During the nine months ended September 30,2017 and the year ended December 31, 2016, payments of $3,863 and $974, respectively, have been made for work completed under these allowances,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’s real estate portfolio incurred losses dueforeseeable future.
Obligations Under Operating Leases
Subsequent to fire damage. Management anticipates that the proceeds receivedInternalization (see Note 4), the Company leases office space for its corporate headquarters and other locations under non-cancellable operating leases with expiration dates ranging from insurance will exceed the book value2020 to 2023. These leases contain provisions for fixed monthly payments, subject to rent escalations. None of the leases are subject to any sublease agreement. The lease for the corporate headquarters is with a related party (see Note 3).
The Company also leases land at certain properties under non-cancellable operating leases (“ground leases”) with initial lease terms ranging from 2034 to 2066. These leases contain provisions for fixed monthly payments, subject to rent escalations. One lease requires the Company to make annual rent payments calculated based upon sales generated at the property destroyed,(“percentage rent”). None of the leases are subject to any sublease agreement.
The following table summarizes the total lease costs associated with operating leases:
|
|
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||
(in thousands) |
| Financial Statement Presentation |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Operating lease costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office leases |
| General and administrative |
| $ | 155 |
|
| $ | — |
|
| $ | 207 |
|
| $ | — |
|
Ground leases |
| Property and operating expense |
|
| 34 |
|
|
| 35 |
|
|
| 67 |
|
|
| 70 |
|
Variable lease costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ground leases |
| Property and operating expense |
|
| 12 |
|
|
| 11 |
|
|
| 30 |
|
|
| 23 |
|
Total lease costs |
|
|
| $ | 201 |
|
| $ | 46 |
|
| $ | 304 |
|
| $ | 93 |
|
The following table summarizes payments associated with obligations under operating leases, reported as Cash flows from operating activities on the accompanying Condensed Consolidated Statements of Cash Flows:
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Operating lease payments |
| $ | 183 |
|
| $ | 28 |
|
| $ | 311 |
|
| $ | 100 |
|
Estimated future lease payments required under non-cancelable operating leases at June 30, 2020, and accordingly a gain on insurance settlementreconciliation to the lease liabilities, is as follows:
(in thousands) |
|
|
|
|
Remainder of 2020 |
| $ | 355 |
|
2021 |
|
| 711 |
|
2022 |
|
| 686 |
|
2023 |
|
| 505 |
|
2024 |
|
| 120 |
|
Thereafter |
|
| 2,411 |
|
Total undiscounted cash flows |
|
| 4,788 |
|
Less imputed interest |
|
| (1,864 | ) |
Lease liabilities |
| $ | 2,924 |
|
The above rental payments include future minimum lease payments due during the initial lease terms. Such amounts exclude any contingent amounts associated with percentage rent that may be recordedbecome due in a future period upon receipt of funds.periods.
17. Subsequent Events
Subsequent to September 30, 2017, the Company has raised $18,443 for a total of 231 shares of the Corporation’s common stock through monthly equity closings, including dividend reinvestments, and $4,635 for a total of 58 units of the Operating Company’s membership interest through an UPREIT transaction. Through November 13, 2017, the Company has paid $8,099 in distributions, including dividend reinvestments.
Subsequent to September 30, 2017, 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,August 4, 2020, the Board of Directors declared avoted to reinstate the Company’s distribution, announcing that the Company would transition to quarterly distribution payments. A quarterly distribution of $0.415$0.54 per share onof the Corporation’sCompany’s common stock and approved a distributionOP Unit for the third quarter of $0.415 per membership unit of the Operating Company for monthly distributions through January 2018. The distributions are2020 will be payable on or priorbefore October 15, 2020, to the 15th of the following month to the Corporation’s common stockholders and the Operating Company’s unit holders of record onas of September 30, 2020.
On August 4, 2020, the last dayBoard of the month. In addition, the IDCDirectors determined the Determined Share Valueshare value for the Corporation’s common stock to be $81.00$82.00 per share for subscription agreements received from Novemberthe period August 1, 20172020 through October 31, 2020. However, on January 31, 2018.10, 2020, the Company suspended its private offering of shares of its common stock until further notice.
On August 4, 2020, the Board of Directors adopted the Broadstone Net Lease, Inc. 2020 Omnibus Equity and Incentive Plan (the “Equity and Incentive Plan”), under which equity awards may be made in respect of 2,250 shares of our common stock. On August 4, 2020, the Company awarded 85 shares of restricted stock under the Equity and Incentive Plan with a grant date fair value of $6,990 which will vest over a three or four year period in accordance with the terms of the individual award agreements.
Except where the context suggests otherwise, as used in this Quarterly Report on Form 10-Q, the terms “BNL,” “we,” “us,” “our,” and “our company” refer to Broadstone Net Lease, Inc., a Maryland corporation incorporated on October 18, 2007, and, as required by context, Broadstone Net Lease, LLC, a New York limited liability company (the “OP”), which we refer to as the or our “Operating Company,“OP,” and to their respective subsidiaries.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statementsCondensed Consolidated Financial Statements and the accompanying notesNotes to the consolidated financial statementsCondensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q may containcontains forward-looking statements, withinwhich reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends, that are intended to be made pursuant to the meaningsafe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding, among other things, our plans, strategies, and prospects, both business and financial.. Forward-looking statements include butall statements that are not limited to,historical facts. In some cases, you can identify these forward-looking statements that represent our beliefs concerning future operations, strategies, financial results or other developments. Forward-looking statements can be identified by the use of forward-looking terminologywords such as but not limited to,“outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “expect,“could,” “anticipate,“seeks,” “estimate,“approximately,” “would be,“projects,” “believe,“predicts,” or “continue”“intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other variationscomparable words. All of comparable terminology. Because thesethe forward-looking statements are basedincluded in this Quarterly Report on estimates and assumptions thatForm 10-Q are subject to significantvarious risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business economic,decisions, all of which are difficult or impossible to predict accurately and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.control. Although we believe that our plans, intentions, andthe expectations reflected in or suggested by thesesuch forward-looking statements are based on reasonable we cannot assure you that we will achieveassumptions, our actual results, performance, and achievements could differ materially from those expressed in or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions. Readers are cautioned not to place undue reliance on theseby the forward-looking statements which speak only asand may be affected by a variety of the date this Form 10-Q is filed with the Securitiesrisks and Exchange Commission (the “SEC”). Except as required by law, we do not undertake any obligationother factors. Accordingly, there are or will be important factors that could cause actual outcomes or results to update or revise anydiffer materially from such forward-looking statements contained in this Form 10-Q. Important factorsstatements.
Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:
Single-tenant leases involve significant risks of tenant default and tenant vacancies;
We have limited opportunities to increase rents under our long-term leases with tenants;
We may not be able to achieve growth through acquisitions at a rate that is comparable to our historical results, as a result of competition or other factors;
We may not be able to effectively manage our growth;
The departure of any of our key personnel with long-standing business relationships could materially and adversely affect us;
We may not be able to generate cash flows sufficient to pay our dividends or meet our debt service obligations;
Market conditions could adversely affect our ability to refinance existing indebtedness on acceptable terms or at all;
We are a holding company with no direct operations and rely on funds received from the OP to pay liabilities;
There are risks related to our recent Internalization, including our ability to effectively manage the Internalization and the outcome of any legal proceedings relating to the Internalization, and the risk that we may not realize the anticipated benefits from the Internalization or that such benefits are less than anticipated as a result of unexpected costs or liabilities that may arise from the Internalization;
Epidemics, pandemics, and other public health crises, including the ongoing COVID-19 pandemic;
Changing general business and economic conditions could impact us and our tenants, including those arising from natural disasters, acts of terrorism or war, as well as the recent coronavirus pandemic, fluctuating interest rates, and volatility and uncertainty in the credit markets and broader financial markets; and
Failure to qualify as a REIT for U.S. federal income tax purposes would materially and adversely affect us and the value of our stock.
You 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. Important factors that could cause 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 Statement2019 Annual Report on Form 10,10-K, as filed with the SEC on February 27, 2020 and in Part II, Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as filed with the SEC on May 7, 2020.
Explanatory Note and Certain Defined Terms
Unless the context otherwise requires, the following terms and phrases are used throughout this Quarterly Report on Form 10-Q as described below:
“annualized base rent” or “ABR” means the annualized contractual cash rent due for the last month of the reporting period, excluding the impacts of the short-term rent deferrals and abatements agreed to as a result of tenant requests for rent relief related to the global coronavirus (“COVID-19”) pandemic, and adjusted to remove rent from properties sold during the month and to include a full month of contractual cash rent for properties acquired during the last month. As discussed below, as a result of the COVID-19 pandemic, in 2020 we received requests for rent relief from several tenants and agreed to temporarily defer the receipt of rent, or in limited circumstances to abate rent, for a portion of the remaining lease terms. As a result of these requests, we agreed to partial rent relief requests for 15 tenants related to 93 properties whose total base rents represent approximately 9.7% of our June 29,ABR. We have excluded the impact of these deferrals and abatements from the calculation of ABR because they are short term in nature relative to the length of our lease terms and relate to a discrete event, and therefore including them in the calculation would not provide an accurate measure of our relative portfolio composition.
“cash capitalization rate” represents the estimated first year cash yield to be generated on a real estate investment property, which was estimated at the time of investment based on the contractually specified cash base rent for the first full year after the date of the investment, divided by the purchase price for the property;
“CPI” means the Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, All Items, as published by the U.S. Bureau of Labor Statistics, or other similar index which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services;
“gross asset value” means the undepreciated book value of an asset, which represents the fair value of the asset as of the date it was acquired, less any subsequent writedowns due to impairment charges;
“occupancy” or a specified percentage of our portfolio that is “occupied” means the quotient of (1) the total square footage of our properties minus the square footage of our properties that are vacant and from which we are not receiving any rental payment, and (2) the total square footage of our properties as of a specified date; and
“Revolving Credit Facility” means our $600 million senior unsecured revolving credit facility, dated June 23, 2017, (the “Form 10”).with Manufacturers and Traders Trust Company and the other lenders party thereto, as amended from time to time.
We are an externally managed real estate investment trust (“REIT”), formed as a Maryland corporation in 2007 to acquire, own, and holdmanage 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, office, and retail property types, and as of June 30, 2020, our portfolio has grown to 632 properties in 41 U.S. states and one property in Canada, with an aggregate gross asset value of approximately $4.0 billion.
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, where the properties 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 lookthere are 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 rather than real estate ownership.
- | Diversified Portfolio. As of June 30, 2020, our portfolio comprised approximately 27.4 million rentable square feet of operational space, and was highly diversified based on property type, geography, tenant, and industry, and is cross-diversified within each (e.g., property-type diversification within a geographic concentration): |
concentrations in manufacturing, distribution and warehouse, clinical, casual dining, quick service restaurant, strategic operations, corporate headquarters, food processing, flex/research and development, and cold storage. |
o | Geographic Diversity: Our properties are located in 41 U.S. states and British Columbia, Canada, with no single geographic concentration exceeding 10.4% of our ABR. |
o | Tenant and Industry Diversity: Our properties are occupied by approximately 182 different commercial tenants who operate 168 different brands that are diversified across 54 differing industries, with no single tenant accounting for more than 2.5% of our ABR. |
- | Strong In-Place Leases with Significant Remaining Lease Term. As of June 30, 2020, our portfolio was approximately 99.6% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 11.0 years, excluding renewal options. |
- | Standard Contractual Base Rent Escalation. Approximately 98.2% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.1%. |
- | Extensive Tenant Financial Reporting. Approximately 88.4% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 6.6% of our ABR is received from tenants that are public companies, which are required to file financial statements with the SEC, although they are not required to provide us with specified financial information under the terms of our lease. |
Recent Developments — COVID-19 Pandemic
The rapidly evolving circumstances related to the COVID-19 pandemic have resulted in deep economic uncertainty and far-reaching impacts on almost every business and industry. In response to the COVID-19 pandemic, many countries and U.S. states, including the areas in which we operate, adopted certain measures to mitigate the ongoing public health crises. Such measures included “shelter in place” or “stay at home” rules, restrictions on travel, and restrictions on the types of businesses that may continue to operate in many countries and U.S. states. Although such restrictions have been or were in the process of being lifted in several locations, the recent resurgence of COVID-19 cases has led to a reinstatement or partial reinstatement of restrictions in other locations. We cannot predict whether and to what extent the restrictions will be reinstated, whether additional states and cities will implement similar restrictions or when restrictions currently in place will expire. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which our tenants operate. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, and consumer spending, as well as other unanticipated consequences, remain unknown.
The sections below summarize the impacts of the COVID-19 pandemic on our results of operations, liquidity and capital resources, during the three and six months ended June 30, 2020, as well as management’s view of potential impacts on our future results of operations, liquidity and capital resources. For more discussion on the risks associated with the COVID-19 outbreak, see Part II, Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 7, 2020.
Impact to Results of Operations
Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that typically impact our results of operations and financial condition, which may be exacerbated by the COVID-19 pandemic, include rental rates and collections, property dispositions, lease renewals and occupancy, acquisition volume, net lease terms, interest expense, general and administrative expenses, tenant bankruptcies, and impairments.
Rental Rates and Collections
Our financial results depend on our ability to timely collect contractual rents due under our long-term net leases. The COVID-19 pandemic’s impact on us has primarily manifested through tenant requests for rent relief, which we started to receive in late March 2020. Although the requests ranged in scope, the most common request was for a full or partial rent deferment for three months, with repayment over a six- to twelve-month period following the reinstatement of regular rent payments. As of June 30, 2020, we had resolved all active outstanding requests for rent relief as of that time. In total, we granted partial rent relief requests to 15 tenants related to 93 properties whose total base contractual rents represent 9.7% of June ABR, compared with total requests received from 59 tenants related to 295 properties whose total base contractual rents represented 33.7% of June ABR.
We evaluated each request for rent relief as a unique situation, employing a rigorous credit and business analysis focusing on, among other things, industry circumstances, the tenant’s financial performance, liquidity position, lease structure, geographic location, and regulatory impacts on the tenant’s operations (e.g., stay-at-home orders, essential v. nonessential business designations). Based on our analyses, we granted relief on a select basis only to those tenants we determined to be most in need. In cases where we granted rent relief, we focused on negotiating the shortest possible repayment period and, when possible, lease enhancements (e.g. extensions of term). There were several tenants who requested rent relief that we believed were well positioned to continue making rent payments during the pandemic. Many of those tenants had strong balance sheets and liquidity positions, had applied for or received Paycheck Protection Program loan funding under the CARES Act, or are designated as essential businesses and can continue to operate despite
restrictions on other businesses. We declined to agree to any rent relief in those circumstances, and in all such cases the tenants continued to pay all rents due as of June 30, 2020.
The rent relief requests we granted included partial deferral of payment of rent with 14 tenants, and a partial abatement of rent with one tenant. The partial rent deferrals ranged in length between two and six months, with a weighted average deferral of 3.4 months. Amounts deferred will be repaid over periods ranging between three months to one year, with a weighted average repayment period of 5.6 months beginning in July 2020. The partial abatement represents a portion of rents due over a nine-month period, with the minimum required rent payable increasing during the abatement period. In exchange, we negotiated a three-year lease term extension and an upside percentage rent clause during the abatement period, which we expect to provide us with long-term value accretion. At June 30, 2020, we had received payment for the base amounts due for the second and third quarters of 2020 under the rent abatement agreement.
In circumstances where we agreed to a rent deferral that is to be repaid over a period of time, and where the terms of the lease and amounts paid under the lease are substantially the same, we will continue to recognize the same amount of GAAP lease revenue each period to the extent the amounts are probable of collection. The amounts we agreed to defer will impact our cash flows from operations.
Other than one tenant that had filed for bankruptcy, all but one tenant paid their rent due for the second quarter, either in full or in accordance with the terms of the agreed-upon rent relief agreements. Uncollected base rent not subject to deferment, abatement, or bankruptcy, represents less than 0.02% of base rents due for the three months ended June 30, 2020.
The following chart and tables summarize our second quarter 2020 rent collection, in total and by tenant industry and property type:
1 Relates to post-petition rents due from one tenant who had filed for bankruptcy.
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|
|
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| % Base Rent Collected |
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| % Base Rent Not Collected |
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Tenant Industry | % of June ABR |
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| April |
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| May |
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| June |
|
| Q2 |
|
| Deferred |
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| Abated |
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| Bankruptcy |
| |
Restaurants | 15.8% |
|
| 97.0% |
|
| 84.0% |
|
| 83.9% |
|
| 88.7% |
|
| 4.4% |
|
| 6.9% |
|
| — |
| |
Home Furnishing Retail | 3.3% |
|
| 26.9% |
|
| 26.9% |
|
| 26.9% |
|
| 26.9% |
|
| 4.8% |
|
| — |
|
| 68.3% |
| |
Specialty Stores | 2.2% |
|
| 68.3% |
|
| 68.3% |
|
| 68.3% |
|
| 68.3% |
|
| 31.7% |
|
| — |
|
| — |
| |
Industrial Machinery | 1.9% |
|
| 84.6% |
|
| 84.6% |
|
| 84.6% |
|
| 84.6% |
|
| 15.4% |
|
| — |
|
| — |
| |
Home Furnishings | 1.8% |
|
| 72.9% |
|
| 72.9% |
|
| 72.9% |
|
| 72.9% |
|
| 27.1% |
|
| — |
|
| — |
| |
Life Sciences Tools & Services | 1.4% |
|
| 81.8% |
|
| 81.8% |
|
| 81.8% |
|
| 81.8% |
|
| 18.2% |
|
| — |
|
| — |
| |
Movies & Entertainment 2 | 1.1% |
|
| 100.0% |
|
| 50.0% |
|
| 50.0% |
|
| 66.7% |
|
| 33.3% |
|
| — |
|
| — |
| |
All Other | 72.5% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| — |
|
| — |
|
| — |
| |
Grand Total | 100.0% |
|
| 94.7% |
|
| 92.1% |
|
| 92.1% |
|
| 93.0% |
|
| 3.0% |
|
| 1.1% |
|
| 2.9% |
|
2 Industrial tenant.
|
|
|
| % Base Rent Collected |
|
| % Base Rent Not Collected |
| ||||||||||||||||
Property Type | % of June ABR |
|
| April |
|
| May |
|
| June |
|
| Q2 |
|
| Deferred |
|
| Abated |
|
| Bankruptcy |
| |
Industrial | 44.1% |
|
| 96.2% |
|
| 95.0% |
|
| 95.0% |
|
| 95.4% |
|
| 4.6% |
|
| — |
|
| — |
| |
Healthcare | 19.9% |
|
| 98.6% |
|
| 98.6% |
|
| 98.6% |
|
| 98.6% |
|
| 1.4% |
|
| — |
|
| — |
| |
Restaurant | 15.5% |
|
| 97.0% |
|
| 83.8% |
|
| 83.7% |
|
| 88.4% |
|
| 4.5% |
|
| 7.1% |
|
| — |
| |
Office | 10.0% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| — |
|
| — |
|
| — |
| |
Retail | 8.8% |
|
| 69.9% |
|
| 69.9% |
|
| 69.9% |
|
| 69.9% |
|
| — |
|
| — |
|
| 30.1% |
| |
Other | 1.7% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| — |
|
| — |
|
| — |
| |
Grand Total | 100.0% |
|
| 94.7% |
|
| 92.1% |
|
| 92.1% |
|
| 93.0% |
|
| 3.0% |
|
| 1.1% |
|
| 2.9% |
|
Rent collections have remained strong during the third quarter to date. As of the date of this filing, we had collected 96.5% of contractual base rents due for July 2020 as well as 100% of amounts due to be repaid in July 2020 under rent deferral agreements. Despite our continued strong rent collections subsequent to the outbreak of the COVID-19 pandemic, the duration of the pandemic and its impact on our tenants’ ability to return to business after governmental restrictions are fully lifted could have a significant negative impact on our ability to continue to collect future rents.
Property Dispositions
From time to time, we strategically dispose of properties, primarily when we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives. The resulting gains or losses on dispositions may materially impact our operating results, and the 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 at the time a property is listed for sale. As a result of the COVID-19 pandemic, we have seen a significant slowdown in real estate transactions. In the short term, the slowdown in market activity may inhibit our ability to dispose of properties we have identified for disposition, including those that experience significant credit deterioration as a result of the COVID-19 pandemic, and the price at which we are able to sell the properties may be negatively impacted. We were able to dispose of certain properties at the end of the first quarter of 2020 and early in the second quarter 2020 that were already under contract and substantially along in the disposition process, and used the proceeds to bolster our liquidity position. We also disposed of a property subsequent to June 30, 2020 that had been vacant as of June 30, 2020. While we successfully disposed of these properties at advantageous prices, we will continue to monitor the pandemic’s impact and continue to selectively dispose of properties when advantageous to do so.
Lease Renewals and Occupancy
As of SeptemberJune 30, 2017,2020, the ABR weighted average remaining term of our portfolio was approximately 11.0 years, excluding renewal options, and approximately 8.4% of our leases (based on ABR) will expire prior to January 1, 2025. The stability of the rental revenue generated by our properties depends principally on our tenants’ ability to pay rent and our ability to collect rents, renew expiring leases or re-lease space upon the expiration or other termination of leases, lease currently vacant properties, and maintain or increase rental rates at our leased properties. To the extent our properties become vacant, we owned a diversified portfoliowould forego rental income while remaining responsible for the payment of 477 individual net leased commercial properties located in 37 states comprising approximately 14.1 millionproperty taxes and maintaining the property until it is re-leased, which could negatively impact our operating results. Our occupancy rates have remained strong during the COVID-19 pandemic, standing at 99.5% as of June 30, 2020 based on rentable square feetfootage. Additionally, when negotiating COVID-19 related rent relief agreements, we have sought to extend lease terms where possible, to preserve the continuity of operational space.tenants and long-term cash flows derived from our portfolio. We continue to monitor the impact the COVID-19 pandemic is having on lease renewals and occupancy.
Acquisition Volume
Our historical growth in revenues and earnings has been achieved through rent escalations associated with existing in-place leases, coupled with rental income generated from accretive property acquisitions. Our ability to grow revenue will depend, to a significant degree, on our ability to identify and complete acquisitions that meet our investment criteria. Changes in capitalization rates, interest rates, or other factors may impact our acquisition opportunities in the future. Market conditions may also impact the total returns we can achieve on our investments. Our acquisition volume also depends on our ability to access third-party debt and equity financing. The COVID-19 pandemic caused a slowdown in acquisition volume, and we have not acquired any new properties in the first six months of 2020. We will continue to monitor the pandemic’s impact on capitalization rates, interest rates, and access and cost of equity and debt capital, and return to our focus on growth through acquisitions when it is prudent to do so.
Net Lease Terms
Substantially all of our leases are net leases pursuant to which our tenant generally is obligated to pay all expenses associated with the leased property including real estate taxes, insurance, maintenance, repairs, and capital costs. A limited number of leases require us to
pay some or all of the property expenses such as the cost of environmental liabilities, roof and structure repairs, real estate taxes, insurance, or certain non-structural repairs and maintenance. Additionally, we seek to use master lease structures where it fits market practice in the particular property type, pursuant to which we seek to lease multiple properties to a single tenant on an all or none basis. Master leases strengthen our ability to preserve rental revenue and prevent costs associated with vacancies for underperforming properties. We believe the master lease structure is most prevalent and applicable to leases in our restaurant and retail property types, while less relevant to our other property types, such as healthcare and industrial. As of SeptemberJune 30, 2017, our properties were 100% leased to 119 different commercial tenants, with no single tenant accounting for more than 5%2020, master leases contributed approximately 34.4% of our annual rental stream.overall ABR (our largest master lease by ABR related to 24 properties and contributed 2.5% of our ABR, and our smallest master lease by ABR related to two properties and contributed 0.1% of our ABR), 72.9% of our restaurant property ABR (161 of our 243 restaurant properties), and 52.8% of our retail property ABR (79 of our 128 retail properties).
In instances in which we granted rent relief, we generally preserved the rights afforded to us pursuant to our leases. We continue to monitor the impact the ongoing COVID-19 pandemic, which presents certain risks of modifications to our lease terms. These lease terms include certain rights we have under master leases and the risk of tenants’ failure to meet their lease obligations, including the risk that the prolonged economic downturn forces tenants into bankruptcy. An increase in the number of leases under which we are responsible for some or all of these expenses could negatively influence our operating results.
Interest Expense
We electedanticipate that we will continue to qualifyincur debt to fund future acquisition activity, which will increase the amount of interest expense we incur. In addition, although we attempt to limit our total floating-rate debt exposure, changes in the interest rate environment could either increase or decrease our weighted average interest rate in the future. Any changes to our debt structure or debt financing associated with property acquisitions, could materially influence our operating results depending on the terms of any such debt. A downgrade in our credit rating could also increase the amount of interest we pay under our debt agreements.
Interest rates have continued to decline as a REIT under the Internal Revenue CodeU.S. federal government attempts to combat the economic impacts of 1986, as amended (the “Internal Revenue Code”), beginning with our taxable year ending December 31, 2008. As a REIT, we are not subject to federal income taxthe COVID-19 pandemic. We benefited from this dynamic to the extent our floating rate borrowings were unhedged during the second quarter. Our floating rate borrowings bear interest at variable rates equal to LIBOR plus a margin based on our credit rating. The one-month LIBOR rate decreased from 1.76% at December 31, 2019, to 0.16% at June 30, 2020. Additionally, as of July 31, 2020, the one-month LIBOR rate was 0.15%. Restrictions in credit markets have simultaneously resulted in an increase in borrowing spreads across the debt capital markets as compared to the end of 2019, although they narrowed during the second quarter of 2020. Approximately $240 million of borrowings under our 2020 Unsecured Term Loan were set to a mature in 2020. We exercised the first of two extension options available under the loan, effective as of August 2, 2020, and extended the maturity to February 2, 2021. As market conditions evolve and we return to executing against our growth strategy, additional changes in interest rates and our borrowing spreads could influence our operating results.
General and Administrative Expenses
Our general and administrative expenses primarily consist of compensation and related costs, third party legal, accounting, and consulting costs, travel and entertainment, and general office expenses. We transitioned to a work from home policy effective on March 16, 2020, successfully migrating approximately 73 employees out of the office. As of the date of this filing, the policy remains in effect. Given our limited headcount, we have not incurred a material amount of cash outlays on information technology or infrastructure to facilitate our remote workforce, and do not believe we will incur significant costs in the future. We expect a significant decrease in travel and entertainment expenses, as social distancing guidelines and restrictions have limited corporate travel. These benefits, however, may be outweighed by incremental third party legal, accounting, and consulting costs if the impacts of the COVID-19 pandemic worsen.
Tenant Bankruptcies
Adverse economic conditions, particularly those that weaffect the markets in which our properties are located, or downturns in our tenants’ industries could impair our tenants’ ability to meet certain requirements, including that we distribute at least 90%their lease obligations to us and our ability to renew expiring leases or re-lease space. In particular, the bankruptcy of one or more of our annual taxabletenants could adversely affect our ability to collect rents from such tenant and maintain our portfolio’s occupancy. At June 30, 2020, one of our tenants, representing less than 0.5% of June ABR, was subject to bankruptcy proceedings. To mitigate the negative impact of these bankruptcy proceedings, we successfully re-leased the majority of properties leased to this tenant at the end of the second quarter. We have yet to see the long-term effects of the pandemic and the extent to which it may impact our tenants in the future. A prolonged exposure to the negative economic impacts of the pandemic may result in additional tenant bankruptcies.
Impairments
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. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. Significant judgment is made as to if and when impairment should be taken. If our stockholdersstrategy, or one or more of the assumptions described above were to change in the future, an impairment may need to be recognized. Indications of a tenant’s inability to continue as a going concern, changes in our view or strategy relative to a tenant’s business or industry as a result of the COVID-19 pandemic, or changes in our long-term hold strategies, could each be indicative of an impairment triggering event. For the three and satisfy other requirements basedsix months ended June 30, 2020, we recognized $0.5 million of impairment associated with a lease modification as the result of a tenant’s request for rent relief. We face the risk of additional impairments depending on the compositionlong-term effects of the COVID-19 pandemic and the extent to which it may impact our tenants in the future.
Impact to Liquidity and Capital Resources
Given the economic uncertainty and evolving circumstances related to the COVID-19 pandemic and the potential for further tenant requests for rent relief, we continue to evaluate all options for strengthening our liquidity position. As previously disclosed, we bolstered our liquidity profile and cash on hand position at the end of the first quarter of 2020, partially through additional borrowings on our Revolving Credit Facility as well as through the suspension of our asset portfoliomonthly dividend. Given the strength of our rent collections, better-than-expected liquidity in the financial markets, and sourcescareful expense management, we repaid a net $105 million on our Revolving Credit Facility during the second quarter, resulting in lower leverage while maintaining financial flexibility. As of income.
We operate underJune 30, 2020, the directionRevolving Credit Facility had an outstanding balance of $248.3 million, and cash and cash equivalents and restricted cash totaled $9.8 million. In addition, in light of the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and then-current tenant rent relief requests, to preserve cash, strengthen our liquidity position, and manage our overall leverage profile, in May 2020 our board of directors which is responsible fordetermined that we would temporarily suspend our monthly distribution. At its August 4, 2020 meeting, the management and control of our affairs. Our board of directors has retained Broadstone Real Estate, LLC (the “Manager”),undertook a full review of our rent collection results for the second quarter of 2020, preliminary collection results for July 2020, our outlook for collections in future months, and our overall liquidity position. Based on our strong collection results and operating performance, the board voted to provide certain property management services for our properties, and Broadstone Asset Management, LLC,reinstate a distribution, announcing that the wholly-owned subsidiary ofCompany would transition to quarterly distribution payments beginning with the Manager (the “Asset Manager”), to manage our day-to-day affairs and implement our investment strategy, subjectquarter ended September 30, 2020. With the continued uncertainty surrounding the COVID-19 pandemic’s long term impact to our tenants, and the recent resurgence in certain geographical hot spots, the board set a $0.54 distribution per common share and OP Unit to stockholders and OP Unit holders of director’s direction, oversight, and approval.
We conduct substantially all of our activities through, and all of our properties are held directly or indirectly by, Broadstone Net Lease, LLC (the “Operating Company”). We are the sole managing member of the Operating Company andrecord as of September 30, 2017,2020, payable on or before October 15, 2020. The Company believes this quarter’s distribution is also an incrementally important step towards ensuring the Company satisfies its REIT distribution requirements for the year ended December 31, 2020.
In addition to our cash on hand, as of June 30, 2020, we owned approximately 92.3%also have $351.7 million of its issuedavailable capacity under our Revolving Credit Facility, and outstanding membership units,$100 million of available capacity in the form of an accordion feature on our 2026 Unsecured Term Loan. Under the terms of our credit agreements, we must maintain ratios of total indebtedness to total market value, and total unsecured indebtedness to total unencumbered eligible property value (together, “leverage covenant ratios”), of less than 60%, measured as of each quarter end. Taking into consideration our leverage covenant ratios, as of June 30, 2020 we had $148.8 million of available borrowing capacity under our covenants. Management believes we were in compliance with the remaining 7.7%terms of its membership units heldour covenants as of June 30, 2020.
We believe our cash on-hand, available capacity on our credit facilities, including the restrictions imposed by persons who were issued membership unitsour covenant ratios, and our ability to manage distributions provide us with the ability to meet all current obligations and to maintain our REIT status, for at least the next four quarters. However, the COVID-19 pandemic’s ultimate impact to tenants is not yet known, and could result in exchange for their interestssignificantly aged delinquencies and tenant defaults, which would have a direct impact on our leverage covenant ratios. See further discussion concerning our liquidity in properties acquiredLiquidity and Capital Resources below.
Internal Controls over Financial Reporting and Disclosure Controls
We have taken proactive steps to maintain an appropriate internal control environment while migrating our workforce to a work from home dynamic. Our access to technology and online communications has required minimal changes to controls, none of which we deem material. We believe our existing disclosure controls are appropriate to address the reporting complexities presented by the Operating Company.COVID-19 pandemic.
AsRecent Developments — Internalization
In order to benefit from increasing economies of scale as we conduct substantially allcontinue to grow, our board of directors made the decision to internalize our management structure, which was completed on February 7, 2020. In connection with the Internalization, we terminated our management agreements with BRE, entered into employment agreements with each of our named executive officers, and began directly employing 71 former employees of BRE. Our historical results of operations through February 7, 2020, include the Operating Company,payment of management fees that 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 towill no longer pay following the Operating Company in exchange for membership unitsInternalization and do not include the direct compensation expense associated with our current 73 employees, or certain professional fees, consulting, portfolio servicing costs, and other general and administrative expenses not previously incurred based upon our externally managed structure. Additional details of the Internalization include the following:
As consideration 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 Internalization, we issued 780,893 shares of our common stock, and non-controlling membership units outstanding during the year. Approximately 1.5OP issued 1,319,513 OP Units and we and the OP paid $31.0 million non-controlling membership units were outstanding as in cash, for aggregate consideration of September 30, 2017,approximately $209.5 million, and the OP assumed approximately $90.5 million of debt. Concurrent with the closing, we refinanced $60 million of the assumed debt with a year-to-date weightednew loan that is guaranteed by Amy L. Tait, our founder and Chairman, and certain members of her family (“Founding Owners”), and repaid the remaining $30.5 million using borrowings from our Revolving Credit Facility.
In addition to the consideration paid immediately following the Mergers, the Merger Agreement provides that additional “earnout” consideration of up to an aggregate of up to $75 million (payable in four tranches of $10 million, $15 million, $25 million, and $25 million) will be due and payable to the former owners of BRE if certain milestones related to either (a) the 40-day dollar volume-weighted average of 1.5 million.
We commenced our ongoing private offering of sharesprice 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),principal exchange or securities market (or over-the-counter market) on 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 of our common stock issued and outstanding, and 1.5 million membership units in the Operating Company issued and outstanding. Each outstanding membership unit in the Operating Company is convertible on a one-for-one basis into shares of our common stock, subject to certain limitations.
Our principal executive offices are located at 800 Clinton Square, Rochester, New York, 14604, and our telephone number is (585) 287-6500.
Q3 2017 Highlights
For the three and nine months ended September 30, 2017, we:
Generated earnings per share on a GAAP basis (as defined below), including amounts attributable to non-controlling interests, of $0.68 and $2.36 for the three and nine months ended September 30, 2017, respectively.
Generated funds from operations (“FFO”), a non-GAAP financial measure, of $1.42 and $4.43 per diluted share for the three and nine months ended September 30, 2017, respectively.
Generated adjusted funds from operations (“AFFO”), a non-GAAP financial measure, of $1.30 and $4.04 per diluted share for the three and nine months ended September 30, 2017, respectively.
Subsequent to quarter end, the IDC approved increasing the Determined Share Value to $81.00 per share, from $80.00 per share, which will remain in effect through January 31, 2018.
Closed seven real estate acquisitions during the three months ended September 30, 2017, totaling $159.2 million, excluding capitalized acquisition expenses, adding 22 new properties at a 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 seven years and a minimum return on equity of 9.5%, unless approved by our IDC. Subsequent to quarter end, we updated our Investment Policy to require a 9.5% minimum return on equity, net of fees, calculated based on the average return recognized across all acquisitions during a calendar year, with a minimum required return of 8.5%, net of fees, for any particular transaction. The IDC approved this update following the regular annual review of our Investment Policy at the November 2017 meeting of our board of directors. We believe the changes will allow us greater flexibility in deploying capital in investment opportunities that maximize the risk-adjusted return to our shareholders. Our criteria for selecting properties (“Property Selection Criteria”) is based on three pillars of underwriting evaluation:
fundamental value and 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.
To achieve an appropriate risk-adjusted return, we maintain a diversified portfolio of real estate spread across multiple tenants, industries, and geographic locations. The following charts summarize our portfolio diversification by industry and geographic location as of September 30, 2017. 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 impact of contractual rent escalations, excluding any potential variable rent increases that are based on consumer price index (“CPI”) and/or the tenants’ sales volume.
Industry Diversification, by % of NTM Rent
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Geographic Diversification, by % of NTM Rent
Substantially all of our leases are triple-net, meaning that our tenants are responsible for the maintenance, insurance, and property taxes associated with the properties they lease from us. Since inception and at September 30, 2017, all of our 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, the 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% 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 our leases in place as of September 30, 2017.
Lease Maturity Schedule, by % of NTM Rent
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 Rent 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.
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 |
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|
| 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:
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Our Investment Policy provides the Asset Manager with the authority to make any acquisition or sale of any property or group of related properties involving up to $50 million for any single or portfolio transaction, $75 million per cumulative tenant concentration, or $100 million per cumulative brand concentration on our behalf, without approval of the IDC, provided that any properties so acquired otherwise meet our Investment Policy and Property Selection Criteria, and any financing related to any such acquisitions does not violate our Leverage Policy (as defined below), as such are established by the IDC from time to time. Our Investment Policy permits investments in properties that do not otherwise meet our Investment Policy or Property Selection Criteria with the approval of the IDC.
Leverage Policy
In March of 2016, Moody’s Investors Service (“Moody’s”) assigned the Operating Company an investment grade credit rating of Baa3 with a stable outlook. Moody’s re-affirmed the investment grade credit rating in March 2017. The investment grade credit rating allowed us to take advantage of preferential borrowing margins on our outstanding debt, including the $800 million credit facility we entered into on June 23, 2017. The investment grade credit ratings will also allow us more attractive access to the debt private placement markets. The rating is based on a number of factors, including an assessment of our financial strength, portfolio size and diversification, credit and operating metrics, corporate governance policies, and sustainability of cash flow and earnings. We are strongly committed to maintaining modest leverage, 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 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 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 inthen traded, following the completion of an IPO, or (b) our ongoing private offering at a price equaladjusted funds from operations per share, prior to a determined share value (the “Determined Share Value”), which is established quarterly by the IDC based oncompletion of an IPO, are achieved during specified periods of time following the net asset value (“NAV”)completion of our portfolio, input from management, and such other factors as the IDC may determine. SharesInternalization. Should all earnout milestones be met, an additional 272,250 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 10.464,820 OP Units would be issued. The following table presents our Determined Share Value for each period indicated below, together with the corresponding NAV as of the preceding quarter-end:
Period |
| NAV as of |
| Determined Share Value |
|
| NAV per share |
| ||
November 1, 2017 - January 31, 2018 |
| September 30, 2017 |
| $ | 81.00 |
|
| $ | 80.55 |
|
August 1, 2017 - October 31, 2017 |
| June 30, 2017 |
| $ | 80.00 |
|
| $ | 79.90 |
|
The adjustments to NAV per share in arriving at the Determined Share Value for the periods presented above account for the inherent imprecision in the valuation estimates. In February 2018, the IDC will review the NAV calculations as of December 31, 2017, and will assess whether adjustments to the current Determined Share Value of $81.00 are appropriate.
The following table provides a breakdown of the major components of ourearnout liability had an estimated NAV and NAV per share amounts as of September 30, 2017 and June 30, 2017 (in thousands, except per share amounts):
NAV as of: |
| September 30, 2017 |
|
| June 30, 2017 |
| ||
Investment in rental property |
| $ | 2,502,140 |
|
| $ | 2,351,989 |
|
Debt |
|
| (909,416 | ) |
|
| (883,112 | ) |
Other assets and liabilities, net |
|
| 1,348 |
|
|
| 34,790 |
|
NAV |
| $ | 1,594,072 |
|
| $ | 1,503,667 |
|
Number of outstanding shares, including noncontrolling interests |
| $ | 19,790 |
|
| $ | 18,820 |
|
NAV per share |
| $ | 80.55 |
|
| $ | 79.90 |
|
The following table details the implied market capitalization rates (shown on a weighted average basis) used to value the investment in rental property, by property type, as of September 30, 2017 and June 30, 2017, supporting the Determined Share Value in effect for the periods of November 1, 2017 through January 31, 2018, and August 1, 2017 through October 31, 2017, respectively:
Market capitalization rates, as of: |
| Retail |
|
| Industrial |
|
| Healthcare |
|
| Other |
|
| Portfolio Total |
| |||||
September 30, 2017 |
|
| 6.38 | % |
|
| 6.96 | % |
|
| 6.95 | % |
|
| 7.11 | % |
|
| 6.75 | % |
June 30, 2017 |
|
| 6.40 | % |
|
| 6.96 | % |
|
| 6.87 | % |
|
| 7.05 | % |
|
| 6.73 | % |
While we believe our assumptions are reasonable, a change in these assumptions would impact the calculation of the value of our real estate investments. For example, assuming all other factors remain unchanged, an increase in the weighted average implied market capitalization rate used as of September 30, 2017, of 0.25%, would result in a decrease in the fair value of our investment in rental property of 3.6%, and our NAV per share would have been $76.03.
Distributions and Distribution Reinvestment
At its November 7, 2017, meeting, our board of directors declared monthly distributions of $0.415 per share of our common stock and unit of membership interest in the Operating Company to be paid by us to our stockholders and members of the Operating Company (other than us) of record prior to the end of November 2017, December 2017, and January 2018:
Dividend Per Share/Unit |
|
| Record Date |
| Payment Date (on or before) | |
$ | 0.415 |
|
| November 29, 2017 |
| December 15, 2017 |
$ | 0.415 |
|
| December 28, 2017 |
| January 15, 2018 |
$ | 0.415 |
|
| January 30, 2018 |
| February 15, 2018 |
Investors may purchase additional shares of our common stock by electing to reinvest their distributions through our DRIP. The purchase price for shares of our common stock acquired through our DRIP will be 98% of the then-current Determined Share Value. Please refer to Item 11. “Description of Registrant’s Securities to Be Registered” of our Form 10 for additional discussion of our DRIP.
The following table summarizes distributions paid in cash and pursuant to our DRIP for the nine months ended September 30, 2017 (in thousands).
Month |
| Year |
| Cash Distribution - Common Stockholders |
|
| Cash Distribution - Membership Units |
|
| Distribution Paid Pursuant to DRIP on Common Stock (1) |
|
| Distribution Paid Pursuant to DRIP on Membership Units (1) |
|
| Total Amount of Distribution |
| |||||
January |
| 2017 |
| $ | 3,319 |
|
| $ | 488 |
|
| $ | 2,738 |
|
| $ | 98 |
|
| $ | 6,643 |
|
February |
| 2017 |
|
| 3,394 |
|
|
| 488 |
|
|
| 2,836 |
|
|
| 98 |
|
|
| 6,816 |
|
March |
| 2017 |
|
| 3,522 |
|
|
| 493 |
|
|
| 2,972 |
|
|
| 99 |
|
|
| 7,086 |
|
April |
| 2017 |
|
| 3,555 |
|
|
| 493 |
|
|
| 3,068 |
|
|
| 99 |
|
|
| 7,215 |
|
May |
| 2017 |
|
| 3,618 |
|
|
| 493 |
|
|
| 3,167 |
|
|
| 99 |
|
|
| 7,377 |
|
June |
| 2017 |
|
| 3,680 |
|
|
| 493 |
|
|
| 3,220 |
|
|
| 99 |
|
|
| 7,492 |
|
July |
| 2017 |
|
| 3,742 |
|
|
| 493 |
|
|
| 3,296 |
|
|
| 99 |
|
|
| 7,630 |
|
August |
| 2017 |
|
| 3,815 |
|
|
| 512 |
|
|
| 3,378 |
|
|
| 122 |
|
|
| 7,827 |
|
September |
| 2017 |
|
| 3,883 |
|
|
| 512 |
|
|
| 3,420 |
|
|
| 123 |
|
|
| 7,938 |
|
TOTAL |
|
|
| $ | 32,528 |
|
| $ | 4,465 |
|
| $ | 28,095 |
|
| $ | 936 |
|
| $ | 66,024 |
|
|
|
The following table summarizes our distributions paid during the nine months ended September 30, 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
We acquire real estate with 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 shareholders through an appropriate balance of debt and equity in our capital structure. Therefore, we attempt to maintain a conservative debt level on our 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 value of our assets. We believe our current leverage model has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by the investment grade credit rating the Operating Company received in March of 2016 and re-affirmed in March 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 value of our assets. From a management perspective and in communications with the credit rating agencies, we also consider our leverage position as a multiple of Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”), a non-GAAP financial measure. EBITDA is a tool we use to measure leverage in the context of our cash flow expectations and projections. Furthermore, given the significance of our growth over the past two years, adding $352.0$40.1 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 with our continued strategic growth initiatives, historical EBITDA may not provide investors with an adequate picture of the contractual cash in-flows associated with these investments. Our investments are typically made throughout the year, 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 balance of debt and equity capital in our overall leverage policy, while maintaining a focus on increasing core value for existing stockholders (achieved via share appreciation and earnings growth). Our debt capital is provided through unsecured term notes, revolving debt facilities, and senior unsecured notes. We also, from time to time, obtain non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not a strategic focus of the active management of our leverage profile. Rather, we enter into mortgages and notes payable as ancillary business transactions on an as-needed basis.
To reduce our 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 up to ten years in duration in order to reduce the exposure to interest rate fluctuations in any one year. 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 attempt to limit our total floating rate debt exposure to no more than 5% of total assets, measured at quarter end. To reduce counterparty concentration risk with respect to the interest rate hedges, we diversify the institutions that serve as swap counterparties. No more than 30% of the nominal value of our total hedged debt may be with any one institution, to be measured at the time we enter into an interest rate swap transaction and at quarter end. We may deviate from these policies from time-to-time subject to the approval of the IDC. The interest rate swaps are considered cash flow hedges. Under these agreements, we receive monthly payments from the counterparties equal to the variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed rate multiplied by the outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable rate borrowings.
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 |
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| 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.
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An applicable facility fee is payable on the amount of the revolving commitments, as defined in the Credit Facility, based on the Operating Company’s credit rating. The initial applicable facility fee equals 0.25% per annum. The previous Revolver contained an unused commitment fee. The following table presents the applicable facility fee on the New Revolver based on credit ratings from S&P or Moody’s.
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Our $250 million 5.5-Year Term Loan matures on January 23, 2023, and was fully drawn as of June 30, 2017. Borrowings under the 5.5-Year Term Loan bear interest at variable rates based on LIBOR plus a margin ranging from 0.90% to 1.75% based on the Operating Company’s credit rating. Based on the Operating Company’s current investment grade credit rating of Baa3, the applicable margin under the 5.5-Year Term Loan equals 1.35% per annum. As compared to the applicable margin for Term Note 1 and Term Note 2 of 1.45% and 1.75%, respectively, the applicable margin of 1.35% on the 5.5-Year Term Loan represents a 10 basis point and 40 basis point reduction, respectively. Borrowings under the 5.5-Year Term Loan are payable interest only during the term, with the principal amount due in full at maturity. The following table presents the margins on the 5.5-Year Term Loan.
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Our $150 million 7-Year Term Loan matures on June 21, 2024. We are permitted to request up to three borrowings under the delayed draw feature of the 7-Year Term Loan, which may be drawn from June 23, 2017, to but excluding June 22, 2018. As of September 30, 2017, we have not drawn upon the 7-Year Term Loan. The rate of interest payable on the 7-Year Term Loan is equal to LIBOR plus a margin. The margin for 7-Year Term Loan borrowings is adjustable based upon the Operating Company’s credit rating and is between 1.5% and 2.45% per annum. Based on the Operating Company’s current investment grade credit rating of Baa3, the initial margin under the 7-Year Term Loan equals 1.9% per annum. A ticking fee is payable on the amount of the commitments for the 7-Year Term Loan, as reduced by the amount of any term loans outstanding under the 7-Year Term Loan, equal to 0.25% per annum. Borrowings under the 7-Year Term Loan are payable interest only during the term, with the principal amount due in full at maturity. The following table presents the margins on the 7-Year Term Loan based on credit ratings from S&P or Moody’s.
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Our $325 million Term Note 3 matures on February 6, 2019, was fully drawn as of September 30, 2017, and provides for two one year extension options, at our option, subject to compliance with all covenants and the payment of a 0.10% fee. The Term Note 3 agreement contains an accordion feature that can increase the note size up to a total of $600 million. Borrowings under Term Note 3 originally bore interest at variable rates based on the one month LIBOR plus a margin. Moody’s assignment of an investment grade credit rating to the Operating Company led to a margin of 1.40% on Term Note 3, effective April 1, 2016. Should the Operating Company lose its investment grade credit rating, the margin would be 1.75% until such time as the Operating Company regains its investment grade credit rating. The following tables present the margins on Term Note 3 based on credit ratings from S&P or Moody’s.
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The Operating Company achieved its investment grade credit rating based on our conservative leverage profile, diversified portfolio, and earnings stability based on the credit-worthiness of our tenants, which we intend to maintain concurrent with our growth objectives. Factors that could negatively impact our credit rating include, but are not limited to: a significant increase in our leverage on a sustained basis; a significant 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, which are substantially the same across each of our loan agreements. As of September 30, 2017, we were in compliance with all of our covenants. In the event of default, either through default on payments or breach of covenants, we may be prohibited from paying dividends on our common stock above the annual 90% REIT taxable income distribution requirement. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the required distribution amounts.
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In connection with our closing of the Credit Facility and amending and restating Term Note 3, we removed the maximum recourse secured indebtedness ratio, minimum tangible net worth requirement, minimum eligible properties, and maximum permitted investments covenants from our term loan and revolving credit agreements. The new debt covenants are characteristic of investment grade credit facilities within the REIT industry.
We believe our leverage policy and capital structure provides us with several advantages, including the ability to:
create a growing and diversified real estate portfolio;Internalization.
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.
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| For the nine months ended |
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|
| 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, 2017 (in thousands).
Year of Maturity |
| Term Note 3(1) |
|
| 5.5-Year Term Loan |
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| New Revolver(2) |
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| Senior Notes |
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| Mortgages |
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| Interest Expense(3) |
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| Tenant Improvement Allowances(4) |
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| Total |
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2017 |
| $ | — |
|
| $ | — |
|
| $ | 28,000 |
|
| $ | — |
|
| $ | 677 |
|
| $ | 8,842 |
|
| $ | 6,627 |
|
| $ | 44,146 |
|
2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,829 |
|
|
| 34,915 |
|
|
| — |
|
|
| 37,744 |
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2019 |
|
| 325,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,036 |
|
|
| 26,907 |
|
|
| — |
|
|
| 354,943 |
|
2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,450 |
|
|
| 25,459 |
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|
| — |
|
|
| 33,909 |
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2021 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13,306 |
|
|
| 24,537 |
|
|
| — |
|
|
| 37,843 |
|
Thereafter |
|
| — |
|
|
| 250,000 |
|
|
| 98,500 |
|
|
| 150,000 |
|
|
| 30,274 |
|
|
| 70,467 |
|
|
| — |
|
|
| 599,241 |
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Total |
| $ | 325,000 |
|
| $ | 250,000 |
|
| $ | 126,500 |
|
| $ | 150,000 |
|
| $ | 58,572 |
|
| $ | 191,127 |
|
| $ | 6,627 |
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| $ | 1,107,826 |
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At September 30, 2017, investment in rental property of $91.3 million is pledged as collateral against our mortgages and notes payable.
Additionally, as of September 30, 2017, we have two separate Tax Protection Agreements (the “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 thirdregistration rights agreement with our founding owners and Trident BRE, LLC and its affiliates, and the Founding Owners’ Tax Protection Agreement with additional Protected Members through one UPREIT transaction conducted in October 2017. The Agreements require us to pay monetary damages in the event of a sale, exchange, transfer, or other disposal of the contributed property in a taxable transaction that would cause a Protected Member to recognize a Protected Gain, as defined in the Agreements and subject to certain exceptions. In such an event, 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 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 for under the Agreements is approximately $12.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded this commitment from the contractual commitments table above.Agreement.
For the three months ended September 30, 2017 and 2016
As of SeptemberJune 30, 2017,2020, our real estate investment portfolio had a net bookgross asset value of $1.9approximately $4.0 billion, consisting of investments in 477 property locations in 37 states and various industries. All of our real estate investment portfolio represents632 commercial real estate properties subjectwith locations in 41 states and one real estate property located in British Columbia, Canada, and leased to long-term leases, and alltenants in various industries. All but seven of our owned properties were subject to a lease as of SeptemberJune 30, 2017. During2020.
Our historical results of operations for the six months ended June 30, 2020 and the three and six months ended SeptemberJune 30, 20172019, discussed below, include the payment of asset and 2016, noneproperty management fees that we will no longer pay following the Internalization, and do not include the expected full impact of our leasesdirect compensation expense associated with tenants expired,employees employed by us following the Internalization or incremental general and all of our leasing activity related to our real estate acquisitions.administrative expenses.
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| For the three months ended |
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| September 30, |
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| Increase/ |
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(in thousands) |
| 2017 |
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| 2016 |
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| (Decrease) |
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Revenues: |
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|
|
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|
|
|
|
|
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 |
|
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||||||||||||||||||
|
| June 30, |
|
| Increase/(Decrease) |
|
| June 30, |
|
| Increase/(Decrease) |
| ||||||||||||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| ||||||||
Contractual rental amounts billed for operating leases and straight-line rent adjustments |
| $ | 75,618 |
|
| $ | 65,563 |
|
| $ | 10,055 |
|
|
| 15.3 | % |
| $ | 150,111 |
|
| $ | 129,153 |
|
| $ | 20,958 |
|
|
| 16.2 | % |
Variable rental amounts earned |
|
| 51 |
|
|
| — |
|
|
| 51 |
|
| >100 | % |
|
| 74 |
|
|
| — |
|
|
| 74 |
|
| >100 | % | ||
Adjustment to revenue recognized for uncollectible rental amounts billed |
|
| (1,190 | ) |
|
| — |
|
|
| (1,190 | ) |
| >100 | % |
|
| (2,223 | ) |
|
| (440 | ) |
|
| (1,783 | ) |
| >100 | % | ||
Operating expenses billed to/reimbursed from tenants |
|
| 4,335 |
|
|
| 2,486 |
|
|
| 1,849 |
|
|
| 74.4 | % |
|
| 8,067 |
|
|
| 6,761 |
|
|
| 1,306 |
|
|
| 19.3 | % |
Other income from real estate transactions |
|
| 702 |
|
|
| — |
|
|
| 702 |
|
| >100 | % |
|
| 731 |
|
|
| — |
|
|
| 731 |
|
| >100 | % | ||
Total lease revenues from operating leases |
|
| 79,516 |
|
|
| 68,049 |
|
|
| 11,467 |
|
|
| 16.9 | % |
|
| 156,760 |
|
|
| 135,474 |
|
|
| 21,286 |
|
|
| 15.7 | % |
Earned income from direct financing leases |
|
| 855 |
|
|
| 1,004 |
|
|
| (149 | ) |
|
| (14.8) | % |
|
| 1,842 |
|
|
| 2,009 |
|
|
| (167 | ) |
|
| (8.3) | % |
Total Lease revenues, net |
| $ | 80,371 |
|
| $ | 69,053 |
|
| $ | 11,318 |
|
|
| 16.4 | % |
| $ | 158,602 |
|
| $ | 137,483 |
|
| $ | 21,119 |
|
|
| 15.4 | % |
TotalThe increase in Lease revenues, increased by $9.2 million, or 24.9%, to $46.2 millionnet for the three and six months ended SeptemberJune 30, 2017, compared to $37.0 million for the three months ended September 30, 2016. The growth in revenue period-over-period is2020, was primarily attributable to the growth in our real estate portfolio. Duringportfolio, which was achieved through accretive property acquisitions during 2019, weighted towards the three months ended September 30, 2017,second half of the year, and continued strong portfolio operating performance. In 2019, we closed seven real estate acquisitions and acquired $159.2 million in real estate,significantly increased the size of our portfolio, adding 74 new properties at an aggregate cost of approximately $1.0 billion, excluding capitalized acquisition costs, comprisedcosts. As of 22 new properties. We capitalizedJune 30, 2020, we had collected approximately $2.4 million in acquisition expenses93% of second quarter rents due and $0.8 million in leasing fees as partour portfolio was 99.5% occupied (based on rentable square footage). As of June 30, 2020, 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 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 three months ended September 30, 2017, excluding capitalized acquisition expenses, represented aABR weighted average capitalization rate of 7.5%annual rent increases on our properties was 2.1%.
Operating Expenses
|
| For the three months ended |
|
|
|
|
|
| For the three months ended |
|
| For the six months ended |
| |||||||||||||||||||||||||||||||
|
| September 30, |
|
| Increase/ |
|
| June 30, |
|
| Increase/(Decrease) |
|
| June 30, |
|
| Increase/(Decrease) |
| ||||||||||||||||||||||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| |||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 15,643 |
|
| $ | 12,114 |
|
| $ | 3,529 |
|
| $ | 39,921 |
|
| $ | 25,287 |
|
| $ | 14,634 |
|
|
| 57.9 | % |
| $ | 71,140 |
|
| $ | 49,597 |
|
| $ | 21,543 |
|
|
| 43.4 | % |
Asset management fees |
|
| 3,844 |
|
|
| 2,789 |
|
|
| 1,055 |
|
|
| — |
|
|
| 5,318 |
|
|
| (5,318 | ) |
|
| (100.0) | % |
|
| 2,461 |
|
|
| 10,438 |
|
|
| (7,977 | ) |
|
| (76.4) | % |
Property management fees |
|
| 1,249 |
|
|
| 1,010 |
|
|
| 239 |
|
|
| — |
|
|
| 1,935 |
|
|
| (1,935 | ) |
|
| (100.0) | % |
|
| 1,275 |
|
|
| 3,820 |
|
|
| (2,545 | ) |
|
| (66.6) | % |
Acquisition expenses |
|
| — |
|
|
| 2,367 |
|
|
| (2,367 | ) | ||||||||||||||||||||||||||||||||
Property and operating expense |
|
| 2,009 |
|
|
| 1,184 |
|
|
| 825 |
|
|
| 4,190 |
|
|
| 3,252 |
|
|
| 938 |
|
|
| 28.8 | % |
|
| 8,305 |
|
|
| 7,642 |
|
|
| 663 |
|
|
| 8.7 | % |
General and administrative |
|
| 1,173 |
|
|
| 598 |
|
|
| 575 |
|
|
| 5,700 |
|
|
| 1,389 |
|
|
| 4,311 |
|
| >100 | % |
|
| 11,542 |
|
|
| 2,492 |
|
|
| 9,050 |
|
| >100 | % | ||
State and franchise tax |
|
| 301 |
|
|
| 71 |
|
|
| 230 |
| ||||||||||||||||||||||||||||||||
Provision for impairment of investment in rental properties |
|
| 2,608 |
|
|
| — |
|
|
| 2,608 |
|
|
| 534 |
|
|
| — |
|
|
| 534 |
|
| >100 | % |
|
| 2,667 |
|
|
| 1,017 |
|
|
| 1,650 |
|
| >100 | % | ||
Total operating expenses |
| $ | 26,827 |
|
| $ | 20,133 |
|
| $ | 6,694 |
|
| $ | 50,345 |
|
| $ | 37,181 |
|
| $ | 13,164 |
|
|
| 35.4 | % |
| $ | 97,390 |
|
| $ | 75,006 |
|
| $ | 22,384 |
|
|
| 29.8 | % |
Depreciation and amortization
DepreciationThe increase in depreciation and amortization increased by $3.5 million, or 29.1%, to $15.6 millionexpense for the three and six months ended SeptemberJune 30, 2017,2020, is primarily as a result ofdue to 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%,and Property management fees
Prior to $3.8 million for the three months ended September 30, 2017. The Asset Manager receives an annual asset managementInternalization on February 7, 2020, we paid our third-party manager a quarterly fee equal to 1%0.25% of the aggregate value of our equity on a fully diluted basis, based on the determined share value established by our board of directors (“Determined Share Value. Value”). Additionally, we paid our third-party manager a monthly fee equal to 3% of gross rentals collected from our real estate portfolio as compensation for its property management services. Upon completion of the Internalization, the agreements with the third-party manager were terminated, resulting in a decrease in these expenses as compared to the prior year period. Our management fees were replaced by compensation and related costs associated with an internalized management structure, and corresponding general and administrative expenses.
The increase in general and administrative expenses mainly reflects the impact of the Internalization, and our current employment of approximately 73 employees. Following the Internalization, our asset and property management fees were replaced with compensation and related expenses, which totaled $3.8 million and $6.6 million during the three and six months ended SeptemberJune 30, 2017 compared to the comparable period in 2016 is a result of an increase in our outstanding equity on a fully diluted basis2020, respectively, along with associated general 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.administrative expenses.
Provision for impairment of investment in rental properties
During the three and six months ended SeptemberJune 30, 2017,2020, we recognized $2.6$0.5 million and $2.7 million, respectively, 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 recognizedThe timing and amount of impairment fluctuates from period to period depending 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%,specific facts and a weighted average discount rate of 8%.circumstances.
Other income (loss)(expenses)
|
| For the three months ended |
|
|
|
|
|
| For the three months ended |
|
| For the six months ended |
| |||||||||||||||||||||||||||||||
|
| September 30, |
|
| Increase/ |
|
| June 30, |
|
| Increase/(Decrease) |
|
| June 30, |
|
| Increase/(Decrease) |
| ||||||||||||||||||||||||||
(in thousands) |
| 2017 |
|
| 2016 |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| |||||||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred distribution income |
| $ | 187 |
|
| $ | 181 |
|
| $ | 6 |
| ||||||||||||||||||||||||||||||||
Interest income |
|
| 127 |
|
|
| 4 |
|
|
| 123 |
|
| $ | 11 |
|
| $ | — |
|
| $ | 11 |
|
| >100 | % |
| $ | 20 |
|
| $ | 1 |
|
| $ | 19 |
|
| >100 | % | ||
Interest expense |
|
| (9,380 | ) |
|
| (4,576 | ) |
|
| (4,804 | ) |
|
| (19,513 | ) |
|
| (16,732 | ) |
|
| 2,781 |
|
|
| 16.6 | % |
|
| (40,504 | ) |
|
| (32,560 | ) |
|
| 7,944 |
|
|
| 24.4 | % |
Cost of debt extinguishment |
|
| (1,404 | ) |
|
| (52 | ) |
|
| (1,352 | ) |
|
| — |
|
|
| (8 | ) |
|
| (8 | ) |
|
| (100.0) | % |
|
| (22 | ) |
|
| (721 | ) |
|
| (699 | ) |
|
| (96.9) | % |
Gain on sale of real estate |
|
| 4,052 |
|
|
| 2,983 |
|
|
| 1,069 |
|
|
| 1,046 |
|
|
| 2,787 |
|
|
| (1,741 | ) |
|
| (62.5) | % |
|
| 8,665 |
|
|
| 4,187 |
|
|
| 4,478 |
|
| >100 | % | |
Income taxes |
|
| (402 | ) |
|
| (305 | ) |
|
| 97 |
|
|
| 31.8 | % |
|
| (951 | ) |
|
| (748 | ) |
|
| 203 |
|
|
| 27.1 | % | ||||||||||||
Internalization expenses |
|
| (389 | ) |
|
| (272 | ) |
|
| 117 |
|
|
| 43.0 | % |
|
| (1,594 | ) |
|
| (272 | ) |
|
| 1,322 |
|
| >100 | % | |||||||||||||
Change in fair value of earnout liability |
|
| 6,321 |
|
|
| — |
|
|
| 6,321 |
|
| >100 | % |
|
| 2,144 |
|
|
| — |
|
|
| (2,144 | ) |
| >100 | % | ||||||||||||||
Other losses |
|
| (2 | ) |
|
| — |
|
|
| 2 |
|
| >100 | % |
|
| (24 | ) |
|
| — |
|
|
| 24 |
|
| >100 | % |
Interest expense
InterestThe increased interest expense increased $4.8 million, or 105%, to $9.4 million forduring the three and six months ended SeptemberJune 30, 2017,2020, resulted primarily from $4.6 million for the three months ended September 30, 2016, due primarily to an increase in long-termaverage outstanding borrowings usedas compared 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 and six months ended SeptemberJune 30, 2016, we recognized approximately $3.0 million2019, due mainly to borrowings associated with a significant acquisition in the third quarter 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 swaps2019, and the loan agreements for the Term Notes and Revolver. The interest rate swaps continued to qualify for hedge accounting,incremental borrowings associated with the effective portionInternalization, partially offset by a 75 basis point decrease in our weighted average cost of mark-to-market adjustments included in accumulated other comprehensive income. During the fourth quarterdebt, inclusive 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 paidswaps. We were able to extinguish the debt compared to the carrying valuetake advantage of the decreasing interest rates since June 30, 2019, as our percentage of floating-rate debt plus any unamortized debt issuance costs atincreased concurrently with our funding of the time of extinguishment. Toaforementioned acquisition. We also amended our 2024 Unsecured Term Loan in July 2019 to reduce the extent that the price paidapplicable margin from 1.90% 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, 2016.1.25%.
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 During the ninethree months ended SeptemberJune 30, 20172020, we recognized gains of $1.0 million on the sale of three properties, compared to gains of $2.8 million on the sale of five properties during the three months ended June 30, 2019. During the six months ended June 30, 2020, we recognized gains of $8.7 million on the sale of 13 properties, compared to gains of $4.2 million on the sale of nine properties during the six months ended June 30, 2019.
Internalization expenses
During the three and 2016
Overview
Assix months ended June 30, 2020, we incurred $0.4 million and $1.6 million, respectively, of September 30, 2017, our real estate investment portfolio had grownthird-party fees and consulting expenses associated with the Internalization that closed on February 7, 2020, compared to a net book$0.3 million of such expenses in the comparable prior year periods. We expect incremental internalization expenses in the future to be limited to third party legal and accounting fees related to residual work in connection with the transaction.
Change in fair 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.earnout liability
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 asAs part of the acquisitions. Additionally, subsequentInternalization we may be required to September 30, 2016 and forpay additional earnout consideration if certain milestones are achieved during the three month period ended December 31, 2016, we closed eight real estate acquisitions and acquired approximately $137.8 million in real estate comprisedEarnout Periods. We record the fair value 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, suchthis contingent consideration as the terms of the lease, each property’s real estate fundamentals, and the market rentsan Earnout liability in the area. The initial contractual cash lease payments on acquisitions duringCondensed Consolidated Balance Sheets, and update the nine months ended September 30, 2017, excluding capitalized acquisition expenses, represented a weighted average capitalization ratefair value at the end 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.each reporting period. 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 determiningestimate the fair value of the assets atearnout liability by considering weighted-average probabilities of likely outcomes, and using a Monte Carlo simulation and discounted cash flow analysis to estimate fair value. These estimates require the timeCompany to make various assumptions about future share prices, timing of measurement,an IPO, and other items that are unobservable and are considered Level 3 inputs in the fair value hierarchy.
Upon closing of the Internalization, we utilized capitalization rates ranging from 7.25%recorded an earnout liability of $40.1 million through our preliminary purchase price allocation, which decreased to 12%,$38.0 million as of June 30, 2020. The decrease in fair value between March 31, 2020 and June 30, 2020 is primarily a weighted average discount rateresult 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 fora decrease in the nine months ended September 30, 2017, from $24.2 million for the nine months ended September 30, 2016, due primarily toestimated net asset value per share assumption used, partially offset by an increase in long-term borrowings used to partially fund the acquisitionpeer stock price volatility, both 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 waswhich are attributable to inconsistencieschanges 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 includedeconomic circumstances impacting global equity markets, as detailed 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 impactNote 2 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.Condensed Consolidated Financial Statements above.
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 dilutivediluted share are presented in accordance with GAAP. We also disclose FFO and AFFO, each of which are non-GAAP measures. We believe the usepresentation of FFO and AFFO are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs. FFO and AFFO should not be considered alternatives to net income as a performance measure or to cash flows from operations, as reported on our statement of cash flows, or as a liquidity measure, and should be considered in addition to, and not in lieu of, GAAP financial measures.
We compute FFO in accordance with the standards established by the 2002 White Paper on FFO approved by the Board of Governors of Nareit, the National Association of Real Estate Investment Trusts (“NAREIT”). NAREITworldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. To derive AFFO, we modify the NAREITNareit computation of FFO to include other adjustments to GAAP net income related to certain non-cash and non-recurring revenues and expenses, including straight-line rents, cost of debt extinguishments, acquisition expenses, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, realized gains or losses on foreign currency transactions, internalization expenses, extraordinary items, and other specified non-cash items. We believe that such items are not a result of normal operations and thus we believe excluding such items assists management and investors in distinguishing whether changes in our operations are due to growth or decline of operations at our properties or from other factors.
Our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market rentals over time. Our leases do not include significant front-loadingfront-loading or back-loading of payments, or significant rent-free periods. Therefore, we find it useful to evaluate rent on a contractual basis as it allows for comparison of existing rental rates to market rental rates. Additionally,In situations where we exclude transaction costshave granted short-term rent deferrals as a result of the COVID-19 pandemic, and such deferrals are probable of collection and expected to be repaid within a short term, we will continue to recognize the same amount of GAAP lease revenues each period. The amounts temporarily deferred are recorded in tenant receivables until they are repaid. Consistent with GAAP lease revenues, the short-term deferrals associated with acquiring real estate subject to existing leases, includingCOVID-19 will not impact our AFFO.
We further exclude costs or gains recorded on the extinguishment of debt, non-cash interest expense and gains, the amortization of debt issuance costs, net mortgage premiums, and lease intangibles, realized gains and losses on foreign currency transactions, and internalization expenses, as well as acquisition expenses paid to our Asset Manager that are based on a percentage of the gross acquisition purchase price. We exclude these costs from AFFO because they are upfront expenses that are recognized in conjunction with an acquisition, and therefore,items are not indicative of ongoing operational results of the portfolio. We believe excluding acquisition expenses provides investors a view of the performance of our portfolio over time. In connection with our adoption of ASU 2017-01, effective January 1, 2017 and on a prospective basis, we capitalize all acquisition expenses as part of the cost-basis of the tangible and intangible assets acquired. Therefore, effective January 1, 2017, we will no longer adjust for acquisition expenses in our AFFO computation. We also exclude the amortization of debt issuance costs and net mortgage premiums as they are not indicative of ongoing operational results of the portfolio.results. We use AFFO as a measure of our performance when we formulate corporate goals.
FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers, primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is a useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.
Neither the SEC ornor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate FFO and AFFO. In the future, the SEC, NAREITNareit or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of FFO and AFFO accordingly.
Net Income, FFO, and AFFO for the three months ended September 30, 2017 and 2016
The following table presents our net income and our non-GAAP FFO and AFFO for the three months ended September 30, 2017 and 2016.AFFO. 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 |
|
|
|
|
|
| For the three months ended |
|
| For the six months ended |
| |||||||||||||||||||||||||||||||
|
| September 30, |
|
| Increase/ |
|
| June 30, |
|
| Increase/(Decrease) |
|
| June 30, |
|
| Increase/(Decrease) |
| ||||||||||||||||||||||||||
(in thousands, except per share data) |
| 2017 |
|
| 2016 |
|
| Decrease |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| |||||||||||
Net income |
| $ | 12,990 |
|
| $ | 15,417 |
|
| $ | (2,427 | ) |
| $ | 17,098 |
|
| $ | 17,342 |
|
| $ | (244 | ) |
|
| (1.4) | % |
| $ | 28,946 |
|
| $ | 32,364 |
|
| $ | (3,418 | ) |
|
| (10.6) | % |
Net earnings per diluted share |
|
| 0.68 |
|
|
| 1.02 |
|
|
| (0.34 | ) |
|
| 0.57 |
|
|
| 0.70 |
|
|
| (0.13 | ) |
|
| (18.6) | % |
|
| 0.98 |
|
|
| 1.32 |
|
|
| (0.34 | ) |
|
| (25.8) | % |
FFO |
|
| 27,189 |
|
|
| 24,548 |
|
|
| 2,641 |
|
|
| 56,485 |
|
|
| 39,842 |
|
|
| 16,643 |
|
|
| 41.8 | % |
|
| 94,057 |
|
|
| 78,791 |
|
|
| 15,266 |
|
|
| 19.4 | % |
FFO per diluted share |
|
| 1.42 |
|
|
| 1.63 |
|
|
| (0.21 | ) |
|
| 1.89 |
|
|
| 1.60 |
|
|
| 0.29 |
|
|
| 18.1 | % |
|
| 3.19 |
|
|
| 3.22 |
|
|
| (0.03 | ) |
|
| (0.9) | % |
AFFO |
|
| 24,813 |
|
|
| 20,476 |
|
|
| 4,337 |
|
|
| 46,056 |
|
|
| 34,637 |
|
|
| 11,419 |
|
|
| 33.0 | % |
|
| 87,124 |
|
|
| 68,806 |
|
|
| 18,318 |
|
|
| 26.6 | % |
AFFO per diluted share |
|
| 1.30 |
|
|
| 1.36 |
|
|
| (0.06 | ) |
|
| 1.54 |
|
|
| 1.39 |
|
|
| 0.15 |
|
|
| 10.8 | % |
|
| 2.96 |
|
|
| 2.81 |
|
|
| 0.15 |
|
|
| 5.3 | % |
Diluted WASO(1) |
|
| 19,147 |
|
|
| 15,074 |
|
|
|
|
| ||||||||||||||||||||||||||||||||
Diluted WASO(a) |
|
| 29,912 |
|
|
| 24,941 |
|
|
| 4,971 |
|
|
| 19.9 | % |
|
| 29,482 |
|
|
| 24,507 |
|
|
| 4,975 |
|
|
| 20.3 | % |
| Weighted average number of shares of our common stock and |
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 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.
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 on a prospective basis. For the three months ended SeptemberJune 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 as2020, compared to the three months ended SeptemberJune 30, 2016.
Earnings per share were further impacted by2019, net income decreased primarily due to a 4.1$14.6 million increase in depreciation and amortization expense associated with a larger real estate portfolio, a $2.8 million increase in interest expense associated with incremental borrowings used to partially fund our real estate acquisitions and the diluted weighted average numberInternalization, and a $1.7 million decrease in gains on sale of sharesreal estate. These factors were partially offset by revenue growth of $11.3 million and the impact of a $6.3 million adjustment to the fair value of our common stock outstandingearnout liability in 2020 with no comparable adjustment in the prior year. In addition, as a result of ongoing equity raises.
FFO
FFOthe Internalization, increased general and administrative expenses of $4.3 million were offset by $2.6$7.3 million or 10.8%, to $27.2 million forlower asset management and property management fees. For the threesix months ended SeptemberJune 30, 2017,2020, compared to $24.5 million for the threesix months ended SeptemberJune 30, 2016. FFO per diluted share2019, net income decreased by $0.21 during the same periodprimarily due to $1.42 per share. Thea $21.5 million increase in FFO is primarily drivendepreciation and amortization expense, a $7.9 million increase in interest expense, a $1.7 million increase in impairment charges, a $1.3 million increase in internalization expenses, and a $2.1 million adjustment to the fair value of our earnout liability in 2020 with no comparable adjustment in the prior year. These factors were partially offset by revenue growth of $21.1 million and increased revenue year over yeargains on sale of real estate in the amount of $4.5 million. In addition, as a result of growththe Internalization, increased general and administrative expenses of $9.1 million were offset by $10.5 million lower asset management and property management fees.
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. These fluctuations, combined with the increase in our real estate investment portfolio, as discussed for net income above. Additionally, we added back $2.6 million of asset impairment charges recognized duringweighted average shares outstanding, contributed to the three months ended September 30, 2017, which were not recognized during the three months ended September 30, 2016.
Consistent with the$0.13 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 SeptemberJune 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 as2020 and 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$0.34 decrease in net earnings per diluted share for the six months ended June 30, 2020.
AFFO
The increase in AFFO during the three and six months ended June 30, 2020, as compared to the same periods in 2019, was more than offsetprimarily driven by a 4.1 million increase in the diluted weighted average number of shares ofrevenue growth, which resulted from rent escalations associated with our common stock outstandingsame property portfolio, accretive acquisitions and strong portfolio operating performance, as well as decreased asset and property management fees as a result of ongoing equity raises.
Net Income, FFO, and AFFO forterminating 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 shareassociated agreements 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, coupledconnection 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 wasInternalization, discussed above. These factors were partially offset by increased depreciationgeneral and administrative expense relatingrelated to incremental compensation and related costs associated with an internalized management structure, combined with increased interest expense associated with incremental borrowings. We are realizing the cost savings associated with being internally managed. During the first six months of 2020, amounts incurred for general and administrative expenses were approximately $5.1 million less than the combined asset and property management fees that we would have paid under our previous external management structure. Approximately $3.5 million of these savings were realized during the second quarter of 2020, our first full quarter operating under an internally managed structure.
The $0.15 increase in AFFO per diluted share during the three and six months ended June 30, 2020, was primarily due to the capitalized costs.
Thefactors discussed above, partially offset by an increase in net income forBNL’s weighted average shares outstanding resulting from continued equity raises associated with our deleveraging plans subsequent to our Industrial Portfolio acquisition in the nine months ended September 30, 2016 was also impacted by a $10.3 million gain onthird quarter of 2019, combined with the salecommon shares and OP Units issued in conjunction with the Internalization. The cost savings associated with an internalized management structure, combined with continued positive operating performance, more than offset the dilutive effect of real estate, representing a $6.2 million increasethe higher share count as compared to the ninethree and six months ended SeptemberJune 30, 2016.
The2019. We expect this accretion will continue to increase in net income in the earnings per share computation was partially offset by a 3.9 million increase in the diluted weighted average numberas we grow our portfolio and recognize economies of shares of our common stock outstanding as a result of ongoing equity raises.scale.
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, which are non-GAAP financial measures. Also presented are the diluted WASO and per diluted share amounts:
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||
| June 30, |
|
| June 30, |
| |||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net income |
| $ | 17,098 |
|
| $ | 17,342 |
|
| $ | 28,946 |
|
| $ | 32,364 |
|
Real property depreciation and amortization |
|
| 39,899 |
|
|
| 25,287 |
|
|
| 71,109 |
|
|
| 49,597 |
|
Gain on sale of real estate |
|
| (1,046 | ) |
|
| (2,787 | ) |
|
| (8,665 | ) |
|
| (4,187 | ) |
Provision for impairment on investment in rental properties |
|
| 534 |
|
|
| — |
|
|
| 2,667 |
|
|
| 1,017 |
|
FFO |
| $ | 56,485 |
|
| $ | 39,842 |
|
| $ | 94,057 |
|
| $ | 78,791 |
|
Capital improvements / reserves |
|
| — |
|
|
| (48 | ) |
|
| — |
|
|
| (97 | ) |
Straight-line rent adjustment |
|
| (6,151 | ) |
|
| (5,240 | ) |
|
| (7,763 | ) |
|
| (10,383 | ) |
Adjustment to provision for credit losses |
|
| (110 | ) |
|
| — |
|
|
| (127 | ) |
|
| — |
|
Cost of debt extinguishment |
|
| — |
|
|
| 8 |
|
|
| 22 |
|
|
| 721 |
|
Amortization of debt issuance costs |
|
| 821 |
|
|
| 597 |
|
|
| 1,709 |
|
|
| 1,150 |
|
Amortization of net mortgage premiums |
|
| (37 | ) |
|
| (36 | ) |
|
| (72 | ) |
|
| (71 | ) |
Gain on interest rate swaps and other non-cash interest expense |
|
| (41 | ) |
|
| (41 | ) |
|
| (83 | ) |
|
| (122 | ) |
Amortization of lease intangibles |
|
| 1,019 |
|
|
| (717 | ) |
|
| (119 | ) |
|
| (1,455 | ) |
Internalization expenses |
|
| 389 |
|
|
| 272 |
|
|
| 1,594 |
|
|
| 272 |
|
Severance |
|
| — |
|
|
| — |
|
|
| 26 |
|
|
| — |
|
Change in fair value of earnout liability |
|
| (6,321 | ) |
|
| — |
|
|
| (2,144 | ) |
|
| — |
|
Other losses |
|
| 2 |
|
|
| — |
|
|
| 24 |
|
|
| — |
|
AFFO |
| $ | 46,056 |
|
| $ | 34,637 |
|
| $ | 87,124 |
|
| $ | 68,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted WASO |
|
| 29,912 |
|
|
| 24,941 |
|
|
| 29,482 |
|
|
| 24,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic and diluted |
| $ | 0.57 |
|
| $ | 0.70 |
|
| $ | 0.98 |
|
| $ | 1.32 |
|
FFO per diluted share |
|
| 1.89 |
|
|
| 1.60 |
|
|
| 3.19 |
|
|
| 3.22 |
|
AFFO per diluted share |
|
| 1.54 |
|
|
| 1.39 |
|
|
| 2.96 |
|
|
| 2.81 |
|
Liquidity and Capital Resources
We acquire real estate using 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 stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our leverage profile and overall liquidity position. We believe our leverage model has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our investment grade credit rating of Baa3 from Moody’s Investors Service (“Moody’s”), which Moody’s reaffirmed on July 31, 2020. As of June 30, 2020, our leverage ratio was 45.4% of the approximate market value of our assets, compared to 45.8% as of December 31, 2019.
Liquidity/REIT Requirements
Liquidity is a measure 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 are required to distribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gain, on an annual basis. As a result, it is unlikely that we will be able to retain substantial cash balances to meet our long-term liquidity needs, including repayment of debt and the acquisition of additional properties, from our annual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital.
Short-term Liquidity Requirements
Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including our general and administrative expenses as well as interest payments on our outstanding debt and to pay distributions. Since our portfolio has a strong occupancy level and substantially all of our leases are net leases, we do not currently anticipate making significant capital expenditures or incurring other significant property costs. We expect to meet our short-term liquidity requirements primarily from cash and cash equivalents balances, net cash provided by operating activities, and borrowing under our Revolving Credit Facility. Additionally, on May 5, 2020 we exercised our first of two options, effective August 2, 2020, to extend the maturity date of our $240 million 2020 Unsecured Term Loan for a period of six months in exchange for a fee of $0.1 million. Refer to Recent Developments – COVID-19 Pandemic for additional discussion regarding the pandemic’s impact on our liquidity.
Long-term Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds necessary to repay debt and invest in additional revenue generating properties. Debt capital is provided through unsecured term notes, revolving debt facilities, and senior unsecured notes.
The source and mix of our debt capital in the future will be impacted by market conditions as well as our continued focus on lengthening our debt maturity profile to better align with our portfolio’s lease terms, staggering debt maturities to reduce the risk that a significant amount of debt will mature in any single year in the future, and managing our exposure to interest rate risk.
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 may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and 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, we enter into mortgages and notes payable as ancillary business transactions on an as-needed basis, most often as the result of lease assumption transactions. Our fiscal strength has enabled us to build a portfolio that is approximately 95% unencumbered on a gross assets basis, with 627 unencumbered properties and approximately $109.3 million of mortgage debt on the remaining properties.
Equity capital for our real estate acquisition activity has historically been provided from the proceeds of our private offering, including distributions reinvested through our DRIP. We suspended our private offering on January 10, 2020, in connection with our confidential submission of a draft registration statement on Form S-11 with the SEC relating to a proposed IPO. Accordingly, we did not raise any equity through our private offering during the first six months of 2020. During the six months ended June 30, 2020, we raised approximately $5.9 million in equity capital through our DRIP. See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” of this Quarterly Report on Form 10-Q for further information. We announced on January 10, 2020 that we were terminating our DRIP, effective February 10, 2020.
Credit Rating
We achieved our current investment grade credit rating of Baa3 based on our conservative leverage profile, diversified real estate investment portfolio, access to capital, and earnings stability provided by the creditworthiness of our tenants. 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 the proportion of secured debt levels, a significant decline in our unencumbered asset base, weakening of our corporate governance structure, and a significant decline in our real estate portfolio diversification or the creditworthiness of our tenants. Factors that could positively impact our credit rating include, but are not limited to, continued growth in the portfolio, improvement in our leverage profile, lengthening of our debt maturity profile, and our Internalization. We have aligned our strategic growth priorities with these factors, as we believe the favorable debt pricing and access to multiple sources of debt capital resulting from our investment grade credit rating, provides us with an advantageous cost of capital and risk-adjusted return on investment for our stockholders.
The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and Senior Notes as of June 30, 2020.
(in thousands, except interest rates) |
| Outstanding Balance |
|
| Interest Rate |
|
| Maturity Date | ||
2020 Unsecured Term Loan |
| $ | 240,000 |
|
| one-month LIBOR + 1.25% |
|
| Feb. 2021 | |
Unsecured Revolving Credit and Term Loan Agreement |
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility |
|
| 248,300 |
|
| one-month LIBOR + 1.20% |
|
| Jan. 2022 | |
2023 Unsecured Term Loan |
|
| 265,000 |
|
| one-month LIBOR + 1.35% |
|
| Jan. 2023 | |
2024 Unsecured Term Loan |
|
| 190,000 |
|
| one-month LIBOR + 1.25% |
|
| Jun. 2024 | |
|
|
| 703,300 |
|
|
|
|
|
|
|
2022 Unsecured Term Loan |
|
| 60,000 |
|
| one-month LIBOR + 1.25% |
|
| Feb. 2022 | |
2026 Unsecured Term Loan |
|
| 450,000 |
|
| one-month LIBOR + 1.85% |
|
| Feb. 2026 | |
Senior Notes |
|
|
|
|
|
|
|
|
|
|
Series A |
|
| 150,000 |
|
| 4.84% |
|
| Apr. 2027 | |
Series B |
|
| 225,000 |
|
| 5.09% |
|
| Jul. 2028 | |
Series C |
|
| 100,000 |
|
| 5.19% |
|
| Jul. 2030 | |
|
|
| 475,000 |
|
|
|
|
|
|
|
Total |
|
| 1,928,300 |
|
|
|
|
|
|
|
Debt issuance costs, net |
|
| (6,908 | ) |
|
|
|
|
|
|
|
| $ | 1,921,392 |
|
|
|
|
|
|
|
2020 Unsecured Term Loan
The 2020 Unsecured Term loan had an initial maturity date of August 2020. Borrowings under the 2020 Unsecured Term Loan bear interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.85% and 1.65% per annum. Based on our current credit rating, the applicable margin is 1.25% as of June 30, 2020. The 2020 Unsecured Term Loan allows for two six-month extensions, at our option, subject to our being in compliance with the debt covenants and customary representations and warranties, and payment of a fee equal to 0.05% of the outstanding principal balance at the time of extension. We exercised the first of these options, effective as of August 2, 2020, extending the loan’s maturity to February 2021.
Revolving Credit Facility
The Revolving Credit Facility has a maximum availability of $600 million, and includes a $35 million sublimit for swingline loans and $20 million available for issuance of letters of credit. The Revolving Credit Facility has an initial maturity date of January 2022 and provides for one five-month extension, at our election, subject to certain conditions set forth in the agreement and payment of a 0.0625% fee on the revolving commitments. The Revolving Credit Facility contains an applicable facility fee ranging between 0.125% and 0.30% per annum, based on our credit rating. Based on our current credit rating of Baa3, the facility fee is 0.25% per annum as of June 30, 2020.
Borrowings on the Revolving Credit Facility bear interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.825% and 1.55% per annum. Based on our current credit rating, the applicable margin is 1.20% as of June 30, 2020.
2023 Unsecured Term Loan
The 2023 Unsecured Term loan has an initial maturity date of January 2023. Borrowings under the 2023 Unsecured Term Loan bear interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.90% and 1.75% per annum. Based on our current credit rating, the applicable margin is 1.35% as of June 30, 2020.
2024 Unsecured Term Loan
The 2024 Unsecured Term Loan has an initial maturity date of June 2024. Borrowings under the 2024 Unsecured Term Loan are subject to interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.85% and 1.65% per annum. Based on our current credit rating, the applicable margin is 1.25% as of June 30, 2020.
On February 7, 2020, we entered into a $60 million term loan agreement maturing in February 2022 with JP Morgan Chase Bank, N.A., as administrative agent. The 2022 Unsecured Term Loan was used to partially repay BRE debt that we assumed as part of the Internalization. Borrowings under the 2022 Unsecured Term Loan are subject to interest only payments at variable rates equal to LIBOR plus a margin based on our credit rating, ranging between 0.85% and 1.65% per annum. Based on our current credit rating, the applicable margin is 1.25% as of June 30, 2020.
2026 Unsecured Term Loan
The 2026 Unsecured Term Loan includes an accordion feature that provides for an increase in the facility size up to a total of $550 million of available capacity. Borrowings under the 2026 Unsecured Term Loan are payable interest only on a monthly basis during the term of the loan, with the principal amount due in February 2026. Borrowings under the 2026 Unsecured Term loan bear interest equal to LIBOR plus a margin based on our credit rating ranging between 1.45% and 2.40% per annum. Based on our current credit rating, the applicable margin is 1.85% as of June 30, 2020.
Senior Notes
To mitigate interest rate risk, we have strategically added unsecured, fixed-rate, interest-only senior promissory notes (“Senior Notes”) to our capital structure. The Senior Notes were issued in three series (Series A, B, and C) as described below.
Series A Notes
The Series A Notes are payable interest only semiannually during their term, bear interest at a fixed rate of 4.84% per annum, and mature on April 18, 2027.
Series B and Series C Notes
The Series B and Series C Notes are payable interest only semiannually during their term, and bear interest at fixed rates of 5.09% per annum and 5.19% per annum, respectively. The Series B Notes mature on July 2, 2028, and the Series C Notes mature on July 2, 2030.
We are subject to various covenants and financial reporting requirements pursuant to our debt facilities. The table below summarizes the applicable financial covenants, which are substantially the same across each of our debt facilities. As of June 30, 2020, we believe that we were in compliance with all of our covenants. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification. Refer to Recent Developments – COVID-19 Pandemic for additional discussion of the pandemic’s impact on our ability to satisfy our financial covenants.
Covenants | Required | Actual (as of June 30, 2020) | ||||
Leverage Ratio(a) | ≤ 0.60 to 1.00 | 0.52 | ||||
Secured Indebtedness Ratio(b) | ≤ 0.40 to 1.00 | 0.03 | ||||
Unencumbered Coverage Ratio(c) | ≥ 1.75 to 1.00 | 4.44 | ||||
Fixed Charge Coverage Ratio(d) | ≥ 1.50 to 1.00 | 3.23 | ||||
Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value(e) | ≤ 0.60 to 1.00 | 0.56 | ||||
Dividends and Other Restricted Payments | Only applicable in case of default | Not Applicable |
(a) | The leverage ratio is calculated as the ratio of total indebtedness to total market value. For debt covenant purposes, total market value is computed on a consolidated basis as the net operating income for the most recently completed fiscal quarter on properties owned for four consecutive quarters at a capitalization rate of 7.50%, multiplied by four, plus the acquisition price of properties acquired in the last four quarters, and the GAAP book value of mortgages receivable, development property, unimproved real estate, unrestricted cash and cash equivalents, and all other tangible assets (the latter subject to a cap of 5% of total market value). For purposes of determining total market value, net operating income from properties disposed of during the immediately preceding period of four consecutive fiscal quarters is excluded. |
(b) | The secured indebtedness ratio is the ratio of secured indebtedness to total market value. Secured indebtedness represents outstanding mortgage borrowings. |
(c) | The unencumbered coverage ratio is the ratio of net operating income for all eligible properties to unsecured interest expense for the most recent fiscal quarter. |
(d) | The fixed charge coverage ratio is the ratio of adjusted EBITDA to fixed charges for the most recent fiscal quarter. Adjusted EBITDA is computed as net income adjusted for depreciation and amortization, interest expense, income tax expense and franchise tax expense, gains and losses from the sale of properties, equity in net income of unconsolidated subsidiaries, non-cash expenses related to mark to market exposure under derivatives contracts, straight-line rent adjustments, amortization of intangibles, gains and losses on early extinguishment of debt, non-cash severance and restructuring charges, transaction costs expensed, and reserves for replacements with respect to certain properties. Fixed charges are computed as interest expense, plus scheduled principal repayments of debt, excluding balloon payments if applicable, plus preferred dividends paid or accrued, if applicable. |
(e) | The ratio is calculated as the ratio of total unsecured indebtedness to unencumbered property value. |
Cash and cash equivalents and restricted cash totaled $9.8 million and $12.7 million at June 30, 2020 and 2019, respectively. The table below shows information concerning cash flows for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016. Also presented is information regarding distributions2019:
|
| For the six months ended |
| |||||
| June 30, |
| ||||||
(In thousands) |
| 2020 |
|
| 2019 |
| ||
Net cash provided by operating activities |
| $ | 79,458 |
|
| $ | 64,719 |
|
Net cash provided by (used in) investing activities |
|
| 10,738 |
|
|
| (120,894 | ) |
Net cash (used in) provided by financing activities |
|
| (100,665 | ) |
|
| 49,904 |
|
Decrease in cash and cash equivalents and restricted cash |
| $ | (10,469 | ) |
| $ | (6,271 | ) |
The increase in net cash provided by operating activities during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization.
The change in net cash provided (used in) by investing activities during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, was mainly due to decreased acquisition volume and increased proceeds from the disposal of properties in 2020, offset by cash paid in connection with the Internalization.
The change in net cash (used in) provided by financing activities during the six months ended June 30, 2020 as compared to common stockholders and non-controlling interests and the weighted average number of sharessix months ended June 30, 2019, mainly reflects a decrease in proceeds from the issuance of our common stock and non-controlling membership unitsincreased distributions resulting from an increase in the number of shares of common stock outstanding.
The leases in our portfolio are long-term in nature, with a current ABR weighted average remaining lease term of 11.0 years as of June 30, 2020. Our rental revenues may be impacted by inflation. Substantially all of our leases have contractual lease escalations, with an
ABR weighted average of 2.1% as of June 30, 2020. Many of our leases contain rent escalators that increase rent at a fixed amount and may not be sufficient during periods of high inflation. Leases that contributed approximately 15.7% of our ABR as of June 30, 2020, contained rent escalators based on increases in CPI and the associated increases in rental revenue may be limited during periods of low inflation. The impact of inflation on our property and operating expenses is limited since substantially all of our leases are net leases, and property-level expenses are generally paid by our tenants. To the extent we bear the cost of such expense, 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. Inflation and increased costs may also have an adverse impact to our tenants and their creditworthiness if the increase in property-level expenses is greater than their increase in revenues.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 30, 2020, or December 31, 2019.
The following table provides information with respect to our contractual commitments and obligations as of June 30, 2020 (in thousands).
Year of Maturity |
| Term Loans(a) |
|
| Revolving Credit Facility(b) |
|
| Senior Notes |
|
| Mortgages and Notes Payable |
|
| Interest Expense(c) |
|
| Tenant Improvement Allowances(d) |
|
| Operating Leases |
|
| Total |
| ||||||||
Remainder of 2020 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 1,614 |
|
| $ | 35,353 |
|
| $ | 2,208 |
|
| $ | 355 |
|
| $ | 39,530 |
|
2021 |
|
| 240,000 |
|
|
| — |
|
|
| — |
|
|
| 18,006 |
|
|
| 66,288 |
|
|
| — |
|
|
| 711 |
|
|
| 325,005 |
|
2022 |
|
| 60,000 |
|
|
| 248,300 |
|
|
| — |
|
|
| 2,907 |
|
|
| 59,532 |
|
|
| — |
|
|
| 686 |
|
|
| 371,425 |
|
2023 |
|
| 265,000 |
|
|
| — |
|
|
| — |
|
|
| 8,173 |
|
|
| 54,508 |
|
|
| — |
|
|
| 505 |
|
|
| 328,186 |
|
2024 |
|
| 190,000 |
|
|
| — |
|
|
| — |
|
|
| 2,260 |
|
|
| 50,464 |
|
|
| — |
|
|
| 120 |
|
|
| 242,844 |
|
Thereafter |
|
| 450,000 |
|
|
| — |
|
|
| 475,000 |
|
|
| 76,912 |
|
|
| 129,118 |
|
|
| — |
|
|
| 2,411 |
|
|
| 1,133,441 |
|
Total |
| $ | 1,205,000 |
|
| $ | 248,300 |
|
| $ | 475,000 |
|
| $ | 109,872 |
|
| $ | 395,263 |
|
| $ | 2,208 |
|
| $ | 4,788 |
|
| $ | 2,440,431 |
|
(a) | The 2020 Unsecured Term Loan had an original maturity date of August 2020, and allows two six-month extensions, at our option, subject to our being in compliance with the debt covenants and customary representations and warranties, and payment of a fee equal to 0.05% of the outstanding principal balance at the time of extension. On May 5, 2020, we exercised the first of these options, effective on August 2, 2020, extending the maturity date of the 2020 Unsecured Term Loan to February 2, 2021. Accordingly, we have included principal repayment of this loan in 2021. |
(b) | We may extend the Revolving Credit Facility once, for a five-month period, subject to certain conditions, including the payment of an extension fee equal to 0.0625% of the revolving commitments. |
(c) | Interest expense is projected based on the outstanding borrowings and interest rates in effect as of June 30, 2020. This amount includes the impact of interest rate swap agreements. |
(d) | We expect to pay tenant improvement allowances out of cash flows from operations or from additional borrowings. |
At June 30, 2020 and December 31, 2019, investment in rental property of $175.7 million and $178.7 million, respectively, was pledged as collateral against our mortgages and notes payable.
Additionally, we are a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and we entered into the Founding Owners’ Tax Protection Agreement with our founding owners in connection with the Internalization. The tax protection agreements require us to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the Operatingcontributed property, or in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, used forin a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the basic and diluted computation per share:agreements, subject to certain exceptions. Based on values as of June 30, 2020, taxable sales of the applicable properties would trigger liability under the four agreements of approximately $22.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above.
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
(in thousands, except per share data) |
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net income |
| $ | 12,990 |
|
| $ | 15,417 |
|
| $ | 42,729 |
|
| $ | 26,474 |
|
Real property depreciation and amortization |
|
| 15,643 |
|
|
| 12,114 |
|
|
| 44,969 |
|
|
| 33,273 |
|
Gain on sale of real estate |
|
| (4,052 | ) |
|
| (2,983 | ) |
|
| (10,332 | ) |
|
| (4,089 | ) |
Asset impairment |
|
| 2,608 |
|
|
| — |
|
|
| 2,608 |
|
|
| — |
|
FFO |
| $ | 27,189 |
|
| $ | 24,548 |
|
| $ | 79,974 |
|
| $ | 55,658 |
|
Capital improvements / reserves |
|
| (49 | ) |
|
| (49 | ) |
|
| (147 | ) |
|
| (147 | ) |
Straight line rent adjustment |
|
| (4,520 | ) |
|
| (3,759 | ) |
|
| (12,585 | ) |
|
| (9,761 | ) |
Cost of debt extinguishment |
|
| 1,404 |
|
|
| 52 |
|
|
| 5,019 |
|
|
| 105 |
|
Amortization of debt issuance costs |
|
| 486 |
|
|
| 456 |
|
|
| 1,343 |
|
|
| 1,279 |
|
Amortization of net mortgage premiums |
|
| 205 |
|
|
| (48 | ) |
|
| 135 |
|
|
| (143 | ) |
(Gain) Loss on interest rate swaps and other non-cash interest expense |
|
| — |
|
|
| (2,991 | ) |
|
| (1,280 | ) |
|
| 2,219 |
|
Amortization of lease intangibles |
|
| 99 |
|
|
| (100 | ) |
|
| 487 |
|
|
| (373 | ) |
Acquisition expenses |
|
| — |
|
|
| 2,367 |
|
|
| — |
|
|
| 8,256 |
|
AFFO |
| $ | 24,813 |
|
| $ | 20,476 |
|
| $ | 72,946 |
|
| $ | 57,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted WASO |
|
| 19,147 |
|
|
| 15,074 |
|
|
| 18,069 |
|
|
| 14,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic and diluted |
| $ | 0.68 |
|
| $ | 1.02 |
|
| $ | 2.36 |
|
| $ | 1.87 |
|
FFO per diluted share |
|
| 1.42 |
|
|
| 1.63 |
|
|
| 4.43 |
|
|
| 3.93 |
|
AFFO per diluted share |
| $ | 1.30 |
|
| $ | 1.36 |
|
| $ | 4.04 |
|
| $ | 4.03 |
|
Critical AccountingAccounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements,Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statementsCondensed Consolidated Financial Statements requires management to make estimates and judgmentsassumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Management basesexpenses as well as other disclosures in the financial statements. On an ongoing basis, management evaluates its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actualassumptions; however, actual results may differ from these estimates under differentand assumptions, or conditions.which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, “Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We believe there have been no significant changes during the ninesix months ended SeptemberJune 30, 20172020, 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 2019 Annual Report on Form 10.10-K.
Impact of Recent AccountingAccounting Pronouncements
For information on the impact of recent accounting pronouncements on our business, see Note 2 of the notesNotes to the condensed consolidated financial statementsCondensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Historically, we have sold shares of common stock in a private offering at a price equal to the Determined Share Value (“DSV”), which was established at least quarterly by the board of directors based on the net asset value (“NAV”, or “Private Enterprise NAV”) of our portfolio, input from management and third-party consultants, and such other factors as the board of directors may determine. The DSV was historically used for purchases, distribution reinvestment, and redemptions. On January 10, 2020, we suspended our private offering of our common stock effective immediately and until further notice, and terminated our dividend reinvestment plan (“DRIP”) and share redemption program, each effective as of February 10, 2020.
At its August 4, 2020, meeting, our board of directors voted to retain the determined share value (“DSV”) at $82.00 per share until October 31, 2020. The DSV is established in good faith by the board of directors based upon the net asset value (“NAV”) of our portfolio, input from management and third-party consultants, and such other factors as the board of directors may determine. The Company’s NAV calculation as of June 30, 2020, was calculated using its established valuation process, starting with an estimate of the fair value of the properties in the portfolio as of that date based upon, among other factors, the implied market price for each asset based upon a review of market capitalization rates.
Beginning with the NAV as of June 30, 2020, we revised our calculation to include only the portion of the earnout liability fair value expected to be paid in cash. We also adjusted the number of outstanding shares, including noncontrolling interests, used to compute NAV per diluted share, to include the portion of the earnout liability fair value expected to be paid in common stock and OP units. These adjustments reflect our expectation of how the earnout liability will be settled if earned.
Additional information regarding our valuation policy and procedures, including significant assumptions used to value our real estate portfolio, and the determination of the DSV by the board of directors, is available in Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” in our 2019 Annual Report on Form 10-K filed with the SEC on February 27, 2020, under the heading Determined Share Value.
Period |
| NAV as of |
| Private Enterprise NAV per diluted share |
|
| Real Estate NAV per diluted share |
|
| Determined Share Value |
| |||
August 1, 2020 - October 31, 2020 |
| June 30, 2020 |
| $ | 82.28 |
|
| $ | 71.06 |
|
| $ | 82.00 |
|
May 1, 2020 - July 31, 2020 |
| March 31, 2020 |
|
| 82.46 |
|
|
| 71.30 |
|
|
| 82.00 |
|
February 1, 2020 - April 30, 2020 |
| December 31, 2019 |
|
| 85.21 |
|
|
| 85.21 |
|
|
| 85.00 |
|
The adjustments made to NAV per diluted share in arriving at the Determined Share Value for the periods presented above account for the inherent imprecision in the valuation estimates.
The following table provides a breakdown of the major components of our estimated NAV and NAV per diluted share amounts (in thousands, except per share amounts), and a reconciliation of the amounts previously reported as March 31, 2020 NAV, to the current methodology, which is provided for comparative purposes only:
|
|
|
|
|
| March 31, 2020 |
| |||||||||
(in thousands, except per share amounts) NAV as of: |
| June 30, 2020 |
|
| As Reported |
|
| Adjustment for Earnout Shares and OP Units |
|
| Current Methodology |
| ||||
Investment in rental property |
| $ | 4,338,230 |
|
| $ | 4,344,570 |
|
| $ | — |
|
| $ | 4,344,570 |
|
Debt |
|
| (2,172,559 | ) |
|
| (2,233,159 | ) |
|
| — |
|
|
| (2,233,159 | ) |
Other assets and liabilities, net |
|
| (13,430 | ) |
|
| 15,344 |
|
|
| 37,001 |
|
|
| 52,345 |
|
Real Estate NAV |
|
| 2,152,241 |
|
|
| 2,126,755 |
|
|
|
|
|
|
| 2,163,756 |
|
Goodwill |
|
| 339,769 |
|
|
| 339,769 |
|
|
| — |
|
|
| 339,769 |
|
Private Enterprise NAV |
| $ | 2,492,010 |
|
| $ | 2,466,524 |
|
| $ | 37,001 |
|
| $ | 2,503,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of outstanding shares, including non-controlling interests |
|
| 29,915 |
|
|
| 29,912 |
|
|
| — |
|
|
| 29,912 |
|
Earnout shares and OP Units(a) |
|
| 373 |
|
|
| — |
|
|
| 435 |
|
|
| 435 |
|
NAV shares |
|
| 30,288 |
|
|
| 29,912 |
|
|
| 435 |
|
|
| 30,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate NAV per share |
| $ | 71.06 |
|
| N/A |
|
|
|
|
|
| $ | 71.30 |
| |
Private Enterprise NAV per share |
|
| 82.28 |
|
|
| 82.46 |
|
| $ | 0.04 |
|
|
| 82.50 |
|
The following table details the implied market capitalization rates (shown on a weighted average basis) used to value the investment in rental property, by property type, as of June 30, 2020, and March 31, 2020, supporting the Determined Share Value in effect for the periods of August 1, 2020 through October 31, 2020, and May 1, 2020, through July 31, 2020, respectively:
Market capitalization rates, as of: |
| Industrial |
|
| Healthcare |
|
| Restaurant |
|
| Office |
|
| Retail |
|
| Other |
|
| Portfolio Total |
| |||||||
June 30, 2020 |
|
| 6.78 | % |
|
| 6.75 | % |
|
| 6.11 | % |
|
| 7.17 | % |
|
| 7.14 | % |
|
| 6.32 | % |
|
| 6.72 | % |
March 31, 2020 |
|
| 6.75 | % |
|
| 6.73 | % |
|
| 6.09 | % |
|
| 7.09 | % |
|
| 8.02 | % |
|
| 6.32 | % |
|
| 6.76 | % |
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 June 30, 2020, of 0.25% would result in a decrease in the fair value of our investment in rental property of 3.6%, and our Real Estate NAV per diluted share and Private Enterprise NAV per diluted share would have been $65.92 and $77.14, respectively. Conversely, a decrease in the weighted average implied capitalization rate used as of June 30, 2020 of 0.25% would result in an increase in the fair value of our investment in rental property of 3.9%, and our Real Estate NAV per diluted share and Private Enterprise NAV per diluted share would have been $76.59 and $87.81, respectively.
The 0.04% decrease in the portfolio total implied market capitalization rate between March 31, 2020 and June 30, 2020, is primarily the result of our re-leasing certain properties previously subject to bankruptcy proceedings in the retail – home furnishings property type to a creditworthy tenant as of June 30, 2020. Additionally, the ongoing COVID-19 pandemic, together with the restrictions on travel and other measures enacted in response to the pandemic, has had and will continue to have a significant adverse impact on our tenants’ operations and the value of our properties for an unknown period of time. Due to the reliance on historical information when valuing a property and the number of unknown variables with respect to the COVID-19 pandemic at this time, the impact of the pandemic on a particular property will likely not be reflected in a property-level valuation for several calendar quarters. Additionally, when conducting property-level valuations, management and our third-party consultants and appraisers utilize available sales data, such as purchase price, from transactions involving comparable assets. Due to the current economic downturn and significant reduction in real estate transactions in the wake of the pandemic, it is difficult for the Company to obtain or utilize meaningful comparable sales data as part of its valuation process. Management expects this will continue to be the case for several calendar quarters. Accordingly, the current Determined Share Value does not accurately reflect the impact of the COVID-19 pandemic on the value of our shares as of the date of this filing. In estimating the fair value of its real estate assets as of June 30, 2020, the Company considered that the COVID-19 pandemic most significantly impacted tenants leasing properties for casual dining restaurants, retail furniture outlets, and corporate offices, and on a case by case basis, reduced its fair value estimate for certain of these properties as part of the determination of NAV. The board of directors will continue to utilize all available valuation information when setting the DSV in future periods as the impacts of the COVID-19 pandemic on real estate asset values continues to unfold.
Distributions and Distribution Reinvestment
In light of the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and then-current tenant rent relief requests, to preserve cash, strengthen our liquidity position, and manage our overall leverage profile, in May 2020 our board of directors determined that we would temporarily suspend our monthly distribution. At its August 4, 2020 meeting, the board of directors undertook a full review of our rent collection results for the second quarter of 2020, preliminary collection results for July 2020, our outlook for collections in future months, and our overall liquidity position. Based on our strong collection results and operating performance, the board voted to reinstate a distribution, announcing that the Company would transition to quarterly distribution payments beginning with the quarter ended September 30, 2020. With the continued uncertainty surrounding the COVID-19 pandemic’s long term impact to our tenants, and the recent resurgence in certain geographical hot spots, the board set a $0.54 distribution per common share and OP Unit to stockholders and OP Unit holders of record as of September 30, 2020, payable on or before October 15, 2020. The Company believes this quarter’s distribution is also an incrementally important step towards ensuring the Company satisfies its REIT distribution requirements for the year ended December 31, 2020.
We terminated our DRIP and share redemption program, effective February 10, 2020. Prior to its termination, pursuant to the terms of our DRIP, stockholders and OP Unit holders (other than us) could elect to have cash distributions reinvested in additional shares of our common stock. Shares of our common stock acquired through our DRIP have the same rights and are subject to the same restrictions on transferability as all other shares of our common stock.
The following table summarizes distributions paid in cash and pursuant to our DRIP for the six months ended June 30, 2020 (in thousands).
Month |
| Year |
| Cash Distribution − Common Stockholders |
|
| Cash Distribution − Membership Units |
|
| Distribution Paid Pursuant to DRIP on Common Stock (a) |
|
| Distribution Paid Pursuant to DRIP on Membership Units (a) |
|
| Total Amount of Distribution |
| |||||
January |
| 2020 |
| $ | 5,663 |
|
| $ | 632 |
|
| $ | 5,734 |
|
| $ | 133 |
|
| $ | 12,162 |
|
February |
| 2020 |
|
| 11,472 |
|
|
| 764 |
|
|
| — |
|
|
| — |
|
|
| 12,236 |
|
March |
| 2020 |
|
| 11,815 |
|
|
| 1,345 |
|
|
| — |
|
|
| — |
|
|
| 13,160 |
|
April |
| 2020 |
|
| 11,815 |
|
|
| 1,345 |
|
|
| — |
|
|
| — |
|
|
| 13,160 |
|
May |
| 2020 |
|
| 11,816 |
|
|
| 1,345 |
|
|
| — |
|
|
| — |
|
|
| 13,161 |
|
June |
| 2020 |
|
| – |
|
|
| – |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
|
|
| $ | 52,581 |
|
| $ | 5,431 |
|
| $ | 5,734 |
|
| $ | 133 |
|
| $ | 63,879 |
|
(a) | Distributions are paid in shares of common stock. |
The following table summarizes our distributions paid, including the source of distributions and a comparison against FFO (in thousands). Refer to Net Income and Non-GAAP Measures (FFO and AFFO) below for further discussion of our FFO.
|
| For the six months ended |
| |||||
|
| June 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Distributions: |
|
|
|
|
|
|
|
|
Paid in cash |
| $ | 58,145 |
|
| $ | 33,525 |
|
Reinvested in shares |
|
| 5,734 |
|
|
| 30,008 |
|
Total Distributions |
| $ | 63,879 |
|
| $ | 63,533 |
|
Source of Distributions: |
|
|
|
|
|
|
|
|
Cash flow from operating activities |
| $ | 63,879 |
|
| $ | 63,533 |
|
FFO |
| $ | 94,057 |
|
| $ | 78,791 |
|
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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks, one of the most predominant of which is a change in interest rate risk arising from changesrates. Increases in interest rates on the floating rate indebtednesscan result in increased interest expense under our unsecured credit facilitiesRevolving Credit Facility and certain mortgages. Borrowings pursuant to our unsecured credit facilities and floating-rate mortgages bear interest at floating rates based on LIBOR plus the applicable margin. Accordingly, fluctuationsother variable-rate debt. Increases in market interest rates may increase or decrease ourcan also result in increased interest expense which will in turn, increase or decreasewhen our net incomefixed rate debt matures and cash flow.
needs to be refinanced. We attempt to manage a portion of our interest rate risk by entering into long-term fixed rate debt or by entering into interest rate swap agreements. Our interest rate risk management strategy is intended to stabilize cash flow requirements by maintaining interest rate swap agreementsswaps to convert certain variable ratevariable-rate debt to a fixed rate. As of September 30, 2017, we had 24 interest rate swap agreements outstanding, with an aggregate notional amount of $640 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable rate borrowings. The interest rate swaps have been designated by us as effective cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes.
The table below summarizes the terms of the current swap agreements relating to Further information concerning our unsecured credit facilities. Several of the interest rate swaps agreements set forthcan be found in Note 11 in our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q.
Our fixed-rate debt includes our Senior Notes, mortgages, and variable-rate debt converted to a fixed rate with the use of interest rate swaps. Our fixed-rate debt and outstanding interest rate swaps had carrying values and fair values of approximately $1.6 billion as of June 30, 2020. Changes in market interest rates impact the fair value of our fixed-rate debt and interest rate swaps, but they have no impact on interest incurred or on cash flows. For instance, if interest rates were to increase 1%, and the fixed-rate debt balance were to remain constant, we would expect the fair value of our debt to decrease, similar to how the price of a bond decreases as interest rates rise. A 1% increase in market interest rates would have resulted in a decrease in the table below were enteredfair value of our fixed-rate debt and interest rate swaps of approximately $85.9 million as of June 30, 2020.
Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on LIBOR plus an applicable margin, and totaled $1.5 billion as of June 30, 2020, of which $859.8 million was swapped to a fixed rate by our use of interest rate swaps. Taking into account the effect of our interest rate swaps, interest expense would have increased by approximately $3.1 million in conjunction with previous secured and unsecured borrowings that were retired and the swaps have sincesix months ended June 30, 2020, if the applicable LIBOR rate had been reapplied in support of the current unsecured credit facilities.1% higher.
Counterparty |
| Maturity Date |
| Fixed Rate |
|
| Variable Rate Index |
| Notional Amount |
|
| Fair Value |
| |||
Bank of America, N.A. |
| November-23 |
|
| 2.80% |
|
| 1 month LIBOR |
| $ | 25,000,000 |
|
|
| (1,177,353 | ) |
Bank of Montreal |
| July-24 |
|
| 1.16% |
|
| 1 month LIBOR |
|
| 40,000,000 |
|
|
| 2,146,861 |
|
Bank of Montreal |
| January-25 |
|
| 1.91% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| 192,803 |
|
Bank of Montreal |
| July-25 |
|
| 2.32% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (489,600 | ) |
Bank of Montreal |
| January-26 |
|
| 1.92% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| 297,340 |
|
Bank of Montreal |
| January-26 |
|
| 2.05% |
|
| 1 month LIBOR |
|
| 40,000,000 |
|
|
| 84,117 |
|
Bank of Montreal |
| December-26 |
|
| 2.33% |
|
| 1 month LIBOR |
|
| 10,000,000 |
|
|
| (175,375 | ) |
Capital One, N.A. |
| December-21 |
|
| 1.05% |
|
| 1 month LIBOR |
|
| 15,000,000 |
|
|
| 486,922 |
|
Capital One, N.A. |
| December-24 |
|
| 1.58% |
|
| 1 month LIBOR |
|
| 15,000,000 |
|
|
| 459,406 |
|
Capital One, N.A. |
| January-26 |
|
| 2.08% |
|
| 1 month LIBOR |
|
| 35,000,000 |
|
|
| 38,960 |
|
Capital One, N.A. |
| July-26 |
|
| 1.32% |
|
| 1 month LIBOR |
|
| 35,000,000 |
|
|
| 2,289,026 |
|
Manufacturers & Traders Trust Co. |
| September-22 |
|
| 2.83% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (1,149,860 | ) |
Manufacturers & Traders Trust Co. |
| November-23 |
|
| 2.65% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (1,023,132 | ) |
Regions Bank |
| March-18 |
|
| 1.77% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (46,329 | ) |
Regions Bank |
| March-19 |
|
| 1.91% |
|
| 3 month LIBOR |
|
| 25,000,000 |
|
|
| (105,943 | ) |
Regions Bank |
| May-20 |
|
| 2.12% |
|
| 1 month LIBOR |
|
| 50,000,000 |
|
|
| (561,657 | ) |
Regions Bank |
| March-22 |
|
| 2.43% |
|
| 3 month LIBOR |
|
| 25,000,000 |
|
|
| (550,191 | ) |
Regions Bank |
| December-23 |
|
| 1.18% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| 1,177,710 |
|
SunTrust Bank |
| April-24 |
|
| 1.99% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (63,116 | ) |
SunTrust Bank |
| April-25 |
|
| 2.20% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| (331,624 | ) |
SunTrust Bank |
| July-25 |
|
| 1.99% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| 71,593 |
|
SunTrust Bank |
| January-26 |
|
| 1.93% |
|
| 1 month LIBOR |
|
| 25,000,000 |
|
|
| 248,334 |
|
Wells Fargo Bank, N.A. |
| February-21 |
|
| 2.39% |
|
| 1 month LIBOR |
|
| 35,000,000 |
|
|
| (738,635 | ) |
Wells Fargo Bank, N.A. |
| October-24 |
|
| 2.72% |
|
| 1 month LIBOR |
|
| 15,000,000 |
|
|
| (706,367 | ) |
With the exception of our interest rate swap transactions, we have not engaged in transactions in derivative financial instruments or derivative commodity instruments.
As of SeptemberJune 30, 2017,2020, our financial instruments were not exposed to significant market risk due to foreign currency exchange risk.
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”)), 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 SeptemberJune 30, 2017,2020, 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 over Financial Reporting
There werehave been no changes toin our internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 2017,2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, weWe are subject to various legal proceedings and claims that arise in the ordinary course of our business. These matters are generally covered by insurance or are subject to our right to be indemnified by our tenants that we include in our leases. Management is 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.
There have been no material changes from theThe risk factors set forthrelating to or impacted by the COVID-19 outbreak that were previously disclosed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 contained certain financial-related information which has been updated for the three months ended June 30, 2020 in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10.10-Q.
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Sales of Common Stock and Issuance of OP Units
In December 2007, weWe commenced our ongoing private offering of shares of our common stock in 2007. The first closing of our private offering occurred on December 31, 2007, and we conducted additional closings at least once every calendar quarter through December 31, 2019. On January 10, 2020, we announced that we suspended until further notice our private offering of shares of our common stock.
As of June 30, 2020, there were 26.9 million shares of our common stock issued and outstanding, including 0.8 million mezzanine equity common shares, and 3.1 million OP Units issued and outstanding, including 1.3 million mezzanine equity non-controlling interests.
The following table provides information regarding the sale of shares of our common stock pursuant to our ongoing private offering during the ninesix months ended SeptemberJune 30, 20172020 (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 |
|
|
|
Month |
| Year |
| Common Shares Sold |
|
| Weighted Average Determined Share Value — Common Shares |
|
| Total Proceeds — Common Shares Sold |
|
| Common Shares DRIP |
|
| Weighted Average Determined Share Value — DRIP(a) |
|
| Total Proceeds — Common Share DRIP(b) |
|
| Total Proceeds |
| |||||||
January |
| 2020 |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 70 |
|
| $ | 83.30 |
|
| $ | 5,865 |
|
| $ | 5,865 |
|
| DRIP shares are purchased at a discounted |
| For common shares reinvested under our DRIP there is no corresponding cash flow from the transaction. Refer to Note 13 to the |
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 whoeach of whom represented to us in writing that theysuch person 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 Unitsan Accredited Investor.
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 CompanyOP 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.OP Units. There were no other membership unitsuch OP Unit issuances during the ninesix months ended SeptemberJune 30, 2017.2020.
None of the membership units in the Operating Company discussed above wereOP Units have been registered under the Securities Act in reliance upon the exemptionexemptions from registration under the Securities Act provided by Rule 506(c) under Regulation D promulgated under the Securities Act and Section 4(a)(2) of the Securities Act. All of the membership units in the Operating Company discussed aboveOP Units were soldissued 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.an Accredited Investor, including third-party verification as permitted under Regulation D.
Internalization Consideration
In connection with the closing of the Internalization, on February 7, 2020, we issued 780,893 shares of our common stock to certain owners of BRE as merger consideration for an aggregate value of $66.4 million.
In connection with the Internalization, on February 7, 2020, the OP issued 1,319,513 OP Units to certain owners of BRE as merger consideration for an aggregate value of $112.2 million.
In each case, the aforementioned securities were issued in reliance on the exemption set forth in Section 4(a)(2) of the Securities Act.
Repurchases of Equity Securities
During the three months ended September 30, 2017, we fulfilled repurchase requests and repurchasedWe had adopted a share redemption program to provide an opportunity for our stockholders to have shares of our common stock pursuantrepurchased, at the end of each quarter, subject to certain restrictions and limitations, at a price equal to or at a discount from the current Determined Share Value in effect as of the date the shares were tendered for redemption. Cash used to fund share redemptions had historically been provided through a combination of cash generated by operations, the sale of assets, and borrowings. On January 10, 2020, we announced that we terminated our share redemption program, effective as follows. of February 10, 2020. Consequently, there were no redemptions of shares of our common stock during the six months ended June 30, 2020.
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.
None.
Not applicable.Item 6. Exhibits
Not applicable.
No. |
| Description | |
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3.1 |
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3.2 |
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4.1 |
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101.1 |
| The following materials from the |
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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.
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| BROADSTONE NET LEASE, INC. |
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Date: |
| /s/ Christopher J. Czarnecki |
|
| Christopher J. Czarnecki |
|
| Chief Executive Officer and President |
|
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Date: |
| /s/ Ryan M. Albano |
|
| Ryan M. Albano |
|
| Executive Vice President and Chief Financial Officer |
56