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 June 30, 2019,March 31, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☐ |
| Accelerated filer |
| ☐ |
Non-accelerated filer |
| ☒ |
| Smaller reporting company |
| ☐ |
Emerging growth company |
| ☒ |
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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 24,783,961.807 26,855,508.755 shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of AugustMay 7, 2019.
Securities registered pursuant to Section 12(b) of the Exchange Act:
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2020.
TABLE OF CONTENTS
Page | ||
1 | ||
Item 1. | 1 | |
| 1 | |
| Condensed Consolidated Statements of Income and Comprehensive (Loss) Income (Unaudited) | 2 |
| Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity (Unaudited) | 3 |
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| |
| Notes to the Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| 28 | |
29 | ||
| 29 | |
| 30 | |
35 | ||
35 | ||
40 | ||
| 44 | |
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45 | ||
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46 | ||
47 | ||
Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)
|
| June 30, 2019 |
|
| December 31, 2018 |
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||
Assets |
|
|
|
|
|
|
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|
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|
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|
|
Accounted for using the operating method, net of accumulated depreciation |
| $ | 2,762,161 |
|
| $ | 2,641,746 |
|
| $ | 3,367,566 |
|
| $ | 3,415,400 |
|
Accounted for using the direct financing method |
|
| 41,949 |
|
|
| 42,000 |
|
|
| 39,961 |
|
|
| 41,890 |
|
Investment in rental property, net |
|
| 2,804,110 |
|
|
| 2,683,746 |
|
|
| 3,407,527 |
|
|
| 3,457,290 |
|
Cash and cash equivalents |
|
| 10,288 |
|
|
| 18,612 |
|
|
| 93,151 |
|
|
| 12,455 |
|
Accrued rental income |
|
| 78,254 |
|
|
| 69,247 |
|
|
| 84,932 |
|
|
| 84,534 |
|
Tenant and other receivables, net |
|
| 129 |
|
|
| 1,026 |
|
|
| 1,287 |
|
|
| 934 |
|
Prepaid expenses and other assets |
|
| 7,176 |
|
|
| 4,316 |
|
|
| 12,397 |
|
|
| 12,613 |
|
Interest rate swap, assets |
|
| 2,687 |
|
|
| 17,633 |
|
|
| — |
|
|
| 2,911 |
|
Goodwill |
|
| 339,769 |
|
|
| — |
| ||||||||
Intangible lease assets, net |
|
| 293,228 |
|
|
| 286,258 |
|
|
| 320,418 |
|
|
| 331,894 |
|
Debt issuance costs – unsecured revolver, net |
|
| 2,978 |
|
|
| 2,261 |
| ||||||||
Debt issuance costs – unsecured revolving credit facility, net |
|
| 2,081 |
|
|
| 2,380 |
| ||||||||
Leasing fees, net |
|
| 13,468 |
|
|
| 13,698 |
|
|
| 12,492 |
|
|
| 12,847 |
|
Total assets |
| $ | 3,212,318 |
|
| $ | 3,096,797 |
|
| $ | 4,274,054 |
|
| $ | 3,917,858 |
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Liabilities and equity |
|
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Unsecured revolver |
| $ | 123,600 |
|
| $ | 141,100 |
| ||||||||
Liabilities, mezzanine equity and equity |
|
|
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|
|
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Unsecured revolving credit facility |
| $ | 353,300 |
|
| $ | 197,300 |
| ||||||||
Mortgages and notes payable, net |
|
| 121,074 |
|
|
| 78,952 |
|
|
| 110,464 |
|
|
| 111,793 |
|
Unsecured term notes, net |
|
| 1,222,376 |
|
|
| 1,225,773 |
|
|
| 1,672,587 |
|
|
| 1,672,081 |
|
Interest rate swap, liabilities |
|
| 22,676 |
|
|
| 1,820 |
|
|
| 79,622 |
|
|
| 24,471 |
|
Earnout liability |
|
| 44,296 |
|
|
| — |
| ||||||||
Accounts payable and other liabilities |
|
| 32,370 |
|
|
| 24,394 |
|
|
| 35,835 |
|
|
| 37,377 |
|
Due to related parties |
|
| 111 |
|
|
| 114 |
| ||||||||
Accrued interest payable |
|
| 2,578 |
|
|
| 9,777 |
|
|
| 9,764 |
|
|
| 3,594 |
|
Intangible lease liabilities, net |
|
| 81,895 |
|
|
| 85,947 |
|
|
| 89,673 |
|
|
| 92,222 |
|
Total liabilities |
|
| 1,606,680 |
|
|
| 1,567,877 |
|
|
| 2,395,541 |
|
|
| 2,138,838 |
|
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|
|
|
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Commitments and contingencies (See Note 16) |
|
|
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Mezzanine equity |
|
|
|
|
|
|
|
| ||||||||
Common stock, 781 shares issued and outstanding at March 31, 2020 |
|
| 66,376 |
|
|
| — |
| ||||||||
Non-controlling interests |
|
| 112,158 |
|
|
| — |
| ||||||||
Total mezzanine equity |
|
| 178,534 |
|
|
| — |
| ||||||||
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Equity |
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Broadstone Net Lease, Inc. stockholders' equity: |
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Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding |
|
| — |
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|
| — |
|
|
| — |
|
|
| — |
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Common stock, $0.001 par value; 80,000 shares authorized, 23,730 and 22,014 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively |
|
| 24 |
|
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| 22 |
| ||||||||
Common stock, $0.001 par value; 80,000 shares authorized, 26,074 and 26,001 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively |
|
| 26 |
|
|
| 26 |
| ||||||||
Additional paid-in capital |
|
| 1,702,911 |
|
|
| 1,557,421 |
|
|
| 1,899,616 |
|
|
| 1,895,935 |
|
Cumulative distributions in excess of retained earnings |
|
| (185,647 | ) |
|
| (155,150 | ) |
|
| (233,067 | ) |
|
| (208,261 | ) |
Accumulated other comprehensive (loss) income |
|
| (18,584 | ) |
|
| 14,806 |
| ||||||||
Accumulated other comprehensive loss |
|
| (73,138 | ) |
|
| (20,086 | ) | ||||||||
Total Broadstone Net Lease, Inc. stockholders’ equity |
|
| 1,498,704 |
|
|
| 1,417,099 |
|
|
| 1,593,437 |
|
|
| 1,667,614 |
|
Non-controlling interests |
|
| 106,934 |
|
|
| 111,821 |
|
|
| 106,542 |
|
|
| 111,406 |
|
Total equity |
|
| 1,605,638 |
|
|
| 1,528,920 |
|
|
| 1,699,979 |
|
|
| 1,779,020 |
|
Total liabilities and equity |
| $ | 3,212,318 |
|
| $ | 3,096,797 |
| ||||||||
Total liabilities, mezzanine equity and equity |
| $ | 4,274,054 |
|
| $ | 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 (Loss) Income
(Unaudited)
(in thousands, except per share amounts)
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
|
| For the three months ended March 31, |
| |||||||||||||||
|
| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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| 2020 |
|
| 2019 |
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Revenues |
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Lease revenues |
| $ | 69,053 |
|
| $ | 57,032 |
|
| $ | 137,483 |
|
| $ | 112,621 |
| ||||||||
Lease revenues, net |
| $ | 78,231 |
|
| $ | 68,430 |
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Operating expenses |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Depreciation and amortization |
|
| 25,287 |
|
|
| 20,232 |
|
|
| 49,597 |
|
|
| 39,434 |
|
|
| 31,219 |
|
|
| 24,310 |
|
Asset management fees |
|
| 5,318 |
|
|
| 4,313 |
|
|
| 10,438 |
|
|
| 8,456 |
|
|
| 2,461 |
|
|
| 5,120 |
|
Property management fees |
|
| 1,935 |
|
|
| 1,595 |
|
|
| 3,820 |
|
|
| 3,112 |
|
|
| 1,275 |
|
|
| 1,885 |
|
Property and operating expense |
|
| 3,252 |
|
|
| 2,530 |
|
|
| 7,642 |
|
|
| 5,149 |
|
|
| 4,115 |
|
|
| 4,390 |
|
General and administrative |
|
| 1,661 |
|
|
| 1,456 |
|
|
| 2,764 |
|
|
| 2,787 |
|
|
| 5,842 |
|
|
| 1,103 |
|
State and franchise tax |
|
| 305 |
|
|
| 510 |
|
|
| 748 |
|
|
| 753 |
| ||||||||
Provision for impairment of investment in rental properties |
|
| — |
|
|
| — |
|
|
| 1,017 |
|
|
| — |
|
|
| 2,133 |
|
|
| 1,017 |
|
Total operating expenses |
|
| 37,758 |
|
|
| 30,636 |
|
|
| 76,026 |
|
|
| 59,691 |
|
|
| 47,045 |
|
|
| 37,825 |
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Other income (expenses) |
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Preferred distribution income |
|
| — |
|
|
| 187 |
|
|
| — |
|
|
| 375 |
| ||||||||
Interest income |
|
| — |
|
|
| 52 |
|
|
| 1 |
|
|
| 162 |
|
|
| 9 |
|
|
| 1 |
|
Interest expense |
|
| (16,732 | ) |
|
| (12,454 | ) |
|
| (32,560 | ) |
|
| (23,631 | ) |
|
| (20,991 | ) |
|
| (15,828 | ) |
Cost of debt extinguishment |
|
| (8 | ) |
|
| (51 | ) |
|
| (721 | ) |
|
| (51 | ) |
|
| (22 | ) |
|
| (713 | ) |
Gain on sale of real estate |
|
| 2,787 |
|
|
| 4,256 |
|
|
| 4,187 |
|
|
| 7,595 |
|
|
| 7,619 |
|
|
| 1,400 |
|
Income taxes |
|
| (549 | ) |
|
| (443 | ) | ||||||||||||||||
Internalization expenses |
|
| (1,205 | ) |
|
| — |
| ||||||||||||||||
Change in fair value of earnout liability |
|
| (4,177 | ) |
|
| — |
| ||||||||||||||||
Other losses |
|
| (22 | ) |
|
| — |
| ||||||||||||||||
Net income |
|
| 17,342 |
|
|
| 18,386 |
|
|
| 32,364 |
|
|
| 37,380 |
|
|
| 11,848 |
|
|
| 15,022 |
|
Net income attributable to non-controlling interests |
|
| (1,208 | ) |
|
| (1,412 | ) |
|
| (2,292 | ) |
|
| (2,834 | ) |
|
| (1,032 | ) |
|
| (1,084 | ) |
Net income attributable to Broadstone Net Lease, Inc. |
| $ | 16,134 |
|
| $ | 16,974 |
|
| $ | 30,072 |
|
| $ | 34,546 |
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| $ | 10,816 |
|
| $ | 13,938 |
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Weighted average number of common shares outstanding |
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Basic |
|
| 23,204 |
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|
| 19,829 |
|
|
| 22,770 |
|
|
| 19,498 |
|
|
| 26,527 |
|
|
| 22,335 |
|
Diluted |
|
| 24,941 |
|
|
| 21,478 |
|
|
| 24,507 |
|
|
| 21,098 |
|
|
| 29,053 |
|
|
| 24,072 |
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Net earnings per common share |
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Basic and diluted |
| $ | 0.70 |
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| $ | 0.86 |
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| $ | 1.32 |
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| $ | 1.77 |
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| $ | 0.41 |
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| $ | 0.62 |
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Comprehensive (loss) income |
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Net income |
| $ | 17,342 |
|
| $ | 18,386 |
|
| $ | 32,364 |
|
| $ | 37,380 |
|
| $ | 11,848 |
|
| $ | 15,022 |
|
Other comprehensive (loss) income |
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Other comprehensive income (loss) |
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Change in fair value of interest rate swaps |
|
| (23,178 | ) |
|
| 7,042 |
|
|
| (35,802 | ) |
|
| 23,997 |
|
|
| (58,062 | ) |
|
| (12,624 | ) |
Realized gain on interest rate swaps |
|
| (41 | ) |
|
| — |
|
|
| (122 | ) |
|
| — |
|
|
| (42 | ) |
|
| (81 | ) |
Comprehensive (loss) income |
|
| (5,877 | ) |
|
| 25,428 |
|
|
| (3,560 | ) |
|
| 61,377 |
|
|
| (46,256 | ) |
|
| 2,317 |
|
Comprehensive loss (income) attributable to non-controlling interests |
|
| 409 |
|
|
| (1,951 | ) |
|
| 242 |
|
|
| (4,643 | ) |
|
| 4,020 |
|
|
| (167 | ) |
Comprehensive (loss) income attributable to Broadstone Net Lease, Inc. |
| $ | (5,468 | ) |
| $ | 23,477 |
|
| $ | (3,318 | ) |
| $ | 56,734 |
|
| $ | (42,236 | ) |
| $ | 2,150 |
|
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 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 interest |
|
| — |
|
|
| (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 |
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Subscriptions Receivable |
|
| Cumulative Distributions in Excess of Retained Earnings |
|
| Accumulated Other Comprehensive Income |
|
| Non- controlling Interests |
|
| Total |
|
| 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 |
|
| $ | 22 |
|
| $ | 1,557,421 |
|
| $ | — |
|
| $ | (155,150 | ) |
| $ | 14,806 |
|
| $ | 111,821 |
|
| $ | 1,528,920 |
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13,938 |
|
|
| — |
|
|
| 1,084 |
|
|
| 15,022 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13,938 |
|
|
| — |
|
|
| 1,084 |
|
|
| 15,022 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 883 shares of common stock |
|
| 1 |
|
|
| 75,099 |
|
|
| (225 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 74,875 |
|
|
| 1 |
|
|
| 75,099 |
|
|
| (225 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 74,875 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Other offering costs |
|
| — |
|
|
| (300 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (300 | ) |
|
| — |
|
|
| (300 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (300 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Distributions declared ($0.43 per share January 2019, $0.44 per share February through March 2019) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (29,635 | ) |
|
| — |
|
|
| (2,348 | ) |
|
| (31,983 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (29,635 | ) |
|
| — |
|
|
| (2,348 | ) |
|
| (31,983 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,713 | ) |
|
| (911 | ) |
|
| (12,624 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,713 | ) |
|
| (911 | ) |
|
| (12,624 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (75 | ) |
|
| (6 | ) |
|
| (81 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (75 | ) |
|
| (6 | ) |
|
| (81 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Redemption of 21 shares of common stock |
|
| — |
|
|
| (1,803 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,803 | ) |
|
| — |
|
|
| (1,803 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,803 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance, March 31, 2019 |
| $ | 23 |
|
| $ | 1,630,417 |
|
| $ | (225 | ) |
| $ | (170,847 | ) |
| $ | 3,018 |
|
| $ | 109,640 |
|
| $ | 1,572,026 |
|
| $ | 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 Stockholders’ Equity – (continued)Cash Flows
(Unaudited)
(in thousands, except per share amounts)thousands)
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Subscriptions Receivable |
|
| Cumulative Distributions in Excess of Retained Earnings |
|
| Accumulated Other Comprehensive Income |
|
| Non- controlling Interests |
|
| Total |
| |||||||
Balance, January 1, 2018 |
| $ | 19 |
|
| $ | 1,301,979 |
|
| $ | (15 | ) |
| $ | (120,280 | ) |
| $ | 5,122 |
|
| $ | 97,376 |
|
| $ | 1,284,201 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17,573 |
|
|
| — |
|
|
| 1,422 |
|
|
| 18,995 |
|
Issuance of 710 shares of common stock |
|
| 1 |
|
|
| 57,154 |
|
|
| (129 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 57,026 |
|
Other offering costs |
|
| — |
|
|
| (224 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (224 | ) |
Distributions declared ($0.415 per share January 2018, $0.43 per share February through March 2018) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (24,476 | ) |
|
| — |
|
|
| (2,472 | ) |
|
| (26,948 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15,685 |
|
|
| 1,270 |
|
|
| 16,955 |
|
Conversion of eight membership units to eight shares of common stock |
|
| — |
|
|
| 684 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (684 | ) |
|
| — |
|
Redemption of 46 shares of common stock |
|
| — |
|
|
| (3,577 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,577 | ) |
Cancellation of nine shares of common stock |
|
| — |
|
|
| (748 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (748 | ) |
Balance, March 31, 2018 |
| $ | 20 |
|
| $ | 1,355,268 |
|
| $ | (144 | ) |
| $ | (127,183 | ) |
| $ | 20,807 |
|
| $ | 96,912 |
|
| $ | 1,345,680 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16,974 |
|
|
| — |
|
|
| 1,412 |
|
|
| 18,386 |
|
Issuance of 695 shares of common stock |
|
| — |
|
|
| 56,886 |
|
|
| (356 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 56,530 |
|
Other offering costs |
|
| — |
|
|
| (301 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (301 | ) |
Issuance of 194 membership units |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15,797 |
|
|
| 15,797 |
|
Distributions declared ($0.43 per share April through June 2018) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (25,620 | ) |
|
| — |
|
|
| (2,383 | ) |
|
| (28,003 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,503 |
|
|
| 539 |
|
|
| 7,042 |
|
Redemption of 28 shares of common stock |
|
| — |
|
|
| (2,312 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,312 | ) |
Balance, June 30, 2018 |
| $ | 20 |
|
| $ | 1,409,541 |
|
| $ | (500 | ) |
| $ | (135,829 | ) |
| $ | 27,310 |
|
| $ | 112,277 |
|
| $ | 1,412,819 |
|
|
| For the three months ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 11,848 |
|
| $ | 15,022 |
|
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 |
|
| 30,081 |
|
|
| 23,572 |
|
Provision for impairment of investment in rental properties |
|
| 2,133 |
|
|
| 1,017 |
|
Amortization of debt issuance costs charged to interest expense |
|
| 853 |
|
|
| 517 |
|
Straight-line rent and financing lease adjustments |
|
| (1,610 | ) |
|
| (5,143 | ) |
Cost of debt extinguishment |
|
| 22 |
|
|
| 713 |
|
Gain on sale of real estate |
|
| (7,619 | ) |
|
| (1,400 | ) |
Change in fair value of earnout liability |
|
| 4,177 |
|
|
| — |
|
Leasing fees paid |
|
| — |
|
|
| (258 | ) |
Adjustment to provision for credit losses |
|
| (17 | ) |
|
| — |
|
Other non-cash items |
|
| 194 |
|
|
| 92 |
|
Changes in assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
Tenant and other receivables |
|
| (353 | ) |
|
| (350 | ) |
Prepaid expenses and other assets |
|
| 291 |
|
|
| (442 | ) |
Accounts payable and other liabilities |
|
| (5,851 | ) |
|
| (315 | ) |
Accrued interest payable |
|
| 6,170 |
|
|
| (1,386 | ) |
Net cash provided by operating activities |
|
| 40,319 |
|
|
| 31,639 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Acquisition of rental property accounted for using the operating method |
|
| — |
|
|
| (75,080 | ) |
Cash paid for Internalization |
|
| (30,861 | ) |
|
| — |
|
Capital expenditures and improvements |
|
| (48 | ) |
|
| (256 | ) |
Proceeds from disposition of rental property, net |
|
| 35,383 |
|
|
| 10,612 |
|
Increase in tenant and capital reserves |
|
| — |
|
|
| (13 | ) |
Change in deposits on investments in rental property |
|
| — |
|
|
| 100 |
|
Net cash provided by (used in) investing activities |
|
| 4,474 |
|
|
| (64,637 | ) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net |
|
| 131 |
|
|
| 59,869 |
|
Redemptions of common stock |
|
| — |
|
|
| (1,803 | ) |
Cash paid for deferred offering costs |
|
| (811 | ) |
|
| — |
|
Borrowings on unsecured term notes |
|
| 60,000 |
|
|
| 300,000 |
|
Principal payments on mortgages, notes payable and unsecured term notes |
|
| (151,781 | ) |
|
| (306,970 | ) |
Borrowings on unsecured revolving credit facility |
|
| 167,000 |
|
|
| 43,800 |
|
Repayments on unsecured revolving credit facility |
|
| (11,000 | ) |
|
| (45,000 | ) |
Cash distributions paid to stockholders |
|
| (29,148 | ) |
|
| (14,495 | ) |
Cash distributions paid to non-controlling interests |
|
| (2,681 | ) |
|
| (2,330 | ) |
Debt issuance and extinguishment costs paid |
|
| (102 | ) |
|
| (5,902 | ) |
Net cash provided by financing activities |
|
| 31,608 |
|
|
| 27,169 |
|
Net increase (decrease) in cash and cash equivalents and restricted cash |
|
| 76,401 |
|
|
| (5,829 | ) |
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 |
| $ | 96,712 |
|
| $ | 13,160 |
|
|
|
|
|
|
|
|
|
|
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 |
| $ | 93,151 |
|
| $ | 11,726 |
|
Restricted cash at end of period |
|
| 3,561 |
|
|
| 1,434 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 96,712 |
|
| $ | 13,160 |
|
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, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 32,364 |
|
| $ | 37,380 |
|
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 |
|
| 48,142 |
|
|
| 39,901 |
|
Provision for impairment on investment in rental properties |
|
| 1,017 |
|
|
| — |
|
Amortization of debt issuance costs charged to interest expense |
|
| 1,079 |
|
|
| 862 |
|
Straight-line rent and financing lease adjustments |
|
| (10,383 | ) |
|
| (10,303 | ) |
Cost of debt extinguishment |
|
| 721 |
|
|
| 51 |
|
Gain on sale of real estate |
|
| (4,187 | ) |
|
| (7,595 | ) |
Leasing fees paid |
|
| (435 | ) |
|
| (1,177 | ) |
Other non-cash items |
|
| 185 |
|
|
| 329 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Tenant and other receivables |
|
| 897 |
|
|
| 54 |
|
Prepaid expenses and other assets |
|
| (16 | ) |
|
| (1,570 | ) |
Accounts payable and other liabilities |
|
| 2,534 |
|
|
| 1,046 |
|
Accrued interest payable |
|
| (7,199 | ) |
|
| (303 | ) |
Net cash provided by operating activities |
|
| 64,719 |
|
|
| 58,675 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Acquisition of rental property accounted for using the operating method, net of mortgages assumed of $49,782 and $20,845 in 2019 and 2018, respectively |
|
| (153,858 | ) |
|
| (216,036 | ) |
Acquisition of rental property accounted for using the direct financing method |
|
| — |
|
|
| (430 | ) |
Capital expenditures and improvements |
|
| (1,543 | ) |
|
| (1,543 | ) |
Proceeds from disposition of rental property, net |
|
| 33,632 |
|
|
| 30,289 |
|
Change in deposits on investments in rental property |
|
| 875 |
|
|
| — |
|
Net cash used in investing activities |
|
| (120,894 | ) |
|
| (187,720 | ) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net |
|
| 120,190 |
|
|
| 88,701 |
|
Redemptions of common stock |
|
| (5,013 | ) |
|
| (5,889 | ) |
Borrowings on mortgages, notes payable and unsecured term notes, net of mortgages assumed of $49,782 and $20,845 in 2019 and 2018, respectively |
|
| 300,000 |
|
|
| 90,000 |
|
Principal payments on mortgages, notes payable and unsecured term notes |
|
| (307,672 | ) |
|
| (2,442 | ) |
Borrowings on unsecured revolver |
|
| 55,800 |
|
|
| 115,000 |
|
Repayments on unsecured revolver |
|
| (73,300 | ) |
|
| (115,500 | ) |
Cash distributions paid to stockholders |
|
| (29,572 | ) |
|
| (25,245 | ) |
Cash distributions paid to non-controlling interests |
|
| (4,627 | ) |
|
| (4,785 | ) |
Debt issuance and extinguishment costs paid |
|
| (5,902 | ) |
|
| (72 | ) |
Net cash provided by financing activities |
|
| 49,904 |
|
|
| 139,768 |
|
Net (decrease) increase in cash and cash equivalents and restricted cash |
|
| (6,271 | ) |
|
| 10,723 |
|
Cash and cash equivalents and restricted cash at beginning of period |
|
| 18,989 |
|
|
| 10,099 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 12,718 |
|
| $ | 20,822 |
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash and cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
| $ | 18,612 |
|
| $ | 9,355 |
|
Restricted cash at beginning of period |
|
| 377 |
|
|
| 744 |
|
Cash and cash equivalents and restricted cash at beginning of period |
| $ | 18,989 |
|
| $ | 10,099 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
| $ | 10,288 |
|
| $ | 13,765 |
|
Restricted cash at end of period |
|
| 2,430 |
|
|
| 7,057 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 12,718 |
|
| $ | 20,822 |
|
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, office, and other commercial businessesproperties under long-term lease agreements. At June 30, 2019,March 31, 2020, the Corporation owned a diversified portfolio of 646635 individual net leased commercial properties located in 4241 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. The Corporation is the sole managing member of the Operating Company.OP. The remaining interestsmembership units in the Operating Company,OP (“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 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 inof the Operating Company:Corporation and the OP:
Percentage of shares owned by |
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Corporation |
|
| 93.2 | % |
|
| 92.7 | % |
Non-controlling interests |
|
| 6.8 | % |
|
| 7.3 | % |
|
|
| 100.0 | % |
|
| 100.0 | % |
|
| March 31, 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 |
|
| 26,074 |
|
|
| 1,737 |
|
|
| 27,811 |
|
|
| 26,001 |
|
|
| 1,737 |
|
|
| 27,738 |
|
Mezzanine equity |
|
| 781 |
|
|
| 1,320 |
|
|
| 2,101 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
|
| 26,855 |
|
|
| 3,057 |
|
|
| 29,912 |
|
|
| 26,001 |
|
|
| 1,737 |
|
|
| 27,738 |
|
Percent Ownership of OP |
|
| 89.9 | % |
|
| 10.1 | % |
|
| 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 (as defined below) affairs. ThePrior to February 7, 2020, the Corporation iswas externally managed and its Board of Directors has retained the Corporation’s sponsor,by Broadstone Real Estate, LLC (the “Manager”(“BRE”) and Broadstone Asset Management, LLC (the “Asset Manager”) to manage the Corporation’s day-to-day affairs, to implement the Corporation’s investment strategy, and to provide certain property management services for the Corporation’s properties, subject to the Board of Directors’ direction, oversight, and approval. The Asset Manager iswas a wholly 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 Company. Refer to Note 3 for further discussion concerning 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 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 Securities 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, 2018,2019, included in the Company’s 20182019 Annual Report on Form 10-K, filed with the SEC on March 14, 2019.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).
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts and operations of the Corporation, the Operating Company and its consolidated subsidiaries, all of which are wholly owned by the Operating Company (collectively, the “Company”).Company. All intercompany balances and transactions have been eliminated in consolidation.
To the extent the Corporation has a variable interest in entities that are not evaluated under the variable interest entity (“VIE”) model, the Corporation evaluates its interests using the voting interest entity model. The Corporation holds a 93.2% interest in the Operating Company at June 30, 2019, 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, the Corporation has 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 Condensed 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 earnout liabilities, the fair value of assumed debt and notes 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.
The 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 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 judgment is made as to if and when impairment should be taken. The Company’s assessment of impairment as of March 31, 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 17), certain of the Company’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 deteriorate or if the Company’s strategy, or one or more of the assumptions described above were to changeexpected 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 conditions, as derived through the use of published commercial real estate market information. The 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 sixthree months ended June 30,March 31, 2020 and 2019, the Company recorded an impairment chargecharges of $1,0172,133 and $1,017, respectively. on one property. Impairment indicators were identified from concerns over
Restricted Cash
Restricted cash includes escrow funds the tenant’s future viability and changesCompany maintains pursuant to the overall investment strategy forterms of certain mortgages, notes payable, and lease agreements, and undistributed proceeds from the real estate assets. The amountsale of properties under Section 1031 of the impairment charge was based on management’s considerationInternal 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 factors detailed above. In determining the fair value of the impaired assets at March 31, 2019, the measurement date, the Company utilized a capitalization rate of 14.58%, and a weighted average discount rate of 8.00%. There were no impairment charges recorded for the three and six months ended June 30, 2018.
The Company has reduced the carrying values of the impaired real estate assets to their estimated fair values at the measurement date as detailed below:following:
|
| March 31, 2019 |
| |||||||||
(in thousands) |
| Previous Carrying Amount |
|
| Allocation of Impairment |
|
| Carrying Amount After Impairment |
| |||
Investment in rental property accounted for using the operating method, net of accumulated depreciation |
| $ | 2,536 |
|
| $ | (748 | ) |
| $ | 1,788 |
|
Accrued rental income |
|
| 180 |
|
|
| (180 | ) |
|
| — |
|
Intangible lease assets, net |
|
| 275 |
|
|
| (81 | ) |
|
| 194 |
|
Leasing fees, net |
|
| 26 |
|
|
| (8 | ) |
|
| 18 |
|
|
| $ | 3,017 |
|
| $ | (1,017 | ) |
| $ | 2,000 |
|
|
| March 31, |
|
| December 31, |
| ||
(in thousands) |
| 2020 |
|
| 2019 |
| ||
Escrow funds and other |
| $ | 1,504 |
|
| $ | 2,311 |
|
Undistributed 1031 proceeds |
|
| 2,057 |
|
|
| 5,545 |
|
|
| $ | 3,561 |
|
| $ | 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 a number of factors, including the initial determination that the contract is or contains a lease. Generally, all of the Company’s property related contracts are or contain leases, and therefore revenue is recognized when the lessee takes possession of or controls the physical use of the leased assets. In most instances this occurs on the lease commencement date. At the time of lease assumption or at the inception of a new lease, 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.Index (“CPI”). Lease income associated with such provisions is considered variable lease income and therefore 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.
As described in Recently Adopted Accounting Standards elsewhere in Note 2, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and related ASUs subsequently issued (collectively, “ASC 842”) as of January 1, 2019.
Leases Executed on or After Adoption of ASC 842
A lease is classified as an operating lease if none of the following criteria are met: (i) ownership transfers to the lessee at the end of the lease term, (ii) the lessee has a purchase option that is reasonably expected to be exercised, (iii) the lease term is for a major part of the economic life of the leased property, (iv) the present value of the future lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the leased 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, the lease will generally be 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 under certain circumstances in accordance with ASC 842.circumstances.
ASC 842 requires theThe Company to accountaccounts for the right 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 in the context of the overall contract, and (iii) whether the right to use the land is coterminous with the rights to use the other assets.
Leases Executed Prior to Adoption of ASC 842
A lease arrangement was classified as an operating lease if none of the following criteria were met: (i) ownership transferred to the lessee prior to or shortly after the end of the lease term, (ii) the lessee had a bargain purchase option during or at the end of the lease term, (iii) the lease term was greater than or equal to 75% of the underlying property’s estimated useful life, or (iv) the present value of the future minimum lease payments (excluding executory costs) was greater than or equal to 90% of the fair value of the leased property. If one or more of these criteria were met, and the minimum lease payments were determined to be reasonably predictable and collectible, the lease arrangement was generally accounted for as a direct financing lease. Consistent with ASC 840, Leases, if the fair value of the land component was 25% or more of the total fair value of the leased property, the land was considered separately from the building for purposes of applying the lease term and minimum lease payments criterion in (iii) and (iv) above.
Revenue recognition methods for operating leases, 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. For leases that have fixed and measurable rent escalations, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded as Accrued rental income on the Condensed Consolidated Balance Sheets.
Rental property accounted for under direct financing leases – The Company utilizes the direct finance method of accounting to record direct financing lease income. The net investment in the direct financing lease represents receivables for the sum of future lease payments to be received and the estimated residual value of the leased property, less unamortized unearned 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 segregateseparate 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 (Loss) Income.
Rent Received in Advance
Rent received in advance represents tenant payments received prior to the contractual due date, and is included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets. Rent received in advance is as follows:
(in thousands) |
| June 30, 2019 |
|
| December 31, 2018 |
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||
Rent received in advance |
| $ | 8,182 |
|
| $ | 7,832 |
|
| $ | 9,918 |
|
| $ | 13,368 |
|
Provision for Uncollectible Rent
Allowance for Doubtful Accounts
Prior to the adoption ofIn accordance with ASC 842, provisionsprovision for doubtful accounts wereuncollectible rent are recorded as bad debt expense and included in General and administrative expensesan offset to Lease revenues, net on the accompanying Condensed Consolidated Statements of Income and Comprehensive (Loss) Income. SubsequentThe following table summarizes the changes in the provision for uncollectible rent:
The following table summarizes the changes in the provision for uncollectible rent:
|
| For the three months ended March 31, |
| |||||
(in thousands) |
| 2020 |
|
| 2019 |
| ||
Beginning balance |
| $ | — |
|
| $ | 2,086 |
|
Provision for uncollectible rent |
|
| 1,033 |
|
|
| 441 |
|
Write-offs |
|
| — |
|
|
| (2,527 | ) |
Ending balance |
| $ | 1,033 |
|
| $ | — |
|
Goodwill
Goodwill represents the excess of the amount paid over the fair value of 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 adoptionsame 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 adopt an annual goodwill testing date during the fourth quarter.
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 ASC 842, provisions for doubtful accounts are recorded prospectivelydirect, 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 an offseta charge to Lease revenues onoperating expenses in the accompanying Condensed Consolidated StatementsStatement of Income and Comprehensive (Loss) Income. At March 31, 2020 and December 31, 2019, deferred IPO costs were $1,282 and $668, respectively, and were included within Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets.
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the 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 prioritizes the inputs used in measuring fair value.
The balances of financial instruments measured at fair value on a recurring basis are as follows (see Note 10):
|
| June 30, 2019 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swap, assets |
| $ | 2,687 |
|
| $ | — |
|
| $ | 2,687 |
|
| $ | — |
|
Interest rate swap, liabilities |
|
| (22,676 | ) |
|
| — |
|
|
| (22,676 | ) |
|
| — |
|
|
| $ | (19,989 | ) |
| $ | — |
|
| $ | (19,989 | ) |
| $ | — |
|
|
| December 31, 2018 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swap, assets |
| $ | 17,633 |
|
| $ | — |
|
| $ | 17,633 |
|
| $ | — |
|
Interest rate swap, liabilities |
|
| (1,820 | ) |
|
| — |
|
|
| (1,820 | ) |
|
| — |
|
|
| $ | 15,813 |
|
| $ | — |
|
| $ | 15,813 |
|
| $ | — |
|
The Company has estimated that the carrying amount reported on the Condensed Consolidated Balance Sheets for Cash and cash equivalents, Prepaid expenses and other assets, Tenant and other receivables, net, and Accounts payable and other liabilities, approximates their fair values due to their short-term nature.
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 future share prices, timing of an IPO, and other items that 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. Due to the market dislocation and uncertainty presented by the COVID-19 pandemic, management revised its weighted average expected IPO date as of quarter end to March 15, 2021. The Company anticipates commencing its IPO when market conditions allow, which may be before March 15, 2021. 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.
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% |
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of March 31, 2020.
Significant Unobservable Inputs | Weighted Average Assumption Used | Range | |||
Expected IPO date | March 15, 2021 | November 2020 through May 2021 | |||
Peer stock price volatility | 30.0% | 22.96% to 43.91% |
The following table presents a reconciliation of the change in the earnout liability:
|
| For the three months ended |
| |
(in thousands) |
| March 31, 2020 |
| |
Allocation of Internalization purchase price at February 7, 2020 |
| $ | 40,119 |
|
Change in fair value subsequent to Internalization |
|
| 4,177 |
|
Balance at March 31, 2020 |
| $ | 44,296 |
|
The increase in the earnout liability fair value between February 7, 2020 and March 31, 2020 is primarily a result of an increase in the peer stock price volatility assumption used, as detailed above, a direct result of changes in economic circumstances impacting global equity markets.
Interest Rate Swaps – The balances of interest rate swap assets and liabilities (see Note 11) and earnout liability measured at fair value on a recurring basis are as follows:
|
| March 31, 2020 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swap, liabilities |
| $ | (79,622 | ) |
| $ | — |
|
| $ | (79,622 | ) |
| $ | — |
|
Earnout liability |
|
| (44,296 | ) |
|
| — |
|
|
| — |
|
|
| (44,296 | ) |
|
| 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 London Interbank Offered Rate (“LIBOR”), U.S. treasuryTreasury 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 Mortgages and notes payable, net, Unsecured term notes, net, and Unsecured revolver:revolving credit facility:
(in thousands) |
| June 30, 2019 |
|
| December 31, 2018 |
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||
Carrying amount |
| $ | 1,475,090 |
|
| $ | 1,450,551 |
|
| $ | 2,144,118 |
|
| $ | 1,989,451 |
|
Fair value |
|
| 1,529,558 |
|
|
| 1,439,264 |
|
|
| 2,233,159 |
|
|
| 2,047,860 |
|
As disclosed under the Long-lived Asset Impairment section elsewhere in Note 2, the Company’s non-recurring fair value measurements at June 30,March 31, 2020 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
In accordanceThe Company is a lessee under non-cancelable operating leases associated with ASC 842, theits 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 leases of land where it is the lessee under non-cancelable operating leases (“ground leases”).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. As allowed under ASC 842, theThe Company has made an accounting policy election, applicable to all asset types, to not segregateseparate lease from nonlease components when allocating contract consideration related to groundoperating leases.
Right-of-use assets and lease liabilities associated with groundoperating leases were included in the accompanying Condensed Consolidated Balance Sheets as follows:
|
|
|
| June 30, |
|
|
|
| March 31, |
|
| December 31, |
| |||
(in thousands) |
| Financial Statement Presentation |
| 2019 |
|
| Financial Statement Presentation |
| 2020 |
|
| 2019 |
| |||
Right-of-use assets |
| Prepaid expenses and other assets |
| $ | 1,665 |
|
| Prepaid expenses and other assets |
| $ | 3,457 |
|
| $ | 1,614 |
|
Lease liabilities |
| Accounts payable and other liabilities |
|
| 1,251 |
|
| Accounts payable and other liabilities |
|
| 3,059 |
|
|
| 1,209 |
|
Taxes Collected From TenantsEarnout Liability
The Company’s earnout liability is payable in a combination of cash, common shares, and RemittedOP 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 Governmental Authorities
A majoritya redemption rights agreement, whereby holders of the Company’s properties are leased on a triple-net basis, which provides thatcommon shares and OP Units will have the tenants are responsible for the payment of all property operating expenses, including, but not limitedright to property taxes, maintenance, insurance, repairs, and capital costs, during the lease term. The Company records such expenses on a net basis. In other situations,require the Company may collect property taxes from its tenantsto repurchase any or all of the common shares or OP Units if an IPO has not occurred (see discussion of the redemption rights agreement in Note 4). The common shares and remit those taxesOP Units are deemed to governmental authorities. Taxes collected from tenantsbe freestanding financial instruments that, at inception, embody an obligation to repurchase the Company’s common shares and remitted to governmental authorities are presentedOP 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 a gross basis, where amounts billed to tenants are included in Lease revenues, and the corresponding expense is included in Property and operating expense, in the accompanying Condensed Consolidated Statements of Income and Comprehensive (Loss) Income.
Rental Expense
Rental expense associated with ground leases is recorded on a straight-line basis over the term of each lease, for leases that have fixed and measurable rent escalations. Under the provisions of ASC 842, the difference between rental expense incurred on a straight-line basis and the cash rental payments due under the provisions of the lease is recordedBalance Sheets as part of the right-of-use asset inpurchase price allocation. The fair value of the accompanying June 30, 2019 Condensed Consolidated Balance Sheet. Prior to the adoption of ASC 842, at December 31, 2018, this difference wasearnout liability is remeasured each reporting period, with changes recorded as a deferred liability and was included as a component of Accounts payable and other liabilitiesChange in the accompanying Condensed Consolidated Balance Sheets. Amounts associated with percentage rent provisions based on the achievement of sales targets are recognized as variable rental expense when achievement of the sales targets is considered probable. Rental expense is included in Property and operating expenses on the accompanying Condensed Consolidated Statements of Income and Comprehensive (Loss) Income.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic ASC 842), which superseded the existing guidance for lease accounting, ASC 840. ASC 842 is effective January 1, 2019, with early adoption permitted. The guidance requires lessees to recognize a right-of-use asset and a corresponding lease liability, initially measured at the presentfair value of lease payments, for both operating and financing leases. Under the new pronouncement, lessor accounting is largely unchanged from prior GAAP, however disclosures were expanded. The Company adopted ASC 842 on January 1, 2019 on a modified retrospective basis and elected the following practical expedients:
The “Package of Three,” which allows an entity to not reassess (i) whether any expired or existing contracts are, or contain, leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for existing leases.
The optional transition method to initially apply the guidance of ASC 842 at the adoption date and to recognize a cumulative-effect adjustment to the opening balance of retained earnings. As a result of electing this practical expedient, the Company’s reporting for the comparative periods presented will continue to beearnout liability in accordance with ASC 840, including the required disclosures.
The ability to make an accounting policy election, by class of underlying asset, to not separate nonlease components from the associated lease component and to account for those components as a single component if certain conditions are met.
ASC 842 requires all income from leases to be presented as a single line item, rather than the prior presentation where rental income from leases was shown separately from amounts billed and collected as reimbursements from tenants on the Condensed Consolidated Statements of Income and Comprehensive (Loss) Income. In addition, bad debt expense is required to be presented as an adjustment to Lease revenues, rather than the prior presentation within Operating expenses on the Condensed Consolidated Statements of Income and Comprehensive (Loss) Income.
Mezzanine Equity
The Company is primarilyissued common shares and OP Units as base consideration for the Internalization, each of which were subject to a lessorredemption rights agreement, where the common shares (“mezzanine equity common stock”) and thereforeOP 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 March 31, 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 interest’s 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 842326 did not have a material impact on its Condensed Consolidated Financial Statements. Uponfinancial statements. In connection with the adoption of ASC 842, it was not necessary for326, the Company to recordrecorded a provision for credit losses of $323 with an offsetting cumulative-effect adjustment to the opening balance of retained earnings however the Company recognized a right-of-use asset and corresponding lease liability as of January 1, 2019, of $1,687 and $1,261, respectively, related to operating leases where it is the lessee (see Note 16). The right-of-use asset was recorded net of a previously recorded straight-line rent liability of $7 and ground lease intangible asset, net of $432 as of the date of adoption.2020.
In OctoberAugust 2018, the FASB issued ASU 2018-16,2018-13, Fair Value Measurement (Topic 820) Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. Previously under Topic 815, the eligible benchmark interest rates in the United States were the interest rates on direct Treasury obligations of the U.S. government (UST), the LIBOR swap rate, the OIS Rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate, which was introduced in ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). The amendments under ASU 2018-13 remove, add, and modify certain disclosure requirements on fair value measurements in ASU 2018-16 permit the use of the OIS rate based on SOFR as a benchmark interest rate for hedge accounting purposes under Topic 815. ASC 820. The amendments in this update were effective for fiscal years, beginning after December 15, 2018, and interim periods within those fiscal years, for public business entities that already adopted the amendments in ASU 2017-12 (which the Company adopted effective January 1, 2018).beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU 2018-16 as of January 1, 2019the new standard on a prospective basis on January 1, 2020. The modifications and new disclosures required by the new standard primarily relate to disclosures around recurring Level 3 fair value measurements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, 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 changes 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 were 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 qualifying new or redesignated hedging relationships entered into on or afterreference rate reform related activities that impact debt, leases, derivatives 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 datefirst quarter of adoption. Adoption2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of this guidance had no impacteffectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the Condensed Consolidated Financial Statements.corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Other Recently Issued Accounting Standards
As more fully described in Note 17, during 2020 there have been business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses which changes how entities measure credit losses for most financial assets. Financial assets that are measured at amortized cost willresponse, lessors may be required to provide rent deferrals and other lease concessions to lessees. While the lease modification guidance in ASC 842, Leases addresses routine changes to lease terms resulting from negotiations between the lessee and the lessor, this guidance did not contemplate concessions being so rapidly executed to address the sudden liquidity constraints of some lessees arising from situations such as the COVID-19 pandemic. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement
reached with the tenant (in which case the modification would be presented ataccounted for within the net amount expectedlease modification accounting framework of ASC 842) or if it was covered under the enforceable rights and obligations within the existing lease agreement (in which case the modification would be precluded from applying the lease modification accounting framework). In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to be collectedlease concessions provided as a result of the COVID-19 pandemic. The Lease Modification Q&A allows the Company, if certain criteria have been met, to elect whether or not it will apply the lease modification accounting framework, with such election applied consistently to leases with similar characteristics and similar circumstances, rather than performing an allowance for credit losses deducted fromanalysis of the amortized costconcessions granted on a lease by lease 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. In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, which provides entities with an option to irrevocably elect the fair value option for eligible instruments upon adoption of Topic 326. ASU 2016-13 is effective January 1, 2020, with early adoption permitted beginning on January 1, 2019, under a modified retrospective application. The Company continues to evaluate the impact this new standard will have on its Condensed Consolidated Financial Statements, including the transition relief provisions, but does not expect such impact will be material based upon the composition of its current lease portfolio.
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 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact the new standard will have on its Condensed Consolidated Financial Statements and expects to adopt the new disclosures on a prospective basis on January 1, 2020.
In April 2019, the FASB issued ASU 2019-04, Codification Improvementselect to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivativesapply such relief and Hedging, and Topic 825, Financial Instruments which served to clarify a variety of Topics in the Codification and applies to all reporting entities within the scopewill avail itself of the affected accounting guidance.election to avoid performing a lease by lease analysis. The Company will assess the impact of the changes to Topic 326 in connection with its adoption of ASU 2018-13 discussed above. The provisions of ASU 2019-04 relating to Topics 815 and 825 are effective on January 1, 2020. The Company is currently evaluating the impact of adopting ASU 2019-04, but does not anticipate that it will have aLease Modification Q&A has no material impact on the Company’s consolidated financial statements as of and for the three months ended March 31, 2020. However, its financial statements.future impact to the Company is dependent upon the extent of lease concessions granted to tenants as a result of the COVID-19 pandemic in future periods and the elections made by the Company at the time of entering into such concessions.
Reclassifications
Certain prior-period amounts have beenThe Company reclassified to conform with the current period’s presentation, including certain items described below which resulted$443 of Income taxes from the adoptiona component of ASC 842.
Components of revenue that were previously reported as Rental income from operating leases, Earned income from direct financing leases, Operating expenses reimbursed from tenants, andto a component of Other income from real estate transactions,(expenses), on the Condensed Consolidated Statements of Income and Comprehensive (Loss) Income have been combined and reported as Lease revenues on the Condensed Consolidated Statements of Income and Comprehensive (Loss) Income as follows:
As originally reported |
| For the three months ended |
|
| For the six months ended |
| ||
(in thousands) |
| June 30, 2018 |
|
| June 30, 2018 |
| ||
Revenues |
|
|
|
|
|
|
|
|
Rental income from operating leases |
| $ | 53,590 |
|
| $ | 105,422 |
|
Earned income from direct financing leases |
|
| 953 |
|
|
| 1,919 |
|
Operating expenses reimbursed from tenants |
|
| 2,486 |
|
|
| 5,235 |
|
Other income from real estate transactions |
|
| 3 |
|
|
| 45 |
|
Total revenues |
| $ | 57,032 |
|
| $ | 112,621 |
|
As revised |
| For the three months ended |
|
| For the six months ended |
| ||
(in thousands) |
| June 30, 2018 |
|
| June 30, 2018 |
| ||
Revenues |
|
|
|
|
|
|
|
|
Lease revenues |
| $ | 57,032 |
|
| $ | 112,621 |
|
In addition, as discussed above, in connection with recording the transition adjustment for the right-of-use asset related to operating leases where the Company is the lessee, amounts reported as ground lease intangible assets, net and ground lease straight-line rent liabilities on the Condensed Consolidated Balance Sheet at Decemberthree months ended March 31, 2018, were reclassified as of January 1, 2019, and are now included as components of the right-of-use asset.
The Company reclassified Restricted cash of $377 and Tenant and capital reserves of $1,136 to Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets at December 31, 2018 to conform with the current period presentation. Additionally, Tenant improvement allowances of $2,125 were reclassified to Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets at December 31, 2018 to conform with the current presentation. The reclassifications are changesreclassification is a change from one acceptable presentation to another acceptable presentation.
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 are a partyOP were parties to a property management agreement (as amended, the “Property Management Agreement”) with the Manager, a related party in which certain 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 Corporation’s rental property.
In exchange for services provided under the Property Management Agreement, the Manager receivesBRE 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 |
| (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. |
The Property Management Agreement automatically renewed on January 1, 2019 for three years ending December 31, 2021, subject to earlier termination pursuant to the termsUpon completion of the Property Management Agreement. The Property Management Agreement provides for termination: (i) immediately by the Corporation’s Independent Directors Committee (“IDC”) for Cause, as defined inInternalization, the Property Management Agreement (ii) by the IDC, upon 30 days’ written noticewas terminated and there will be no future property management fees payable to the Manager, in connection withBRE. The Internalization was not considered a change in control of the Manager, as defined in“termination event” under the Property Management Agreement, (iii) byso no fees were payable to BRE as a result of the IDC, by providingInternalization. See Note 4 for further discussion regarding the Manager with written notice of termination not less than one year prior toInternalization, including the last calendar day of any renewal term, (iv) by the Manager upon written notice to the Company not less than one year prior to the last calendar day of any renewal period, (v) automatically in the event of a Termination Event, as defined in the Property Management Agreement, and (vi) by the IDC upon a Key Person Event, as defined in the Property Management Agreement.
If the Corporation terminates the agreement prior to any renewal term or in any manner described above, other than termination by the Corporation for Cause, the Corporation will be subject to 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 at June 30, 2019, if the Property Management Agreement had been terminated at June 30, 2019, subject to the conditions noted above, the termination fee would have been $21,711.associated payments related thereto.
Asset Management Agreement
The Corporation and the Operating Company are partyOP were parties to an asset management agreement (as amended, the “Asset Management Agreement”) with the Asset Manager, a single member limited liability company withof which BRE was the Manager as the singlesole member, and therefore a related party in which certain directors of the Corporation havehad 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 Corporation’s IDCIndependent Directors Committee (“IDC”) for its valuation functions and other duties. The Asset Manager also nominatesnominated two individuals to serve on the Board of Directors of the Corporation.
Under the terms of the Asset Management Agreement, the Asset Manager iswas 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 |
| (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 |
| (iv) | 2% of the gross purchase price paid for each rental property acquired in the event that the acquisition of a rental property |
| (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 |
The Asset Management Agreement automatically renewed on January 1, 2019 for three years ending December 31, 2021, subject to earlier termination pursuant to the termsUpon completion of the Asset Management Agreement. The Asset Management Agreement provides for termination: (i) immediately by the IDC for Cause, as defined inInternalization, the Asset Management Agreement (ii) bywas terminated and there will be no future asset management fees payable to the IDC, upon 30 days’ written noticeAsset Manager. The Internalization was not considered a “termination event” under the Asset Management Agreement, so no fees were payable to the Asset Manager in connection withas a change in controlresult of the Asset Manager, as defined inInternalization. See Note 4 for further discussion regarding the Asset Management Agreement, (iii) byInternalization, including the IDC, by providing the Asset Manager with written notice of termination not less than one year prior to the last calendar day of any renewal term, (iv) by the Asset Manager upon written notice to the Company not less than one year prior to the last calendar day of any renewal period, (v) automatically in the event of a Disposition Event, as defined in the Asset Management Agreement, and (vi) by the IDC upon a Key Person Event, as defined in the Asset Management Agreement.
If the Corporation terminates the agreement prior to any renewal term or in any manner described above, other than termination by the Corporation for Cause, 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 at June 30, 2019, if the Asset Management Agreement had been terminated at June 30, 2019, subject to the conditions noted above, the termination fee would have been $60,465.associated payments related thereto.
Total fees incurred under the Property Management Agreement and Asset Management Agreement arewere as follows:
(in thousands) |
|
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
|
|
|
| For the three months ended March 31, |
| |||||||||||||||
Type of Fee |
| Financial Statement Presentation |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| Financial Statement Presentation |
| 2020(a) |
|
| 2019 |
| ||||||
Asset management fee |
| Asset management fees |
| $ | 5,318 |
|
| $ | 4,313 |
|
| $ | 10,438 |
|
| $ | 8,456 |
|
| Asset management fees |
| $ | 2,461 |
|
| $ | 5,120 |
|
Property management fee |
| Property management fees |
|
| 1,935 |
|
|
| 1,595 |
|
|
| 3,820 |
|
|
| 3,112 |
|
| Property management fees |
|
| 1,275 |
|
|
| 1,885 |
|
Total management fee expense |
|
|
|
| 7,253 |
|
|
| 5,908 |
|
|
| 14,258 |
|
|
| 11,568 |
|
|
|
|
| 3,736 |
|
|
| 7,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing fee (offering costs) |
| Additional paid-in capital |
|
| 300 |
|
|
| 301 |
|
|
| 600 |
|
|
| 525 |
|
| Additional paid-in capital |
|
| — |
|
|
| 300 |
|
Acquisition fee |
| Capitalized as a component of assets acquired |
|
| 1,275 |
|
|
| 1,380 |
|
|
| 2,005 |
|
|
| 2,386 |
|
| Capitalized as a component of assets acquired |
|
| — |
|
|
| 730 |
|
Leasing fee |
| Leasing fees, net |
|
| 177 |
|
|
| 392 |
|
|
| 435 |
|
|
| 1,177 |
| ||||||||||
Leasing fee and re-leasing fees |
| Leasing fees, net |
|
| — |
|
|
| 258 |
| ||||||||||||||||||
Disposition fee |
| Gain on sale of real estate |
|
| 238 |
|
|
| 155 |
|
|
| 351 |
|
|
| 323 |
|
| Gain on sale of real estate |
|
| 109 |
|
|
| 113 |
|
Total management fees |
|
|
| $ | 9,243 |
|
| $ | 8,136 |
|
| $ | 17,649 |
|
| $ | 15,979 |
|
|
|
| $ | 3,845 |
|
| $ | 8,406 |
|
(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 Due to related parties on the Condensed Consolidated Balance SheetsThere were no unpaid management fees at June 30, 2019March 31, 2020 and December 31, 2018, are $95 and $114 of unpaid management fees, 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.
Tax Protection Agreement
Upon closing of the Internalization, the Company entered into an agreement with Amy L. Tait, the Company’s founder, and certain members of her family (“Founding Owners”), pursuant 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 contingent liability that would be payable to certain members of the 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 $44,296 as of March 31, 2020.
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 indirectly owned by the Company’s Chairman and member of the Board of Directors. The lease of 24,072 square feet of office space is scheduled to expire on August 31, 2023, with 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. AcquisitionsInternalization
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 OP.
The consideration paid at closing of the Internalization is summarized in the following 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 closedmay 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 IPO, or (b) the Company’s AFFO per share, prior to the completion of an IPO, (each, an “Earnout Trigger”) are achieved during the Earnout Periods. The consideration will consist of a combination of cash, shares of the Company’s common stock, and OP Units, based on the following acquisitions duringsame proportions paid in the six months ended June 30, 2019:base consideration.
The earnout tranches, applicable 40-day VWAP of a REIT Share and AFFO per share, and the applicable Earnout Periods are as follows:
(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 |
| Other |
|
| 1 |
|
|
| 76,000 |
| (a) |
May 21, 2019 |
| Retail |
|
| 2 |
|
|
| 6,500 |
|
|
May 31, 2019 |
| Retail |
|
| 1 |
|
|
| 3,192 |
|
|
June 7, 2019 |
| Other |
|
| 1 |
|
|
| 30,589 |
|
|
June 26, 2019 |
| Industrial |
|
| 2 |
|
|
| 11,180 |
|
|
|
|
|
|
| 34 |
|
| $ | 200,539 |
| (b) |
(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) |
|
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 amounts payable 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 relates to the potential issuance of common shares and OP Units and approximately $6,608 relates to the potential payment of cash. The Company will estimate the fair value of the earnout liability at each reporting date during the contingency period and record any changes in estimated fair value in its Condensed Consolidated Statement of Income and Comprehensive (Loss) Income.
Redemption Rights Agreement
The mezzanine equity common shares and OP Units 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 March 31, 2020. If an IPO does not occur on or before December 31, 2020, then each holder of mezzanine equity common shares and OP Units 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 thereafter 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.
If an IPO does not occur on or before the satisfaction of any Earnout Trigger, then each holder of common shares or OP Units issued under the earnout shall have the right to require the Company to repurchase any or all of such holder’s shares or OP Units at a price equal to the greater of (i) the initial fair value of $85 of the common shares at the date of the Internalization or (ii) the current fair value of such common shares, as adjusted for interest and distributions. Such repurchases can occur during the period from the date of 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.
The Internalization was accounted for as a business combination and accordingly, the Company allocated the purchase price utilizing the acquisition method to record assets acquired and liabilities 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 associated 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 tax purposes.
In connection with the Internalization, 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 entering into a new $60,000 term loan agreement (see Note 9).
The Company incurred $1,205 in non-recurring costs associated with the Internalization during the three months ended March 31, 2020, which were classified as Internalization expenses in the Condensed Consolidated Statements of Income and Comprehensive (Loss) Income.
The effect of the Internalization has been reflected in the Company’s operating results beginning on February 7, 2020. No incremental revenues were recorded as a result of the Internalization. From February 7, 2020 to March 31, 2020, the Company incurred $3,662 in expenses as a result of being internalized, which 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 Internalization. These expenses do not include the $1,205 non-recurring costs discussed above.
Condensed Pro Forma Financial Information
The following pro forma information summarizes selected financial information from the Company’s combined results of operations, as if the Internalization had occurred on January 1, 2019. These results contain certain adjustments totaling $5,646 and $6,377 of income, respectively, for the three months ended March 31, 2020 and 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 results, and adjustments to reflect incremental interest expense associated with the borrowing related to the Internalization. This pro forma information is presented for informational purposes only, and may not be indicative of what actual results of operations would have been had the Internalization occurred at the beginning of the period, nor does it purport to represent the results of future operations.
The condensed pro forma financial information is as follows for the three months ended March 31, 2020 and 2019:
|
| For the three months ended March 31, |
| |||||
(in thousands) |
| 2020 |
|
| 2019 |
| ||
Revenues |
| $ | 78,231 |
|
| $ | 68,430 |
|
Net income |
|
| 13,751 |
|
|
| 17,685 |
|
5. Acquisitions of Rental Property
The Company did not complete any acquisitions of rental property during the three months ended March 31, 2020. The Company closed on the following acquisitions of rental property during the three months ended March 31, 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 |
|
|
|
|
|
|
| 27 |
|
| $ | 73,078 |
| (a) |
| Acquisition price does not include capitalized acquisition costs of |
The Company closed on the following acquisitions during the six months ended June 30, 2018:
(in thousands, except number of properties) |
| Number of |
|
| Real Estate |
|
| ||||
Date |
| Property Type |
| Properties |
|
| Acquisition Price |
|
| ||
March 27, 2018 |
| Industrial |
|
| 1 |
|
| $ | 22,000 |
|
|
March 30, 2018 |
| Industrial/Retail |
|
| 26 |
|
|
| 78,530 |
|
|
April 30, 2018 |
| Other |
|
| 1 |
|
|
| 16,170 |
|
|
June 6, 2018 |
| Industrial |
|
| 1 |
|
|
| 8,500 |
|
|
June 14, 2018 |
| Industrial |
|
| 1 |
|
|
| 39,700 |
|
|
June 14, 2018 |
| Retail |
|
| 6 |
|
|
| 14,479 |
|
|
June 21, 2018 |
| Retail |
|
| 1 |
|
|
| 20,231 |
|
|
June 21, 2018 |
| Industrial |
|
| 1 |
|
|
| 38,340 |
| (c) |
June 29, 2018 |
| Industrial |
|
| 1 |
|
|
| 10,400 |
|
|
June 29, 2018 |
| Retail |
|
| 2 |
|
|
| 6,433 |
|
|
|
|
|
|
| 41 |
|
| $ | 254,783 |
| (d) |
|
|
|
|
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:
|
| For the six months ended June 30, |
| |||||
(in thousands) |
| 2019 |
|
| 2018 |
| ||
Land |
| $ | 13,339 |
|
| $ | 34,765 |
|
Land improvements |
|
| 16,758 |
|
|
| 13,051 |
|
Buildings and other improvements |
|
| 154,107 |
|
|
| 191,713 |
|
Acquired in-place leases(e) |
|
| 19,942 |
|
|
| 24,995 |
|
Acquired above-market leases(f) |
|
| 2,281 |
|
|
| 2,527 |
|
Acquired below-market leases(g) |
|
| (858 | ) |
|
| (7,526 | ) |
Direct financing investments |
|
| — |
|
|
| 430 |
|
Mortgages payable |
|
| (49,782 | ) |
|
| (20,845 | ) |
|
| $ | 155,787 |
|
| $ | 239,110 |
|
(in thousands) |
| For the three months ended March 31, 2019 |
| |
Land |
| $ | 7,149 |
|
Land improvements |
|
| 10,506 |
|
Buildings and improvements |
|
| 49,677 |
|
Acquired in-place leases(b) |
|
| 6,618 |
|
Acquired above-market leases(c) |
|
| 2,169 |
|
Acquired below-market leases(d) |
|
| (836 | ) |
|
| $ | 75,283 |
|
| The weighted average amortization period for acquired in-place leases is 15 years |
| The weighted average amortization period for acquired above-market leases is 17 years |
| The weighted average amortization period for acquired below-market leases is |
The above acquisitions were funded using a combination of available cash on hand, proceeds fromborrowings under the Company’s unsecured revolving line of credit,Revolving Credit Facility, and proceeds from equity issuances. All real estate acquisitions closed during the sixthree months ended June 30,March 31, 2019, and 2018, qualified as asset acquisitions and, as such, acquisition costs werehave been capitalized.
Subsequent to June 30, 2019, the Company closed on the following acquisitions (see Note 17):
(in thousands, except number of properties) |
| Number of |
|
| Real Estate |
|
| ||||
Date |
| Property Type |
| Properties |
|
| Acquisition Price |
|
| ||
July 15, 2019 |
| Retail |
|
| 1 |
|
| $ | 3,214 |
|
|
July 15, 2019 |
| Industrial |
|
| 1 |
|
|
| 11,330 |
|
|
July 31, 2019 |
| Healthcare |
|
| 5 |
|
|
| 27,277 |
|
|
|
|
|
|
| 7 |
|
| $ | 41,821 |
|
|
The Company has not completed the allocation of the acquisition date fair values for the properties acquired subsequent to June 30, 2019; 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.
5.6. Sale of Real Estate
The Company closed on the following sales of real estate, none of which qualified as discontinued operations:
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
|
| For the three months ended March 31, |
| |||||||||||||||
(in thousands, except number of properties) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||||
Number of properties disposed |
|
| 5 |
|
|
| 6 |
|
|
| 9 |
|
|
| 11 |
|
|
| 10 |
|
|
| 4 |
|
Aggregate sale price |
| $ | 23,809 |
|
| $ | 15,529 |
|
| $ | 35,100 |
|
| $ | 32,342 |
|
| $ | 37,185 |
|
| $ | 11,291 |
|
Aggregate carrying value |
|
| (20,233 | ) |
|
| (10,295 | ) |
|
| (29,445 | ) |
|
| (22,694 | ) |
|
| (27,764 | ) |
|
| (9,212 | ) |
Additional sales expenses |
|
| (789 | ) |
|
| (978 | ) |
|
| (1,468 | ) |
|
| (2,053 | ) |
|
| (1,802 | ) |
|
| (679 | ) |
Gain on sale of real estate |
| $ | 2,787 |
|
| $ | 4,256 |
|
| $ | 4,187 |
|
| $ | 7,595 |
|
| $ | 7,619 |
|
| $ | 1,400 |
|
6.7. Investment in Rental Property and Lease Arrangements
The Company generally leases its investment rental property to established tenants in the retail,industrial, healthcare, manufacturing,restaurant, office, retail, and other industries. At June 30, 2019,March 31, 2020, the Company had 627616 real estate properties which were leased under leases that have been classified as operating leases and 1615 that have been classified as direct financing leases. Of the 1615 leases classified as direct financing leases, four 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. The Company’s leases generally provide for limited increases in rent as a result of fixed increases, increases in the Consumer Price Index,CPI, or increases in the tenant’s sales volume. Generally, tenants 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. None of the Company’s leases contain purchase options.
The Company’s leases do not include residual value guarantees. To protect the residual value of its assets under lease, the Company requires tenants to maintain certain levels of property insurance, and in some cases will purchase supplemental policies directly. Management physically inspects each property on a regular basis, to ensure the tenant is maintaining the property so that it will be in a condition at the end of the lease term that is suitable for the Company to lease to a new tenant without the need for significant additional investment. For assets other than land, at lease inception the Company estimates the residual value taking into consideration the original fair value of the asset, less anticipated depreciation over the lease term. In general, at lease inception the Company assumes the value ascribed to land will be fully recoverable at the end of the lease term.
Investment in Rental Property – Accounted for Using the Operating Method
Rental property subject to non-cancelable operating leases with tenants arewas as follows:
(in thousands) |
| June 30, 2019 |
|
| December 31, 2018 |
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||
Land |
| $ | 418,671 |
|
| $ | 411,043 |
|
| $ | 545,846 |
|
| $ | 548,911 |
|
Land improvements |
|
| 254,340 |
|
|
| 239,701 |
|
|
| 274,135 |
|
|
| 275,470 |
|
Buildings and improvements |
|
| 2,319,054 |
|
|
| 2,186,499 |
|
|
| 2,827,111 |
|
|
| 2,850,571 |
|
Equipment |
|
| 11,492 |
|
|
| 11,492 |
|
|
| 11,492 |
|
|
| 11,492 |
|
|
|
| 3,003,557 |
|
|
| 2,848,735 |
|
|
| 3,658,584 |
|
|
| 3,686,444 |
|
Less accumulated depreciation |
|
| (241,396 | ) |
|
| (206,989 | ) |
|
| (291,018 | ) |
|
| (271,044 | ) |
|
| $ | 2,762,161 |
|
| $ | 2,641,746 |
|
| $ | 3,367,566 |
|
| $ | 3,415,400 |
|
Depreciation expense on investment in rental property was as follows:
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
|
| For the three months ended March 31, |
| |||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||||
Depreciation |
| $ | 19,532 |
|
| $ | 15,985 |
|
| $ | 38,285 |
|
| $ | 31,149 |
|
| $ | 23,515 |
|
| $ | 18,753 |
|
Estimated lease payments to be received under non-cancelable operating leases with tenants at June 30, 2019March 31, 2020 are as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Remainder of 2019 |
| $ | 121,921 |
| ||||
2020 |
|
| 246,965 |
| ||||
Remainder of 2020 |
| $ | 210,383 |
| ||||
2021 |
|
| 250,129 |
|
|
| 284,505 |
|
2022 |
|
| 252,425 |
|
|
| 287,511 |
|
2023 |
|
| 254,220 |
|
|
| 290,357 |
|
2024 |
|
| 285,396 |
| ||||
Thereafter |
|
| 2,167,629 |
|
|
| 2,130,183 |
|
|
| $ | 3,293,289 |
|
| $ | 3,488,335 |
|
Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future 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 variable rents which may be received under the leases based on a percentage of the tenant’s gross sales.
Investment in Rental Property – Direct Financing Leases
The Company’s net investment in direct financing leases iswas comprised of the following:
(in thousands) |
| June 30, 2019 |
|
| December 31, 2018 |
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||
Undiscounted estimated lease payments to be received |
| $ | 74,795 |
|
| $ | 76,829 |
|
| $ | 68,898 |
|
| $ | 72,753 |
|
Estimated unguaranteed residual values |
|
| 20,358 |
|
|
| 20,358 |
|
|
| 19,827 |
|
|
| 20,358 |
|
Unearned income |
|
| (53,204 | ) |
|
| (55,187 | ) |
|
| (48,459 | ) |
|
| (51,221 | ) |
Reserve for credit losses |
|
| (305 | ) |
|
| — |
| ||||||||
Net investment in direct financing leases |
| $ | 41,949 |
|
| $ | 42,000 |
|
| $ | 39,961 |
|
| $ | 41,890 |
|
Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at June 30, 2019March 31, 2020 are as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Remainder of 2019 |
| $ | 2,042 |
| ||||
2020 |
|
| 4,194 |
| ||||
Remainder of 2020 |
| $ | 3,047 |
| ||||
2021 |
|
| 4,283 |
|
|
| 4,138 |
|
2022 |
|
| 4,369 |
|
|
| 4,220 |
|
2023 |
|
| 4,456 |
|
|
| 4,305 |
|
2024 |
|
| 4,385 |
| ||||
Thereafter |
|
| 55,451 |
|
|
| 48,803 |
|
|
| $ | 74,795 |
|
| $ | 68,898 |
|
The above rental receipts do not include future lease payments for renewal periods, potential variable Consumer Price IndexCPI rent increases, or variable 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 (Loss) Income:
|
| For the three months ended |
|
| For the six months ended |
|
| For the three months ended March 31, |
| |||||||
(in thousands) |
| June 30, 2019 |
|
| June 30, 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Contractual rental amounts billed for operating leases |
| $ | 60,294 |
|
| $ | 118,713 |
|
| $ | 72,828 |
|
| $ | 58,419 |
|
Straight-line rent adjustments |
|
| 5,269 |
|
|
| 10,440 |
| ||||||||
Adjustment to recognize contractual operating lease billings on a straight-line basis |
|
| 1,665 |
|
|
| 5,171 |
| ||||||||
Percentage rent income |
|
| 3 |
|
|
| — |
| ||||||||
Adjustment to revenue recognized for uncollectible rental amounts billed |
|
| — |
|
|
| (440 | ) |
|
| (1,033 | ) |
|
| (440 | ) |
Total operating lease rental revenues |
|
| 65,563 |
|
|
| 128,713 |
|
|
| 73,463 |
|
|
| 63,150 |
|
Earned income from direct financing leases |
|
| 1,004 |
|
|
| 2,009 |
|
|
| 987 |
|
|
| 1,005 |
|
Operating expenses billed to tenants |
|
| 2,486 |
|
|
| 6,761 |
|
|
| 3,732 |
|
|
| 4,275 |
|
Total lease revenues |
| $ | 69,053 |
|
| $ | 137,483 |
| ||||||||
Other income from real estate transactions |
|
| 49 |
|
|
| — |
| ||||||||
Total Lease revenues, net |
| $ | 78,231 |
|
| $ | 68,430 |
|
7.8. Intangible Assets and Liabilities
The following is a summary of intangible assets and liabilities and related accumulated amortization:
(in thousands) |
| June 30, 2019 |
|
| December 31, 2018 |
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||
Lease intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired above-market leases |
| $ | 65,047 |
|
| $ | 64,164 |
|
| $ | 60,394 |
|
| $ | 62,136 |
|
Less accumulated amortization |
|
| (16,438 | ) |
|
| (14,740 | ) |
|
| (17,989 | ) |
|
| (17,433 | ) |
Acquired above-market leases, net |
|
| 48,609 |
|
|
| 49,424 |
|
|
| 42,405 |
|
|
| 44,703 |
|
Acquired in-place leases |
|
| 295,786 |
|
|
| 277,659 |
|
|
| 346,165 |
|
|
| 349,645 |
|
Less accumulated amortization |
|
| (51,167 | ) |
|
| (40,825 | ) |
|
| (68,152 | ) |
|
| (62,454 | ) |
Acquired in-place leases, net |
|
| 244,619 |
|
|
| 236,834 |
|
|
| 278,013 |
|
|
| 287,191 |
|
Total intangible lease assets, net |
| $ | 293,228 |
|
| $ | 286,258 |
|
| $ | 320,418 |
|
| $ | 331,894 |
|
Acquired below-market leases |
| $ | 100,247 |
|
| $ | 101,602 |
|
| $ | 113,091 |
|
| $ | 113,862 |
|
Less accumulated amortization |
|
| (18,352 | ) |
|
| (15,655 | ) |
|
| (23,418 | ) |
|
| (21,640 | ) |
Intangible lease liabilities, net |
| $ | 81,895 |
|
| $ | 85,947 |
|
| $ | 89,673 |
|
| $ | 92,222 |
|
Leasing fees |
| $ | 17,449 |
|
| $ | 17,274 |
|
| $ | 16,841 |
|
| $ | 17,013 |
|
Less accumulated amortization |
|
| (3,981 | ) |
|
| (3,576 | ) |
|
| (4,349 | ) |
|
| (4,166 | ) |
Leasing fees, net |
| $ | 13,468 |
|
| $ | 13,698 |
|
| $ | 12,492 |
|
| $ | 12,847 |
|
Amortization for intangible lease assets and liabilities iswas as follows:
(in thousands) |
|
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
|
|
|
| For the three months ended March 31, |
| |||||||||||||||
Intangible |
| Financial Statement Presentation |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| Financial Statement Presentation |
| 2020 |
|
| 2019 |
| ||||||
Acquired in-place leases and leasing fees |
| Depreciation and amortization |
| $ | 5,755 |
|
| $ | 4,247 |
|
| $ | 11,312 |
|
| $ | 8,285 |
|
| Depreciation and amortization |
| $ | 7,695 |
|
| $ | 5,557 |
|
Above-market and below-market leases |
| Increase (decrease) to lease revenues |
|
| 720 |
|
|
| (289 | ) |
|
| 1,460 |
|
|
| (467 | ) |
| Lease revenues, net |
|
| 1,140 |
|
|
| 740 |
|
Estimated future amortization of intangible assets and liabilities at June 30, 2019March 31, 2020 is as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Remainder of 2019 |
| $ | 10,268 |
| ||||
2020 |
|
| 20,307 |
| ||||
Remainder of 2020 |
| $ | 17,706 |
| ||||
2021 |
|
| 19,896 |
|
|
| 23,286 |
|
2022 |
|
| 19,281 |
|
|
| 22,738 |
|
2023 |
|
| 18,901 |
|
|
| 22,411 |
|
2024 |
|
| 21,644 |
| ||||
Thereafter |
|
| 136,148 |
|
|
| 135,452 |
|
|
| $ | 224,801 |
|
| $ | 243,237 |
|
8.9. Unsecured Credit Agreements
The following table summarizes the Company’s unsecured credit agreements:
| Outstanding Balance |
|
|
|
|
|
|
|
| Outstanding Balance |
|
|
|
|
|
|
| |||||||||||
(in thousands, except interest rates) |
| June 30, 2019 |
|
| December 31, 2018 |
|
| Interest Rate(d) |
|
| Maturity Date |
| March 31, 2020 |
|
| December 31, 2019 |
|
| Interest Rate(c) |
|
| Maturity Date | ||||||
2019 Unsecured Term Loan (a) |
| $ | — |
|
| $ | 300,000 |
|
| one-month LIBOR + 1.40% |
|
| Feb. 2020 (f) | |||||||||||||||
2020 Unsecured Term Loan(a) |
| $ | 240,000 |
|
| $ | 300,000 |
|
| one-month LIBOR + 1.25% |
|
| Aug. 2020(d) | |||||||||||||||
Unsecured Revolving Credit and Term Loan Agreement(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolver (b) |
|
| 123,600 |
|
|
| 141,100 |
|
| one-month LIBOR + 1.20%(e) |
|
| Jan. 2022 | |||||||||||||||
Revolving Credit Facility |
|
| 353,300 |
|
|
| 197,300 |
|
| one-month LIBOR + 1.20% |
|
| Jan. 2022 | |||||||||||||||
2023 Unsecured Term Loan |
|
| 265,000 |
|
|
| 265,000 |
|
| one-month LIBOR + 1.35% |
|
| Jan. 2023 |
|
| 265,000 |
|
|
| 265,000 |
|
| one-month LIBOR + 1.35% |
|
| Jan. 2023 | ||
2024 Unsecured Term Loan |
|
| 190,000 |
|
|
| 190,000 |
|
| one-month LIBOR + 1.90% |
|
| Jun. 2024 |
|
| 190,000 |
|
|
| 190,000 |
|
| one-month LIBOR + 1.25% |
|
| Jun. 2024 | ||
|
|
| 578,600 |
|
|
| 596,100 |
|
|
|
|
|
|
|
|
| 808,300 |
|
|
| 652,300 |
|
|
|
|
|
|
|
2022 Unsecured Term Loan(a) |
|
| 60,000 |
|
|
| — |
|
| one-month LIBOR + 1.25% |
|
| Feb. 2022 | |||||||||||||||
2026 Unsecured Term Loan (a) |
|
| 300,000 |
|
|
| — |
|
| one-month LIBOR + 1.85% |
|
| Feb. 2026 |
|
| 450,000 |
|
|
| 450,000 |
|
| one-month LIBOR + 1.85% |
|
| Feb. 2026 | ||
Senior Notes(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
| 150,000 |
|
|
| 150,000 |
|
| 4.84% |
|
| Apr. 2027 |
|
| 150,000 |
|
|
| 150,000 |
|
| 4.84% |
|
| Apr. 2027 | ||
Series B |
|
| 225,000 |
|
|
| 225,000 |
|
| 5.09% |
|
| Jul. 2028 |
|
| 225,000 |
|
|
| 225,000 |
|
| 5.09% |
|
| Jul. 2028 | ||
Series C |
|
| 100,000 |
|
|
| 100,000 |
|
| 5.19% |
|
| Jul. 2030 |
|
| 100,000 |
|
|
| 100,000 |
|
| 5.19% |
|
| Jul. 2030 | ||
|
|
| 475,000 |
|
|
| 475,000 |
|
|
|
|
|
|
|
|
| 475,000 |
|
|
| 475,000 |
|
|
|
|
|
|
|
Total |
|
| 1,353,600 |
|
|
| 1,371,100 |
|
|
|
|
|
|
|
|
| 2,033,300 |
|
|
| 1,877,300 |
|
|
|
|
|
|
|
Debt issuance costs, net(c) |
|
| (7,624 | ) |
|
| (4,227 | ) |
|
|
|
|
|
| ||||||||||||||
Debt issuance costs, net(b) |
|
| (7,413 | ) |
|
| (7,919 | ) |
|
|
|
|
|
| ||||||||||||||
|
| $ | 1,345,976 |
|
| $ | 1,366,873 |
|
|
|
|
|
|
|
| $ | 2,025,887 |
|
| $ | 1,869,381 |
|
|
|
|
|
|
|
(a) | The Company believes it was in compliance with all financial covenants for all periods presented. |
| Amounts presented include debt issuance costs, net, related to the unsecured term notes and senior notes only. |
| At |
|
|
|
|
On February 27, 2019,7, 2020, the Company entered into a $450,000 seven-year unsecured$60,000 term loan agreement maturing on February 28, 2022 (the “2026“2022 Unsecured Term Loan”) with Capital One, National AssociationJP Morgan Chase, N.A. as administrative agent. The 20262022 Unsecured Term Loan provides an accordion feature for upwas fully funded at closing and used to repay a totalportion of $550,000 borrowing capacity. The 2026 Unsecured Term Loan has an initial maturity datethe debt assumed by the Company as part of February 27, 2026.the Internalization. Borrowings under the 20262022 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 1.45%0.85% and 2.40%1.65% per annum based on the Operating Company’s investment grade credit rating.annum. Based on the Operating Company’s current credit rating of Baa3, the applicable margin under the 2026 Unsecured Term Loan is 1.85%. The 2026 Unsecured Term Loan is subject to a feewas 1.25% as of 0.25% per annum on the amount of the commitment, reduced by the amount of term loans outstanding. At closing, $300,000 of the commitment was funded and used to repay the 2019 Unsecured Term Loan in full. The remaining $150,000 commitment can be drawn in up to three requests through August 27, 2019.
On February 28, 2019, the Company amended the Unsecured Revolving Credit and Term Loan Agreement to increase the amount available under the Revolver from $425,000 to $600,000. This increased the total available borrowings under the Unsecured Revolving Credit and Term Loan Agreement to $1,055,000. All other terms and conditions of the Unsecured Revolving Credit and Term Loan Agreement remain the same as those in effect prior to this amendment.March 31, 2020.
At June 30, 2019,March 31, 2020, the weighted average interest rate on all outstanding borrowings was 4.39%3.03%. In addition, the RevolverRevolving Credit Facility is subject to a facility fee of 0.25% per annum.
For the sixthree months ended June 30,March 31, 2019, the Company paid $5,229 in debt issuance costs associated with the 2026 Unsecured Term Loan and the amended Unsecured Revolving Credit and Term Loan 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 was 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, $5,229 of the debt issuance costs incurred in the three months ended March 31, 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.
Additionally, $215 of unamortized debt issuance costs were expensed in the three months ended March 31, 2019, and included in Cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive (Loss) Income for the six months ended June 30, 2019.Income.
Debt issuance costs are amortized as a component of interest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive (Loss) Income. The following table summarizes debt issuance cost amortization:
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
|
| For the three months ended March 31, |
| |||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||||
Debt issuance costs amortization |
| $ | 597 |
|
| $ | 472 |
|
| $ | 1,150 |
|
| $ | 934 |
|
| $ | 888 |
|
| $ | 553 |
|
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 March 31, 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 17), 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:
|
|
| Origination |
| Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Origination |
| Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except interest rates) | (in thousands, except interest rates) |
| Date |
| Date |
| Interest |
|
| June 30, |
|
| December 31, |
|
|
| (in thousands, except interest rates) |
| Date |
| Date |
| Interest |
|
| March 31, |
|
| December 31, |
|
|
| ||||||
Lender | Lender |
| (Month/Year) |
| (Month/Year) |
| Rate |
|
| 2019 |
|
| 2018 |
|
|
| Lender |
| (Month/Year) |
| (Month/Year) |
| Rate |
|
| 2020 |
|
| 2019 |
|
|
| ||||||
(1) | Wilmington Trust National Association |
| Apr-19 |
| Feb-28 |
| 4.92% |
|
| $ | 49,605 |
|
| $ | — |
|
| (a) (b) (c) (n) | Wilmington Trust National Association |
| Apr-19 |
| Feb-28 |
| 4.92% |
|
| $ | 48,787 |
|
| $ | 49,065 |
|
| (a) (b) (c) (k) | ||
(2) | Wilmington Trust National Association |
| Jun-18 |
| Aug-25 |
| 4.36% |
|
|
| 20,496 |
|
|
| 20,674 |
|
| (a) (b) (c) (m) | Wilmington Trust National Association |
| Jun-18 |
| Aug-25 |
| 4.36% |
|
|
| 20,225 |
|
|
| 20,318 |
|
| (a) (b) (c) (j) | ||
(3) | PNC Bank |
| Oct-16 |
| Nov-26 |
| 3.62% |
|
|
| 18,073 |
|
|
| 18,260 |
|
| (b) (c) | PNC Bank |
| Oct-16 |
| Nov-26 |
| 3.62% |
|
|
| 17,789 |
|
|
| 17,885 |
|
| (b) (c) | ||
(4) | Sun Life |
| Mar-12 |
| Oct-21 |
| 5.13% |
|
|
| 11,090 |
|
|
| 11,288 |
|
| (b) (g) | Sun Life |
| Mar-12 |
| Oct-21 |
| 5.13% |
|
|
| 10,785 |
|
|
| 10,888 |
|
| (b) (f) | ||
(5) | Aegon |
| Apr-12 |
| Oct-23 |
| 6.38% |
|
|
| 8,147 |
|
|
| 8,496 |
|
| (b) (h) | Aegon |
| Apr-12 |
| Oct-23 |
| 6.38% |
|
|
| 7,604 |
|
|
| 7,788 |
|
| (b) (g) | ||
(6) | Symetra Financial |
| Nov-17 |
| Oct-26 |
| 3.65% |
|
|
| 6,355 |
|
|
| 6,467 |
|
| (a) (b) (k) (l) | M&T Bank |
| Oct-17 |
| Aug-21 |
| one - month LIBOR+3% |
|
|
| 4,878 |
|
|
| 4,913 |
|
| (b) (d) (h) (i) | ||
(7) | M&T Bank |
| Oct-17 |
| Aug-21 |
| one - month LIBOR+3% |
|
|
| 4,983 |
|
|
| 5,051 |
|
| (b) (d) (i) (j) | Note holders |
| Dec-08 |
| Dec-23 |
| 6.25% |
|
|
| 750 |
|
|
| 750 |
|
| (d) | ||
(8) | Columbian Mutual Life Insurance Company |
| Aug-10 |
| Sep-25 |
| 7.00% |
|
|
| 1,437 |
|
|
| 1,459 |
|
| (b) (c) (d) (o) | Standard Insurance Co. |
| Jul-10 |
| Aug-30 |
| 6.75% |
|
|
| — |
|
|
| 544 |
|
| (b) (c) (d) (e) | ||
| Note holders |
| Dec-08 |
| Dec-23 |
| 6.25% |
|
|
| 750 |
|
|
| 750 |
|
| (d) |
|
|
|
|
|
|
|
|
|
|
| 110,818 |
|
|
| 112,151 |
|
|
| |
(10) | Standard Insurance Co. |
| Jul-10 |
| Aug-30 |
| 6.75% |
|
|
| 554 |
|
|
| 563 |
|
| (b) (c) (d) (f) | ||||||||||||||||||||
(11) | Legg Mason Mortgage Capital Corporation |
| Aug-10 |
| Aug-22 |
| 7.06% |
|
|
| — |
|
|
| 4,692 |
|
| (b) (e) | ||||||||||||||||||||
(12) | Standard Insurance Co. |
| Apr-09 |
| May-34 |
| 6.88% |
|
|
| — |
|
|
| 1,751 |
|
| (b) (c) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| 121,490 |
|
|
| 79,451 |
|
|
| Debt issuance costs, net |
|
|
|
|
|
|
|
|
|
| (354 | ) |
|
| (358 | ) |
|
|
| Debt issuance costs, net |
|
|
|
|
|
|
|
|
|
| (416 | ) |
|
| (499 | ) |
|
|
|
|
|
|
|
|
|
|
|
| $ | 110,464 |
|
| $ | 111,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 121,074 |
|
| $ | 78,952 |
|
|
|
(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 recorded at fair value at the time of the assumption. |
| Mortgage was assumed in April 2012 as part of the acquisition of the related property. The debt was recorded at fair value at the time of the assumption. |
| The Company entered into an interest rate swap agreement in connection with the mortgage note, as further described in Note |
| 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 June 2018 as part of the acquisition of the related property. The debt was recorded at fair value at the time of assumption. |
| Mortgage was assumed in April 2019 as part of the acquisition of the related property. The debt was recorded at fair value at the time of assumption. |
|
|
At June 30, 2019,March 31, 2020, investment in rental property of $195,523 is$176,805 was pledged as collateral against the Company’s mortgages and notes payable.
The following table summarizes the mortgages extinguished by the Company:
(in thousands, except number of mortgages) |
| For the six months ended June 30, 2019 |
|
| For the year ended December 31, 2018 |
|
| For the three months ended March 31, 2020 |
|
| For the year ended December 31, 2019 |
| ||||
Number of mortgages |
| 2 |
|
| 2 |
|
| 1 |
|
| 4 |
| ||||
Outstanding balance of mortgages |
| $ | 6,173 |
|
| $ | 6,666 |
|
| $ | 541 |
|
| $ | 13,905 |
|
The following table summarizes the cost of mortgage extinguishment:
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
|
| For the three months ended March 31, |
| |||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||||
Cost of mortgage extinguishment |
| $ | 8 |
|
| $ | 51 |
|
| $ | 506 |
|
| $ | 51 |
|
| $ | 22 |
|
| $ | 498 |
|
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 June 30, 2019March 31, 2020 are as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Remainder of 2019 |
| $ | 1,685 |
| ||||
2020 |
|
| 3,492 |
| ||||
Remainder of 2020 |
| $ | 2,401 |
| ||||
2021 |
|
| 18,322 |
|
|
| 258,006 |
|
2022 |
|
| 126,837 |
|
|
| 416,207 |
|
2023 |
|
| 273,677 |
|
|
| 273,332 |
|
2024 |
|
| 192,260 |
| ||||
Thereafter |
|
| 1,051,077 |
|
|
| 1,001,912 |
|
|
| $ | 1,475,090 |
|
| $ | 2,144,118 |
|
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. These prepayment fees are not reflected as part of the table above.
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-rate borrowings.
The following is a summary of the Company’s outstanding interest rate swap agreements:
(in thousands, except interest rates) | (in thousands, except interest rates) |
|
|
|
|
|
|
|
|
|
|
| Fair Value |
|
| (in thousands, except interest rates) |
|
|
|
|
|
|
|
|
|
|
| Fair Value |
|
| ||||||||||||
Counterparty |
| Maturity Date |
| Fixed Rate |
|
| Variable Rate Index |
| Notional Amount |
|
| June 30, 2019 |
|
| December 31, 2018 |
|
|
| Maturity Date |
| Fixed Rate |
|
| Variable Rate Index |
| Notional Amount |
|
| March 31, 2020 |
|
| December 31, 2019 |
|
| ||||||||
Bank of America, N.A. |
| November 2023 |
|
| 2.80 | % |
| one-month LIBOR |
| $ | 25,000 |
|
| $ | (1,214 | ) |
| $ | (411 | ) |
|
| November 2023 |
|
| 2.80 | % |
| one-month LIBOR |
| $ | 25,000 |
|
| $ | (2,178 | ) |
| $ | (1,136 | ) |
|
Bank of Montreal |
| July 2024 |
|
| 1.16 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| 948 |
|
|
| 2,702 |
|
|
| July 2024 |
|
| 1.16 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| (1,324 | ) |
|
| 740 |
|
|
Bank of Montreal |
| January 2025 |
|
| 1.91 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (345 | ) |
|
| 769 |
|
|
| January 2025 |
|
| 1.91 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,806 | ) |
|
| (402 | ) |
|
Bank of Montreal |
| July 2025 |
|
| 2.32 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (946 | ) |
|
| 222 |
|
|
| July 2025 |
|
| 2.32 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,500 | ) |
|
| (970 | ) |
|
Bank of Montreal |
| January 2026 |
|
| 1.92 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (364 | ) |
|
| 915 |
|
|
| January 2026 |
|
| 1.92 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,118 | ) |
|
| (448 | ) |
|
Bank of Montreal |
| January 2026 |
|
| 2.05 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| (903 | ) |
|
| 1,130 |
|
|
| January 2026 |
|
| 2.05 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| (3,685 | ) |
|
| (1,014 | ) |
|
Bank of Montreal |
| May 2026 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (467 | ) |
|
| — |
|
|
| December 2026 |
|
| 2.33 | % |
| one-month LIBOR |
|
| 10,000 |
|
|
| (1,231 | ) |
|
| (460 | ) |
|
Bank of Montreal |
| December 2026 |
|
| 2.33 | % |
| one-month LIBOR |
|
| 10,000 |
|
|
| (431 | ) |
| 132 |
|
|
| December 2026 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,500 | ) |
|
| (577 | ) |
| |
Bank of Montreal |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,200 | ) |
|
| 355 |
|
|
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,497 | ) |
|
| (1,306 | ) |
|
Bank of Montreal |
| May 2029 |
|
| 2.09 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (601 | ) |
|
| — |
|
|
| May 2029 |
|
| 2.09 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,342 | ) |
|
| (799 | ) |
|
Capital One, National Association |
| December 2021 |
|
| 1.05 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| 212 |
|
|
| 605 |
|
|
| December 2021 |
|
| 1.05 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (213 | ) |
|
| 143 |
|
|
Capital One, National Association |
| December 2024 |
|
| 1.58 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| 58 |
|
|
| 727 |
|
|
| December 2024 |
|
| 1.58 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (836 | ) |
|
| 10 |
|
|
Capital One, National Association |
| January 2026 |
|
| 2.08 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (836 | ) |
|
| 930 |
|
|
| January 2026 |
|
| 2.08 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (3,291 | ) |
|
| (911 | ) |
|
Capital One, National Association |
| April 2026 |
|
| 2.68 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (947 | ) |
|
| (189 | ) |
|
| April 2026 |
|
| 2.68 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (2,007 | ) |
|
| (944 | ) |
|
Capital One, National Association |
| July 2026 |
|
| 1.32 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| 933 |
|
|
| 2,877 |
|
|
| July 2026 |
|
| 1.32 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (1,844 | ) |
|
| 720 |
|
|
Capital One, National Association |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,191 | ) |
|
| 345 |
|
|
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,533 | ) |
|
| (1,278 | ) |
|
M&T Bank |
| August 2021 |
|
| 1.02 | % |
| one-month LIBOR |
|
| 4,982 |
|
|
| 64 |
|
|
| 177 |
| (a), (b) |
| August 2021 |
|
| 1.02 | % |
| one-month LIBOR |
|
| 4,877 |
|
|
| (45 | ) |
|
| 41 |
| (a), (b) |
M&T Bank |
| September 2022 |
|
| 2.83 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (964 | ) |
|
| (362 | ) |
|
| September 2022 |
|
| 2.83 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,553 | ) |
|
| (862 | ) |
|
M&T Bank |
| November 2023 |
|
| 2.65 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,108 | ) |
|
| (254 | ) |
|
| November 2023 |
|
| 2.65 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,097 | ) |
|
| (1,038 | ) |
|
Regions Bank |
| May 2020 |
|
| 2.12 | % |
| one-month LIBOR |
|
| 50,000 |
|
|
| (92 | ) |
|
| 271 |
|
|
| May 2020 |
|
| 2.12 | % |
| one-month LIBOR |
|
| 50,000 |
|
|
| (92 | ) |
|
| (104 | ) |
|
Regions Bank |
| December 2023 |
|
| 1.18 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 472 |
|
|
| 1,484 |
|
|
| December 2023 |
|
| 1.18 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (793 | ) |
|
| 376 |
|
|
Regions Bank |
| May 2029 |
|
| 2.11 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (659 | ) |
|
| — |
|
|
| May 2029 |
|
| 2.11 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,438 | ) |
|
| (827 | ) |
|
Regions Bank |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (485 | ) |
|
| — |
| (c) |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,260 | ) |
|
| (651 | ) |
|
SunTrust Bank |
| April 2024 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (387 | ) |
|
| 554 |
|
| |||||||||||||||||||||
SunTrust Bank |
| April 2025 |
|
| 2.20 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (708 | ) |
|
| 382 |
|
| |||||||||||||||||||||
SunTrust Bank |
| July 2025 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (419 | ) |
|
| 728 |
|
| |||||||||||||||||||||
SunTrust Bank |
| December 2025 |
|
| 2.30 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (902 | ) |
|
| 299 |
|
| |||||||||||||||||||||
SunTrust Bank |
| January 2026 |
|
| 1.93 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (326 | ) |
|
| 903 |
|
| |||||||||||||||||||||
Truist Financial Corporation |
| April 2024 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,655 | ) |
|
| (451 | ) |
| |||||||||||||||||||||
Truist Financial Corporation |
| April 2025 |
|
| 2.20 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,260 | ) |
|
| (781 | ) |
| |||||||||||||||||||||
Truist Financial Corporation |
| July 2025 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,075 | ) |
|
| (524 | ) |
| |||||||||||||||||||||
Truist Financial Corporation |
| December 2025 |
|
| 2.30 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,676 | ) |
|
| (993 | ) |
| |||||||||||||||||||||
Truist Financial Corporation |
| January 2026 |
|
| 1.93 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,146 | ) |
|
| (458 | ) |
| |||||||||||||||||||||
U.S. Bank National Association |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,263 | ) |
|
| (681 | ) |
| |||||||||||||||||||||
U.S. Bank National Association |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (489 | ) |
|
| — |
| (c) |
| August 2029 |
|
| 1.35 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,699 | ) |
|
| 881 |
|
|
Wells Fargo Bank, N.A. |
| February 2021 |
|
| 2.39 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (377 | ) |
|
| 59 |
|
|
| February 2021 |
|
| 2.39 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (599 | ) |
|
| (302 | ) |
|
Wells Fargo Bank, N.A. |
| October 2024 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (829 | ) |
|
| (222 | ) |
|
| October 2024 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (1,591 | ) |
|
| (795 | ) |
|
Wells Fargo Bank, N.A. |
| April 2027 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,827 | ) |
|
| (382 | ) |
|
| April 2027 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,878 | ) |
|
| (1,845 | ) |
|
Wells Fargo Bank, N.A. |
| January 2028 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 75,000 |
|
|
| (3,659 | ) |
|
| 1,067 |
|
|
| January 2028 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 75,000 |
|
|
| (10,597 | ) |
|
| (3,914 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (19,989 | ) |
| $ | 15,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (79,622 | ) |
| $ | (21,560 | ) |
|
(a) | Notional amount at December 31, |
(b) | Interest rate swap was assumed in October 2017 as part of an UPREIT transaction. |
|
|
The total amounts recognized, and the location in the accompanying Condensed Consolidated Statements of Income and Comprehensive (Loss) Income, from converting from variable rates to fixed rates under these agreements arewere as follows:
|
|
|
|
|
| Reclassification from |
|
| Total Interest Expense |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Total Interest Expense |
|
| Amount of Loss |
|
| Accumulated Other |
|
| Presented in the |
| ||||||
|
| Amount of (Loss) Gain |
|
| Reclassification from Accumulated Other |
|
| Presented in the |
|
| Recognized in |
|
| Comprehensive Loss |
|
| Consolidated Statements of |
| ||||||||||
(in thousands) |
| Recognized in |
|
| Comprehensive (Loss) Income |
|
| Consolidated Statements of |
|
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
| ||||||||
|
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
| |||||||||||||||||
For the three months ended June 30, |
| Comprehensive (Loss) Income |
|
| Location |
| Gain (Loss) |
|
| (Loss) Income |
| |||||||||||||||||
For the three months ended March 31, |
| Comprehensive Loss |
|
| Location |
| (Loss) Gain |
|
| (Loss) Income |
| |||||||||||||||||
2020 |
| $ | (58,062 | ) |
| Interest expense |
| $ | (885 | ) |
| $ | 20,991 |
| ||||||||||||||
2019 |
| $ | (23,178 | ) |
| Interest expense |
| $ | 778 |
|
| $ | 16,738 |
|
|
| (12,624 | ) |
| Interest expense |
|
| 836 |
|
|
| 15,828 |
|
2018 |
|
| 7,042 |
|
| Interest expense |
|
| (354 | ) |
|
| 12,454 |
|
|
|
|
|
|
|
|
|
|
|
| Total Interest Expense |
| ||
|
| Amount of (Loss) Gain |
|
| Reclassification from Accumulated Other |
|
| Presented in the |
| |||||
(in thousands) |
| Recognized in |
|
| Comprehensive (Loss) Income |
|
| Consolidated Statements of |
| |||||
|
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
| |||
For the six months ended June 30, |
| Comprehensive (Loss) Income |
|
| Location |
| Gain (Loss) |
|
| (Loss) Income |
| |||
2019 |
| $ | (35,802 | ) |
| Interest expense |
| $ | 1,614 |
|
| $ | 32,566 |
|
2018 |
|
| 23,997 |
|
| Interest expense |
|
| (1,267 | ) |
|
| 23,631 |
|
Amounts related to the interest rate swaps expected to be reclassified out of Accumulated other comprehensive (loss) incomeloss to Interest expense during the next twelve months are estimated to be a loss of $2,010.$14,802. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes the risk exposure by limiting counterparties to 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 in exchange for membership interests in the Operating Company. Properties contributed as part of UPREIT transactions were valued at $15,797 during the three and six months ended June 30, 2018, which represents the estimated fair value of the properties contributed, less any assumed debt. There were no UPREIT transactions during the three and six months ended June 30, 2019.
12. Credit Risk Concentrations
The Company maintained bank balances that, at times, exceeded the federally insured limit during the sixthree months ended June 30, 2019.March 31, 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 paid to the ManagerBRE and Asset Manager representrepresented 8% and 19% of total operating expenses for the three and six months ended June 30,March 31, 2020 and 2019, and 2018.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 twothree institutions that comprise 57.7%comprised 62%, 16%, and 14.9%10% of total mortgages and notes payable at June 30, 2019. The Company has mortgagesMarch 31, 2020 and notes payable with four institutions that comprise 26%, 23%, 14%, and 11% of total mortgages and notes payable at December 31, 2018.2019. For the three and six months ended June 30,March 31, 2020 and 2019, and 2018, the Company had no individual tenants or common franchises that accounted for more than 10% of total revenues.
13. Equity
Share Redemption Program
The Share Redemption Program was terminated effective February 10, 2020, and as a result there were no redemptions during the three months ended March 31, 2020. The following table summarizes redemptions under the Company’s Share Redemption Program:Program during the three months ended March 31, 2019:
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
| ||||||||||||||
(in thousands, except number of redemptions) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
|
|
| |||||
Number of redemptions requested |
| 16 |
|
| 14 |
|
| 29 |
|
| 22 |
|
| 13 |
| |||||
Number of shares |
| 38 |
|
| 28 |
|
| 59 |
|
| 74 |
|
| 21 |
| |||||
Aggregate redemption price |
| $ | 3,210 |
|
| $ | 2,312 |
|
| $ | 5,013 |
|
| $ | 5,889 |
|
| $ | 1,803 |
|
Distribution Reinvestment Plan
The Corporation hashad adopted 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 least 30 days prior to the effective date of the termination.2020. At June 30, 2019March 31, 2020 and December 31, 2018,2019, a total of 2,6003,075 and 2,2333,005 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 June 30, |
|
| For the six months ended June 30, |
|
| For the three months ended March 31, |
| |||||||||||||||
(in thousands, except per share) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||||
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Broadstone Net Lease, Inc. |
| $ | 16,134 |
|
| $ | 16,974 |
|
| $ | 30,072 |
|
| $ | 34,546 |
|
| $ | 10,816 |
|
| $ | 13,938 |
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Broadstone Net Lease, Inc. |
| $ | 16,134 |
|
| $ | 16,974 |
|
| $ | 30,072 |
|
| $ | 34,546 |
|
| $ | 10,816 |
|
| $ | 13,938 |
|
Net earnings attributable to non-controlling interests |
|
| 1,208 |
|
|
| 1,412 |
|
|
| 2,292 |
|
|
| 2,834 |
|
|
| 1,032 |
|
|
| 1,084 |
|
|
| $ | 17,342 |
|
| $ | 18,386 |
|
| $ | 32,364 |
|
| $ | 37,380 |
|
| $ | 11,848 |
|
| $ | 15,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in basic earnings per share |
|
| 23,204 |
|
|
| 19,829 |
|
|
| 22,770 |
|
|
| 19,498 |
|
|
| 26,527 |
|
|
| 22,335 |
|
Effects of convertible membership units |
|
| 1,737 |
|
|
| 1,649 |
|
|
| 1,737 |
|
|
| 1,600 |
|
|
| 2,526 |
|
|
| 1,737 |
|
Weighted average number of common shares outstanding used in diluted earnings per share |
|
| 24,941 |
|
|
| 21,478 |
|
|
| 24,507 |
|
|
| 21,098 |
|
|
| 29,053 |
|
|
| 24,072 |
|
Basic and diluted net earnings per common share |
| $ | 0.70 |
|
| $ | 0.86 |
|
| $ | 1.32 |
|
| $ | 1.77 |
|
| $ | 0.41 |
|
| $ | 0.62 |
|
In the table above, outstanding membership unitsOP 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 $38,808$14,010 and $23,071$16,777 for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively. Cash paid for state income and franchise taxes was $422$195 and $745$395 for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively.
The following are non-cash transactions and have been excluded from the accompanying Condensed Consolidated Statements of Cash Flows:
During the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, the Corporation issued 35869 and 298173 shares, respectively, of common stock with a value of approximately $30,008$5,733 and $24,004,$14,533, respectively, under the terms of the DRIP (see Note 13).
During the sixthree months ended June 30, 2018,March 31, 2020, the Company issued 194 membership unitsshares of common stock and OP 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 $15,797Internalization and assumed $90,484 of debt (see Note 11)4).
During the sixthree months ended June 30, 2018,March 31, 2020, the Corporation cancelled nine thousand shares of common stock with aCompany adjusted the carrying value of $748 that were pledged as collateralmezzanine equity non-controlling interests by a tenant. The cancellation of the shares was used$2,416 with an offset to settle $748 in outstanding receivables associated with the tenant.additional paid-in capital (see Note 2).
At June 30,March 31, 2020 and 2019, and 2018, dividend amounts declared and accrued but not yet paid amounted to $11,119$13,160 and $9,366,$10,734, respectively.
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, described in Note 2, 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, in connection with the adoption of ASC 842 as described in Note 2.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.
In connection with real estate transactions conducted during the six months ended June 30, 2018, the Company settled notes receivable in the amount of $6,527 in exchange for a reduction to the cash paid for the associated real estate assets.
In connection with real estate transactions conducted during the six months ended June 30, 2019 the Company accepted tenant improvement allowances of $1,727 in exchange for a reduction to the cash paid for the associated real estate assets.
16. Commitments and Contingencies
Litigation
From time to time, the Company is a party to various litigation matters incidental to the conduct of the Company’s business. While the resolution of such matters cannot be predicted with certainty, based on currently available information, the Company does not believe that the final outcome of any of these matters will have a material effect on its consolidated financial position, results of operations, or liquidity.
Property and Acquisition Related
In connection with ownership and operation of real estate, the Company may potentially be liable for cost and damages related to environmental matters. The Company is not aware of any non-compliance, liability, claim, or other environmental condition that would have a material effect on its consolidated financial position, results of operations, or liquidity.
As part of an acquisition closed during the six months ended June 30, 2019, the company assumed a lease agreement that provided for a total of $1,727 in tenant improvement allowances.
Balances 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, 2019 |
|
| December 31, 2018 |
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||
Tenant improvement allowances |
| $ | 3,635 |
|
| $ | 2,125 |
|
| $ | 2,219 |
|
| $ | 2,706 |
|
The Company is a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and to the Founding Owners’ Tax Protection Agreement in connection with the Internalization (see Note 3). The tax protection agreements require the Company to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, 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 March 31, 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 the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future.
Obligations Under Operating Leases
Subsequent to the Internalization (see Note 4), the Company leases office space for its corporate headquarters and other locations under non-cancellable operating leases with remaining lease terms ranging from 2020 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 20252034 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 (“percentage rent”). None of the leases are subject to any sublease agreement.
The following table summarizes the total lease costs associated with these leases, reported as a component of Property and operating expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive (Loss) Income:leases:
|
| For the three months ended June 30, |
|
| For the six months ended June 30, |
|
|
|
| For the three months ended March 31, |
| |||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| Financial Statement Presentation |
| 2020 |
|
| 2019 |
| ||||||
Operating lease costs |
| $ | 35 |
|
| $ | 3 |
|
| $ | 70 |
|
| $ | 3 |
|
|
|
|
|
|
|
|
|
|
|
Office leases |
| General and administrative |
| $ | 52 |
|
| $ | — |
| ||||||||||||||||
Ground leases |
| Property and operating expense |
|
| 33 |
|
|
| 35 |
| ||||||||||||||||
Variable lease costs |
|
| 11 |
|
|
| 2 |
|
|
| 23 |
|
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
Ground leases |
| Property and operating expense |
|
| 18 |
|
|
| 12 |
| ||||||||||||||||
Total lease costs |
| $ | 46 |
|
| $ | 5 |
|
| $ | 93 |
|
| $ | 5 |
|
|
|
| $ | 103 |
|
| $ | 47 |
|
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, |
|
| For the three months ended March 31, |
| |||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||||
Operating lease payments |
| $ | 28 |
|
| $ | 3 |
|
| $ | 100 |
|
| $ | 3 |
|
| $ | 128 |
|
| $ | 72 |
|
Estimated future lease payments required under non-cancelable operating leases at June 30, 2019,March 31, 2020, and a reconciliation to the lease liabilities, is as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Remainder of 2019 |
| $ | 59 |
| ||||
2020 |
|
| 120 |
| ||||
Remainder of 2020 |
| $ | 534 |
| ||||
2021 |
|
| 122 |
|
|
| 711 |
|
2022 |
|
| 124 |
|
|
| 686 |
|
2023 |
|
| 125 |
|
|
| 505 |
|
2024 |
|
| 120 |
| ||||
Thereafter |
|
| 2,540 |
|
|
| 2,411 |
|
Total undiscounted cash flows |
|
| 3,090 |
|
|
| 4,967 |
|
Less imputed interest |
|
| (1,839 | ) |
|
| (1,908 | ) |
Lease liabilities |
| $ | 1,251 |
|
| $ | 3,059 |
|
The above rental payments include future minimum lease payments due during the initial lease terms. Such amounts exclude any variable lease paymentscontingent amounts associated with percentage rent or changes in the Consumer Price Index that may become due in future periods.
17. Subsequent Events
Through August 7, 2019,Subsequent to March 31, 2020, the OP drew additional borrowings on the Revolving Credit Facility in the aggregate amount of $25,000.
On May 5, 2020, the Company has raised $90,562 throughgave notice that it was exercising the salefirst of 1,054 sharestwo six-month extension options available under the terms of the 2020 Unsecured Term Loan Agreement (see Note 9), effective as of August 2, 2020, and extending the maturity date of the loan to February 2, 2021, subject to certain customary conditions and in exchange for the payment of a 0.05% fee payable on August 2, 2020.
Subsequent to March 31, 2020, the Company paid $13,160 in distributions. At its May 7, 2020 meeting, the Board of Directors undertook a full review of the Company’s rent collection results for April, preliminary collection results for May, the outlook for collections in future months, and the Company’s overall liquidity position. Given the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic (discussed below) and current tenant rent relief requests, to preserve cash and strengthen the Company’s liquidity position, the Board of Directors determined that it would temporarily suspend the Company’s monthly distribution. The previously announced distribution of $0.44 per common share and OP Unit for the month of April 2020 will be paid on May 15, 2020. The Board of Directors will re-evaluate whether or not to reinstate a distribution at its August 2020 meeting.
On May 7, 2020, the Board of Directors determined the share value for the Corporation’s common stock from monthly equity closings, including dividend reinvestments. Through August 7, 2019,to be $82.00 per share for the period May 1, 2020 through July 31, 2020. However, as previously disclosed, on January 10, 2020, the Company has paid $11,119 in distributions, including dividend reinvestments.suspended its private offering of shares of its common stock until further notice.
Subsequent to June 30, 2019, the Company continued to expand its operations through the acquisition of additional rental property and associated intangible assets and liabilities. The Company acquired approximately $41,821 of rental property and associated intangible assets and liabilities. Through AugustMay 7, 2019,2020, the Company sold seventhree properties with an aggregate carrying value of $24,474approximately $8,994 for total proceeds of $29,483.$10,538. The Company incurred additional expenses related to the sales of approximately $1,468,$489, resulting in a gain on sale of real estate of approximately $3,541.$1,055.
On July 23,COVID-19 Pandemic
Since its discovery in December 2019, a novel strain of coronavirus, which causes the viral disease known as COVID-19, has spread throughout most countries of the world, including the United States. The outbreak has been declared a pandemic by the World Health Organization, and the United States Secretary of Health and Human Services has declared a public health emergency in the United States. In response to the COVID-19 pandemic, many local, state and federal governments have instituted “stay at home” or “shelter in place” rules and restrictions on the types of businesses that may continue to operate, which resulted in closure of many businesses deemed to be non-essential. Many of the Company’s tenants, in particular those who operate in the retail and restaurant industries, depend on in-person interactions with customers to generate unit-level profitability, and have been negatively impacted by the pandemic, as have businesses who supply products and services to these industries. As a result, in March and subsequent to the end of the quarter, the Company entered intoreceived rent relief requests from 68 tenants representing approximately 36.3% of annualized contractual revenues. The Company is in various stages of discussion with these tenants and currently expects to grant relief to some of its tenants to defer rent payments as a result of their estimated lost revenues from the current COVID-19 pandemic; however, there can be no assurance the Company will reach an agreement with any tenant or if an agreement is reached, that any such tenant will be able to acquire a portfoliorepay any such deferred rent in the future. The full extent of commercial net leased properties for a purchase pricethe impact of $735,740. In connection with this potential future acquisition, the Company made a non-refundable deposit of $20,000.
On August 5, 2019, the Board of Directors declared a distribution of $0.44 per shareCOVID-19 pandemic on the Corporation’s common stockCompany’s financial condition, results of operations, income, expenses, and approved a distribution of $0.44 per membership unitability to pay distributions cannot be determined at this time and will depend on certain developments, including the duration and spread of the Operating Company for monthly distributions through October 2019. The distributionsoutbreak and its impact on the Company’s tenants, all of which are payable on or prior to the 15th dayuncertain and cannot be predicted. For further discussion of the following monthCOVID-19 outbreak, refer to stockholders and unit holdersPart II, Item 1A. of recordthis Quarterly Report on the record date, which is generally the next-to-the-last business day of the prior month. In addition, the IDC determined the share value for the Corporation’s common stock to be $85 per share for the period from August 1, 2019 through October 31, 2019.Form 10-Q.
Subsequent to June 30, 2019, the Operating Company paid off borrowings on the Revolver in the aggregate amount of $30,000, borrowed and repaid $5,000 on the swingline loan feature of the Revolver, and prepaid a mortgage in full in the amount of $1,433 (see Note 9).
On July 1, 2019, the Company amended the Unsecured Revolving Credit and Term Loan Agreement (see Note 8). Prior to the amendment, the borrowings under the 2024 Unsecured Term Loan were subject to 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% per annum with the applicable margin being 1.90% at June 30, 2019 and December 31, 2018. The amendment restated the margin to a range between 0.85% and 1.65% per annum and based on the Operating Company’s current credit rating of Baa3, the applicable margin is 1.25% beginning on July 1, 2019. All other terms and conditions of the Unsecured Revolving Credit and Term Loan Agreement remained materially the same as those in effect prior to this amendment.
On August 2, 2019, the Company entered into a $300,000 term loan agreement (the “2020 Unsecured Term Loan”) with JP Morgan Chase Bank, N.A. as administrative agent. Under the agreement, the Company may request funding in up to three separate borrowings between August 2, 2019 and November 2, 2019, at the latest, in $25,000 minimums. The 2020 Unsecured Term Loan has an initial maturity date of August 2, 2020 with two six-month extension options, at the election of the Company, subject to certain conditions set forth in the agreement and payment of a 0.05% fee on the outstanding principal balance. Borrowings under the 2020 Unsecured Term Loan are subject to interest only payments at variable rates equal to LIBOR plus a margin based on the Operating Company’s investment grade credit rating between 0.85% and 1.65% per annum. Based on the Operating Company’s current credit rating of Baa3, the applicable margin is 1.25%. The 2020 Unsecured Term Loan is subject to a fee of 0.25% per annum on the amount of the commitment, reduced by the amount of term loans outstanding. At closing and through August 7, 2019, the Company has not funded any of the available commitment.
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 Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements appearing elsewhere in this 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,” “intend,“seeks,” “anticipate,“approximately,” “estimate,“projects,” “would be,“predicts,” “believe,“intends,” or “continue”“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 known and unknown risks, uncertainties, and assumptions, including risks related toby the pending large portfolio acquisition, financing of the portfolio, and associated post-closing deleveraging activity as well as general economic conditions, local real estate conditions, tenant financial health, property acquisitions and the timing of these acquisitions, and the availability of capital to finance planned growth, among others. Readers are cautioned not to place undue reliance on these 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 our 2019 Annual Report on Form 10-K, for the year ended December 31, 2018,as filed with the SEC on March 14, 2019 (the “Form 10-K”).February 27, 2020 and in Part II, Item 1A. “Risk Factors” of this Form 10-Q.
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 cash rent due for the last month of the reporting period, 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 month, and annualized;
“cash capitalization rate” represents the estimated first year cash yield to be generated on a real estate investment property, and was calculated 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 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 throughoutthat 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 United States, substantially allindustrial, healthcare, restaurant, office, and retail property types, and as of which are leasedMarch 31, 2020, our portfolio has grown to the properties’ operators under long-term net leases. Under a “net lease,” the tenant occupying the leased635 properties in 41 U.S. states and one property (usually as a single tenant) does so in much the same manner as if the tenant were the ownerCanada, with an aggregate gross asset value of the property. There are various forms of net leases, most typically classified as triple-net or double-net. Triple-net leases typically require that the tenant pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance, repairs, and capital costs). Double-net leases typically require that the tenant pay all operating expenses associated with the property (e.g., real estate taxes, insurance, and maintenance), but exclude some or all major repairs (e.g., roof, structure, and parking lot). Accordingly, the owner receives the rent “net” of these expenses, rendering the cash flow associated with the lease predictable for the term of the lease. Under a net lease, the tenant generally agrees to lease the property for a significant term and agrees that it will either have no ability, or only limited ability, to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation, or failure by the landlord to fulfill its obligations under the lease.$4.0 billion.
We focus on investing in real estate that is operated by acreditworthy single tenanttenants in industries characterized by positive business drivers and trends, where the real estate isproperties 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, among others. We target properties with creditworthy 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 mission criticalstrategically important locations, while conservingallocating their debt and equity capital to fund their fundamentalcore business operations.
As of June 30, 2019, we owned a diversified portfolio of 646 individual net leased commercial properties located in 42 states, and comprising approximately 20.3 million rentable square feet of operational space. As of June 30, 2019, all but three of our properties were subject to leases and were 99.6% occupied by 166 different commercial tenants, with no single tenant accounting for moreoperations rather than 3.3% of our contractual rental revenue over the next 12 months (“NTM Rent”).
We operate under the direction of our board of directors, which is responsible for the management and control of our affairs. Our board of directors has retained Broadstone Real Estate, LLC (the “Manager”) to provide certain property management services for our properties, and Broadstone Asset Management, LLC, a wholly owned subsidiary of the Manager (the “Asset Manager”), to manage our day-to-day affairs and implement our investment strategy, subject to our board of directors’ direction, oversight, and approval.
As we conduct substantially all of our operations through the Operating Company, we are structured as what is referred to as an umbrella partnership real estate investment trust (“UPREIT”). The UPREIT structure allows a property owner to contribute property to the Operating Company in exchange for membership units in the Operating Company and generally defer taxation of a resulting gain until the contributor later disposes of the membership units or the property is sold in a taxable transaction. The membership units of the Operating Company held by members of the Operating Company other than us are referred to herein and in our condensed 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 units based on the weighted average number of shares of our common stock and non-controlling membership units outstanding during the year.
We currently close sales of additional shares of our common stock on a monthly basis, subject to an equity cap and queue program for new and additional investments. The cap does not apply to investments made pursuant to our Distribution Reinvestment Plan (“DRIP”) or equity capital received in connection with UPREIT transactions. For the months of February 2019 through June 2019, new and additional investments were capped at $20 million per month. On July 3, 2019, we announced that we were removing the equity cap for the month of July 2019 based on our current leverage profile and pipeline of potential acquisitions. We anticipate reinstating the equity cap once we are comfortably within the leverage range of the Company’s investment grade credit rating.
Shares of our common stock are currently being offered in our ongoing private offering at a price equal to a Determined Share Value (as defined below) of $85 per share. For the six months ended June 30, 2019, we sold 1,771,161 shares of our common stock in our private offering, including 367,604 shares of common stock issued pursuant to our DRIP. Cash received for newly issued shares totaled $120.0 million and shares with a value of $30.8 million were issued pursuant to DRIP transactions. We intend to use substantially all of the net proceeds from our ongoing private offering, supplemented with additional borrowings, to continue to invest in additional net leased properties and for general corporate purposes. See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” of this Form 10-Q for further information.
As of June 30, 2019, there were 23.7 million shares of our common stock issued and outstanding, and 1.7 million non-controlling membership units issued and outstanding.
Our principal executive offices are located at 800 Clinton Square, Rochester, New York, 14604, and our telephone number is (585) 287-6500.
Q2 2019 Highlights
For the three months ended June 30, 2019, we:ownership.
Generated funds from operations (“FFO”), a non-GAAP financial measure, of $39.8 million, representing an increase of $5.5 million, or 15.9%, compared to the three months ended June 30, 2018. FFO per diluted share was $1.60 for the three months ended June 30, 2019, unchanged from the three months ended June 30, 2018.
o | Geographic Diversity: Our properties are located in 41 U.S. states and British Columbia, Canada, with no single geographic concentration exceeding 10.3% of our ABR. |
o | Tenant and Industry Diversity: Our properties are occupied by approximately 181 different commercial tenants who operate 167 different brands that are diversified across 54 differing industries, with no single tenant accounting for more than 2.9% of our ABR. |
Generated adjusted funds from operations (“AFFO”), a non-GAAP financial measure, of $34.4 million, representing an increase of $4.4 million, or 14.8%, compared to the three months ended June 30, 2018. AFFO per diluted share was $1.38 for the three months ended June 30, 2019, representing a decrease of $0.01 per diluted share, or 0.7%, compared to the three months ended June 30, 2018.
- | Strong In-Place Leases with Significant Remaining Lease Term. As of March 31, 2020, our portfolio was approximately 99.6% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 11.3 years, excluding renewal options. |
- | Extensive Tenant Financial Reporting. Approximately 87.6% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 4.5% of our ABR is received from tenants that are public companies, and 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. |
Sold five properties, representing 0.7%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 the country. In response to the COVID-19 pandemic, many countries and U.S. states, including the areas in which we operate, have adopted certain measures to mitigate the ongoing public health crises. Such measures include “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. The COVID-19 pandemic has negatively impacted nearly every industry directly or indirectly.
The COVID-19 pandemic did not have a material impact on our portfolio valueresults of operations and liquidity and capital resources as of Decemberand for the three months ended March 31, 2018, at a weighted average capitalization rate2020. While we are still in the early stages of 7.4%, fornavigating the actual and potential impacts the pandemic will have on our tenants and our business, the sections below summarize developments subsequent to quarter-end and management’s view of the potential impacts the COVID-19 pandemic may have on our future results of operations, liquidity and capital resources, and other various company-specific matters. For more discussion on the COVID-19 outbreak, see Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q.
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, property dispositions, lease renewals and occupancy, acquisition volume, net proceeds of $23.0 million, recognizing a gain of $2.8 million above carrying value.
Received $75.9 million in investments from newlease terms, interest expense, general and existing stockholders, including investments made throughadministrative expenses, tenant bankruptcies, and impairments.
Rental Rates
Our financial results depend on our DRIP.
Collected 99.9+%ability to timely collect contractual rents due under our long-term net leases. We collected approximately 98% of rents due as of March 31, 2020; however, 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. Based on industry and property type and ABR as of March 31, 2020, the following represents the scope of rent relief requests we have received through April 30, 2020:
|
| Rent Relief Request as of April 30, 2020 |
|
| Portfolio Diversification as of March 31, 2020 |
| ||||||||||||||||||||||
Tenant Industry |
| # Properties |
|
| ABR ($000s) |
|
| % of Portfolio ABR |
|
| % of Property Type ABR |
|
| # Properties |
|
| ABR ($000s) |
|
| % of Portfolio ABR |
| |||||||
Restaurants |
|
| 186 |
|
| $ | 34,357 |
|
|
| 11.8 | % |
|
| 74.1 | % |
|
| 246 |
|
| $ | 46,337 |
|
|
| 15.9 | % |
Auto Parts & Equipment |
|
| 25 |
|
|
| 9,555 |
|
|
| 3.3 | % |
|
| 94.6 | % |
|
| 31 |
|
|
| 10,103 |
|
|
| 3.5 | % |
Specialized Consumer Services |
|
| 36 |
|
|
| 9,077 |
|
|
| 3.1 | % |
|
| 97.4 | % |
|
| 37 |
|
|
| 9,318 |
|
|
| 3.2 | % |
Healthcare Facilities |
|
| 29 |
|
|
| 8,072 |
|
|
| 2.8 | % |
|
| 17.9 | % |
|
| 96 |
|
|
| 45,203 |
|
|
| 15.6 | % |
Home Furnishings |
|
| 2 |
|
|
| 5,185 |
|
|
| 1.8 | % |
|
| 100.0 | % |
|
| 2 |
|
|
| 5,185 |
|
|
| 1.8 | % |
Home Furnishings Retail |
|
| 9 |
|
|
| 3,910 |
|
|
| 1.3 | % |
|
| 32.1 | % |
|
| 19 |
|
|
| 12,195 |
|
|
| 4.2 | % |
Movies & Entertainment |
|
| 1 |
|
|
| 3,125 |
|
|
| 1.1 | % |
|
| 100.0 | % |
|
| 1 |
|
|
| 3,125 |
|
|
| 1.1 | % |
Personal Products |
|
| 2 |
|
|
| 2,899 |
|
|
| 1.0 | % |
|
| 100.0 | % |
|
| 2 |
|
|
| 2,899 |
|
|
| 1.0 | % |
Air Freight & Logistics |
|
| 1 |
|
|
| 2,744 |
|
|
| 0.9 | % |
|
| 42.9 | % |
|
| 3 |
|
|
| 6,400 |
|
|
| 2.2 | % |
Industrial Machinery |
|
| 6 |
|
|
| 2,675 |
|
|
| 0.9 | % |
|
| 49.1 | % |
|
| 15 |
|
|
| 5,454 |
|
|
| 1.9 | % |
Specialty Stores |
|
| 1 |
|
|
| 2,557 |
|
|
| 0.9 | % |
|
| 41.8 | % |
|
| 15 |
|
|
| 6,114 |
|
|
| 2.1 | % |
Distillers & Vintners |
|
| 1 |
|
|
| 2,344 |
|
|
| 0.8 | % |
|
| 100.0 | % |
|
| 1 |
|
|
| 2,344 |
|
|
| 0.8 | % |
Internet & Direct Marketing Retail |
|
| 1 |
|
|
| 2,280 |
|
|
| 0.8 | % |
|
| 49.9 | % |
|
| 2 |
|
|
| 4,564 |
|
|
| 1.6 | % |
Construction Machinery & Heavy Truck |
|
| 1 |
|
|
| 1,972 |
|
|
| 0.7 | % |
|
| 100.0 | % |
|
| 1 |
|
|
| 1,972 |
|
|
| 0.7 | % |
Food Retail |
|
| 1 |
|
|
| 1,860 |
|
|
| 0.6 | % |
|
| 100.0 | % |
|
| 1 |
|
|
| 1,860 |
|
|
| 0.6 | % |
Footwear |
|
| 1 |
|
|
| 1,761 |
|
|
| 0.6 | % |
|
| 100.0 | % |
|
| 1 |
|
|
| 1,761 |
|
|
| 0.6 | % |
Automotive Retail |
|
| 6 |
|
|
| 1,717 |
|
|
| 0.6 | % |
|
| 87.4 | % |
|
| 8 |
|
|
| 1,964 |
|
|
| 0.7 | % |
Data Processing & Outsourced Services |
|
| 1 |
|
|
| 1,580 |
|
|
| 0.5 | % |
|
| 100.0 | % |
|
| 1 |
|
|
| 1,580 |
|
|
| 0.5 | % |
Marine |
|
| 1 |
|
|
| 1,571 |
|
|
| 0.5 | % |
|
| 100.0 | % |
|
| 1 |
|
|
| 1,571 |
|
|
| 0.5 | % |
Life Sciences Tools & Services |
|
| 3 |
|
|
| 1,449 |
|
|
| 0.5 | % |
|
| 36.5 | % |
|
| 5 |
|
|
| 3,973 |
|
|
| 1.4 | % |
Automobile Manufacturers |
|
| 1 |
|
|
| 1,104 |
|
|
| 0.4 | % |
|
| 100.0 | % |
|
| 1 |
|
|
| 1,104 |
|
|
| 0.4 | % |
Healthcare Services |
|
| 1 |
|
|
| 1,058 |
|
|
| 0.4 | % |
|
| 13.0 | % |
|
| 16 |
|
|
| 8,143 |
|
|
| 2.8 | % |
Food Distributors |
|
| 1 |
|
|
| 1,031 |
|
|
| 0.4 | % |
|
| 8.1 | % |
|
| 7 |
|
|
| 12,670 |
|
|
| 4.4 | % |
Paper Packaging |
|
| 1 |
|
|
| 793 |
|
|
| 0.3 | % |
|
| 20.1 | % |
|
| 3 |
|
|
| 3,948 |
|
|
| 1.4 | % |
Commodity Chemicals |
|
| 3 |
|
|
| 783 |
|
|
| 0.3 | % |
|
| 56.3 | % |
|
| 4 |
|
|
| 1,392 |
|
|
| 0.5 | % |
Miscellaneous |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 117 |
|
|
| 89,367 |
|
|
| 30.6 | % |
Total |
|
| 321 |
|
| $ | 105,459 |
|
|
| 36.3 | % |
| N/A |
|
|
| 636 |
|
| $ | 290,546 |
|
|
| 100.0 | % |
|
| Rent Relief Request as of April 30, 2020 |
|
| Portfolio Diversification as of March 31. 2020 |
| ||||||||||||||||||||||
Property Type |
| # Properties |
|
| ABR ($000s) |
|
| % of Portfolio ABR |
|
| % of Property Type ABR |
|
| # Properties |
|
| ABR ($000s) |
|
| % of Portfolio ABR |
| |||||||
Industrial |
|
| 45 |
|
| $ | 43,587 |
|
|
| 15.0 | % |
|
| 34.5 | % |
|
| 113 |
|
| $ | 126,477 |
|
|
| 43.5 | % |
Healthcare |
|
| 33 |
|
|
| 10,579 |
|
|
| 3.7 | % |
|
| 18.5 | % |
|
| 122 |
|
|
| 57,115 |
|
|
| 19.7 | % |
Restaurant |
|
| 186 |
|
|
| 34,357 |
|
|
| 11.8 | % |
|
| 75.2 | % |
|
| 245 |
|
|
| 45,673 |
|
|
| 15.7 | % |
Office |
|
| 3 |
|
|
| 4,705 |
|
|
| 1.6 | % |
|
| 16.5 | % |
|
| 17 |
|
|
| 28,491 |
|
|
| 9.8 | % |
Retail |
|
| 53 |
|
|
| 10,371 |
|
|
| 3.6 | % |
|
| 37.2 | % |
|
| 128 |
|
|
| 27,855 |
|
|
| 9.6 | % |
Other |
|
| 1 |
|
|
| 1,860 |
|
|
| 0.6 | % |
|
| 37.7 | % |
|
| 11 |
|
|
| 4,935 |
|
|
| 1.7 | % |
Total |
|
| 321 |
|
| $ | 105,459 |
|
|
| 36.3 | % |
| N/A |
|
|
| 636 |
|
| $ | 290,546 |
|
|
| 100.0 | % |
Although the requests range in scope, the most common request is for a full or partial rent deferment for three months, with repayment over a six- to 12-month period following the reinstatement of regular rent payments. In certain cases, we are also negotiating for lease extensions or the early exercise of a tenant renewal option in addition to the repayment of the deferred rent. We have not agreed to any rent forgiveness or permanent abatement and are only negotiating rent deferrals. There are several tenants that have requested rent relief that we believe are well positioned to continue making rent payments during this period. Many of those tenants have strong balance sheets and liquidity positions, have applied for or received Paycheck Protection Program loan funding under the CARES Act, or are designated as essential and can continue to operate despite restrictions on other businesses. At this point, we have declined to agree to any rent relief in those circumstances and are seeking to collect the full amount of rent that is due but cannot provide any assurances regarding the ultimate outcome of our ongoing discussions.
Despite the extent of requests, we have collected 87.8% of rents due for April 2020, and through May 6, 2020, have collected 77.5% of rents due for May 2020. The duration of the COVID-19 pandemic and our tenants’ ability to return to business after governmental restrictions are lifted will have a significant impact on our ability to continue to collect rents.
In circumstances where we agree to a rent deferral that is 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 agree to defer will impact our cash flows from operations, and may impact the amount of AFFO we recognize each period. Refer to Impact to Liquidity and Capital Resources below for further discussion.
Property Dispositions
From time to time, we will strategically dispose of properties, primarily where 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. We were able to dispose of certain properties at the end of the first quarter and early in the second quarter that were already under contract and substantially along in the disposition process, and used the proceeds to bolster our liquidity position. In the short term, however, 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 impacted. Management believes the market slowdowns are temporary, and will dispose of properties as opportunities become available.
Lease Renewals and Occupancy
As of March 31, 2020, the ABR weighted average remaining term of our leases was approximately 11.3 years, excluding renewal options. As of March 31, 2020, approximately 8.5% 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 would forego rental income while remaining responsible for the payment of property taxes and maintaining the property until it is re-leased, which could negatively impact our operating results. Our occupancy rates have remained strong subsequent to quarter-end, standing at 99.5% based on rentable square footage maintainedas of April 30, 2020, and we continue to monitor the impact the COVID-19 pandemic has on our tenants.
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 99.8%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 to fund our capital needs. The COVID-19 pandemic has caused a slowdown in acquisition volume, and we have strategically redeployed our acquisitions team to assist with the influx of requests for rent relief, including performing credit analysis and negotiating deferments with tenants. During these uncertain times we are focused on preserving shareholder value. We will continue to monitor the pandemic’s impact to capitalization rates, interest rates, and access and cost of equity and debt capital, and return to our focus on growth through acquisitions and execution on our de-leveraging initiatives 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 portfolio.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. An increase in the number of leases in which we are responsible for some or all of these expenses could negatively influence our operating results. 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 March 31, 2020, master leases contributed approximately 36.3% of our 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), 74.1% of our restaurant property ABR (164 of our 245 restaurant properties), and 68.0% of our retail property ABR (85 of our 128 retail properties).
As we review requests for rent relief and consider granting limited deferments, we are focused on ensuring our contractual rights under the leases are preserved, and are evaluating opportunities to create value by negotiating enhanced financial reporting under the leases and the possibility for lease extensions or early lease renewals. The COVID-19 pandemic, however, presents certain risks of modifications to our lease terms, including certain rights we have under master leases and the risk of tenants’ failure to meet their lease obligations, including the risk that the prolonged exposure forces tenants into bankruptcy.
Interest Expense
We anticipate that we will continue to incur debt in the future in order 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.
We have seen a decrease in interest rates as the U.S. federal government attempts to combat the economic impacts of the COVID-19 pandemic, which we have been able to take advantage of on approximately $653.3 million of floating rate borrowings as of March 31, 2020. 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 0.99% at March 31, 2020. Additionally, as of April 30, 2020, the one-month LIBOR rate was 0.33%. Simultaneously, restrictions in credit markets have resulted in an increase in borrowing spreads across the debt capital markets. Approximately $240 million of our borrowings under our 2020 Unsecured Term Loan have a maturity within one year. On July 1, 2019,May 5, 2020, we gave notice that we were exercising the first of two available extension options effective upon the original maturity date of the debt in August 2020, 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 that time. Accordingly, we do not expect the increase in borrowing spreads to have a material impact to us at this time.
In response to the COVID-19 pandemic, and discussed further below in Impact to Liquidity and Capital Resources, we have bolstered our liquidity profile and cash on hand position, with approximately $95.2 million in cash and cash equivalents and restricted 1031 funds at March 31, 2020. We have typically used a portion of these funds, in addition to cash generated by operating activities, to pay down our Revolving Credit Facility balances. Accordingly, the increased cash position and corresponding leverage balances will result in increased interest expense. We are committed to an investment grade balance sheet, and plan to deleverage once the capital markets have improved.
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 71 employees out of the office. Given our limited headcount, we have not incurred a material amount of cash outlays on information technology or infrastructure to facilitate our newly 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 as we navigate the impacts of the COVID-19 pandemic.
Tenant Bankruptcies
Adverse economic conditions, particularly those that affect the markets in which our properties are located, or downturns in our tenants’ industries could impair our tenants’ ability to meet 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 tenants could adversely affect our ability to collect rents from such tenant and maintain our portfolio’s occupancy.
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 strategy, or one or more of the assumptions described above were to change in the future, an impairment may need to be recognized. As of March 31, 2020, we have not identified any impairment triggering events as a result of the COVID-19 pandemic, including tenant requests for rent relief, but 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. 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 be indicative of an impairment triggering event.
Impact to Liquidity and Capital Resources
We have taken proactive measures to bolster our liquidity profile, including borrowing an additional $75 million on our Revolving Credit Facility at quarter end, $25 million of which was funded subsequent to quarter end, strategically reverting approximately $35 million of 1031 proceeds originally planned to be reinvested in replacement properties, and holding onto cash generated from rentals that otherwise would have been used to pay down our Revolving Credit Facility. As of March 31, 2020, we amendedhad approximately $95.2 million in cash and cash equivalents and restricted 1031 cash not yet reverted to our operating account, excluding the additional $25 million Revolving Credit Facility borrowing funded on April 2, 2020. Given the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and current tenant requests for rent relief, we intend to evaluate all options for preserving cash and strengthening our liquidity position. As discussed below, at its May 7, 2020 meeting, our board of directors determined that we would temporarily suspend our monthly distribution. The board of directors will re-evaluate whether to reinstate the dividend at its August 2020 meeting. We intend to maintain REIT status, and to make a special distribution in 2020 in order to maintain REIT status if it becomes necessary to do so.
Under the terms of our credit agreements, we must maintain ratios of total indebtedness to total market value, and term loan agreementtotal unsecured indebtedness to reducetotal unencumbered eligible property value (together, “leverage covenant ratios”), of less than 60%, measured as of each quarter end. At March 31, 2020, we believe we were in compliance with all required covenants. In addition to our cash on hand, we also have $246.7 million of available capacity under our Revolving Credit Facility, and $100 million of available capacity in the margin above LIBOR paidform of an accordion feature on the 2024our 2026 Unsecured Term Loan (as defined below)Loan. Taking into consideration our leverage covenant ratios, however, as of March 31, 2020 we had $50.7 million of available borrowing capacity under our covenants, excluding the $25 million revolver draw subsequent to quarter end. We believe the cash on-hand, available capacity on our credit facilities, including the restrictions imposed by our covenant ratios, and our ability to manage distributions provide us with the ability to meet all current obligations, including maintaining our REIT status, for at least the next four quarters prior to collecting another dollar of rent.
In addition to these factors, the total market value and total unencumbered eligible property value included in our leverage covenant ratios are computed in part based on a computation of portfolio net operating income, which takes into consideration contractual rents with exclusions for certain aged delinquencies and tenant defaults, divided by a stated market capitalization rate. Management believes we were in compliance with our covenants as of March 31, 2020, and we believe it is probable we will continue to be in compliance. However, the COVID-19 pandemic’s impact to tenants is not yet known, and could result in significantly aged delinquencies and tenant defaults, which have a direct impact to our leverage covenant ratios. Accordingly, there are no assurances
that we will continue to comply with our covenants. See further discussion concerning our liquidity in Liquidity and Capital Resources below.
Other Considerations
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 1.90%home dynamic. Our access to 1.25%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 COVID-19 pandemic.
Recent Developments — Internalization
In order to benefit from increasing economies of scale as we continue 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 payment of management fees that we will no longer pay following the Internalization and do not include the direct compensation expense associated with our 71 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 Internalization, we issued 780,893 shares of our common stock, and the OP issued 1,319,513 OP Units and we and the OP paid $31.0 million in cash, for aggregate consideration of 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 new 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.
On August 2, 2019, subsequentIn addition to quarter end, wethe 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 price of our common stock on the principal exchange or securities market (or over-the-counter market) on which our common stock are then traded, following the completion of an IPO, or (b) our adjusted funds from operations per share, prior to the completion of an IPO, are achieved during specified periods of time following the completion of the Internalization. Should all earnout milestones be met, an additional 272,250 shares of common stock and 464,820 OP Units would be issued. The earnout liability has an estimated fair value of $40.1 million at the time of the Internalization.
We entered into a one-year $300 million unsecured delayed-draw term loanregistration rights agreement (the “2020 Unsecured Term Loan”) with a syndicate of banksour founding owners and financial institutions. We anticipate drawing on this facility to partially fundTrident BRE, LLC and its affiliates, and the Anticipated Transaction (as defined below). Borrowings under the 2020 Unsecured Term Loan bear interest at LIBOR plus a spread ranging between 0.85% and 1.65%. Based on our current investment grade credit rating, the spread for initial borrowings under the 2020 Unsecured Term Loan will be 1.25%.Founding Owners’ Tax Protection Agreement.
Year-to-Date 2019 HighlightsResults of Operations
As of March 31, 2020, our real estate investment portfolio had a gross asset value of approximately $4.0 billion, consisting of investments in 635 commercial real estate properties with locations in 41 states and one real estate property located in British Columbia, Canada, and leased to tenants in various industries. All but five of our properties were subject to a lease as of March 31, 2020.
Our historical results of operations for the sixthree months ended June 30,March 31, 2020 and March 31, 2019, we:discussed below, include the payment of asset and property management fees that we will no longer pay following the Internalization, and do not include the expected full impact of direct compensation expense associated with 71 employees employed by us following the Internalization or incremental general and administrative expenses.
Lease Revenues, net
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| For the three months ended |
| |||||||||||||
|
| March 31, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| ||||
Contractual rental amounts billed for operating leases and straight-line rent adjustments |
| $ | 74,493 |
|
| $ | 63,590 |
|
| $ | 10,903 |
|
|
| 17.1 | % |
Percentage rent income |
|
| 3 |
|
|
| — |
|
|
| 3 |
|
| >100 | % | |
Adjustment to revenue recognized for uncollectible rental amounts billed |
|
| (1,033 | ) |
|
| (440 | ) |
|
| (593 | ) |
| (>100 | )% | |
Operating expenses billed to/reimbursed from tenants |
|
| 3,732 |
|
|
| 4,275 |
|
|
| (543 | ) |
|
| (12.7 | )% |
Other income from real estate transactions |
|
| 49 |
|
|
| — |
|
|
| 49 |
|
| >100 | % | |
Total lease revenues from operating leases |
|
| 77,244 |
|
|
| 67,425 |
|
|
| 9,819 |
|
|
| 14.6 | % |
Earned income from direct financing leases |
|
| 987 |
|
|
| 1,005 |
|
|
| (18 | ) |
|
| (1.8 | )% |
Total Lease revenues, net |
| $ | 78,231 |
|
| $ | 68,430 |
|
| $ | 9,801 |
|
|
| 14.3 | % |
IncreasedThe increase in Lease revenues, to $137.5 million, representing growth of 22.1% comparednet for the three months ended March 31, 2020, was primarily attributable to the six months ended June 30, 2018.
Generated net income on a GAAP basis of $32.4 million, representing a decrease of $5.0 million, or 13.4%, compared to the six months ended June 30, 2018. Earnings per diluted share on a GAAP basis was $1.32 for the six months ended June 30, 2019, representing a decrease of $0.45 per diluted share, or 25.4%, compared to the six months ended June 30, 2018.
Generated FFO of $78.8 million, representing an increase of $9.6 million, or 13.8%, compared to the six months ended June 30, 2018. FFO per diluted share was $3.22 for the six months ended June 30, 2019, representing a decrease of $0.06 per diluted share, or 1.8%, compared to the six months ended June 30, 2018.
Generated AFFO of $68.5 million, representing an increase of $8.3 million, or 13.8%, compared to the six months ended June 30, 2018. AFFO per diluted share was $2.80 for the six months ended June 30, 2019, representing a decrease of $0.05 per diluted share, or 1.8%, compared to the six months ended June 30, 2018.
Closed 10growth in our real estate portfolio, which was achieved through accretive property acquisitions totaling $200.5 million,during 2019, weighted towards the second half of the year, and continued strong portfolio operating performance. In 2019, we significantly increased the size of our portfolio, adding 74 new properties at a price of approximately $1.0 billion, excluding capitalized acquisition costs, adding 34 new properties with a weighted average initial cash capitalization ratecosts. During the three months ended March 31, 2020, we experienced approximately 98% rent collection and 99.5% occupancy (based on rentable square footage). As of 7.4%. AtMarch 31, 2020, the time of acquisition, the properties had a weighted average remaining lease term of 15.1 years andABR weighted average annual rent increases on our properties was 2.1%.
Operating Expenses
|
| For the three months ended |
| |||||||||||||
|
| March 31, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| ||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 31,219 |
|
| $ | 24,310 |
|
| $ | 6,909 |
|
|
| 28.4 | % |
Asset management fees |
|
| 2,461 |
|
|
| 5,120 |
|
|
| (2,659 | ) |
|
| (51.9 | )% |
Property management fees |
|
| 1,275 |
|
|
| 1,885 |
|
|
| (610 | ) |
|
| (32.4 | )% |
Property and operating expense |
|
| 4,115 |
|
|
| 4,390 |
|
|
| (275 | ) |
|
| (6.3 | )% |
General and administrative |
|
| 5,842 |
|
|
| 1,103 |
|
|
| 4,739 |
|
| >100 | % | |
Provision for impairment of investment in rental properties |
|
| 2,133 |
|
|
| 1,017 |
|
|
| 1,116 |
|
| >100 | % | |
Total operating expenses |
| $ | 47,045 |
|
| $ | 37,825 |
|
| $ | 9,220 |
|
|
| 24.4 | % |
Depreciation and amortization
The increase in depreciation and amortization expense for the three months ended March 31, 2020, is primarily due to the growth in our real estate portfolio.
Asset management fees and Property management fees
Prior to the Internalization on February 7, 2020, we paid our third-party manager a quarterly fee equal to 0.25% of 2.0%.
Sold nine properties, representing 1.0%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”). 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.
General and administrative
The increase in general and administrative expenses mainly reflects the impact of the Internalization, and our employment of approximately 71 employees. At such time, our asset and property management fees were replaced with compensation and related expenses, which totaled $2.8 million during the three months ended March 31, 2020, along with associated general and administrative expenses. During the three months ended March 31, 2020, we also incurred $0.9 million in incremental legal fees associated with general corporate matters that were not incurred in the comparable prior period.
Provision for impairment of investment in rental properties
During the three months ended March 31, 2020, we recognized $2.1 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. The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.
Other income (expenses)
|
| For the three months ended |
| |||||||||||||
|
| March 31, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| ||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| $ | 9 |
|
| $ | 1 |
|
| $ | 8 |
|
| >100 | % | |
Interest expense |
|
| (20,991 | ) |
|
| (15,828 | ) |
|
| 5,163 |
|
|
| 32.6 | % |
Cost of debt extinguishment |
|
| (22 | ) |
|
| (713 | ) |
|
| (691 | ) |
|
| (96.9 | )% |
Gain on sale of real estate |
|
| 7,619 |
|
|
| 1,400 |
|
|
| 6,219 |
|
| >100 | % | |
Income taxes |
|
| (549 | ) |
|
| (443 | ) |
|
| 106 |
|
|
| 23.9 | % |
Internalization expenses |
|
| (1,205 | ) |
|
| — |
|
|
| 1,205 |
|
| >100 | % | |
Change in fair value of earnout liability |
|
| (4,177 | ) |
|
| — |
|
|
| 4,177 |
|
| >100 | % | |
Other losses |
|
| (22 | ) |
|
| — |
|
|
| 22 |
|
| >100 | % |
Interest expense
The increased interest expense during the three months ended March 31, 2020, resulted primarily from an increase in average outstanding borrowings as compared to the three months ended March 31, 2019, due mainly to the incurrence of December 31, 2018, atindebtedness associated with a significant acquisition in the third quarter of 2019, and incremental borrowings associated with the Internalization, partially offset by a 61 basis point decrease in our weighted average capitalization ratecost of 7.3%, for net proceeds of $33.6 million, recognizing a gain of $4.2 million above carrying value.
Received $150.8 million in investments from new and existing stockholders, including investments made through our DRIP.
Collected 99.9+% of rents due and, based on rentable square footage, maintained a 99.8% leased portfolio.
Subsequent to quarter end, on July 23, 2019, we entered into an agreement to acquire a portfolio of 23 fully leased industrial (warehouse, distribution, manufacturing and cold storage) and office/flex assets, for $735.7 million, excluding capitalized acquisition costs (the “Anticipated Transaction”). The portfolio comprises 6.9 million rentable square feet of operational space and is well diversified with 19 different tenants, and properties located in 14 states and British Columbia, Canada. The acquisition is expected to be funded through a combination of proceeds from our ongoing private offering of sharesdebt, inclusive of our common stock, drawinginterest rate swaps. We were able to take advantage of the remaining $150 million commitment available underdecreasing interest rates since March 31, 2019, as our 2026percentage of floating-rate debt increased concurrently with our funding of the aforementioned acquisition. We also amended our 2024 Unsecured Term Loan (as described below), $300in July 2019 to reduce the applicable margin from 1.90% to 1.25%.
Gain on sale of real estate
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months ended March 31, 2020, we recognized gains of $7.6 million fromon the sale of 10 properties, compared to gains of $1.4 million on the sale of four properties during the three months ended March 31, 2019.
Internalization expenses
During the three months ended March 31, 2020, Unsecured Term Loan,we incurred $1.2 million of third-party fees and consulting expenses associated with the balance funded from proceeds from our senior unsecured revolving credit facility. The Anticipated Transaction is expectedInternalization that closed on February 7, 2020. We expect incremental internalization expenses in the future to closebe limited to third party legal and accounting fees related to residual work in August 2019, subjectconnection with the transaction.
Change in fair value of earnout liability
As part of the Internalization we may be required to pay additional earnout consideration if certain milestones are achieved during the completionEarnout Periods. We record the fair value of due diligencethis contingent consideration as an Earnout liability in the Condensed Consolidated Balance Sheets, and update the fair value at the end of each reporting period. We estimate the fair value of the earnout 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 Company to make various assumptions about future share prices, timing of an IPO, and other customaryitems that are unobservable and transaction-specificare considered Level 3 inputs in the fair value hierarchy.
Upon closing conditions. For additional discussion of the Anticipated Transaction, seeInternalization, we recorded an earnout liability of $40.1 million through our preliminary purchase price allocation, which increased to $44.3 million as of March 31, 2020. The increase in fair value between February 7, 2020 and March 31, 2020 is primarily a result of an increase in the peer stock price volatility assumption used, as detailed in Note 17, “Subsequent Events” within the Notes2 to the Condensed Consolidated Financial Statements within Item 1. “Financial Statements”above, a direct result of this Form 10-Q.changes in economic circumstances impacting global equity markets.
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. See 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 Propertiesreported results and Investment Objectives
net earnings per diluted share are presented in accordance with GAAP. We target acquisitions of fee simple interests in individual properties priced between $5 millionalso disclose FFO 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:
preserve, protect, and return capital to investors,
realize increased cash available for distributions and long-term capital appreciation from growth in the value of our properties, and
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 creditworthy tenants in sale-leaseback transactions, where they sell us their properties and simultaneously lease them back through long-term, net leases, or through the purchase of properties already under a net lease (i.e., a lease assumption). Under either scenario, our properties are generally under lease and fully occupied at the time of acquisition. We focus on properties in growth markets with at least ten years of lease term remaining that are expected to achieve financial returns on equity of greater than 9.5%, net of fees, calculated based on the average return recognized across all acquisitions during a calendar year, provided that, with certain exceptions provided for in our Investment Policy, all acquisitions must have a minimum remaining lease term of seven years and a minimum return on equity of 8.5%, net of fees, unless otherwise approved by the Independent Directors Committee. Our criteria for selecting properties are based on the following underwriting principles:
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 underwriting principles 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 property type, tenant industry, and geographic location as of June 30, 2019. The percentages below are calculated based on our NTM Rent as of June 30, 2019, 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.
Property Type, by % of NTM Rent
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Geographic Diversification, by % of NTM Rent
At June 30, 2019, 99.8% of our portfolio’s rentable square footage, representing all but three of our properties, is subject to a lease, substantially allAFFO, each of which are non-GAAP measures. We believe the presentation 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 leases. We do not currently engage in the development of real estate, which could causeincome as a delay in timing between the funds usedperformance measure or to invest in properties and the corresponding cash inflows from rental receipts. Our cash flows from operations, are primarily generated throughas 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 Board of Governors of Nareit, the worldwide representative voice for REITs and publicly traded real estate investment portfoliocompanies 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 monthlyNareit 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, amortization of lease payments underintangibles, 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 long-termoperations are due to growth or decline of operations at our properties or from other factors.
Our leases with our tenants.
Dueinclude 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-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. We further exclude costs or gains recorded on the fact that substantially allextinguishment 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 these items are not indicative of ongoing operational results. We use AFFO as a measure of our propertiesperformance 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 leased under long-term leases, we arebased 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 currently requiredbe comparable to perform significant ongoing leasing activities on our properties. The leases for sixsimilarly titled measures employed by other REITs, and comparisons of our properties, representing less than 1% of our annual rental streams (calculated basedFFO and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.
Neither the SEC nor any other regulatory body has passed judgment on NTM Rent), will expire before 2021. As of June 30, 2019, the weighted average remaining term of our leases (calculated based on NTM Rent) was approximately 11.9 years, excluding renewal options, which are exercisable at the option of our tenants upon expiration of their base lease term. Approximately 4%acceptability of the propertiesadjustments to FFO that we use to calculate AFFO. In the future, the SEC, Nareit or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our portfolio are subject to leases without at least one renewal option. Furthermore, the weighted average remaining lease term on the $200.5 million in properties acquired during the six months ended June 30, 2019, was 15.1 years at the timecalculation and characterization of acquisition. More than 57% of our rental revenue is derived from leases that expire during 2030 and thereafter. As of June 30, 2019, no more than 9.4% of our rental revenue is derived from leases that expire in any single year in the next ten years. The following chart sets forth our lease expirations based upon the terms of our leases in place as of June 30, 2019.
Lease Maturity Schedule, by % of NTM Rent
AFFO accordingly.
The following table presents our net income and our non-GAAP FFO and AFFO. Our measures of FFO and AFFO are computed on the lease expirations by year, includingbasis of amounts attributable to both us and non-controlling interests. As the number of tenantsnon-controlling interests share in our net income on a one-for-one basis, the basic and properties with leases expiring,diluted per share amounts are 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. Amounts are in thousands, except the number of tenants and properties. We did not have any significant lease renewals during the six months ended June 30, 2019.same.
Year |
| Number of Tenants |
|
| Number of Properties |
|
| Square Footage |
|
| NTM Rent |
|
| Percentage of NTM Rent |
| |||||
2019 |
|
| 1 |
|
|
| 1 |
|
|
| 11 |
|
| $ | 25 |
|
| <0.1 | % | |
2020 |
|
| 5 |
|
|
| 5 |
|
|
| 112 |
|
|
| 1,273 |
|
|
| 0.5 | % |
2021 |
|
| 7 |
|
|
| 11 |
|
|
| 99 |
|
|
| 1,926 |
|
|
| 0.8 | % |
2022 |
|
| 5 |
|
|
| 4 |
|
|
| 124 |
|
|
| 3,273 |
|
|
| 1.3 | % |
2023 |
|
| 12 |
|
|
| 13 |
|
|
| 703 |
|
|
| 6,938 |
|
|
| 2.8 | % |
2024 |
|
| 13 |
|
|
| 15 |
|
|
| 1,668 |
|
|
| 13,692 |
|
|
| 5.5 | % |
2025 |
|
| 10 |
|
|
| 18 |
|
|
| 271 |
|
|
| 4,393 |
|
|
| 1.8 | % |
2026 |
|
| 18 |
|
|
| 29 |
|
|
| 825 |
|
|
| 12,581 |
|
|
| 5.0 | % |
2027 |
|
| 23 |
|
|
| 34 |
|
|
| 1,984 |
|
|
| 20,329 |
|
|
| 8.2 | % |
2028 |
|
| 23 |
|
|
| 36 |
|
|
| 2,030 |
|
|
| 23,507 |
|
|
| 9.4 | % |
2029 |
|
| 16 |
|
|
| 62 |
|
|
| 2,485 |
|
|
| 18,597 |
|
|
| 7.5 | % |
2030 and thereafter |
|
| 95 |
|
|
| 415 |
|
|
| 9,917 |
|
|
| 142,623 |
|
|
| 57.2 | % |
Untenanted properties |
|
| — |
|
|
| 3 |
|
|
| 47 |
|
|
| — |
|
|
| — |
|
Total |
|
| 228 |
|
|
| 646 |
|
|
| 20,276 |
|
| $ | 249,157 |
|
|
| 100.0 | % |
Our top tenants and brands at June 30, 2019, are listed in the tables below. The percentages are calculated based on the NTM Rent associated with the tenant or brand divided by total NTM Rent.
Top Ten Tenants, by % of NTM Rent
Tenant |
| Property Type |
| % NTM Rent |
|
| Properties |
| ||
Art Van Furniture, LLC |
| Retail |
|
| 3.3 | % |
|
| 10 |
|
Red Lobster Hospitality & Red Lobster Restaurants LLC |
| Retail |
|
| 3.0 | % |
|
| 25 |
|
Jack's Family Restaurants LP |
| Retail |
|
| 2.4 | % |
|
| 36 |
|
Axcelis Technologies, Inc. |
| Other |
|
| 2.3 | % |
|
| 1 |
|
Outback Steakhouse of Florida LLC (a) |
| Retail |
|
| 2.2 | % |
|
| 24 |
|
Krispy Kreme Doughnut Corporation |
| Industrial/Retail |
|
| 2.0 | % |
|
| 27 |
|
BluePearl Holdings, LLC |
| Healthcare |
|
| 2.0 | % |
|
| 12 |
|
Big Tex Trailer Manufacturing, Inc. |
| Industrial/Retail/Office |
|
| 1.9 | % |
|
| 17 |
|
Siemens Medical Solutions USA, Inc. & Siemens Corporation |
| Industrial |
|
| 1.9 | % |
|
| 2 |
|
Nestle' Dreyer's Ice Cream Company |
| Industrial |
|
| 1.7 | % |
|
| 1 |
|
Total Top Ten |
|
|
|
| 22.7 | % |
|
| 155 |
|
All Other |
|
|
|
| 77.3 | % |
|
| 491 |
|
Total |
|
|
|
| 100.0 | % |
|
| 646 |
|
|
| For the three months ended |
| |||||||||||||
|
| March 31, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands, except per share data) |
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| ||||
Net income |
| $ | 11,848 |
|
| $ | 15,022 |
|
| $ | (3,174 | ) |
|
| (21.1 | )% |
Net earnings per diluted share |
|
| 0.41 |
|
|
| 0.62 |
|
|
| (0.21 | ) |
|
| (33.9 | )% |
FFO |
|
| 37,572 |
|
|
| 38,949 |
|
|
| (1,377 | ) |
|
| (3.5 | )% |
FFO per diluted share |
|
| 1.29 |
|
|
| 1.62 |
|
|
| (0.33 | ) |
|
| (20.4 | )% |
AFFO |
|
| 41,068 |
|
|
| 34,169 |
|
|
| 6,899 |
|
|
| 20.2 | % |
AFFO per diluted share |
|
| 1.41 |
|
|
| 1.42 |
|
|
| (0.01 | ) |
|
| (0.7 | )% |
Diluted WASO(a) |
|
| 29,053 |
|
|
| 24,072 |
|
|
| 4,981 |
|
|
| 20.7 | % |
(a) |
|
Top Ten Brands, by % of NTM Rent
Brand |
| Property Type |
| % NTM Rent |
|
| Properties |
| ||
Art Van Furniture |
| Retail |
|
| 3.3 | % |
|
| 10 |
|
Bob Evans Farms (a) |
| Industrial/Retail |
|
| 3.0 | % |
|
| 27 |
|
Red Lobster |
| Retail |
|
| 3.0 | % |
|
| 25 |
|
Wendy's |
| Retail |
|
| 2.5 | % |
|
| 41 |
|
Jack's Family Restaurants |
| Retail |
|
| 2.4 | % |
|
| 36 |
|
Axcelis |
| Other |
|
| 2.3 | % |
|
| 1 |
|
Taco Bell |
| Retail |
|
| 2.1 | % |
|
| 41 |
|
Krispy Kreme |
| Industrial/Retail |
|
| 2.0 | % |
|
| 27 |
|
BluePearl Veterinary Partners |
| Healthcare |
|
| 2.0 | % |
|
| 12 |
|
Outback Steakhouse |
| Retail |
|
| 1.9 | % |
|
| 22 |
|
Total Top Ten |
|
|
|
| 24.5 | % |
|
| 242 |
|
All Other |
|
|
|
| 75.5 | % |
|
| 404 |
|
Total |
|
|
|
| 100.0 | % |
|
| 646 |
|
|
|
Moody’s Investors Service (“Moody’s”) has assignedFor the Operating Company an investment grade credit rating of Baa3 with a stable outlook, which allows us to take advantage of preferential borrowing margins and provides more attractive accessthree months ended March 31, 2020, compared to the debt markets, including the debt private placement market. The Operating Company’s credit 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. While Moody’s utilizes other factors outside of our leverage ratio in assigning ratings, we are strongly committed to maintaining a modest leverage profile commensurate with our investment grade rating. Our leverage policy (“Leverage Policy”) is to maintain a leverage ratio in the 35% to 45% range based on the approximate market value of our assets, recognizing that the actual leverage ratio may 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 Independent Directors Committee. The Independent Directors Committee 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.
To reduce our exposure to variable-rate debt, we enter into interest rate swap agreements to fix the rate of interest as a hedge against interest rate fluctuations on floating-rate debt. 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 variable-rate debt, which offers flexibility in maintaining our hedge designation concurrent with our ongoing capital markets activity. We attempt to limit our total exposure to floating-rate debt to no more than 5% of the approximate market value of our assets, measured at quarter end.
As of June 30, 2019, our total outstanding indebtedness was $1,475.1 million, and the ratio of our total indebtedness to the approximate market value of our assets was 40.2%.
Determined Share Value
We sell shares of our common stock in our ongoing private offering at a price equal to a determined share value (the “Determined Share Value”), which is established at least quarterly by the Independent Directors Committee based on the net asset value (“NAV”) of our portfolio, input from management and third-party consultants, and such other factors as the Independent Directors Committee may determine. Shares of our common stock are also sold pursuant to our DRIP, and repurchased by us pursuant to our share redemption program, at a price based upon the Determined Share Value. For additional information regarding our valuation policy and procedures, please see the section titled Determined Share Value in Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of our Form 10-K. The following table presents the Determined Share Value for each period indicated below, together with the corresponding NAV per diluted share as of the preceding quarter end:
Period |
| NAV as of |
| NAV per diluted share |
|
| Determined Share Value |
| ||
August 1, 2019 - October 31, 2019 |
| June 30, 2019 |
| $ | 84.68 |
|
| $ | 85.00 |
|
May 1, 2019 - July 31, 2019 |
| March 31, 2019 |
| $ | 85.57 |
|
| $ | 86.00 |
|
February 1, 2019 - April 30, 2019 |
| December 31, 2018 |
| $ | 84.92 |
|
| $ | 85.00 |
|
The adjustments 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. In November 2019, the Independent Directors Committee will review the NAV per diluted share calculations as of September 30, 2019, and will assess whether adjustments to the Determined Share Value are appropriate.
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):
NAV component: |
| June 30, 2019 |
|
| March 31, 2019 |
| ||
Investment in rental property |
| $ | 3,704,911 |
|
| $ | 3,568,282 |
|
Debt |
|
| (1,529,385 | ) |
|
| (1,445,814 | ) |
Other assets and liabilities, net |
|
| (19,078 | ) |
|
| (16,352 | ) |
NAV |
| $ | 2,156,448 |
|
| $ | 2,106,116 |
|
Number of outstanding shares, including noncontrolling interests |
|
| 25,467 |
|
|
| 24,612 |
|
NAV per diluted share |
| $ | 84.68 |
|
| $ | 85.57 |
|
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, 2019, andthree months ended March 31, 2019, supporting the Determined Share Valuenet income decreased primarily due to a $6.9 million increase in effect for the periods of August 1, 2019 through October 31, 2019,depreciation and May 1, 2019 through July 31, 2019, respectively:
Market capitalization rates, as of: |
| Retail |
|
| Industrial |
|
| Healthcare |
|
| Office |
|
| Other |
|
| Portfolio Total |
| ||||||
|
| 6.40 | % |
|
| 6.89 | % |
|
| 6.73 | % |
|
| 6.90 | % |
|
| 7.36 | % |
|
| 6.72 | % | |
March 31, 2019 |
|
| 6.41 | % |
|
| 6.89 | % |
|
| 6.79 | % |
|
| 7.03 | % |
|
| 7.26 | % |
|
| 6.72 | % |
While we believe our assumptions are reasonable,amortization expense associated with a changelarger real estate portfolio, a $5.2 million increase in these assumptions would impact the calculation of the value ofinterest expense associated with incremental borrowings used to partially fund our real estate investments. For example, assuming all other factors remain unchanged, an increase inacquisitions and the weighted average implied market capitalization rate used as of June 30, 2019, of 0.25% would result inInternalization, a decrease in the fair value of our investment in rental property of 3.6%, and our NAV per diluted share would have been $79.47. Conversely, a decrease in the weighted average implied market capitalization rate used as of June 30, 2019, of 0.25% would result in an$4.2 million increase in the fair value of our investmentearnout liability, $1.2 million in rental propertyinternalization expenses incurred in 2020, and a $1.1 million increase in provisions for impairment. These factors were partially offset by revenue growth of 3.9%,$9.8 million, combined with a $6.2 million increase in gains on sale of real estate.
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 increased general and administrative expenses and the increase in our NAVweighted average shares outstanding, contributed to the $0.21 decrease in net earnings per diluted share would have been $90.29.for the three months ended March 31, 2020.
DistributionsAFFO
The increase in AFFO during the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, was primarily driven by revenue growth, which resulted from rent escalations associated with our same property portfolio, accretive acquisitions and Distribution Reinvestmentstrong portfolio operating performance, as well as a $3.3 million decrease in asset and property management fees as a result of terminating the associated agreements in connection with the Internalization. These factors were partially offset by a $4.7 million increase in general and administrative expense related to incremental compensation and related costs associated with an internalized management structure, and a $5.2 million increase in interest expense associated with incremental borrowings.
AtThe $0.01 decrease in AFFO per diluted share was primarily due to the short-term dilution caused by the immediate increase in BNL’s weighted average shares outstanding resulting from the consideration paid in conjunction with the Internalization. Upon consummation of the transaction in February, BNL began recognizing cash flow and AFFO benefits due to the immediate cost savings achieved by operating the REIT with an internalized management structure, as compared to the recurring management fees and transaction-based fees incurred under its August 5, 2019 meeting, our boardprevious externally-managed structure. Although the full dilutive effect of directors declared monthly distributionsshares outstanding was recognized at the time of $0.44 per share of our common stock and unit of membership interestthe transaction, we expect the continued cost savings to be paidsubstantial and to our stockholders and members of the Operating Company (other than us) of record as follows:
Dividend Per Share/Unit |
|
| Record Date |
| Payment Date (on or before) | |
$ | 0.44 |
|
| August 29, 2019 |
| September 13, 2019 |
$ | 0.44 |
|
| September 27, 2019 |
| October 15, 2019 |
$ | 0.44 |
|
| October 30, 2019 |
| November 15, 2019 |
Investors may purchase additional shares of our common stock by electing to reinvest their distributions through our DRIP. Cash distributions will be reinvested in additional shares of common stock attranslate into accretive results on a per share price equalbasis over time as the cash flow and AFFO benefits are recognized. Further, we expect this accretion will continue to 98%increase as we grow our portfolio and recognize economies of the Determined Share Value as of the applicable distribution date. Refer to the section titled Distribution and Distribution Reinvestment in Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of our Form 10-K, for additional discussion of our DRIP.scale.
The following table summarizes distributions paid in cash and pursuant to our DRIP for the six months ended June 30, 2019 (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 |
| 2019 |
| $ | 4,634 |
|
| $ | 617 |
|
| $ | 4,730 |
|
| $ | 130 |
|
| $ | 10,111 |
|
February |
| 2019 |
|
| 4,691 |
|
|
| 617 |
|
|
| 4,800 |
|
|
| 130 |
|
|
| 10,238 |
|
March |
| 2019 |
|
| 4,836 |
|
|
| 632 |
|
|
| 5,003 |
|
|
| 132 |
|
|
| 10,603 |
|
April |
| 2019 |
|
| 4,879 |
|
|
| 631 |
|
|
| 5,092 |
|
|
| 132 |
|
|
| 10,734 |
|
May |
| 2019 |
|
| 4,917 |
|
|
| 632 |
|
|
| 5,176 |
|
|
| 133 |
|
|
| 10,858 |
|
June |
| 2019 |
|
| 5,017 |
|
|
| 632 |
|
|
| 5,207 |
|
|
| 133 |
|
|
| 10,989 |
|
Total |
|
|
| $ | 28,974 |
|
| $ | 3,761 |
|
| $ | 30,008 |
|
| $ | 790 |
|
| $ | 63,533 |
|
(a)Distributions are paid in sharesReconciliation of common stock.Non-GAAP Measures
The following table summarizes our distributions paid, includingis a reconciliation of net income to FFO and AFFO, which are non-GAAP financial measures. Also presented are the source of distributionsdiluted WASO and a comparison against FFO (in thousands).
per diluted share amounts:
|
| For the six months ended |
| |||||
|
| June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Distributions: |
|
|
|
|
|
|
|
|
Paid in cash |
| $ | 33,525 |
|
| $ | 29,265 |
|
Reinvested in shares |
|
| 30,008 |
|
|
| 24,004 |
|
Total Distributions |
| $ | 63,533 |
|
| $ | 53,269 |
|
Source of Distributions: |
|
|
|
|
|
|
|
|
Cash flow from operating activities |
| $ | 63,533 |
|
| $ | 53,269 |
|
FFO |
| $ | 78,791 |
|
| $ | 69,219 |
|
For the six months ended June 30, 2019 and 2018, 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.
|
| For the three months ended |
| |||||
(in thousands, except per share data) |
| March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Net income |
| $ | 11,848 |
|
| $ | 15,022 |
|
Real property depreciation and amortization |
|
| 31,210 |
|
|
| 24,310 |
|
Gain on sale of real estate |
|
| (7,619 | ) |
|
| (1,400 | ) |
Provision for impairment on investment in rental properties |
|
| 2,133 |
|
|
| 1,017 |
|
FFO |
| $ | 37,572 |
|
| $ | 38,949 |
|
Capital improvements / reserves |
|
| — |
|
|
| (49 | ) |
Straight-line rent adjustment |
|
| (1,612 | ) |
|
| (5,143 | ) |
Adjustment to provision for credit losses |
|
| (17 | ) |
|
| — |
|
Cost of debt extinguishment |
|
| 22 |
|
|
| 713 |
|
Amortization of debt issuance costs |
|
| 888 |
|
|
| 553 |
|
Amortization of net mortgage premiums |
|
| (35 | ) |
|
| (35 | ) |
Gain on interest rate swaps and other non-cash interest expense |
|
| (42 | ) |
|
| (81 | ) |
Amortization of lease intangibles |
|
| (1,138 | ) |
|
| (738 | ) |
Internalization expenses |
|
| 1,205 |
|
|
| — |
|
Severance |
|
| 26 |
|
|
| — |
|
Change in fair value of earnout liability |
|
| 4,177 |
|
|
| — |
|
Other losses |
|
| 22 |
|
|
| — |
|
AFFO |
| $ | 41,068 |
|
| $ | 34,169 |
|
|
|
|
|
|
|
|
|
|
Diluted WASO |
|
| 29,053 |
|
|
| 24,072 |
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic and diluted |
| $ | 0.41 |
|
| $ | 0.62 |
|
FFO per diluted share |
|
| 1.29 |
|
|
| 1.62 |
|
AFFO per diluted share |
|
| 1.41 |
|
|
| 1.42 |
|
Liquidity and CapitalCapital Resources
General
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. Therefore, we attemptWe are committed to maintain a conservativemaintaining an investment grade balance sheet through active management of our leverage profile with total debt equal to 35% to 45% of the approximate market value of our assets.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.rating of Baa3 from Moody’s Investors Service (“Moody’s”). As of June 30, 2019, theMarch 31, 2020, our leverage ratio was 40.2%45.7% of the approximate market value of our assets. Management and our credit rating agencies also consider our leverage positionassets, compared to 45.8% as a multiple of Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”), a non-GAAP financial measure. EBITDADecember 31, 2019.
Liquidity/REIT Requirements
Liquidity is a metric we use to measure leverage in the context of our ability to meet potential cash flow expectationsrequirements, including our ongoing commitments to repay debt, fund our operations, acquire properties, make distributions to our stockholders, and projections. Given the significanceother general business needs. As a REIT, we are required to distribute to our stockholders at least 90% of our recent growth, however, adding $200.5 million in investments duringREIT taxable income determined without regard to the six months ended June 30, 2019, $606.8 million in investments during 2018,dividends paid deduction and $683.6 million in investments during 2017, coupled with our continued strategic growth initiatives, historical EBITDA may not provide investors withexcluding net capital gain, on an adequate picture of the contractual cash inflows associated with these investments. Our investments are typically made throughout the year (with a significant portion typically occurring in the fourth quarter of 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 metric to manage our leverage profile. We utilize this analysis inclusive of our focus on debt-to-market value metrics. We anticipate that our leverage ratio will increase as a result of the incremental borrowings associated with funding the Anticipated Transaction discussed above. We intend to begin working to reduce our leverage profile in the near term, to a range within the leverage profile consistent with our investment grade credit rating, using a combination of proceeds from our ongoing private offering of shares of our common stock and increasing disposition activity.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 announcementannual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of the Anticipated Transaction, Moody’s affirmed our investment grade credit rating and stable outlook.capital.
Short-term Liquidity Requirements
Our primary cash expenditures include the monthly interest payments we make on the debt we useshort-term liquidity requirements consist primarily of funds necessary to financepay for our real estate investment portfolio, asset management and property management fees of servicing the portfolio, acquisition costs related to the growth ofoperating expenses, including our portfolio, and the general and administrative expenses of operatingas well as interest payments on our business.outstanding debt and to pay distributions. Since our portfolio has a strong occupancy level and substantially all of our leases are net leases, 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, although, 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 on an aggregate basis during the term of the property leases incosts. We expect to meet our current portfolio. To the extent that we have vacant properties, we will incur certain costs to operateshort-term liquidity requirements primarily from cash and maintain the properties, however, we do not currently expect these costs to be material.
As shown in the table below,cash equivalents balances, net cash provided by operating activities, increased by $6.0and borrowing under our Revolving Credit Facility. Additionally, our $240 million 2020 Unsecured Term Loan matures in August 2020, at which time we have the option to $64.7 millionextend the loan twice, each for thea period of six months, ended June 30, 2019, from $58.7 million for the six months ended June 30, 2018. We funded real estate investment activity with a combination of cash from operations, proceeds from our unsecured revolving credit agreements, and proceeds from the issuance of common stock. We paid cash dividendssubject to our stockholdersbeing in compliance with the debt covenants and holderscustomary representations and warranties, and payment of non-controlling membership unitsa fee equal to 0.05% of $34.2 million and $30.0 million for the six months ended June 30, 2019 and 2018, respectively. The increased dividends between periodsoutstanding principal balance at the time of extension. On May 5, 2020, we gave notice that we were primarily funded by cash provided by our operations. Cash and cash equivalents and restricted cash totaled $12.7 million and $20.8 million at June 30, 2019 and 2018, respectively.
|
| For the six months ended |
| |||||
|
| June 30, |
| |||||
(In thousands) |
| 2019 |
|
| 2018 |
| ||
Net cash provided by operating activities |
| $ | 64,719 |
|
| $ | 58,675 |
|
Net cash used in investing activities |
|
| (120,894 | ) |
|
| (187,720 | ) |
Net cash provided by financing activities |
|
| 49,904 |
|
|
| 139,768 |
|
Increase in cash and cash equivalents and restricted cash |
| $ | (6,271 | ) |
| $ | 10,723 |
|
Substantially all of our cash from operations is generated by our real estate portfolio. As of June 30, 2019, the historical cost basis of our real estate investment portfolio totaled $2,804.1 million, consisting of investments in 646 properties. Duringexercising the first six months of 2019, our portfolio generated monthly straight-line rent revenues of approximately $21.4 million, and monthly contractual cash revenues of approximately $19.7 million. Duringsix-month option, effective August 2, 2020. Refer to Recent Developments – COVID-19 Pandemic for additional discussion regarding the six months ended June 30, 2019, we closed 10 real estate acquisitions totaling $200.5 million, excluding capitalized acquisition costs, adding 34 new propertiespandemic’s impact to our portfolio. We currently expect the new properties will generate approximately $1.4 million in monthly straight-line rent revenues and approximately $1.3 million in monthly contractual cash revenues over the next twelve months.
Capital Resourcesliquidity profile.
We intendLong-term Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds necessary to continue to grow through additional real estate investments. To accomplish this objective, we must continue to identify acquisitions that are consistent with our investment policy and raise additionalrepay debt and equity capital. We have financed our acquisition of properties using a combination of debt and equity capital. We seek to maintain an appropriate balance of debt and equity capitalinvest in our overall leverage policy, while maintaining a focus on increasing core value for existing stockholders, which we seek to achieve through earnings growth and share price appreciation. The mix of our financing sources may change over time based on market conditions and our liquidity needs.
Equity capital for our real estate acquisition activity is provided by the proceeds of our ongoing private offering, including distributions reinvested through our DRIP. During the six months ended June 30, 2019, we raised $150.8 million in equity capital to be used in our acquisition activities, of which $120.0 million was received through new cash investments and $30.8 million was raised through our DRIP.
Debt Capital Resources
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 629 unencumbered properties and approximately $110.8 million of mortgage debt on the remaining properties. Refer to Recent Developments – COVID-19 Pandemic for additional discussion regarding the pandemic’s impact to our liquidity profile.
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 debtEquity Capital Resources
Equity 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. Specifically, we recognized a rent collection rate of greater than 99% during the six months ended June 30, 2019 and 2018. As we growfor our real estate portfolio,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 intend to managedid not raise any equity through our debt maturities to reduce the risk that a significant amount of debt will mature in any single year in the future. For example,private offering during the first quarterquarter. During the three months ended March 31, 2020, we raised approximately $5.9 million in equity capital through our DRIP. See Part II, Item 2. “Unregistered Sales of 2019, we used proceeds from the longer-term 2026 Unsecured Term Loan (as defined below) to repay a shorter-term unsecured term loan that had been due in 2019 (the “2019 Unsecured Term Loan”). Refer to Contractual Obligations belowEquity Securities and Use of Proceeds” of this Form 10-Q for further details of the maturitiesinformation. We announced on our contractual obligations, including long-term debt maturities.January 10, 2020 that we were terminating 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, which we intend to maintain concurrent with our growth objectives.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.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 theour investment grade credit rating, provides us with an advantageous cost of capital and risk-adjusted return on investment for our stockholders.
Existing DebtCredit Facilities
The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and Senior Notes as of March 31, 2020.
(in thousands, except interest rates) |
| Outstanding Balance |
|
| Interest Rate |
|
| Maturity Date | ||
2020 Unsecured Term Loan |
| $ | 240,000 |
|
| one-month LIBOR + 1.25% |
|
| Aug. 2020 | |
Unsecured Revolving Credit and Term Loan Agreement |
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility |
|
| 353,300 |
|
| 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 | |
|
|
| 808,300 |
|
|
|
|
|
|
|
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 |
|
| 2,033,300 |
|
|
|
|
|
|
|
Debt issuance costs, net |
|
| (7,413 | ) |
|
|
|
|
|
|
|
| $ | 2,025,887 |
|
|
|
|
|
|
|
2020 Unsecured Term Loan
The 2020 Unsecured Term loan has 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 March 31, 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. On May 5, 2020, we gave notice that we were exercising the first of these options, effective as of August 2, 2020.
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 March 31, 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 March 31, 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 March 31, 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 March 31, 2020.
2022 Unsecured Term Loan
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 had been 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 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 March 31, 2020.
2026 Unsecured Term Loan
On February 27, 2019, we entered into a $450 million seven-year unsecured term loan agreement (the “2026 Unsecured Term Loan”). At closing, we borrowed $300 million and used the proceeds to fully repay our 2019 Unsecured Term Loan. The 2026 Unsecured Term Loan includes an accordion feature that canprovides 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 onin February 27, 2026. The rate of interest payable on borrowingsBorrowings under the 2026 Unsecured Term Loan, at our option, isloan bear interest equal to LIBOR plus a margin.margin based on our credit rating ranging between 1.45% and 2.40% per annum. Based on our investment gradecurrent credit rating, the applicable margin is currently 1.85%.
As of June 30, 2019, we have a $1.055 billion unsecured credit facility and term loan agreement (the “Credit Facility”), which is comprised of (i) a $600 million senior unsecured revolving credit facility (the “Revolver”), (ii) a $265 million senior unsecured delayed draw term loan due in 2023 (the “2023 Unsecured Term Loan”), and (iii) a $190 million senior unsecured delayed draw term loan due in 2024 (the “2024 Unsecured Term Loan”). Borrowings under the Credit Facility are payable interest only during the term of the appropriate loan tranche, with the principal amount due in full on the applicable maturity date.
The following table summarizes the amounts drawn and available to be drawn on the Credit Facility and 2026 Unsecured Term Loan as of June 30, 2019 (in thousands, excluding Loan Tranche and Maturity Date).
Loan Tranche |
| Amount Drawn |
|
| Amount Available |
|
| Total Capacity |
|
| Maturity Date | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revolver |
| $ | 123,600 |
|
| $ | 476,400 |
|
| $ | 600,000 |
|
| January 21, 2022(a) |
2023 Unsecured Term Loan |
|
| 265,000 |
|
|
| — |
|
|
| 265,000 |
|
| January 23, 2023 |
2024 Unsecured Term Loan |
|
| 190,000 |
|
|
| — |
|
|
| 190,000 |
|
| June 21, 2024 |
2026 Unsecured Term Loan |
|
| 300,000 |
|
| 150,000(b) |
|
|
| 450,000 |
|
| February 27, 2026 |
|
|
|
|
On July 1, 2019, subsequent to quarter end, we amended the Credit Facility to reduce the margin above LIBOR paid on the 2024 Unsecured Term Loan from 1.90% to 1.25%.March 31, 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. At June 30, 2019 and December 31, 2018, we had $475 million of Senior Notes outstanding. The Senior Notes were issued in three series (Series A, B, and C) as described below.
Series A NotesReconciliation of Non-GAAP Measures
On April 18, 2017, we issued $150 millionThe following is a reconciliation of Senior Notes (the “Series A Notes”). The Series A Notesnet income to FFO and AFFO, which are payable interest only during their term, bear interest atnon-GAAP financial measures. Also presented are the diluted WASO and per diluted share amounts:
|
| For the three months ended |
| |||||
(in thousands, except per share data) |
| March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Net income |
| $ | 11,848 |
|
| $ | 15,022 |
|
Real property depreciation and amortization |
|
| 31,210 |
|
|
| 24,310 |
|
Gain on sale of real estate |
|
| (7,619 | ) |
|
| (1,400 | ) |
Provision for impairment on investment in rental properties |
|
| 2,133 |
|
|
| 1,017 |
|
FFO |
| $ | 37,572 |
|
| $ | 38,949 |
|
Capital improvements / reserves |
|
| — |
|
|
| (49 | ) |
Straight-line rent adjustment |
|
| (1,612 | ) |
|
| (5,143 | ) |
Adjustment to provision for credit losses |
|
| (17 | ) |
|
| — |
|
Cost of debt extinguishment |
|
| 22 |
|
|
| 713 |
|
Amortization of debt issuance costs |
|
| 888 |
|
|
| 553 |
|
Amortization of net mortgage premiums |
|
| (35 | ) |
|
| (35 | ) |
Gain on interest rate swaps and other non-cash interest expense |
|
| (42 | ) |
|
| (81 | ) |
Amortization of lease intangibles |
|
| (1,138 | ) |
|
| (738 | ) |
Internalization expenses |
|
| 1,205 |
|
|
| — |
|
Severance |
|
| 26 |
|
|
| — |
|
Change in fair value of earnout liability |
|
| 4,177 |
|
|
| — |
|
Other losses |
|
| 22 |
|
|
| — |
|
AFFO |
| $ | 41,068 |
|
| $ | 34,169 |
|
|
|
|
|
|
|
|
|
|
Diluted WASO |
|
| 29,053 |
|
|
| 24,072 |
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic and diluted |
| $ | 0.41 |
|
| $ | 0.62 |
|
FFO per diluted share |
|
| 1.29 |
|
|
| 1.62 |
|
AFFO per diluted share |
|
| 1.41 |
|
|
| 1.42 |
|
Liquidity and Capital Resources
We acquire real estate using a fixed ratecombination of 4.84% per annum,debt and matureequity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on April 18, 2027.
Series Bmaximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and Series C Notes
On July 2, 2018, we issued $325 millionequity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of Senior Notes in two series: (i) $225 million of 10-year Senior Notes (“Series B Notes”) maturing on July 2, 2028,our leverage profile and (ii) $100 million of 12-year Senior Notes (“Series C Notes”) maturing on July 2, 2030. The Series B and Series C Notes are payable interest only during their term, and bear interest at fixed rates of 5.09% per annum and 5.19% per annum, respectively.
In additionoverall liquidity position. We believe our leverage model has allowed us to funding acquisitions, a portiontake advantage of the net proceedslower 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”). As of March 31, 2020, our leverage ratio was 45.7% of the Series B Notes and Series C Notes was usedapproximate 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 outstanding borrowings underdebt, 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 Revolverdividends 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 $25interest 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, our $240 million 2020 Unsecured Term Loan matures in August 2020, at which time we have the option to extend the loan twice, each for a period of six months, 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 gave notice that we were exercising the first six-month option, effective August 2, 2020. Refer to Recent Developments – COVID-19 Pandemic for additional discussion regarding the pandemic’s impact to our liquidity profile.
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 2019 Unsecured Term Loan.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 629 unencumbered properties and approximately $110.8 million of mortgage debt on the remaining properties. Refer to Recent Developments – COVID-19 Pandemic for additional discussion regarding the pandemic’s impact to our liquidity profile.
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 quarter. During the three months ended March 31, 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 Form 10-Q for further information. We announced on January 10, 2020 that we were terminating 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.
Debt CovenantsExisting Credit Facilities
We are subject to various covenantsThe following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and financial reporting requirements pursuant to our loan agreements. The table below summarizes the applicable financial covenants, which are substantially the same across eachSenior Notes as of the agreements. As of June 30, 2019, 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 above the annual 90% REIT taxable income distribution requirement. For each of the previous three years, our cash flows from operations exceeded the required cash dividend distribution amounts.March 31, 2020.
|
|
| ||||
|
| |||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
|
(in thousands, except interest rates) |
| Outstanding Balance |
|
| Interest Rate |
|
| Maturity Date | ||
2020 Unsecured Term Loan |
| $ | 240,000 |
|
| one-month LIBOR + 1.25% |
|
| Aug. 2020 | |
Unsecured Revolving Credit and Term Loan Agreement |
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility |
|
| 353,300 |
|
| 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 | |
|
|
| 808,300 |
|
|
|
|
|
|
|
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 |
|
| 2,033,300 |
|
|
|
|
|
|
|
Debt issuance costs, net |
|
| (7,413 | ) |
|
|
|
|
|
|
|
| $ | 2,025,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Activity
On August 2, 2019 we entered into a one-year $300 million unsecured delayed-draw term loan agreement (the “2020 Unsecured Term Loan”) with a syndicate of banks and financial institutions. Under the 2020 Unsecured Term Loan we may borrow up to $300 million between August 2, 2019 and November 2, 2019. We anticipate drawing on the facility to partially fund the Anticipated Transaction. Borrowings under the
The 2020 Unsecured Term Loan are payable interest only over the term of the loan with the principal balance due in full on August 2, 2020, provided that we have two options to extend thehas an initial maturity date of the loan for a six-month period for each extension (for a total possible extension of up to one year), subject to payment of an extension fee.August 2020. Borrowings under the 2020 Unsecured Term Loan bear interest at variable rates based on LIBOR plus a spreadmargin based on our credit rating ranging between 0.85% and 1.65%. per annum. Based on our current investment grade credit rating, the spread for initial borrowings under theapplicable margin is 1.25% as of March 31, 2020. The 2020 Unsecured Term Loan is 1.25%.
Capital Strategy
We believe our leverage policy and capital structure provide us with several advantages, including the ability to:
create a growing and diversified real estate portfolio with a flexible capital structure that allows for independent investing and financing decisions;
capitalize on competitive debt pricing;
add valuetwo six-month extensions, at our option, subject to our stockholders through earnings growth via a growing pool of assets; and
issue unsecuredbeing in compliance with the debt having relatively limited negative financial covenants and maintaincustomary representations and warranties, and payment of a fee equal to 0.05% of the distributions necessaryoutstanding principal balance at the time of extension. On May 5, 2020, we gave notice that we were exercising the first of these options, effective as of August 2, 2020.
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 retain our REIT statuscertain conditions set forth in the eventagreement and payment of contractual default, which we believe increasesa 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 corporate flexibility.
We intend to exercisecredit rating. Based on our current credit rating of Baa3, the extension provisionsfacility fee is 0.25% per annum as of March 31, 2020.
Borrowings on the Revolving Credit Facility bear interest at variable rates based on LIBOR plus a margin based on our debt instruments, refinance, or replacecredit rating ranging between 0.825% and 1.55% per annum. Based on our current credit rating, the existing borrowingsapplicable margin is 1.20% as they become due, including through additional private debt placements, all withof March 31, 2020.
2023 Unsecured Term Loan
The 2023 Unsecured Term loan has an initial maturity date of January 2023. Borrowings under the goal2023 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 limiting future debt serviceMarch 31, 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 payments only. Asat variable rates based on LIBOR plus a result, we do not intend to make principal paymentsmargin based on these debt obligations inour credit rating ranging between 0.85% and 1.65% per annum. Based on our current credit rating, the foreseeable future. Additionally, we may be required to increase our borrowing capacity to partially fund future acquisitions, including the Anticipated Transaction. We assess market conditions and the availability and pricingapplicable margin is 1.25% as 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 our investors. To the extent that we are unable to recast our debt facilities, our cashMarch 31, 2020.
flows from operations will not be adequate2022 Unsecured Term Loan
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 paypartially repay BRE debt that had been assumed by the principal amountCompany as part of debt,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 we may be forced to liquidate properties to satisfy our obligations.
We believe that the cash generated by our operations and our ongoing private offering, our cash and cash equivalents at June 30, 2019,1.65% per annum. Based on our current borrowing capacity under our Credit Facility andcredit rating, the applicable margin is 1.25% as of March 31, 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 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.
The leases in our portfolio are long-term in nature, withpayable interest only on a current weighted average remaining lease term of 11.9 years as of June 30, 2019. To mitigate the impact of inflation on our fixed revenue streams, we have implemented limited rent escalation clauses in our leases. As of June 30, 2019, substantially all of our leases had contractual lease escalations, with an annual weighted average of 2.0%. A majority of our leases have fixed annual rent increases or periodic escalations overmonthly basis during the term of the lease (e.g., a 10% increase every five years), and the remaining portion has annual lease escalations based on increases in the CPI. 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, net leases also shelters us from inflationary fluctuations in the cost of services and maintenance. For a portion of our portfolio, we have leases that are not fully triple-net, and, therefore, we bear certain responsibilities for the maintenance and structural component replacements (e.g., roof, structure, or parking lot) that may be required in the future, although the tenants are still required to pay all operating expenses associatedloan, with the property (e.g., real estate taxes, insurance, and maintenance). Inflation and increased costs may have an adverse impact on our tenants and their creditworthiness if the increaseprincipal amount due in costs is greater than their increase in revenue. 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 had no off-balance sheet arrangements as of June 30, 2019, or December 31, 2018.
The following table provides information with respect to our contractual commitments and obligations as of June 30, 2019 (in thousands).
Year of Maturity |
| Term Loans |
|
| Revolver(a) |
|
| Senior Notes |
|
| Mortgages and Notes Payable |
|
| Interest Expense(b) |
|
| Tenant Improvement Allowances(c) |
|
| Operating Leases |
|
| Total |
| ||||||||
Remainder of 2019 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 1,685 |
|
| $ | 31,581 |
|
| $ | 3,635 |
|
| $ | 59 |
|
| $ | 36,960 |
|
2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,492 |
|
|
| 62,555 |
|
|
| — |
|
|
| 120 |
|
|
| 66,167 |
|
2021 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,322 |
|
|
| 62,317 |
|
|
| — |
|
|
| 122 |
|
|
| 80,761 |
|
2022 |
|
| — |
|
|
| 123,600 |
|
|
| — |
|
|
| 3,237 |
|
|
| 56,105 |
|
|
| — |
|
|
| 124 |
|
|
| 183,066 |
|
2023 |
|
| 265,000 |
|
|
| — |
|
|
| — |
|
|
| 8,677 |
|
|
| 46,072 |
|
|
| — |
|
|
| 125 |
|
|
| 319,874 |
|
Thereafter |
|
| 490,000 |
|
|
| — |
|
|
| 475,000 |
|
|
| 86,077 |
|
|
| 147,414 |
|
|
| — |
|
|
| 2,540 |
|
|
| 1,201,031 |
|
Total |
| $ | 755,000 |
|
| $ | 123,600 |
|
| $ | 475,000 |
|
| $ | 121,490 |
|
| $ | 406,044 |
|
| $ | 3,635 |
|
| $ | 3,090 |
|
| $ | 1,887,859 |
|
|
|
|
|
|
|
At June 30, 2019, investment in rental property of $195.5 million is pledged as collateral against our mortgages and notes payable.
Additionally, as of June 30, 2019, we are a party to three separate Tax Protection Agreements (the “Agreements”) with the contributing members (the “Protected Members”) of three distinct UPREIT transactions. 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, subject to certain exceptions. Based on values as of June 30, 2019, taxable sales of the applicable properties would trigger liabilityFebruary 2026. Borrowings under the Agreements of 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 these commitments from the contractual commitments table above. For a more detailed discussion of the Agreements, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations”, in our Form 10-K.
Overview
As of June 30, 2019, our real estate investment portfolio had grown to a net book value of $2,804.1 million, consisting of investments in 646 commercial real estate properties with locations in 42 states and leased to tenants in various industries. All but three of our properties were subject to a lease as of June 30, 2019, and substantially all of our leasing activity related to our real estate acquisitions.
For the three months ended June 30, 2019 and 2018
Lease Revenues
|
| For the three months ended |
|
|
|
|
|
|
|
|
| |||||
| June 30, |
|
| Increase/(Decrease) |
| |||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
Lease revenues |
| $ | 69,053 |
|
| $ | 57,032 |
|
| $ | 12,021 |
|
|
| 21.1 | % |
Total lease revenues increased to $69.1 million for the three months ended June 30, 2019, compared to $57.0 million for the three months ended June 30, 2018. The increase in revenue period-over-period is primarily attributable to the growth in our real estate portfolio, which was achieved through rent escalations associated with our same property portfolio, coupled with rental revenue generated during the first six months of 2019 from accretive property acquisitions completed since the second quarter of 2018, and continued strong portfolio operating performance. We acquired $606.8 million in real estate in 2018, excluding capitalized acquisition costs. These properties provide annual straight-line rental revenue of approximately $47.4 million, or $11.8 million per quarter. In addition, during the first quarter of 2019, we acquired $73.1 million of real estate, excluding capitalized acquisition costs, which provided $1.5 million of straight-line rental revenue in the second quarter. These incremental revenues were offset mainly by the effect of revenues associated with properties we have disposed of subsequent to the second quarter of 2018. The acquisitions closed during the three months ended June 30, 2019, did not materially impact reported rental income, due to their timing. However, they are expected to provide approximately $2.7 million of straight-line rental revenue in the third quarter. The rental rates we receive 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 cash capitalization rate on acquisitions closed during the three months ended June 30, 2019, was 7.4%.
Operating Expenses
|
| For the three months ended |
|
|
|
|
|
|
|
|
| |||||
| June 30, |
|
| Increase/(Decrease) |
| |||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 25,287 |
|
| $ | 20,232 |
|
| $ | 5,055 |
|
|
| 25.0 | % |
Asset management fees |
|
| 5,318 |
|
|
| 4,313 |
|
|
| 1,005 |
|
|
| 23.3 | % |
Property management fees |
|
| 1,935 |
|
|
| 1,595 |
|
|
| 340 |
|
|
| 21.3 | % |
Property and operating expense |
|
| 3,252 |
|
|
| 2,530 |
|
|
| 722 |
|
|
| 28.5 | % |
General and administrative |
|
| 1,661 |
|
|
| 1,456 |
|
|
| 205 |
|
|
| 14.1 | % |
State and franchise tax |
|
| 305 |
|
|
| 510 |
|
|
| (205 | ) |
|
| (40.2 | )% |
Total operating expenses |
| $ | 37,758 |
|
| $ | 30,636 |
|
| $ | 7,122 |
|
|
| 23.2 | % |
Depreciation and amortization increased to $25.3 million for the three months ended June 30, 2019, compared to $20.2 million for the three months ended June 30, 2018. The increase is primarily due to the growth in our real estate portfolio, as discussed above.
Asset management fees
Asset management fees increased to $5.3 million for the three months ended June 30, 2019, compared to $4.3 million for the three months ended June 30, 2018. We pay the Asset Manager a quarterly fee2026 Unsecured Term loan bear interest equal to 0.25% of the aggregate value of our equity onLIBOR plus a fully diluted basis, based on the Determined Share Value. The increase in asset management fees during the three months ended June 30, 2019, compared to the comparable period in 2018, is the result of an increase in our total outstanding equity on a fully diluted basis, combined with an increase in the Determined Share Value.
The $86.00 Determined Share Value in effect as of June 30, 2019, reflected an increase of 3.6% from the $83.00 Determined Share Value in effect as of June 30, 2018. Additionally, the number of shares of our common stock and non-controlling membership units outstanding increased as the result of continued equity capital investments. As of June 30, 2019, there were 25.5 million shares of our common stock and non-controlling membership units outstanding, compared to 22.0 million as of June 30, 2018. The increase in equity capital was used to partially fund the continued growth in our real estate portfolio.
Property and operating expense
Property and operating expense increased to $3.3 million for the three months ended June 30, 2019, compared to $2.5 million for the three months ended June 30, 2018. The increase is mainly attributable to the number of properties we own for which we are responsible for engaging a third-party property manager to manage ongoing property maintenance, along with insurance and real estate taxes associated with those properties. A majority of these expenses are paid by us and reimbursed by the tenant under the terms of the respective leases. There was a corresponding increase in operating expenses billed to tenants and included within Lease revenues.
Other income (expenses)
|
| For the three months ended |
|
|
|
|
|
|
|
|
| |||||
|
| June 30, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred distribution income |
| $ | — |
|
| $ | 187 |
|
| $ | (187 | ) |
|
| (100.0 | )% |
Interest income |
|
| — |
|
|
| 52 |
|
|
| (52 | ) |
|
| (100.0 | )% |
Interest expense |
|
| (16,732 | ) |
|
| (12,454 | ) |
|
| 4,278 |
|
|
| 34.4 | % |
Cost of debt extinguishment |
|
| (8 | ) |
|
| (51 | ) |
|
| (43 | ) |
|
| (84.3 | )% |
Gain on sale of real estate |
|
| 2,787 |
|
|
| 4,256 |
|
|
| (1,469 | ) |
|
| (34.5 | )% |
Interest expense
Interest expense increased to $16.7 million for the three months ended June 30, 2019, compared to $12.5 million for the three months ended June 30, 2018. The increased interest expense resulted from a $185.8 million increase in overall borrowings used to partially fund new acquisitions, as well as an increase in our weighted average interest rate. We continue to strengthen our balance sheet by more closely aligning debt maturities and lease terms, accomplished through the refinancing of shorter-term borrowings with longer duration fixed-rate debt. Immediately following the second quarter of 2018, we refinanced our outstanding Revolver borrowings with our fixed rate Series B and Series C Notes, providing for an additional six and eight years of duration, respectively, beyond the Revolver maturity. Extending our debt maturity profile increased our weighted average interest rate on outstanding borrowings from 3.84% at June 30, 2018 to 4.26% at June 30, 2019, inclusive of our interest rate swaps.
Gain on sale of real estate
During the three months ended June 30, 2019, we recognized gains of $2.8 million on the sale of five properties, compared to gains of $4.3 million on the sale of six properties during the three months ended June 30, 2018. Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market.
For the six months ended June 30, 2019 and 2018
Lease Revenues
|
| For the six months ended |
|
|
|
|
|
|
|
|
| |||||
|
| June 30, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
Lease revenues |
| $ | 137,483 |
|
| $ | 112,621 |
|
| $ | 24,862 |
|
|
| 22.1 | % |
Total lease revenues increased to $137.5 million for the six months ended June 30, 2019, compared to $112.6 million for the six months ended June 30, 2018. The increase in revenue period-over-period is primarily attributable to the growth in our real estate portfolio during 2018 as described in the discussion related to the three months ended June 30, 2019 above. The initial cash capitalization rate on acquisitions made during the six months ended June 30, 2019, was 7.4%.
Operating Expenses
|
| For the six months ended |
|
|
|
|
|
|
|
|
| |||||
|
| June 30, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 49,597 |
|
| $ | 39,434 |
|
| $ | 10,163 |
|
|
| 25.8 | % |
Asset management fees |
|
| 10,438 |
|
|
| 8,456 |
|
|
| 1,982 |
|
|
| 23.4 | % |
Property management fees |
|
| 3,820 |
|
|
| 3,112 |
|
|
| 708 |
|
|
| 22.8 | % |
Property and operating expense |
|
| 7,642 |
|
|
| 5,149 |
|
|
| 2,493 |
|
|
| 48.4 | % |
General and administrative |
|
| 2,764 |
|
|
| 2,787 |
|
|
| (23 | ) |
|
| (0.8 | )% |
State and franchise tax |
|
| 748 |
|
|
| 753 |
|
|
| (5 | ) |
|
| (0.7 | )% |
Provision for impairment of investment in rental properties |
|
| 1,017 |
|
|
| — |
|
|
| 1,017 |
|
|
| 100.0 | % |
Total operating expenses |
| $ | 76,026 |
|
| $ | 59,691 |
|
| $ | 16,335 |
|
|
| 27.4 | % |
Depreciation and amortization
Depreciation and amortization increased to $49.6 million for the six months ended June 30, 2019, compared to $39.4 million for the six months ended June 30, 2018. The increase is primarily due to the growth in our real estate portfolio, as described in the discussion related to the three months ended June 30, 2019, above.
Asset management fees
Asset management fees increased to $10.4 million for the six months ended June 30, 2019, compared to $8.5 million for the six months ended June 30, 2018. As described in the discussion above related to the three months ended June 30, 2019, the increase in asset management fees during the six months ended June 30, 2019, compared to the comparable period in 2018, is a result of an increase in our outstanding equity on a fully diluted basis, combined with the increase in the Determined Share Value.
Property and operating expense
Property and operating expense increased to $7.6 million for the six months ended June 30, 2019, compared to $5.1 million for the six months ended June 30, 2018. The increase is attributable to the number of properties we own for which we are responsible for engaging a third-party property manager to manage ongoing property maintenance, along with insurance and real estate taxes associated with those properties. A majority of 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 billed to tenants included within Lease revenues.
Provision for impairment of investment in rental properties
During the six months ended June 30, 2019, we recognized $1.0 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. The impairment recognized during the six months ended June 30, 2019, related to a single property whose carrying amount we determined was not recoverable. In determining the fair value of the assets at the time of measurement, we utilized a capitalization rate of 14.6%, and a weighted average discount rate of 8%. We did not recognize any impairment during the six months ended June 30, 2018.
|
| For the six months ended |
|
|
|
|
|
|
|
|
| |||||
|
| June 30, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred distribution income |
| $ | — |
|
| $ | 375 |
|
| $ | (375 | ) |
|
| (100.0 | )% |
Interest income |
|
| 1 |
|
|
| 162 |
|
|
| (161 | ) |
|
| (99.4 | )% |
Interest expense |
|
| (32,560 | ) |
|
| (23,631 | ) |
|
| 8,929 |
|
|
| 37.8 | % |
Cost of debt extinguishment |
|
| (721 | ) |
|
| (51 | ) |
|
| 670 |
|
|
| 100.0 | % |
Gain on sale of real estate |
|
| 4,187 |
|
|
| 7,595 |
|
|
| (3,408 | ) |
|
| (44.9 | )% |
Interest expense
Interest expense increased to $32.6 million for the six months ended June 30, 2019, compared to $23.6 million for the six months ended June 30, 2018, due to higher overall borrowings as well as an increase in the weighted average interest rate we pay on those borrowings as compared to a year ago, as described in the discussion above related to the three months ended June 30, 2019.
Gain on sale of real estate
During the six months ended June 30, 2019, we recognized gains of $4.2 million on the sale of nine properties, compared to gains of $7.6 million on the sale of 11 properties during the six months ended June 30, 2018. 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 diluted share are presented in accordance with GAAP. We also disclose FFO and AFFO, each of which are non-GAAP measures. We believe the presentation 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 Board of Governors of Nareit, the worldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. To derive AFFO, we modify the Nareit computation of FFO to include other adjustments to GAAP net income related to certain non-cash revenues and expenses, including straight-line rents, cost of debt extinguishments, 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, 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-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. 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, as these items are not indicative of ongoing operational 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 nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO and AFFO. In the future, the SEC, Nareit or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of FFO and AFFO accordingly.
Net Income, FFO, and AFFO for the three months ended June 30, 2019 and 2018
The following table presents our net income and our non-GAAP FFO and AFFO for the three months ended June 30, 2019 and 2018. 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 |
|
|
|
|
|
|
|
|
| |||||
|
| June 30, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands, except per share data) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
Net income |
| $ | 17,342 |
|
| $ | 18,386 |
|
| $ | (1,044 | ) |
|
| (5.7 | )% |
Net earnings per diluted share |
|
| 0.70 |
|
|
| 0.86 |
|
|
| (0.16 | ) |
|
| (18.6 | )% |
FFO |
|
| 39,842 |
|
|
| 34,362 |
|
|
| 5,480 |
|
|
| 15.9 | % |
FFO per diluted share |
|
| 1.60 |
|
|
| 1.60 |
|
|
| — |
|
|
| — |
|
AFFO |
|
| 34,365 |
|
|
| 29,928 |
|
|
| 4,437 |
|
|
| 14.8 | % |
AFFO per diluted share |
|
| 1.38 |
|
|
| 1.39 |
|
|
| (0.01 | ) |
|
| (0.7 | )% |
Diluted WASO(a) |
|
| 24,941 |
|
|
| 21,478 |
|
|
| 3,463 |
|
|
| 16.1 | % |
|
|
As compared to the same period in 2018, revenue growth during the three months ended June 30, 2019, was partially offset by an increase in depreciation and amortization, asset management and property management expenses, and property and operating expenses, all of which are associated with a larger real estate portfolio, as well as increased interest expense and decreased gains on the sale of real estate.
The increased interest expense resulted from a $185.8 million increase in overall borrowings used to partially fund new acquisitions, as well as an increase in our weighted average interest rate. We continue to strengthen our balance sheet by more closely aligning debt maturities and lease terms, accomplished through the refinancing of shorter-term borrowings with longer duration fixed-rate debt. Immediately following the second quarter of 2018, we refinanced our outstanding Revolver borrowings with our fixed rate Series B and Series C Notes, providing for an additional six and eight years of duration, respectively, beyond the Revolver maturity. Extending our debt maturity profile increased our weighted average interest rate on outstanding borrowings from 3.84% at June 30, 2018, to 4.26% at June 30, 2019, inclusive of our interest rate swaps.
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-to-period comparisons. The gain on sale of real estate decreased $1.5 million during the three months ended June 30, 2019, as compared to the same period in 2018.
Our per share results were negatively impacted by funding a larger portion of our acquisitions with equity and recycling proceeds from property dispositions. We actively manage our leverage profile and overall liquidity position, and use a monthly equity cap to balance the mix of equity and debt capital used to fund acquisitions. We maintained a $20 million cap on new equity investments during the six months ended June 30, 2019, and removed the cap for new investments beginning in the month of July 2019,margin based on our pipeline of potential acquisitions, including the Anticipated Transaction for $735.7 million.credit rating ranging between 1.45% and 2.40% per annum. Based on our current credit rating, the timing difference between equity inflows managed through the cap and expected deployment into accretive acquisitions, our leverage ratio decreased to 40.2%applicable margin is 1.85% as of June 30, 2019, compared to 41.4% as of June 30, 2018. Upon closing the Anticipated Transaction,March 31, 2020.
Senior Notes
To mitigate interest rate risk, we expect a short-term increase in leverage, and a corresponding positive impacthave strategically added unsecured, fixed-rate, interest-only senior promissory notes (“Senior Notes”) to our results of operations based on the accretive nature of the investment and the relative cost of debt to equity. Consistent with our growth priorities and commitment to maintaining an investment grade balance sheet, we are committed to continuing to actively manage our leverage profile and overall liquidity position.
capital structure. The 15.9% increaseSenior Notes were issued in FFO and the 14.8% increase in AFFO during the three months ended June 30, 2019, as compared to the same period in 2018, was primarily driven by revenue growth in our real estate investment portfolio. As discussed above, this resulted from rent escalations associated with our same property portfolio, accretive acquisitions made since the second quarter of 2018, and strong portfolio operating performance. The increase in revenues was partially offset by increased interest expense, as discussed above, a result of extending our debt maturity profile. Consistent with the decrease in earnings per share, FFO per share remained constant with, and AFFO per share decreased from, the comparable period in 2018 as a result of our change in funding mix.
Net Income, FFO, and AFFO for the six months ended June 30, 2019 and 2018
The following table presents our net income and our non-GAAP FFO and AFFO for the six months ended June 30, 2019 and 2018. Our measures of FFO and AFFO are computed on the basis of amounts attributable to both us and non-controlling interests.
|
| For the six months ended |
|
|
|
|
|
|
|
|
| |||||
|
| June 30, |
|
| Increase/(Decrease) |
| ||||||||||
(in thousands, except per share data) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
Net income |
| $ | 32,364 |
|
| $ | 37,380 |
|
| $ | (5,016 | ) |
|
| (13.4 | )% |
Net earnings per diluted share |
|
| 1.32 |
|
|
| 1.77 |
|
|
| (0.45 | ) |
|
| (25.4 | )% |
FFO |
|
| 78,791 |
|
|
| 69,219 |
|
|
| 9,572 |
|
|
| 13.8 | % |
FFO per diluted share |
|
| 3.22 |
|
|
| 3.28 |
|
|
| (0.06 | ) |
|
| (1.8 | )% |
AFFO |
|
| 68,534 |
|
|
| 60,198 |
|
|
| 8,336 |
|
|
| 13.8 | % |
AFFO per diluted share |
|
| 2.80 |
|
|
| 2.85 |
|
|
| (0.05 | ) |
|
| (1.8 | )% |
Diluted WASO |
|
| 24,507 |
|
|
| 21,098 |
|
|
| 3,409 |
|
|
| 16.2 | % |
Net income
As compared to the same period in 2018, revenue growth during the six months ended June 30, 2019, was partially offset by an increase in depreciation and amortization, asset management and property management expenses, and property and operating expenses, all of which are associated with a larger real estate portfolio, as well as increased interest expense and decreased gains on the sale of real estate.
The increased interest expense resulted from a $185.8 million increase in overall borrowings used to partially fund new acquisitions, as well as an increase in our weighted average interest rate. We continue to strengthen our balance sheet by more closely aligning debt maturities and lease terms, accomplished through the refinancing of shorter-term borrowings with longer duration fixed-rate debt. Immediately following the second quarter of 2018, we refinanced our outstanding Revolver borrowings with our fixed rate Seriesseries (Series A, B, and Series C Notes, providing for an additional six and eight years of duration, respectively, beyond the Revolver maturity. Extending our debt maturity profile increased our weighted average interest rate on outstanding borrowings from 3.84% at June 30, 2018, to 4.26% at June 30, 2019, inclusive of our interest rate swaps.
GAAP net income includes items suchC) 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-to-period comparisons. The gain on sale of real estate decreased $3.4 million during the six months ended June 30, 2019, as compared to the same period in 2018. Additionally, we recognized a $1.0 million provision for impairment on investment in rental properties during the six months ended June 30, 2019, with no comparable charges during the same period in 2018.described below.
Our per share results were negatively impacted by funding a larger portion of our acquisitions with equity and recycling proceeds from property dispositions. We actively manage our leverage profile and overall liquidity position, and use a monthly equity cap to balance the mix of equity and debt capital used to fund acquisitions. We maintained a $20 million cap on new equity investments during the six months ended June 30, 2019, and removed the cap for new investments beginning in the month of July 2019, based on our pipeline of potential acquisitions, including the Anticipated Transaction (as defined below) for $735.7 million. Based on the timing difference between equity inflows managed through the cap and expected deployment into accretive acquisitions, our leverage ratio decreased to 40.2% as of June 30, 2019, compared to 41.4% as of June 30, 2018. Upon closing the Anticipated Transaction, we expect a short-term increase in leverage, and a corresponding positive impact to our results of operations based on the accretive nature of the investment and the relative cost of debt to equity. Consistent with our growth priorities and commitment to maintaining an investment grade balance sheet, we are committed to continuing to actively manage our leverage profile and overall liquidity position.
The 13.8% increase in both FFO and AFFO during the six months ended June 30, 2019, as compared to the same period in 2018, was primarily driven by revenue growth in our real estate investment portfolio. As discussed above, this resulted from rent escalations associated with our same property portfolio, accretive acquisitions made since the second quarter of 2018, and strong portfolio operating performance. The increase in revenues was partially offset by increased interest expense, as discussed above, a result of extending our debt maturity profile. Consistent with the decrease in earnings per share, FFO per share and AFFO per share decreased from the comparable period in 2018 as a result of our change in funding mix.
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 is information regardingare the diluted WASO and per diluted share amounts:
|
| For the three months ended |
| |||||
(in thousands, except per share data) |
| March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Net income |
| $ | 11,848 |
|
| $ | 15,022 |
|
Real property depreciation and amortization |
|
| 31,210 |
|
|
| 24,310 |
|
Gain on sale of real estate |
|
| (7,619 | ) |
|
| (1,400 | ) |
Provision for impairment on investment in rental properties |
|
| 2,133 |
|
|
| 1,017 |
|
FFO |
| $ | 37,572 |
|
| $ | 38,949 |
|
Capital improvements / reserves |
|
| — |
|
|
| (49 | ) |
Straight-line rent adjustment |
|
| (1,612 | ) |
|
| (5,143 | ) |
Adjustment to provision for credit losses |
|
| (17 | ) |
|
| — |
|
Cost of debt extinguishment |
|
| 22 |
|
|
| 713 |
|
Amortization of debt issuance costs |
|
| 888 |
|
|
| 553 |
|
Amortization of net mortgage premiums |
|
| (35 | ) |
|
| (35 | ) |
Gain on interest rate swaps and other non-cash interest expense |
|
| (42 | ) |
|
| (81 | ) |
Amortization of lease intangibles |
|
| (1,138 | ) |
|
| (738 | ) |
Internalization expenses |
|
| 1,205 |
|
|
| — |
|
Severance |
|
| 26 |
|
|
| — |
|
Change in fair value of earnout liability |
|
| 4,177 |
|
|
| — |
|
Other losses |
|
| 22 |
|
|
| — |
|
AFFO |
| $ | 41,068 |
|
| $ | 34,169 |
|
|
|
|
|
|
|
|
|
|
Diluted WASO |
|
| 29,053 |
|
|
| 24,072 |
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic and diluted |
| $ | 0.41 |
|
| $ | 0.62 |
|
FFO per diluted share |
|
| 1.29 |
|
|
| 1.62 |
|
AFFO per diluted share |
|
| 1.41 |
|
|
| 1.42 |
|
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”). As of March 31, 2020, our leverage ratio was 45.7% 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, our $240 million 2020 Unsecured Term Loan matures in August 2020, at which time we have the option to extend the loan twice, each for a period of six months, 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 gave notice that we were exercising the first six-month option, effective August 2, 2020. Refer to Recent Developments – COVID-19 Pandemic for additional discussion regarding the pandemic’s impact to our liquidity profile.
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 629 unencumbered properties and approximately $110.8 million of mortgage debt on the remaining properties. Refer to Recent Developments – COVID-19 Pandemic for additional discussion regarding the pandemic’s impact to our liquidity profile.
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 quarter. During the three months ended March 31, 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 Form 10-Q for further information. We announced on January 10, 2020 that we were terminating 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.
Existing Credit Facilities
The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and Senior Notes as of March 31, 2020.
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||
(in thousands, except per share data) |
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net income |
| $ | 17,342 |
|
| $ | 18,386 |
|
| $ | 32,364 |
|
| $ | 37,380 |
|
Real property depreciation and amortization |
|
| 25,287 |
|
|
| 20,232 |
|
|
| 49,597 |
|
|
| 39,434 |
|
Gain on sale of real estate |
|
| (2,787 | ) |
|
| (4,256 | ) |
|
| (4,187 | ) |
|
| (7,595 | ) |
Provision for impairment on investment in rental properties |
|
| — |
|
|
| — |
|
|
| 1,017 |
|
|
| — |
|
FFO |
| $ | 39,842 |
|
| $ | 34,362 |
|
| $ | 78,791 |
|
| $ | 69,219 |
|
Capital improvements / reserves |
|
| (48 | ) |
|
| (49 | ) |
|
| (97 | ) |
|
| (98 | ) |
Straight-line rent adjustment |
|
| (5,240 | ) |
|
| (5,162 | ) |
|
| (10,383 | ) |
|
| (10,303 | ) |
Cost of debt extinguishment |
|
| 8 |
|
|
| 51 |
|
|
| 721 |
|
|
| 51 |
|
Amortization of debt issuance costs |
|
| 597 |
|
|
| 472 |
|
|
| 1,150 |
|
|
| 933 |
|
Amortization of net mortgage premiums |
|
| (36 | ) |
|
| (35 | ) |
|
| (71 | ) |
|
| (71 | ) |
Gain on interest rate swaps and other non-cash interest expense |
|
| (41 | ) |
|
| — |
|
|
| (122 | ) |
|
| — |
|
Amortization of lease intangibles |
|
| (717 | ) |
|
| 289 |
|
|
| (1,455 | ) |
|
| 467 |
|
AFFO |
| $ | 34,365 |
|
| $ | 29,928 |
|
| $ | 68,534 |
|
| $ | 60,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted WASO |
|
| 24,941 |
|
|
| 21,478 |
|
|
| 24,507 |
|
|
| 21,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic and diluted |
| $ | 0.70 |
|
| $ | 0.86 |
|
| $ | 1.32 |
|
| $ | 1.77 |
|
FFO per diluted share |
|
| 1.60 |
|
|
| 1.60 |
|
|
| 3.22 |
|
|
| 3.28 |
|
AFFO per diluted share |
| $ | 1.38 |
|
| $ | 1.39 |
|
| $ | 2.80 |
|
| $ | 2.85 |
|
(in thousands, except interest rates) |
| Outstanding Balance |
|
| Interest Rate |
|
| Maturity Date | ||
2020 Unsecured Term Loan |
| $ | 240,000 |
|
| one-month LIBOR + 1.25% |
|
| Aug. 2020 | |
Unsecured Revolving Credit and Term Loan Agreement |
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility |
|
| 353,300 |
|
| 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 | |
|
|
| 808,300 |
|
|
|
|
|
|
|
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 |
|
| 2,033,300 |
|
|
|
|
|
|
|
Debt issuance costs, net |
|
| (7,413 | ) |
|
|
|
|
|
|
|
| $ | 2,025,887 |
|
|
|
|
|
|
|
2020 Unsecured Term Loan
The 2020 Unsecured Term loan has 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 March 31, 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. On May 5, 2020, we gave notice that we were exercising the first of these options, effective as of August 2, 2020.
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 March 31, 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 March 31, 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 March 31, 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 March 31, 2020.
2022 Unsecured Term Loan
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 had been 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 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 March 31, 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 March 31, 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.
Debt Covenants
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 March 31, 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 over the pandemic’s impact on our ability to satisfy our financial covenants.
Covenants | Required | Actual (as of March 31, 2020) | ||||
Leverage Ratio(a) | ≤ 0.60 to 1.00 | 0.54 | ||||
Secured Indebtedness Ratio(b) | ≤ 0.40 to 1.00 | 0.03 | ||||
Unencumbered Coverage Ratio(c) | ≥ 1.75 to 1.00 | 3.54 | ||||
Fixed Charge Coverage Ratio(d) | ≥ 1.50 to 1.00 | 2.81 | ||||
Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value(e) | ≤ 0.60 to 1.00 | 0.59 | ||||
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 are 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 $96.7 million and $13.2 million at March 31, 2020 and 2019, respectively. The table below shows information concerning cash flows for the three months ended March 31, 2020 and 2019:
|
| For the three months ended |
| |||||
| March 31, |
| ||||||
(In thousands) |
| 2020 |
|
| 2019 |
| ||
Net cash provided by operating activities |
| $ | 40,319 |
|
| $ | 31,639 |
|
Net cash provided by (used in) investing activities |
|
| 4,474 |
|
|
| (64,637 | ) |
Net cash provided by financing activities |
|
| 31,608 |
|
|
| 27,169 |
|
Increase (decrease) in cash and cash equivalents and restricted cash |
| $ | 76,401 |
|
| $ | (5,829 | ) |
The increase in net cash provided by operating activities during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, was mainly due to growth in our real estate portfolio.
The change in net cash provided by investing activities during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, was mainly due to decreased acquisition volume and increased proceeds from the disposal of properties, offset by cash paid in connection with the Internalization.
The increase in net cash provided by financing activities during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, mainly reflects a net increase in borrowings (as discussed in Liquidity above), partially offset by a decrease in proceeds from the issuance of our common stock and increased 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 11.3 years as of March 31, 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 March 31, 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 16.0% of our ABR as of March 31, 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 March 31, 2020, or December 31, 2019.
The following table provides information with respect to our contractual commitments and obligations as of March 31, 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 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 2,401 |
|
| $ | 58,412 |
|
| $ | 2,219 |
|
| $ | 534 |
|
| $ | 63,566 |
|
2021 |
|
| 240,000 |
|
|
| — |
|
|
| — |
|
|
| 18,006 |
|
|
| 72,049 |
|
|
| — |
|
|
| 711 |
|
|
| 330,766 |
|
2022 |
|
| 60,000 |
|
|
| 353,300 |
|
|
| — |
|
|
| 2,907 |
|
|
| 60,773 |
|
|
| — |
|
|
| 686 |
|
|
| 477,666 |
|
2023 |
|
| 265,000 |
|
|
| — |
|
|
| — |
|
|
| 8,332 |
|
|
| 53,562 |
|
|
| — |
|
|
| 505 |
|
|
| 327,399 |
|
2024 |
|
| 190,000 |
|
|
| — |
|
|
| — |
|
|
| 2,260 |
|
|
| 49,454 |
|
|
| — |
|
|
| 120 |
|
|
| 241,834 |
|
Thereafter |
|
| 450,000 |
|
|
| — |
|
|
| 475,000 |
|
|
| 76,912 |
|
|
| 122,555 |
|
|
| — |
|
|
| 2,411 |
|
|
| 1,126,878 |
|
Total |
| $ | 1,205,000 |
|
| $ | 353,300 |
|
| $ | 475,000 |
|
| $ | 110,818 |
|
| $ | 416,805 |
|
| $ | 2,219 |
|
| $ | 4,967 |
|
| $ | 2,568,109 |
|
(a) | Subsequent to quarter end, we gave notice that we were exercising the first of two six-month options to extend the maturity date of the 2020 Unsecured Term Loan, effective as of August 2, 2020, 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 March 31, 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 March 31, 2020 and December 31, 2019, investment in rental property of $176.8 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 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 March 31, 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.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of ourthese Condensed 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 we believe 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.
As discussedwhich 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 elsewhere in this
Quarterly Report on Form 10-Q, during the first quarter of 2019, we adopted the provisions of ASC 842, which resulted in a change to the critical accounting policy with respect to revenue recognition that had been disclosed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2018 Form 10-K.10-Q. We believe there have been no other significant changes during the sixthree months ended June 30, 2019,March 31, 2020, to the items that we disclosed as our critical accounting policies in our 20182019 Annual report on Form 10-K.
Impact of Recent Accounting Pronouncements
For information on the impact of recent accounting pronouncements on our business, see Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this 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”) 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 until further notice and terminated our dividend reinvestment plan (“DRIP”) and share redemption program as of February 10, 2020.
At its May 7, 2020, meeting, our board of directors voted to set the DSV at $82.00 per share until July 31, 2020, compared to the prior DSV of $85 per share. The Company’s NAV calculation as of March 31, 2020 was consistently calculated using the Company’s 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 our review of market capitalization rates. The Company did not adjust the values of its real estate assets to estimate any potential impact from the COVID-19 pandemic on its portfolio as of March 31, 2020.
The decline in the Company’s NAV during the first quarter was due to a decrease in the estimated value of the Company’s real estate investments (driven mainly by downward adjustments to fair value associated with properties leased to our largest tenant, who declared bankruptcy in March, and current quarter disposition activity), combined with a decline in market interest rates during the first quarter, which led to an increase in our estimated fair value of debt (and a corresponding decline in NAV). Additional information regarding our valuation policy and procedures, including significant assumptions used to value our real estate portfolio and corresponding sensitivity disclosures, 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 |
| NAV per diluted share |
|
| Determined Share Value |
| ||
May 1, 2020 - July 31, 2020 |
| March 31, 2020 |
| $ | 82.46 |
|
| $ | 82.00 |
|
February 1, 2020 - April 30, 2020 |
| December 31, 2019 |
| $ | 85.21 |
|
| $ | 85.00 |
|
November 1, 2019 - January 31, 2020 |
| September 30, 2019 |
| $ | 84.12 |
|
| $ | 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):
(in thousands, except per share amounts) NAV as of: |
| March 31, 2020 |
|
| December 31, 2019 |
| ||
Investment in rental property |
| $ | 4,344,570 |
|
| $ | 4,427,567 |
|
Debt |
|
| (2,233,159 | ) |
|
| (2,047,860 | ) |
Other assets and liabilities, net |
|
| 355,113 |
|
|
| (16,149 | ) |
NAV |
| $ | 2,466,524 |
|
| $ | 2,363,558 |
|
Number of outstanding shares, including noncontrolling interests |
|
| 29,912 |
|
|
| 27,738 |
|
NAV per diluted share |
| $ | 82.46 |
|
| $ | 85.21 |
|
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 March 31, 2020, and December 31, 2019, supporting the Determined Share Value in effect for the periods of May 1, 2020 through July 31, 2020, and February 1, 2020, through April 30, 2020, respectively:
Market capitalization rates, as of: |
| Industrial |
|
| Healthcare |
|
| Restaurant |
|
| Office |
|
| Retail |
|
| Other |
|
| Portfolio Total |
| |||||||
March 31, 2020 |
|
| 6.75 | % |
|
| 6.73 | % |
|
| 6.09 | % |
|
| 7.09 | % |
|
| 8.02 | % |
|
| 6.32 | % |
|
| 6.76 | % |
December 31, 2019 |
|
| 6.71 | % |
|
| 6.75 | % |
|
| 6.05 | % |
|
| 7.09 | % |
|
| 7.01 | % |
|
| 6.40 | % |
|
| 6.66 | % |
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 March 31, 2020, 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 diluted share would have been $77.27. Conversely, a decrease in the weighted average implied capitalization rate used as of March 31, 2020, of 0.25% would result in an increase in the fair value of our investment in rental property of 3.8%, and our NAV per diluted share would have been $88.05.
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. Given 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. Given the current economic downturn and significant reduction in real estate transactions, it is likely that we will be unable to obtain or utilize comparable sales data as part of our valuation process for several calendar quarters, which further impedes our ability to conduct accurate valuations. 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. 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
At its May 7, 2020 meeting, our board of directors undertook a full review of our rent collection results for April, preliminary collection results for May, our outlook for collections in future months, and our overall liquidity position. Given the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and current tenant rent relief requests, to preserve cash and strengthen our liquidity position, the board determined that it would temporarily suspend our monthly distribution. The previously announced distribution of $0.44 per common share and OP Unit for the month of April will remain payable on May 15, 2020. The board of directors will re-evaluate whether or not to reinstate a distribution at its August 2020 meeting. In connection with that re-evaluation, the board will consider the impact the COVID-19 pandemic has had on the Company’s results of operations through that time and, based upon the Company’s determination of its progress against its growth initiatives, will also evaluate the appropriate payout ratio and payment frequency for any future distributions. We intend to maintain BNL’s REIT status, and intend to make a special distribution in 2020 if it becomes necessary to do so based on the ultimate decisions with respect to future distributions.
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 three months ended March 31, 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 |
|
Total |
|
|
| $ | 28,950 |
|
| $ | 2,741 |
|
| $ | 5,734 |
|
| $ | 133 |
|
| $ | 37,558 |
|
(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 three months ended |
| |||||
|
| March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Distributions: |
|
|
|
|
|
|
|
|
Paid in cash |
| $ | 31,824 |
|
| $ | 16,419 |
|
Reinvested in shares |
|
| 5,734 |
|
|
| 14,533 |
|
Total Distributions |
| $ | 37,558 |
|
| $ | 30,952 |
|
Source of Distributions: |
|
|
|
|
|
|
|
|
Cash flow from operating activities |
| $ | 37,558 |
|
| $ | 30,952 |
|
FFO |
| $ | 37,572 |
|
| $ | 38,949 |
|
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.
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 borrowingscan result in increased interest expense under our unsecured credit facilitiesRevolving Credit Facility and a certain mortgage. Borrowings pursuant to our unsecured credit facilities and the floating-rate mortgage bear interest at floating rates based on LIBOR plus an 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 interestlong-term fixed rate swaps. Our interest rate risk management strategy is intended to stabilize cash flow requirementsdebt or by maintainingentering into interest rate swaps to convert certain variable-rate debt to a fixed rate. As of June 30, 2019, we had 33 interest rate swaps outstanding, in an aggregate notional amount of $885.0 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable-rate borrowings. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. Further information concerning our interest rate swaps can be found in Note 11 in our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q.
The table below summarizesOur fixed-rate debt includes our Senior Notes, mortgages, and variable-rate debt converted to a fixed rate with the termsuse 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 March 31, 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 fair value of our fixed-rate debt and interest rate swaps of approximately $85.4 million as of March 31, 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 $1.6 billion as of March 31, 2020, of which $909.9 million was swapped to a fixed rate by our use of interest rate swaps. Taking into account the effect of our interest rate swaps, at June 30, 2019.
(in thousands, except interest rates) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty |
| Maturity Date |
| Fixed Rate |
|
| Variable Rate Index |
| Notional Amount |
|
| Fair Value |
| |||
Bank of America, N.A. |
| November 2023 |
|
| 2.80 | % |
| one-month LIBOR |
| $ | 25,000 |
|
| $ | (1,214 | ) |
Bank of Montreal |
| July 2024 |
|
| 1.16 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| 948 |
|
Bank of Montreal |
| January 2025 |
|
| 1.91 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (345 | ) |
Bank of Montreal |
| July 2025 |
|
| 2.32 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (946 | ) |
Bank of Montreal |
| January 2026 |
|
| 1.92 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (364 | ) |
Bank of Montreal |
| January 2026 |
|
| 2.05 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| (903 | ) |
Bank of Montreal |
| May 2026 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (467 | ) |
Bank of Montreal |
| December 2026 |
|
| 2.33 | % |
| one-month LIBOR |
|
| 10,000 |
|
|
| (431 | ) |
Bank of Montreal |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,200 | ) |
Bank of Montreal |
| May 2029 |
|
| 2.09 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (601 | ) |
Capital One, National Association |
| December 2021 |
|
| 1.05 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| 212 |
|
Capital One, National Association |
| December 2024 |
|
| 1.58 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| 58 |
|
Capital One, National Association |
| January 2026 |
|
| 2.08 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (836 | ) |
Capital One, National Association |
| April 2026 |
|
| 2.68 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (947 | ) |
Capital One, National Association |
| July 2026 |
|
| 1.32 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| 933 |
|
Capital One, National Association |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,191 | ) |
M&T Bank |
| August 2021 |
|
| 1.02 | % |
| one-month LIBOR |
|
| 4,982 |
|
|
| 64 |
|
M&T Bank |
| September 2022 |
|
| 2.83 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (964 | ) |
M&T Bank |
| November 2023 |
|
| 2.65 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,108 | ) |
Regions Bank |
| May 2020 |
|
| 2.12 | % |
| one-month LIBOR |
|
| 50,000 |
|
|
| (92 | ) |
Regions Bank |
| December 2023 |
|
| 1.18 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 472 |
|
Regions Bank |
| May 2029 |
|
| 2.11 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (659 | ) |
Regions Bank |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (485 | ) |
SunTrust Bank |
| April 2024 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (387 | ) |
SunTrust Bank |
| April 2025 |
|
| 2.20 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (708 | ) |
SunTrust Bank |
| July 2025 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (419 | ) |
SunTrust Bank |
| December 2025 |
|
| 2.30 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (902 | ) |
SunTrust Bank |
| January 2026 |
|
| 1.93 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (326 | ) |
U.S. Bank National Association |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (489 | ) |
Wells Fargo Bank, N.A. |
| February 2021 |
|
| 2.39 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (377 | ) |
Wells Fargo Bank, N.A. |
| October 2024 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (829 | ) |
Wells Fargo Bank, N.A. |
| April 2027 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,827 | ) |
Wells Fargo Bank, N.A. |
| January 2028 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 75,000 |
|
|
| (3,659 | ) |
|
|
|
|
|
|
|
|
|
| $ | 884,982 |
|
| $ | (19,989 | ) |
interest expense would have increased by approximately $1.4 million in the three months ended March 31, 2020, if the applicable LIBOR rate had been 1% higher.
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 June 30, 2019,March 31, 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 June 30, 2019,March 31, 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 were no changesAs a result of our Internalization on February 7, 2020, we implemented internal controls over financial reporting to consider the management functions previously performed by our third-party manager. The Internalization represents a material change in internal control over financial reporting subsequent to management’s last assessment of our internal control over financial reporting, that occurredwhich was completed on December 31, 2019.
There have been no other changes in our internal control over financial reporting during the quarterthree months ended June 30, 2019,March 31, 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.
ThereOther than the addition of the text below, there have been no material changes from risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K. See the discussion of the Company’s risk factors under Part I, Item 1A. in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Actual or perceived threats associated with epidemics, pandemics or public health crises, including the COVID-19 pandemic, could have a material adverse effect on our results of operations and the businesses of our tenants.
Since its discovery in December 2019, a novel strain of coronavirus, which causes the viral disease known as COVID-19, has spread throughout most countries in the world, including the United States. This outbreak, which has since been declared a pandemic by the World Health Organization, has negatively impacted regional and global economic activity and contributed to volatility in financial markets throughout the world. Additionally, in response to the COVID-19 pandemic, many countries and U.S. states, including the areas in which we operate, have adopted certain measures to mitigate the ongoing public health crises. Such measures include “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. The COVID-19 pandemic has negatively impacted nearly every industry directly or indirectly.
The COVID-19 pandemic, and future epidemics, pandemics, and other public health crises could materially and adversely affect our and our tenants’ results of operations, liquidity, and ability to access capital markets or pay distributions due to, among other factors:
an ongoing reduction in general economic activity, which may cause one or more of our tenants to be unable to maintain profitability and make timely rental payments to us pursuant to their leases, or to declare bankruptcy;
an increase in property vacancies could result in our obligation to pay the associated real estate taxes, insurance, and general property operating expenses;
a continuing complete or partial closure of, or other operational issues at, one or more of our properties resulting from government or tenant action;
delays in the supply of material products or services to us or our tenants from vendors;
a reduction in our tenants’ available workforce as a result of local, state or federal “shelter in place” or “stay at home” rules and restrictions;
indications of a tenant’s inability to continue as a going concern, changes in our view of strategy relative to a tenant’s business or industry, or changes in our long-term hold strategies, which could be indicative of an impairment triggering event with respect to a particular property or properties;
a general decline in business activity and demand for real estate transactions, which could adversely affect our ability to grow our portfolio or sell properties upon desirable terms;
difficulty accessing debt and equity capital on attractive terms, if at all; and
an inability to maintain compliance with financial covenants of credit facility and other loan agreements, which may result in a default of such arrangements and potentially result in an acceleration of indebtedness, or increased interest expense should a waiver be required from the lending institutions.
The extent to which the COVID-19 pandemic impacts our investments and operations will depend on future developments, including, among others, the duration of the outbreak, new information that may emerge concerning the severity of COVID-19, and the actions taken to contain the COVID-19 pandemic or treat the disease. These developments and the full impact of the COVID-19 pandemic on our business are highly uncertain and cannot be predicted with confidence. Nevertheless, the COVID-19 pandemic and any future epidemics, pandemics or public health crises could materially and adversely affect our business, financial condition, liquidity and results of operations, as well as our ability to pay distributions to our stockholders, for the reasons discussed above. In particular, the following risk factors previously disclosed in our Annual Report on Form 10-K are updated as follows:
The failure of one or more of our tenants to pay rent due to the market disruption caused by the COVID-19 outbreak or any other reason could materially and adversely affect us, including our results of operations.
Our performance depends on the financial condition of our tenants and their ability to fulfill their lease obligations by paying rent in a timely manner. The outbreak has adversely affected our tenants’ businesses generally. As of April 30, 2020, we have received requests for rent relief from 36.3% of our tenants based on ABR. Although the requests range in scope, the most common request is for a full or partial rent deferment for three months, with repayment over a six to 12-month period following the reinstatement of regular rent payments. In certain cases, we are also negotiating for lease extensions or the early exercise of a tenant renewal option in addition to the repayment of the deferred rent. We have not agreed to any rent forgiveness or permanent abatement and are only negotiating rent deferrals. However, we cannot predict the ultimate resolution of these discussions with our tenants or whether any such negotiations could break down in the future and result in any such tenants refusing to pay all or a substantial portion of the rent due under their leases. The duration of the COVID-19 pandemic and our tenants’ ability to return to business after governmental restrictions are lifted will have a significant impact on our ability to continue to collect rents, and any material disruption in our ability to collect rents could have a material adverse impact on our business and results of operations.
General economic disruption resulting from the COVID-19 pandemic could result in a reduction in the willingness or ability of consumers to use their discretionary income in the businesses of our tenants and potential tenants, which could reduce the demand for our properties and in turn could materially and adversely affect us.
A significant portion of our portfolio is leased to tenants operating businesses at our properties that rely on discretionary consumer spending. Restaurants (including quick service and casual and family dining) represent a material portion of our portfolio and the highest proportion of tenants seeking rent relief at this time are in the restaurant sector. Red Lobster Hospitality, Jack’s Family Restaurants, Outback Steakhouse, and Krispy Kreme are among the most significant tenants in our portfolio. The success of most of these businesses depends on the willingness of consumers to use discretionary income to purchase their products or services. A downturn in the economy resulting from the COVID-19 pandemic could cause consumers to reduce their discretionary spending, which could result in tenant bankruptcies or otherwise have an adverse impact on our tenants’ ability to successfully manage their businesses and pay us amounts due under our lease agreements, thereby materially and adversely affecting us.
More generally, if the pandemic results in a period of economic slowdown, rising interest rates and declining demand for real estate, then it may cause a general decline in rents or an increased incidence of defaults under existing leases. A lack of demand for rental space could adversely affect our ability to maintain our current tenants and gain new tenants, which may affect our growth and results of operations. Accordingly, a general decline in economic conditions resulting from the COVID-19 pandemic could materially and adversely affect us.
Legal restrictions intended to mitigate the impact of COVID-19 could have a particularly adverse impact on the restaurant and retail industries, which may materially and adversely affect us.
The legal restrictions adopted by many U.S. states to mitigate the ongoing public health crises related to COVID-19, including “shelter in place” and “stay at home” rules, restrictions on travel, and restrictions on the types of businesses that may continue to operate, have had a particularly acute negative economic impact on restaurant and retail businesses throughout the areas in which we operate. As of March 31, 2020, leases representing approximately 15.7% of our ABR were with tenants in the restaurant industry and 9.6% of our ABR were with tenants in the retail industry. Accordingly, decreases in the demand for restaurant and/or retail spaces may have a greater adverse effect on us than if we had fewer investments in these industries. For example, if there is an increase in the number of companies in the restaurant industry that declare bankruptcy, go out of business, or significantly reduce the number of their locations as a result of the pandemic, then we are likely to experience challenges with our restaurant tenants, and may record asset impairments on certain assets as a result of increased credit losses. To the extent that economic conditions continue to deteriorate in the retail and restaurant industries, they are likely to negatively affect market rents for such properties and could materially and adversely affect us.
Decreases in real estate transaction activity resulting from the COVID-19 pandemic may materially inhibit our ability to achieve growth through acquisitions at a rate that is comparable to our historical results, which could materially and adversely affect us.
Although the long-term impact of the COVID-19 pandemic on investment sales markets is currently difficult to predict, the disruption from the pandemic thus far has resulted in a significant decrease in real estate investment sales. Our growth strategy depends significantly on acquiring new properties. Since 2015, our team has acquired more than $500 million of net leased real estate each year, with approximately $1 billion during 2019. The Company did not complete any acquisitions during the three months ended March 31, 2020, which increases the risk of lower overall acquisition activity for the full year given the ongoing impact of the COVID-19 pandemic. Our ability to grow requires us to identify and complete acquisitions that meet our investment criteria. Changes in the volume of real estate investment sales, or our ability to access acquisition financing, resulting from the COVID-19 pandemic may negatively impact our acquisition opportunities, and if we are unable to achieve growth through acquisitions at a rate that is comparable to our historical results, it could materially and adversely affect us.
The Determined Share Value is not directly derived from any independent valuation or from the value of the existing property portfolio. Investors should use caution in using the Determined Share Value as the current value of shares of our common stock.
Historically, shares of our common stock have been sold by us in a private offering at a price per share equal to what we refer to as the current Determined Share Value, which is established at least quarterly by our Board of Directors based on the net asset value of the portfolio, input from management and third-party consultants, and such other factors set forthas the Board of Directors may, in its sole discretion, determine. Our net assets are primarily comprised of our Form 10-K.investment in real property and debt, as well as other assets and liabilities such as cash, interest rate swaps, and accounts payable. The values ascribed to our mortgages and unsecured notes are marked to market each quarter.
Sales of Common Stock and Issuance of MembershipOP Units
We 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 have conducted additional closings at least once every calendar quarter since then. Currently,through December 31, 2019. On January 10, 2020, we close salesannounced that we suspended until further notice our private offering of additional shares of our common stock monthly. In November 2017, we instituted an equity cap and queue program for new and additional investments in our common stock. The cap does not apply to investments made pursuant to our DRIP, or to equity capital received in connection with UPREIT transactions. For the months
As of February 2019 through June 2019, new and additional investmentsMarch 31, 2020, there were capped at $20 million per month. On July 3, 2019, we announced that we were removing the equity cap for the month of July 2019 based on our current leverage profile and pipeline of potential acquisitions. We anticipate reinstating the equity cap once we are comfortably within the leverage range of our investment grade credit rating.
If the total subscriptions for shares of our common stock exceed the cap for a month, subscriptions will generally be accepted at that month’s closing in the order in which they were submitted. In our or the Asset Manager’s discretion, however, certain subscriptions may be given priority over other subscriptions based on factors other than the order of submission, including the size of the subscription, the size of a stockholder’s existing investment, whether the subscription was sourced through an existing or new intermediary relationship, and such other factors we or the Asset Manager may consider. Any subscription for shares that we do not accept at any closing may be held for two subsequent closings and, if so held, shall be treated as a continuing subscription to purchase any remaining shares at the two subsequent closings (and, if applicable, any additional subsequent closings resulting from the subscriber’s exercise of the renewal option discussed below) at the offering price then in effect. If we do not accept and request payment for all of the shares subscribed for at one of the first three closings after receipt of a subscription, the subscriber will have the option to renew its subscription for three additional closings and maintain its position in any equity subscription queue by providing written notice of the subscriber’s election to exercise such option. The same option will be available to the subscriber for each subsequent three-closing period.
For the six months ended June 30, 2019, we sold 1.826.9 million shares of our common stock in our private offering,issued and outstanding, including 0.40.8 million mezzanine equity common shares, of common stockand 3.1 million OP Units issued pursuant to our DRIP, for gross offering proceeds of approximately $150.8 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, to reduce ourand outstanding, indebtedness, and for general corporate purposes.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 sixthree months ended June 30, 2019March 31, 2020 (in thousands, except year and Determined Share Value amounts).
Month |
| Year |
| Common Shares Sold |
|
| Weighted Average Determined Share Value — Common Shares(a) |
|
| Total Proceeds — Common Shares Sold |
|
| Common Shares DRIP |
|
| Weighted Average Determined Share Value — DRIP(b) |
|
| Total Proceeds — Common Share DRIP(c) |
|
| Total Proceeds |
| |||||||
January |
| 2019 |
|
| 233 |
|
| $ | 86.00 |
|
| $ | 20,000 |
|
|
| 58 |
|
| $ | 84.28 |
|
| $ | 4,862 |
|
| $ | 24,862 |
|
February |
| 2019 |
|
| 235 |
|
| $ | 85.00 |
|
|
| 20,000 |
|
|
| 58 |
|
| $ | 84.28 |
|
|
| 4,930 |
|
|
| 24,930 |
|
March |
| 2019 |
|
| 235 |
|
| $ | 85.00 |
|
|
| 20,000 |
|
|
| 62 |
|
| $ | 83.30 |
|
|
| 5,136 |
|
|
| 25,136 |
|
April |
| 2019 |
|
| 235 |
|
| $ | 85.00 |
|
|
| 20,000 |
|
|
| 63 |
|
| $ | 83.30 |
|
|
| 5,224 |
|
|
| 25,224 |
|
May |
| 2019 |
|
| 233 |
|
| $ | 86.00 |
|
|
| 20,000 |
|
|
| 64 |
|
| $ | 83.30 |
|
|
| 5,306 |
|
|
| 25,306 |
|
June |
| 2019 |
|
| 233 |
|
| $ | 86.00 |
|
|
| 20,000 |
|
|
| 63 |
|
| $ | 84.28 |
|
|
| 5,339 |
|
|
| 25,339 |
|
Total |
|
|
|
| 1,404 |
|
|
|
|
|
|
| 120,000 |
|
|
| 368 |
|
|
|
|
|
|
| 30,797 |
|
|
| 150,797 |
|
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 |
|
(a) |
|
| DRIP shares are purchased at a discounted price of 98% of the Determined Share Value. |
| For common shares reinvested under our DRIP there is no corresponding cash flow from the transaction. Refer to Note 13 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further discussion. |
None of the shares of our common stock set forth in the table above were registered under the Securities Act and were issued 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 an 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 OP in exchange for OP Units. There were no such OP Unit issuances during the quarter ended March 31, 2020.
None of the OP Units have been registered under the Securities Act in reliance upon the exemptions 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 OP Units were issued to persons who represented to us in writing that they qualified as an Accredited Investor, and provided us with additional documentation to assist us in verifying such person’s status as 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 June 30, 2019, 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 three months ended March 31, 2020.
Period |
| Total Number of Shares Requested to be Redeemed (a) |
|
| Total Number of Shares Redeemed |
|
| Average Price Paid Per Share (b) |
|
| Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program | |||
April 2019 |
|
| — |
|
|
| — |
|
|
| — |
|
| (c) |
May 2019 |
|
| — |
|
|
| — |
|
|
| — |
|
| (c) |
June 2019 |
|
| 37,501 |
|
|
| 37,501 |
|
| $ | 85.59 |
|
| (c) |
|
|
|
|
|
|
None.
Not applicable.
The other information presented below is being filed as a result of the Company’s adoption of the new accounting guidance for lease accounting (“ASC 842”) on January 1, 2019. As part of that adoption, the Company elected the available practical expedient, for all classes of assets, not to separate lease components in contracts from the nonlease components in those contracts, when recording revenues associated with operating leases where it is the lessor. Since the lease component is the predominant component under the Company’s leases, combined revenues from both the lease and nonlease components are accounted for in accordance with ASC 842 and will be reported in all periods subsequent to the adoption of the new accounting guidance in a single caption, “Lease revenues,” on the Company’s Consolidated Statements of Income and Comprehensive (Loss) Income. The presentation and disclosure of Lease revenues have been adjusted to reflect these changes for the three and six months ended June 30, 2019. Refer to Note 2 of Part I, Item 1. “Financial Statements,” for further details on these updates to significant accounting policies.
This information is intended to assist investors in making comparisons of the Company’s historical financial information with future financial information. The reported financial information below has been revised to conform to the current presentation.
This table below summarizes total revenues as originally reported in the Consolidated Statements of Income and Comprehensive (Loss) Income included the Company’s 2018 Annual Report on Form 10-K, as follows (in thousands):
As originally reportedNone.
|
| For the years ended December 31, |
| |||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Rental income from operating leases |
| $ | 222,208 |
|
| $ | 170,493 |
|
| $ | 133,943 |
|
Earned income from direct financing leases |
|
| 3,941 |
|
|
| 4,141 |
|
|
| 4,544 |
|
Operating expenses reimbursed from tenants |
|
| 11,221 |
|
|
| 6,721 |
|
|
| 4,173 |
|
Other income from real estate transactions |
|
| 109 |
|
|
| 208 |
|
|
| 209 |
|
Total revenues |
| $ | 237,479 |
|
| $ | 181,563 |
|
| $ | 142,869 |
|
As revised
|
| For the years ended December 31, |
| |||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenues |
| $ | 237,479 |
|
| $ | 181,563 |
|
| $ | 142,869 |
|
No. |
| Description |
|
|
|
2.1 | ||
2.2 | ||
3.1 |
| |
|
|
|
3.2 |
| |
|
|
|
4.1 |
| |
|
|
|
|
| |
10.2 | ||
10.3 | ||
10.5 | ||
10.6 | ||
10.7+ | ||
10.8+ | ||
10.9+ | ||
No. | Description | |
10.10+ | Broadstone Net Lease, LLC, Broadstone Employee Sub, LLC, and John D. Moragne (filed as Exhibit 10.10 to the Corporation’s Current Report on Form 8-K filed February 7, 2020 and incorporated herein by reference) | |
|
|
|
31.1* |
| |
|
|
|
| ||
|
|
|
32.1*† |
| |
|
|
|
32.2*† |
| |
|
|
|
101.1 |
| The following materials from the |
* | Filed herewith. |
+ | Management contract or compensatory plan or arrangement. |
† | In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| BROADSTONE NET LEASE, INC. |
|
|
|
Date: |
| /s/ Christopher J. Czarnecki |
|
| Christopher J. Czarnecki |
|
| Chief Executive Officer and President |
|
|
|
Date: |
| /s/ Ryan M. Albano |
|
| Ryan M. Albano |
|
| Executive Vice President and Chief Financial Officer |
5856