UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2019,2020, or
☐ | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 000-55774001-39529
BROADSTONE NET LEASE, INC.
(Exact name of registrant as specified in its charter)
Maryland | 26-1516177 |
(State or other jurisdiction of | (I.R.S. Employer |
800 Clinton Square Rochester, New York | 14604 |
(Address of principal executive offices) | (Zip Code) |
(585) 287-6500
(Registrant’s telephone number, including area code)
Securities registered pursuant toSection 12(b) of the Exchange Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
|
| BNL |
| New York Stock Exchange |
Class A Common Stock, $0.00025 par value 1 | BNL | New York Stock Exchange |
1 Each share of Class A Common Stock will automatically convert to one share of Common Stock on March 20, 2021, the date that is 180 days after the completion of the initial public offering of the Class A Common Stock. The Common Stock will be listed and tradeable on the New York Stock Exchange on March 22, 2021.
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 |
| ☒ |
|
|
|
|
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 25,550,886.642 107,786,452shares of the Registrant’s common stock, $0.001Common Stock, $0.00025 par value per share, and 37,000,000 shares of the Registrant’s Class A Common Stock, $0.00025 par value per share, outstanding as of November 12, 2019.5, 2020.
TABLE OF CONTENTS
| Page | |
1 | ||
Item 1. | 1 | |
| 1 | |
| Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited) | 2 |
| Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity (Unaudited) | 3 |
| 5 | |
| Notes to the Condensed Consolidated Financial Statements (Unaudited) | 6 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
| |
|
| |
| 33 | |
Recent Developments – Stock Split and Initial Public Offering | 33 | |
34 | ||
39 | ||
45 | ||
47 | ||
| ||
51 | ||
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| |
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| |
| ||
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52 | ||
| 52 | |
53 | ||
56 | ||
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Item 3. |
| |
Item 4. |
| |
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Item 1. |
| |
Item 1A. |
| |
Item 2. |
| |
Item 3. | 59 | |
Item 4. | 59 | |
Item 5. | 59 | |
Item 6. | 60 |
Part I. FINANCIALFINANCIAL INFORMATION
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)
|
| September 30, 2019 |
|
| December 31, 2018 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounted for using the operating method, net of accumulated depreciation |
| $ | 3,459,626 |
|
| $ | 2,641,746 |
|
| $ | 3,304,002 |
|
| $ | 3,415,400 |
|
Accounted for using the direct financing method |
|
| 41,920 |
|
|
| 42,000 |
|
|
| 30,902 |
|
|
| 41,890 |
|
Investment in rental property, net |
|
| 3,501,546 |
|
|
| 2,683,746 |
|
|
| 3,334,904 |
|
|
| 3,457,290 |
|
Cash and cash equivalents |
|
| 14,008 |
|
|
| 18,612 |
|
|
| 101,787 |
|
|
| 12,455 |
|
Accrued rental income |
|
| 81,251 |
|
|
| 69,247 |
|
|
| 97,517 |
|
|
| 84,534 |
|
Tenant and other receivables, net |
|
| 861 |
|
|
| 1,026 |
|
|
| 3,957 |
|
|
| 934 |
|
Prepaid expenses and other assets |
|
| 34,594 |
|
|
| 4,316 |
|
|
| 19,522 |
|
|
| 12,613 |
|
Interest rate swap, assets |
|
| 1,120 |
|
|
| 17,633 |
|
|
| 0 |
|
|
| 2,911 |
|
Goodwill |
|
| 339,769 |
|
|
| 0 |
| ||||||||
Intangible lease assets, net |
|
| 342,478 |
|
|
| 286,258 |
|
|
| 288,971 |
|
|
| 331,894 |
|
Debt issuance costs – unsecured revolver, net |
|
| 2,679 |
|
|
| 2,261 |
| ||||||||
Debt issuance costs – unsecured revolving credit facility, net |
|
| 7,027 |
|
|
| 2,380 |
| ||||||||
Leasing fees, net |
|
| 13,251 |
|
|
| 13,698 |
|
|
| 11,015 |
|
|
| 12,847 |
|
Total assets |
| $ | 3,991,788 |
|
| $ | 3,096,797 |
|
| $ | 4,204,469 |
|
| $ | 3,917,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured revolver |
| $ | 303,300 |
|
| $ | 141,100 |
| ||||||||
Unsecured revolving credit facility |
| $ | 0 |
|
| $ | 197,300 |
| ||||||||
Mortgages and notes payable, net |
|
| 112,562 |
|
|
| 78,952 |
|
|
| 108,752 |
|
|
| 111,793 |
|
Unsecured term notes, net |
|
| 1,671,511 |
|
|
| 1,225,773 |
|
|
| 1,433,495 |
|
|
| 1,672,081 |
|
Interest rate swap, liabilities |
|
| 37,489 |
|
|
| 1,820 |
|
|
| 81,326 |
|
|
| 24,471 |
|
Earnout liability |
|
| 13,177 |
|
|
| 0 |
| ||||||||
Accounts payable and other liabilities |
|
| 34,008 |
|
|
| 24,394 |
|
|
| 55,339 |
|
|
| 37,377 |
|
Due to related parties |
|
| 433 |
|
|
| 114 |
| ||||||||
Accrued interest payable |
|
| 9,482 |
|
|
| 9,777 |
|
|
| 9,453 |
|
|
| 3,594 |
|
Intangible lease liabilities, net |
|
| 94,503 |
|
|
| 85,947 |
|
|
| 81,220 |
|
|
| 92,222 |
|
Total liabilities |
|
| 2,263,288 |
|
|
| 1,567,877 |
|
|
| 1,782,762 |
|
|
| 2,138,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (See Note 16) |
|
|
|
|
|
|
|
| ||||||||
Commitments and contingencies (See Note 17) |
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadstone Net Lease, Inc. stockholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.001 par value; 80,000 shares authorized, 25,482 and 22,014 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively |
|
| 25 |
|
|
| 22 |
| ||||||||
Preferred stock, $0.001 par value; 20,000 shares authorized, 0 shares issued or outstanding |
|
| 0 |
|
|
| 0 |
| ||||||||
Common stock, $0.00025 par value; 440,000 shares authorized, 107,773 shares issued and outstanding at September 30, 2020; 320,000 shares authorized, 104,006 shares issued and outstanding at December 31, 2019 |
|
| 27 |
|
|
| 26 |
| ||||||||
Class A common stock, $0.00025 par value; 60,000 shares authorized, 33,500 shares issued and outstanding at September 30, 2020; 0 shares authorized, issued or outstanding at December 31, 2019 |
|
| 8 |
|
|
| 0 |
| ||||||||
Additional paid-in capital |
|
| 1,852,038 |
|
|
| 1,557,421 |
|
|
| 2,506,008 |
|
|
| 1,895,935 |
|
Cumulative distributions in excess of retained earnings |
|
| (194,790 | ) |
|
| (155,150 | ) |
|
| (239,520 | ) |
|
| (208,261 | ) |
Accumulated other comprehensive (loss) income |
|
| (33,911 | ) |
|
| 14,806 |
| ||||||||
Accumulated other comprehensive loss |
|
| (74,729 | ) |
|
| (20,086 | ) | ||||||||
Total Broadstone Net Lease, Inc. stockholders’ equity |
|
| 1,623,362 |
|
|
| 1,417,099 |
|
|
| 2,191,794 |
|
|
| 1,667,614 |
|
Non-controlling interests |
|
| 105,138 |
|
|
| 111,821 |
|
|
| 229,913 |
|
|
| 111,406 |
|
Total equity |
|
| 1,728,500 |
|
|
| 1,528,920 |
|
|
| 2,421,707 |
|
|
| 1,779,020 |
|
Total liabilities and equity |
| $ | 3,991,788 |
|
| $ | 3,096,797 |
|
| $ | 4,204,469 |
|
| $ | 3,917,858 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Loss)
(Unaudited)
(in thousands, except per share amounts)
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenues, net |
| $ | 80,744 |
|
| $ | 76,401 |
|
| $ | 239,346 |
|
| $ | 213,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 31,363 |
|
|
| 28,392 |
|
|
| 102,503 |
|
|
| 77,989 |
|
Asset management fees |
|
| 0 |
|
|
| 5,610 |
|
|
| 2,461 |
|
|
| 16,048 |
|
Property management fees |
|
| 0 |
|
|
| 2,098 |
|
|
| 1,275 |
|
|
| 5,918 |
|
Property and operating expense |
|
| 4,187 |
|
|
| 3,855 |
|
|
| 12,492 |
|
|
| 11,497 |
|
General and administrative |
|
| 7,214 |
|
|
| 1,315 |
|
|
| 18,756 |
|
|
| 3,807 |
|
Provision for impairment of investment in rental properties |
|
| 14,732 |
|
|
| 2,435 |
|
|
| 17,399 |
|
|
| 3,452 |
|
Total operating expenses |
|
| 57,496 |
|
|
| 43,705 |
|
|
| 154,886 |
|
|
| 118,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 0 |
|
|
| 5 |
|
|
| 20 |
|
|
| 6 |
|
Interest expense |
|
| (18,511 | ) |
|
| (18,465 | ) |
|
| (59,015 | ) |
|
| (51,025 | ) |
Cost of debt extinguishment |
|
| (392 | ) |
|
| (455 | ) |
|
| (414 | ) |
|
| (1,176 | ) |
Gain on sale of real estate |
|
| 1,060 |
|
|
| 12,585 |
|
|
| 9,725 |
|
|
| 16,772 |
|
Income taxes |
|
| (129 | ) |
|
| (405 | ) |
|
| (1,080 | ) |
|
| (1,153 | ) |
Internalization expenses |
|
| (1,929 | ) |
|
| (923 | ) |
|
| (3,523 | ) |
|
| (1,195 | ) |
Change in fair value of earnout liability |
|
| 6,362 |
|
|
| 0 |
|
|
| 8,506 |
|
|
| 0 |
|
Other gains (losses) |
|
| 2 |
|
|
| 0 |
|
|
| (22 | ) |
|
| 0 |
|
Net income |
|
| 9,711 |
|
|
| 25,038 |
|
|
| 38,657 |
|
|
| 57,402 |
|
Net income attributable to non-controlling interests |
|
| (961 | ) |
|
| (1,650 | ) |
|
| (3,738 | ) |
|
| (3,942 | ) |
Net income attributable to Broadstone Net Lease, Inc. |
| $ | 8,750 |
|
| $ | 23,388 |
|
| $ | 34,919 |
|
| $ | 53,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 111,155 |
|
|
| 98,568 |
|
|
| 108,228 |
|
|
| 93,575 |
|
Diluted |
|
| 123,381 |
|
|
| 105,516 |
|
|
| 119,747 |
|
|
| 100,523 |
|
Net earnings per share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
| $ | 0.08 |
|
| $ | 0.24 |
|
| $ | 0.32 |
|
| $ | 0.57 |
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 9,711 |
|
| $ | 25,038 |
|
| $ | 38,657 |
|
| $ | 57,402 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate swaps |
|
| 4,352 |
|
|
| (16,380 | ) |
|
| (59,766 | ) |
|
| (52,182 | ) |
Realized gain on interest rate swaps |
|
| (42 | ) |
|
| (41 | ) |
|
| (125 | ) |
|
| (163 | ) |
Comprehensive income (loss) |
|
| 14,021 |
|
|
| 8,617 |
|
|
| (21,234 | ) |
|
| 5,057 |
|
Comprehensive (income) loss attributable to non-controlling interests |
|
| (1,387 | ) |
|
| (557 | ) |
|
| 1,510 |
|
|
| (315 | ) |
Comprehensive income (loss) attributable to Broadstone Net Lease, Inc. |
| $ | 12,634 |
|
| $ | 8,060 |
|
| $ | (19,724 | ) |
| $ | 4,742 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of IncomeStockholders’ Equity and Comprehensive IncomeMezzanine Equity
(Unaudited)
(in thousands, except per share amounts)
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenues |
| $ | 76,401 |
|
| $ | 61,764 |
|
| $ | 213,884 |
|
| $ | 174,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 28,392 |
|
|
| 21,869 |
|
|
| 77,989 |
|
|
| 61,303 |
|
Asset management fees |
|
| 5,610 |
|
|
| 4,663 |
|
|
| 16,048 |
|
|
| 13,119 |
|
Property management fees |
|
| 2,098 |
|
|
| 1,680 |
|
|
| 5,918 |
|
|
| 4,792 |
|
Property and operating expense |
|
| 3,855 |
|
|
| 2,777 |
|
|
| 11,497 |
|
|
| 7,926 |
|
General and administrative |
|
| 1,315 |
|
|
| 1,664 |
|
|
| 3,807 |
|
|
| 4,451 |
|
State, franchise and foreign tax |
|
| 405 |
|
|
| 58 |
|
|
| 1,153 |
|
|
| 811 |
|
Provision for impairment of investment in rental properties |
|
| 2,435 |
|
|
| 2,061 |
|
|
| 3,452 |
|
|
| 2,061 |
|
Total operating expenses |
|
| 44,110 |
|
|
| 34,772 |
|
|
| 119,864 |
|
|
| 94,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred distribution income |
|
| — |
|
|
| 65 |
|
|
| — |
|
|
| 440 |
|
Interest income |
|
| 5 |
|
|
| 16 |
|
|
| 6 |
|
|
| 178 |
|
Interest expense |
|
| (18,465 | ) |
|
| (14,484 | ) |
|
| (51,025 | ) |
|
| (38,115 | ) |
Cost of debt extinguishment |
|
| (455 | ) |
|
| (50 | ) |
|
| (1,176 | ) |
|
| (101 | ) |
Gain on sale of real estate |
|
| 12,585 |
|
|
| 2,025 |
|
|
| 16,772 |
|
|
| 9,620 |
|
Gain on sale of investment in related party |
|
| — |
|
|
| 8,500 |
|
|
| — |
|
|
| 8,500 |
|
Internalization expenses |
|
| (923 | ) |
|
| — |
|
|
| (1,195 | ) |
|
| — |
|
Net income |
|
| 25,038 |
|
|
| 23,064 |
|
|
| 57,402 |
|
|
| 60,444 |
|
Net income attributable to non-controlling interests |
|
| (1,650 | ) |
|
| (1,797 | ) |
|
| (3,942 | ) |
|
| (4,631 | ) |
Net income attributable to Broadstone Net Lease, Inc. |
| $ | 23,388 |
|
| $ | 21,267 |
|
| $ | 53,460 |
|
| $ | 55,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 24,642 |
|
|
| 20,554 |
|
|
| 23,394 |
|
|
| 19,850 |
|
Diluted |
|
| 26,379 |
|
|
| 22,291 |
|
|
| 25,131 |
|
|
| 21,496 |
|
Net earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
| $ | 0.95 |
|
| $ | 1.03 |
|
| $ | 2.28 |
|
| $ | 2.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 25,038 |
|
| $ | 23,064 |
|
| $ | 57,402 |
|
| $ | 60,444 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate swaps |
|
| (16,380 | ) |
|
| 6,299 |
|
|
| (52,182 | ) |
|
| 30,296 |
|
Realized gain on interest rate swaps |
|
| (41 | ) |
|
| (4 | ) |
|
| (163 | ) |
|
| (4 | ) |
Comprehensive income |
|
| 8,617 |
|
|
| 29,359 |
|
|
| 5,057 |
|
|
| 90,736 |
|
Comprehensive income attributable to non-controlling interests |
|
| (557 | ) |
|
| (2,288 | ) |
|
| (315 | ) |
|
| (6,931 | ) |
Comprehensive income attributable to Broadstone Net Lease, Inc. |
| $ | 8,060 |
|
| $ | 27,071 |
|
| $ | 4,742 |
|
| $ | 83,805 |
|
|
| Common Stock |
|
| Class A Common Stock |
|
| Additional Paid-in Capital |
|
| Cumulative Distributions in Excess of Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Non- controlling Interests |
|
| Total Stockholders' Equity |
|
|
| Mezzanine Equity Common Stock |
|
| Mezzanine Equity Non- controlling Interests |
|
| Total Mezzanine Equity |
| ||||||||||
Balance, January 1, 2020 |
| $ | 26 |
|
| $ | — |
|
| $ | 1,895,935 |
|
| $ | (208,261 | ) |
| $ | (20,086 | ) |
| $ | 111,406 |
|
| $ | 1,779,020 |
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Cumulative effect of accounting change (see Note 2) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (323 | ) |
|
| — |
|
|
| — |
|
|
| (323 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,816 |
|
|
| — |
|
|
| 710 |
|
|
| 11,526 |
|
|
|
| — |
|
|
| 322 |
|
|
| 322 |
|
Issuance of 293 shares of common stock and 3,124 shares of mezzanine equity common stock |
|
| — |
|
|
| — |
|
|
| 6,097 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,097 |
|
|
|
| 66,376 |
|
|
| — |
|
|
| 66,376 |
|
Issuance of 5,278 mezzanine non-controlling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| 112,159 |
|
|
| 112,159 |
|
Adjustment to carrying value of mezzanine equity non-controlling interests |
|
| — |
|
|
| — |
|
|
| (2,416 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,416 | ) |
|
|
| — |
|
|
| 2,416 |
|
|
| 2,416 |
|
Distributions declared ($0.11 per share January 2020 through March 2020) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35,299 | ) |
|
| — |
|
|
| (2,100 | ) |
|
| (37,399 | ) |
|
|
| — |
|
|
| (1,161 | ) |
|
| (1,161 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (53,014 | ) |
|
| (3,472 | ) |
|
| (56,486 | ) |
|
|
| — |
|
|
| (1,576 | ) |
|
| (1,576 | ) |
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (38 | ) |
|
| (2 | ) |
|
| (40 | ) |
|
|
| — |
|
|
| (2 | ) |
|
| (2 | ) |
Balance, March 31, 2020 |
|
| 26 |
|
|
| — |
|
|
| 1,899,616 |
|
|
| (233,067 | ) |
|
| (73,138 | ) |
|
| 106,542 |
|
|
| 1,699,979 |
|
|
|
| 66,376 |
|
|
| 112,158 |
|
|
| 178,534 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15,353 |
|
|
| — |
|
|
| 992 |
|
|
| 16,345 |
|
|
|
| — |
|
|
| 753 |
|
|
| 753 |
|
Issuance of 11 shares of common stock |
|
| — |
|
|
| — |
|
|
| 232 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 232 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Adjustment to carrying value of mezzanine equity non-controlling interests |
|
| — |
|
|
| — |
|
|
| (97 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (97 | ) |
|
|
| — |
|
|
| 97 |
|
|
| 97 |
|
Distributions declared ($0.11 per share in April 2020) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,817 | ) |
|
| — |
|
|
| (701 | ) |
|
| (12,518 | ) |
|
|
| — |
|
|
| (581 | ) |
|
| (581 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,438 | ) |
|
| (351 | ) |
|
| (5,789 | ) |
|
|
| — |
|
|
| (267 | ) |
|
| (267 | ) |
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (37 | ) |
|
| (3 | ) |
|
| (40 | ) |
|
|
| — |
|
|
| (1 | ) |
|
| (1 | ) |
Balance, June 30, 2020 |
|
| 26 |
|
|
| — |
|
|
| 1,899,751 |
|
|
| (229,531 | ) |
|
| (78,613 | ) |
|
| 106,479 |
|
|
| 1,698,112 |
|
|
|
| 66,376 |
|
|
| 112,159 |
|
|
| 178,535 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,750 |
|
|
| — |
|
|
| 587 |
|
|
| 9,337 |
|
|
|
| — |
|
|
| 374 |
|
|
| 374 |
|
Issuance of 341 shares of common stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 796 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 796 |
|
|
|
| — |
|
|
| — |
|
|
| �� |
|
Issuance of 33,500 shares of Class A common stock |
|
| — |
|
|
| 8 |
|
|
| 569,492 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 569,500 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Offering costs, discounts, and commissions |
|
| — |
|
|
| — |
|
|
| (37,180 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (37,180 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Reclassification of portion of contingent earnout liability |
|
| — |
|
|
| — |
|
|
| 6,809 |
|
|
| — |
|
|
| — |
|
|
| 11,627 |
|
|
| 18,436 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Reclassification of 3,124 shares of mezzanine equity common stock to 3,124 shares of common stock |
|
| 1 |
|
|
| — |
|
|
| 66,375 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 66,376 |
|
|
|
| (66,376 | ) |
|
| — |
|
|
| (66,376 | ) |
Reclassification of 5,278 mezzanine equity non-controlling interests to 5,278 non- controlling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 112,698 |
|
|
| 112,698 |
|
|
|
| — |
|
|
| (112,698 | ) |
|
| (112,698 | ) |
Repurchase of 2 fractional shares of common stock |
|
| — |
|
|
| — |
|
|
| (35 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Repurchase of fractional OP Units |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| (1 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Distributions declared ($0.135 per share for three months ended September 30, 2020) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18,739 | ) |
|
| — |
|
|
| (1,738 | ) |
|
| (20,477 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,921 |
|
|
| 264 |
|
|
| 4,185 |
|
|
|
| — |
|
|
| 167 |
|
|
| 167 |
|
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (37 | ) |
|
| (3 | ) |
|
| (40 | ) |
|
|
| — |
|
|
| (2 | ) |
|
| (2 | ) |
Balance, September 30, 2020 |
| $ | 27 |
|
| $ | 8 |
|
| $ | 2,506,008 |
|
| $ | (239,520 | ) |
| $ | (74,729 | ) |
| $ | 229,913 |
|
| $ | 2,421,707 |
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity
(Unaudited)
(in thousands, except per share amounts)
|
| Common Stock |
|
| Class A Common Stock |
|
| Additional Paid-in Capital |
|
| Subscriptions Receivable |
|
| Cumulative Distributions in Excess of Retained Earnings |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Non- controlling Interests |
|
| Total Stockholders' Equity |
|
|
| Mezzanine Equity Common Stock |
|
| Mezzanine Equity Non- controlling Interests |
|
| Total Mezzanine Equity |
| |||||||||||
Balance, January 1, 2019 |
| $ | 22 |
|
| $ | — |
|
| $ | 1,557,421 |
|
| $ | — |
|
| $ | (155,150 | ) |
| $ | 14,806 |
|
| $ | 111,821 |
|
| $ | 1,528,920 |
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13,938 |
|
|
| — |
|
|
| 1,084 |
|
|
| 15,022 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 3,532 shares of common stock |
|
| 1 |
|
|
| — |
|
|
| 75,099 |
|
|
| (225 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 74,875 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Other offering costs |
|
| — |
|
|
| — |
|
|
| (300 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (300 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Distributions declared ($0.1075 per share January 2019, $0.11 per share February through March 2019) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (29,635 | ) |
|
| — |
|
|
| (2,348 | ) |
|
| (31,983 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,713 | ) |
|
| (911 | ) |
|
| (12,624 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (75 | ) |
|
| (6 | ) |
|
| (81 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Redemption of 85 shares of common stock |
|
| — |
|
|
| — |
|
|
| (1,803 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,803 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance, March 31, 2019 |
|
| 23 |
|
|
| — |
|
|
| 1,630,417 |
|
|
| (225 | ) |
|
| (170,847 | ) |
|
| 3,018 |
|
|
| 109,640 |
|
|
| 1,572,026 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16,134 |
|
|
| — |
|
|
| 1,208 |
|
|
| 17,342 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 3,567 shares of common stock |
|
| 1 |
|
|
| — |
|
|
| 76,004 |
|
|
| 225 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 76,230 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Other offering costs |
|
| — |
|
|
| — |
|
|
| (300 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (300 | ) |
|
|
| �� |
|
|
| — |
|
|
|
|
|
Distributions declared ($0.11 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 150 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 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 23,388 |
|
|
| — |
|
|
| 1,650 |
|
|
| 25,038 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 7,360 shares of common stock |
|
| 1 |
|
|
| — |
|
|
| 157,191 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 157,192 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
Other offering costs |
|
| — |
|
|
| — |
|
|
| (703 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (703 | ) |
|
|
| — |
|
|
| — |
|
|
|
|
|
Distributions declared ($0.11 per share July through September 2019) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (32,531 | ) |
|
| — |
|
|
| (2,352 | ) |
|
| (34,883 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15,288 | ) |
|
| (1,092 | ) |
|
| (16,380 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (39 | ) |
|
| (2 | ) |
|
| (41 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Redemption of 353 shares of common stock |
|
| — |
|
|
| — |
|
|
| (7,361 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,361 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance, September 30, 2019 |
| $ | 25 |
|
| $ | — |
|
| $ | 1,852,038 |
|
| $ | — |
|
| $ | (194,790 | ) |
| $ | (33,911 | ) |
| $ | 105,138 |
|
| $ | 1,728,500 |
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except per share amounts)
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Subscriptions Receivable |
|
| Cumulative Distributions in Excess of Retained Earnings |
|
| Accumulated Other Comprehensive (Loss) Income |
|
| Non- controlling Interests |
|
| Total |
| |||||||
Balance, January 1, 2019 |
| $ | 22 |
|
| $ | 1,557,421 |
|
| $ | — |
|
| $ | (155,150 | ) |
| $ | 14,806 |
|
| $ | 111,821 |
|
| $ | 1,528,920 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13,938 |
|
|
| — |
|
|
| 1,084 |
|
|
| 15,022 |
|
Issuance of 883 shares of common stock |
|
| 1 |
|
|
| 75,099 |
|
|
| (225 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 74,875 |
|
Other offering costs |
|
| — |
|
|
| (300 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (300 | ) |
Distributions declared ($0.43 per share January 2019, $0.44 per share February through March 2019) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (29,635 | ) |
|
| — |
|
|
| (2,348 | ) |
|
| (31,983 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,713 | ) |
|
| (911 | ) |
|
| (12,624 | ) |
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (75 | ) |
|
| (6 | ) |
|
| (81 | ) |
Redemption of 21 shares of common stock |
|
| — |
|
|
| (1,803 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,803 | ) |
Balance, March 31, 2019 |
| $ | 23 |
|
| $ | 1,630,417 |
|
| $ | (225 | ) |
| $ | (170,847 | ) |
| $ | 3,018 |
|
| $ | 109,640 |
|
| $ | 1,572,026 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16,134 |
|
|
| — |
|
|
| 1,208 |
|
|
| 17,342 |
|
Issuance of 892 shares of common stock |
|
| 1 |
|
|
| 76,004 |
|
|
| 225 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 76,230 |
|
Other offering costs |
|
| — |
|
|
| (300 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (300 | ) |
Distributions declared ($0.44 per share April through June 2019) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (30,934 | ) |
|
| — |
|
|
| (2,297 | ) |
|
| (33,231 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (21,564 | ) |
|
| (1,614 | ) |
|
| (23,178 | ) |
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (38 | ) |
|
| (3 | ) |
|
| (41 | ) |
Redemption of 38 shares of common stock |
|
| — |
|
|
| (3,210 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,210 | ) |
Balance, June 30, 2019 |
| $ | 24 |
|
| $ | 1,702,911 |
|
| $ | — |
|
| $ | (185,647 | ) |
| $ | (18,584 | ) |
| $ | 106,934 |
|
| $ | 1,605,638 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 23,388 |
|
|
| — |
|
|
| 1,650 |
|
|
| 25,038 |
|
Issuance of 1,840 shares of common stock |
|
| 1 |
|
|
| 157,191 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 157,192 |
|
Other offering costs |
|
| — |
|
|
| (703 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (703 | ) |
Distributions declared ($0.44 per share July through September 2019) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (32,531 | ) |
|
| — |
|
|
| (2,352 | ) |
|
| (34,883 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15,288 | ) |
|
| (1,092 | ) |
|
| (16,380 | ) |
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (39 | ) |
|
| (2 | ) |
|
| (41 | ) |
Redemption of 88 shares of common stock |
|
| — |
|
|
| (7,361 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,361 | ) |
Balance, September 30, 2019 |
| $ | 25 |
|
| $ | 1,852,038 |
|
| $ | — |
|
| $ | (194,790 | ) |
| $ | (33,911 | ) |
| $ | 105,138 |
|
| $ | 1,728,500 |
|
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 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 21,267 |
|
|
| — |
|
|
| 1,797 |
|
|
| 23,064 |
|
Issuance of 870 shares of common stock |
|
| 1 |
|
|
| 72,770 |
|
|
| (1,190 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 71,581 |
|
Other offering costs |
|
| — |
|
|
| (297 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (297 | ) |
Distributions declared ($0.43 per share July through September 2018) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (26,555 | ) |
|
| — |
|
|
| (1,861 | ) |
|
| (28,416 | ) |
Change in fair value of interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,807 |
|
|
| 492 |
|
|
| 6,299 |
|
Realized gain on interest rate swap agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
| (1 | ) |
|
| (4 | ) |
Redemption of 32 shares of common stock |
|
| — |
|
|
| (2,675 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,675 | ) |
Balance, September 30, 2018 |
| $ | 21 |
|
| $ | 1,479,339 |
|
| $ | (1,690 | ) |
| $ | (141,117 | ) |
| $ | 33,114 |
|
| $ | 112,704 |
|
| $ | 1,482,371 |
|
|
| For the nine months ended September 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 38,657 |
|
| $ | 57,402 |
|
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 |
|
| 102,536 |
|
|
| 75,661 |
|
Provision for impairment of investment in rental properties |
|
| 17,399 |
|
|
| 3,452 |
|
Amortization of debt issuance costs charged to interest expense |
|
| 2,421 |
|
|
| 1,655 |
|
Stock-based compensation expense |
|
| 796 |
|
|
| — |
|
Straight-line rent and financing lease adjustments |
|
| (14,696 | ) |
|
| (15,882 | ) |
Cost of debt extinguishment |
|
| 414 |
|
|
| 1,176 |
|
Gain on sale of real estate |
|
| (9,725 | ) |
|
| (16,772 | ) |
Change in fair value of earnout liability |
|
| (8,506 | ) |
|
| — |
|
Leasing fees paid |
|
| — |
|
|
| (747 | ) |
Adjustment to provision for credit losses |
|
| (142 | ) |
|
| — |
|
Other non-cash items |
|
| 420 |
|
|
| 277 |
|
Changes in assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
Tenant and other receivables |
|
| (3,023 | ) |
|
| 165 |
|
Prepaid expenses and other assets |
|
| (4,751 | ) |
|
| (393 | ) |
Accounts payable and other liabilities |
|
| 5,305 |
|
|
| 5,234 |
|
Accrued interest payable |
|
| 5,859 |
|
|
| (295 | ) |
Net cash provided by operating activities |
|
| 132,964 |
|
|
| 110,933 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Acquisition of rental property accounted for using the operating method, net of mortgages assumed of $0 and $49,782 in 2020 and 2019, respectively |
|
| (76 | ) |
|
| (957,820 | ) |
Cash paid for Internalization |
|
| (30,861 | ) |
|
| — |
|
Capital expenditures and improvements |
|
| (7,629 | ) |
|
| (4,044 | ) |
Proceeds from disposition of rental property, net |
|
| 54,810 |
|
|
| 90,137 |
|
Change in deposits on investments in rental property |
|
| (37 | ) |
|
| 1,500 |
|
Net cash provided by (used in) investing activities |
|
| 16,207 |
|
|
| (870,227 | ) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock and Class A common stock, net of $35,514 offering costs, discounts, and commissions |
|
| 534,117 |
|
|
| 260,475 |
|
Redemptions of common stock |
|
| — |
|
|
| (12,374 | ) |
Repurchase of fractional shares of common stock |
|
| (36 | ) |
|
| — |
|
Borrowings on mortgages, notes payable and unsecured term notes, net of mortgages assumed of $0 and $49,782 in 2020 and 2019, respectively |
|
| 60,000 |
|
|
| 750,000 |
|
Principal payments on mortgages, notes payable and unsecured term notes |
|
| (393,294 | ) |
|
| (316,191 | ) |
Borrowings on unsecured revolving credit facility |
|
| 192,000 |
|
|
| 389,100 |
|
Repayments on unsecured revolving credit facility |
|
| (389,300 | ) |
|
| (226,900 | ) |
Cash distributions paid to stockholders |
|
| (52,447 | ) |
|
| (45,219 | ) |
Cash distributions paid to non-controlling interests |
|
| (5,395 | ) |
|
| (6,980 | ) |
Debt issuance and extinguishment costs paid |
|
| (6,140 | ) |
|
| (7,491 | ) |
Net cash (used in) provided by financing activities |
|
| (60,495 | ) |
|
| 784,420 |
|
Net increase in cash and cash equivalents and restricted cash |
|
| 88,676 |
|
|
| 25,126 |
|
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 |
| $ | 108,987 |
|
| $ | 44,115 |
|
|
|
|
|
|
|
|
|
|
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 |
| $ | 101,787 |
|
| $ | 14,008 |
|
Restricted cash at end of period |
|
| 7,200 |
|
|
| 30,107 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 108,987 |
|
| $ | 44,115 |
|
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 nine months ended September 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 57,402 |
|
| $ | 60,444 |
|
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 |
|
| 75,661 |
|
|
| 61,515 |
|
Provision for impairment on investment in rental properties |
|
| 3,452 |
|
|
| 2,061 |
|
Amortization of debt issuance costs charged to interest expense |
|
| 1,655 |
|
|
| 1,303 |
|
Straight-line rent and financing lease adjustments |
|
| (15,882 | ) |
|
| (15,640 | ) |
Cost of debt extinguishment |
|
| 1,176 |
|
|
| 101 |
|
Gain on sale of real estate |
|
| (16,772 | ) |
|
| (9,620 | ) |
Settlement of interest rate swap |
|
| — |
|
|
| 760 |
|
Gain on sale of investment in related party |
|
| — |
|
|
| (8,500 | ) |
Leasing fees paid |
|
| (747 | ) |
|
| (1,325 | ) |
Other non-cash items |
|
| 277 |
|
|
| 468 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Tenant and other receivables |
|
| 165 |
|
|
| (65 | ) |
Prepaid expenses and other assets |
|
| (393 | ) |
|
| (799 | ) |
Accounts payable and other liabilities |
|
| 5,234 |
|
|
| (893 | ) |
Accrued interest payable |
|
| (295 | ) |
|
| 3,707 |
|
Net cash provided by operating activities |
|
| 110,933 |
|
|
| 93,517 |
|
|
|
|
|
|
|
|
|
|
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 |
|
| (957,820 | ) |
|
| (329,664 | ) |
Acquisition of rental property accounted for using the direct financing method |
|
| — |
|
|
| (430 | ) |
Capital expenditures and improvements |
|
| (4,044 | ) |
|
| (4,326 | ) |
Proceeds from sale of investment in related party |
|
| — |
|
|
| 18,500 |
|
Proceeds from disposition of rental property, net |
|
| 90,137 |
|
|
| 41,330 |
|
Change in deposits on investments in rental property |
|
| 1,500 |
|
|
| — |
|
Net cash used in investing activities |
|
| (870,227 | ) |
|
| (274,590 | ) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net |
|
| 260,475 |
|
|
| 146,791 |
|
Redemptions of common stock |
|
| (12,374 | ) |
|
| (8,564 | ) |
Borrowings on mortgages, notes payable and unsecured term notes, net of mortgages assumed of $49,782 and $20,845 in 2019 and 2018, respectively |
|
| 750,000 |
|
|
| 415,000 |
|
Principal payments on mortgages, notes payable and unsecured term notes |
|
| (316,191 | ) |
|
| (33,930 | ) |
Borrowings on unsecured revolver |
|
| 389,100 |
|
|
| 189,500 |
|
Repayments on unsecured revolver |
|
| (226,900 | ) |
|
| (462,500 | ) |
Cash distributions paid to stockholders |
|
| (45,219 | ) |
|
| (38,410 | ) |
Cash distributions paid to non-controlling interests |
|
| (6,980 | ) |
|
| (6,630 | ) |
Debt issuance and extinguishment costs paid |
|
| (7,491 | ) |
|
| (2,255 | ) |
Net cash provided by financing activities |
|
| 784,420 |
|
|
| 199,002 |
|
Net increase in cash and cash equivalents and restricted cash |
|
| 25,126 |
|
|
| 17,929 |
|
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 |
| $ | 44,115 |
|
| $ | 28,028 |
|
|
|
|
|
|
|
|
|
|
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 |
| $ | 14,008 |
|
| $ | 17,301 |
|
Restricted cash at end of period |
|
| 30,107 |
|
|
| 10,727 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 44,115 |
|
| $ | 28,028 |
|
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)thousands, except per share amounts)
1. Business Description
Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008. The Corporation focuses on investing in income-producing, net leased commercial properties, 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 September 30, 2019,2020, the Corporation owned a diversified portfolio of 662627 individual net leased commercial properties located in 4241 states throughout the continental United States and 1 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 following table summarizesCorporation, the economic ownership interest inOP, and its consolidated subsidiaries are collectively referred to as the Operating Company:“Company”.
Percentage of shares owned by |
| September 30, 2019 |
|
| December 31, 2018 |
| ||
Corporation |
|
| 93.6 | % |
|
| 92.7 | % |
Non-controlling interests |
|
| 6.4 | % |
|
| 7.3 | % |
|
|
| 100.0 | % |
|
| 100.0 | % |
ThePrior to February 7, 2020, 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. The Corporation is currentlywas 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.approval of the Company’s board of directors (the “Board of Directors”). 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 0 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.
On September 18, 2020, the Corporation effected a 4-for-one split on its then outstanding 26,944 shares of common stock (“Common Stock”) that previously had a $0.001 par value. Concurrent with the stock split, the OP effected a four-for-one stock split of its outstanding OP Units. No fractional shares or OP Units were issued as a result of the stock split. All historic share and per share amounts in these Condensed Consolidated Financial Statements have been adjusted to give retroactive effect to the stock split.
On September 21, 2020, the Corporation closed its initial public offering (“IPO”) at $17.00 per share, of 33,500 shares of a new class of common stock, $0.00025 par value per share (“Class A Common Stock”) pursuant to a registration statement on Form S-11 (File No. 333-240381), as amended, under the Securities Act of 1933, as amended. Shares of the Class A Common Stock are listed on the New York Stock Exchange under the symbol “BNL”.
The terms of the Class A Common Stock are identical to the terms of the Common Stock, except that each share of Class A Common Stock will automatically convert into one share of Common Stock on March 20, 2021. The Common Stock will subsequently be listed on the New York Stock Exchange on March 22, 2021, which represents the first trading day following the 180-day period following the closing of the IPO. The Common Stock and Class A Common Stock are collectively referred to as the Corporation’s “common stock”. See further discussion of the Company’s IPO and stock split in Note 13.
The following table summarizes the outstanding equity and economic ownership interest of the Corporation and the OP:
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||
(in thousands) |
| Shares of Common Stock |
|
| OP Units |
|
| Total Diluted Shares |
|
| Shares of Common Stock |
|
| OP Units |
|
| Total Diluted Shares |
| ||||||
Ownership interest |
|
| 141,273 |
|
|
| 12,226 |
|
|
| 153,499 |
|
|
| 104,006 |
|
|
| 6,948 |
|
|
| 110,954 |
|
Percent Ownership of OP |
|
| 92.0 | % |
|
| 8.0 | % |
|
| 100.0 | % |
|
| 93.7 | % |
|
| 6.3 | % |
|
| 100.0 | % |
Refer to Note 15 for further discussion regarding the calculation of weighted average shares outstanding.
On October 20, 2020, the Company issued an additional 3,500 shares of Class A Common Stock, pursuant to the underwriters’ partial exercise of their option to acquire up to 5,025 shares of Class A Common Stock at $17.00 per share. See Note 18.
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 has 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 the earnout liability, 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 September 30, 2020 was based on the most current information available to the Company. Based upon current market conditions resulting from the COVID-19 pandemic (see Note 19), 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 each of those properties, the Company believes that their carrying amounts are recoverable and therefore, under applicable GAAP guidance, 0 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, anfuture. During the three and nine months ended September 30, 2020, the Company recorded impairment may needcharges associated with three and six properties, respectively. Impairment indicators included changes in the Company’s long-term hold strategy with respect to be recognized.the individual properties, which was due in part to unfavorable market trends resulting from the COVID-19 pandemic in geographic areas where the Company has vacant properties being marketed for re-lease or sale.
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 three and nine months ended September 30, 2020 and 2019, the Company recorded impairment charges of $2,43514,732 and $2,435, and $17,399 and $3,452, respectively. During the three and nine months ended September 30, 2018,
Restricted Cash
Restricted cash includes escrow funds the Company recorded impairment charges of $2,061. Impairment indicators were identified due to concerns over the tenant’s future viability, property vacancies, and changesmaintains 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 charges were basedInternal Revenue Code of 1986, as amended (the “Code”), and is reported within Prepaid expenses and other assets on management’s considerationthe Condensed Consolidated Balance Sheets.
Restricted cash consisted of the factors detailed above. In determining the fair value of the impaired assets at September 30, 2019 and March 31, 2019, the measurement dates, the Company utilized a capitalization rate of 14.58%, a weighted average discount rate of 8.00%, and a weighted average price per square foot of $226. In determining the fair value of the impaired assets at September 30, 2018, the measurement date, the Company utilized capitalization rates ranging from 7.50% to 10.00%, and a weighted average discount rate of 8.00%.following:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2020 |
|
| 2019 |
| ||
Escrow funds and other |
| $ | 3,815 |
|
| $ | 2,311 |
|
Undistributed 1031 proceeds |
|
| 3,385 |
|
|
| 5,545 |
|
|
| $ | 7,200 |
|
| $ | 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 and collectability of the lease payments is probable, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded as Accrued rental income on the Condensed Consolidated Balance Sheets. If the Company determines that collectability of the lease payments is not probable, the Company records an adjustment to Lease revenues, net to reduce cumulative income recognized since lease commencement to the amount of cash collected from the lessee. Future revenue recognition is limited to amounts paid by the lessee.
Rental property accounted for under direct financing leases – The Company utilizes the direct finance method of accounting to record direct financing lease income. 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 separate the lease components from the nonlease components when accounting for operating leases. Since the lease component is the predominant component under each of these leases, combined revenues from both the lease and nonlease components are reported as Lease revenues, net in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.Income (Loss).
Refer below to the Recently Adopted Accounting Standards section of this Note regarding a question and answer document released by the Financial Accounting Standards Board (“FASB”) with guidance on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic.
Rent Received in Advance
Rent received in advance represents tenant payments received prior to 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) |
| September 30, 2019 |
|
| December 31, 2018 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
Rent received in advance |
| $ | 10,694 |
|
| $ | 7,832 |
|
| $ | 11,119 |
|
| $ | 13,368 |
|
Goodwill
AllowanceGoodwill 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 same as its reportable segment. Goodwill has an indefinite life and is therefore not amortized. The Company evaluates goodwill for Doubtful Accountsimpairment when an event occurs or circumstances change that indicate the carrying value may not be recoverable, or at least annually. The Company will perform its first annual goodwill testing during the fourth quarter of 2020.
Initial Public Offering Costs
Prior to the adoptionclose of ASC 842, provisionsthe IPO on September 21, 2020, the Company incurred and capitalized certain direct, incremental legal, professional, accounting and other third-party fees in connection with the IPO. The deferred IPO costs were offset against IPO proceeds, and reclassified as a component of Additional paid-in capital on the Condensed Consolidated Balance Sheets upon the consummation of the offering. At December 31, 2019, deferred IPO costs totaled $668 and were included within Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets. See Note 13 for doubtful accountsfurther discussion of net proceeds associated with the IPO.
Earnout Liability
The Company’s earnout liability is payable in four tranches, in a combination of cash, common shares, and OP Units, in the same proportion as the initial consideration paid in the Internalization (see Note 4). The common shares and OP Units payable under the arrangement were originally subject to a redemption rights agreement, whereby holders of the common shares and OP Units had the right to require the Company to repurchase any or all of the common shares or OP Units if an IPO had not occurred on or before December 31, 2020 (see discussion of the redemption rights agreement in Note 4). The common shares and OP Units were deemed to be freestanding financial instruments that, at inception, embody an obligation to repurchase the Company’s common shares and OP Units, and therefore were initially classified as liabilities together with the cash portion of the earnout, and recorded in Earnout liability on the Condensed Consolidated Balance Sheets as part of the purchase price allocation. The fair value of the earnout liability is remeasured each reporting period, with changes recorded as bad debt expense and includedChange in General and administrative expenses onfair value of earnout liability in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income. SubsequentIncome (Loss).
Upon completion of the IPO, the redemption rights with respect to the adoptioncommon shares and OP Units terminated, and the $18,436 fair value of ASC 842, provisions for doubtful accounts are recorded prospectivelythe 726 shares of common stock and 1,240 OP Units associated with the third and fourth earnout tranches as an offsetof the date of the IPO, was reclassified to Lease revenuesequity as a component of Additional paid-in capital and Non-controlling interests on the accompanying Condensed Consolidated StatementsBalance Sheets. At September 30, 2020, the remaining balance in the earnout liability represents $5,207 that is potentially payable in the form of Incomecash associated with all 4 tranches, and Comprehensive Income. $7,970, representing the estimated fair value of 363 shares of common stock and 619 OP Units associated with the first and second earnout tranches, that remain potentially payable based upon the achievement of 2020 adjusted funds from operations (“AFFO”) targets.
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):
|
| September 30, 2019 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swap, assets |
| $ | 1,120 |
|
| $ | — |
|
| $ | 1,120 |
|
| $ | — |
|
Interest rate swap, liabilities |
|
| (37,489 | ) |
|
| — |
|
|
| (37,489 | ) |
|
| — |
|
|
| $ | (36,369 | ) |
| $ | — |
|
| $ | (36,369 | ) |
| $ | — |
|
|
| 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, Accrued interest payable, and Accounts payable and other liabilities, approximates their fair values due to their short-term nature.
Recurring Fair Value Measurements
The Company measures and records its interest rate swap instruments (see Note 11) and earnout liability at fair value, and discloses the fair value of its long-term debt, on a recurring basis.
Earnout Liability – In connection with the Internalization, the Company recognized an earnout liability that will be due and payable to the former owners of BRE if certain milestones are achieved during specified periods of time following the closing of the Internalization (the “Earnout Periods”). Under the terms of the agreement, the milestones 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 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 share price volatility and, prior to the IPO, about the timing of an IPO and net asset prices, each of which are unobservable and considered Level 3 inputs in the 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. Specifically, advancements in the estimated IPO date assumption increase 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. Increases in the volatility assumption would increase the earnout liability’s fair value. Increases in net asset values would also increase the earnout liability’s fair value.
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of September 30, 2020:
Significant Unobservable Inputs | Weighted Average Assumption Used | Range | |||
Peer stock price volatility | 40.0% | 26.11% - 56.85% |
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of February 7, 2020, the transaction date:
Significant Unobservable Inputs |
| Weighted Average Assumption Used |
|
| Range | |
Expected IPO date |
| April 15, 2020 |
|
| March 2020 through May 2020 | |
Peer stock price volatility |
| 20.0% |
|
| 16.22% to 23.09% | |
Company's net asset value per diluted share |
| $ | 21.30 |
|
| (a) |
(a) | The Company’s net asset value per diluted share is primarily based on the fair value of its real estate investment portfolio, together with the fair value of its other assets and liabilities. The fair value of the Company’s real estate investment portfolio as of the measurement date was determined using market capitalization rates that ranged between 6.05% and 7.09%. |
The following table presents a reconciliation of the change in the earnout liability during the three and nine months ended September 30, 2020:
|
| For the three months ended |
|
| For the nine months ended |
| ||
(in thousands) |
| September 30, 2020 |
|
| September 30, 2020 |
| ||
Beginning balance |
| $ | 37,975 |
|
| $ | — |
|
Allocation of Internalization purchase price at February 7, 2020 |
|
| — |
|
|
| 40,119 |
|
Change in fair value subsequent to Internalization |
|
| (6,362 | ) |
|
| (8,506 | ) |
Reclassification as a component of additional paid-in capital and non-controlling interests |
|
| (18,436 | ) |
|
| (18,436 | ) |
Ending balance |
| $ | 13,177 |
|
| $ | 13,177 |
|
The Company closed its IPO on September 21, 2020, at which time a portion of the liability payable in common shares and OP units was reclassified to equity at fair value as a component of Additional paid-in capital and Non-controlling interests, respectively. See further discussion in Earnout Liability in this Note 2.
The decrease in fair value between the Internalization and the IPO closing was driven by a lower IPO price, correlating to the net asset value assumption, and the delayed closing of the IPO due to market disruption and uncertainty presented by the COVID-19 pandemic late in the first quarter of 2020. These factors were partially offset by an increase in peer stock price volatility, which is attributable to changes in economic circumstances impacting global equity markets.
The balances of assets and liabilities measured at fair value on a recurring basis are as follows:
|
| September 30, 2020 |
| |||||||||||||
(in thousands) |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Interest rate swap, liabilities |
| $ | (81,326 | ) |
| $ | — |
|
| $ | (81,326 | ) |
| $ | — |
|
Earnout liability |
|
| (13,177 | ) |
|
| — |
|
|
| — |
|
|
| (13,177 | ) |
|
| 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, which reflects the fair value of interest rate swaps:
(in thousands) |
| September 30, 2019 |
|
| December 31, 2018 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
Carrying amount |
| $ | 2,096,235 |
|
| $ | 1,450,551 |
|
| $ | 1,549,076 |
|
| $ | 1,989,451 |
|
Fair value |
|
| 2,180,100 |
|
|
| 1,439,264 |
|
|
| 1,683,505 |
|
|
| 2,047,860 |
|
Non-recurring Fair Value Measurements
As disclosed under Long-lived Asset Impairment elsewhere in Note 2, theThe Company’s non-recurring fair value measurements at September 30, 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, not to not separate 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:
|
|
|
| September 30, |
|
|
|
| September 30, |
|
| December 31, |
| |||
(in thousands) |
| Financial Statement Presentation |
| 2019 |
|
| Financial Statement Presentation |
| 2020 |
|
| 2019 |
| |||
Right-of-use assets |
| Prepaid expenses and other assets |
| $ | 1,654 |
|
| Prepaid expenses and other assets |
| $ | 3,167 |
|
| $ | 1,614 |
|
Lease liabilities |
| Accounts payable and other liabilities |
|
| 1,246 |
|
| Accounts payable and other liabilities |
|
| 2,787 |
|
|
| 1,209 |
|
Taxes Collected From TenantsStock-Based Compensation
On August 4, 2020, the Board of Directors adopted the Broadstone Net Lease, Inc. 2020 Omnibus Equity and RemittedIncentive Plan (the “Equity Incentive Plan”) to Governmental Authorities
A majorityprovide long-term stock-based incentives to employees and non-employee directors of the Company’s properties are leased on a triple-net basis, which provides thatCompany. Subject to any adjustment as provided in the tenants are responsible forEquity Incentive Plan, up to 9,000 shares may be issued pursuant to awards granted under the paymentEquity Incentive Plan in the form of all property operating expenses, including, but not limitedstock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalent rights, share awards and performance-based awards (including performance share units and performance-based restricted stock) and LTIP Units (as defined in the Equity Incentive Plan). On August 4, 2020, the Company awarded 341 shares of restricted common stock under the Equity Incentive Plan to property taxes, maintenance, insurance, repairs,certain officers and capital costs, during the lease term.employees. The Company recordsaccounts for stock-based incentives in accordance with ASC 718, Compensation – Stock Compensation, which requires that such expensescompensation be recognized in the financial statements based on a net basis. In other situations, the Company may collect property taxes from its tenants and remit those taxes to governmental authorities. Taxes collected from tenants and remitted to governmental authorities are presented on a gross basis, where amounts billed to tenants are included in Lease revenues, and the corresponding expenseaward’s estimated grant date fair value. The value of such awards is included in Property and operatingrecognized as compensation expense in General and administrative expenses in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.
Rental Expense
Rental expense associated with ground leases is recordedIncome (Loss) over the appropriate vesting period on a straight-line basis overor at the termcumulative amount vested at each balance sheet date, if greater. The Company records forfeitures during the period in which they occur by reversing all previously recorded stock compensation expense associated with the forfeited shares. Dividends declared on shares 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 duerestricted common stock issued under the provisions of the lease is
Equity Incentive Plan are recorded as partCumulative distribution in excess of retained earnings on the right-of-use asset in the accompanying September 30, 2019 Condensed Consolidated Balance Sheet. Prior to the adoption of ASC 842, at December 31, 2018, this difference was recorded as a deferred liability and was included as a component of Accounts payable and other liabilities in the accompanying Condensed Consolidated Balance Sheets. Amounts associated with percentage rent provisions based onAccumulated dividends related to forfeited awards will be reversed through compensation expense in the achievement of sales targets are recognized as variable rental expense when achievementperiod the forfeiture occurs.
Earnings per Share
Earnings per common share has been computed pursuant to the guidance in FASB ASC Topic 260, Earnings Per Share, which requires the classification of the sales targetsCompany’s unvested shares of restricted common stock, which contain rights to receive non-forfeitable dividends, as participating securities requiring the two-class method of computing earnings per share. The two-class method is considered probable. Rental expense is includedan earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends declared (or accumulated) and participation rights in Propertyundistributed earnings. In accordance with the two-class method, the Company’s calculation of earnings per share excludes the income attributable to the unvested shares of restricted common stock from the numerator of the calculation and operating expenses on the accompanying Condensed Consolidated Statementsweighted average number of Income and Comprehensive Income.such unvested shares from the denominator. See Note 15.
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 present 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 be 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 Income. In addition, bad debt expense is required to be recorded as an adjustment to Lease revenues, rather than recorded within Operating expenses on the Condensed Consolidated Statements of Income and Comprehensive Income, as had previously been the case.
The Company is primarily a lessor and therefore adoption of ASC 842 did not have a material impact on its Condensed Consolidated Financial Statements. Upon adoption of ASC 842, it was not necessary for the Company to record a 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.
In October 2018, the FASB issued ASU 2018-16, 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 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. 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). The Company adopted ASU 2018-16 as of January 1, 2019 on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. Adoption of this guidance had no impact on the Condensed Consolidated Financial Statements.
Other Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses which changeschanged how entities measure credit losses for most financial assets. Financial assets that are measured at amortized cost will beare required to be presented at the net amount expected to be collected with an allowancea 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,losses, 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 isand ASU 2018-09 (collectively, “ASC 326”) were effective January 1, 2020, with early adoption permitted beginning on January 1, 2019, under a modified retrospective application. The Company continuesnew guidance applies to evaluate the Company’s investments in direct financing leases. Due to the nature of its activities, the Company’s lease portfolio has historically not included a significant number of direct financing leases, and as a result the adoption of ASC 326 did not have a material impact this new standard will have on its Condensed Consolidated Financial Statements, includingfinancial statements. In connection with the transition relief provisions, but does not expect such impact will be material based uponadoption of ASC 326, the compositionCompany recorded a provision for credit losses of its current lease portfolio.$323 with an offsetting cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2020.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments under ASU 2018-13 remove, add, and modify certain disclosure requirements on fair value measurements in ASC 820. The amendments arewere 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 impactadopted 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. The modifications and new disclosures required by the new standard primarily relate to disclosures concerning 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 clarifiesclarified and improvesimproved guidance within the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The Company will assessassessed the impact of the changes to Topic 326 in connection with its adoption of ASU 2018-132016-13 discussed above. The provisions of ASU 2019-04 relating
to Topics 815 and 825 relate to clarifying the provisions of existing guidance that are effectivenot 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 January 1, 2020.Financial Reporting, which provides optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting affected by reference rate reform if certain criteria are met. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, 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 first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company is currently evaluatingcontinues to evaluate the impact of adopting ASU 2019-04, but does not anticipatethe guidance and may apply other elections as applicable as additional changes in the market occur.
In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) that it willfocused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under ASC 842, economic relief that was agreed to or negotiated outside of the original lease agreement is typically considered a lease modification, in which case both the lessee and lessor would be required to apply the respective modification frameworks. However, if the lessee was entitled to the economic relief because of either contractual or legal rights, the relief would be accounted for outside of the modification framework. Although the original lease modification guidance in ASC 842 remains appropriate to address routine lease modifications, the Lease Modification Q&A established a different framework to account for certain lease concessions granted in response to the COVID-19 pandemic, if certain criteria have been met. The Lease Modification Q&A allows the Company to make an accounting policy election to account for COVID-19 related lease concessions as either a materiallease modification or a negative variable
adjustment to rental revenue. Such election is required to be applied consistently to leases with similar characteristics and similar circumstances. Refer to Note 19, COVID-19 Pandemic regarding information on COVID-19 related concessions and the associated impact on its financial statements.the Company’s results of operations.
Reclassifications
Certain prior-period amounts have beenThe Company reclassified to conform with the current period’s presentation, including certain items described below which resulted$405 and $1,153 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 Income have been combined and reported as Lease revenues on the Condensed Consolidated Statements of Income and Comprehensive Income as follows:
As originally reported |
| For the three months ended |
|
| For the nine months ended |
| ||
(in thousands) |
| September 30, 2018 |
|
| September 30, 2018 |
| ||
Revenues |
|
|
|
|
|
|
|
|
Rental income from operating leases |
| $ | 58,189 |
|
| $ | 163,611 |
|
Earned income from direct financing leases |
|
| 1,017 |
|
|
| 2,936 |
|
Operating expenses reimbursed from tenants |
|
| 2,529 |
|
|
| 7,764 |
|
Other income from real estate transactions |
|
| 29 |
|
|
| 74 |
|
Total revenues |
| $ | 61,764 |
|
| $ | 174,385 |
|
As revised |
| For the three months ended |
|
| For the nine months ended |
| ||
(in thousands) |
| September 30, 2018 |
|
| September 30, 2018 |
| ||
Revenues |
|
|
|
|
|
|
|
|
Lease revenues |
| $ | 61,764 |
|
| $ | 174,385 |
|
In addition, as discussed above, in connection with recording the transition adjustment(Loss) for the right-of-use asset related to operating leases where the Company is the lessee, amounts reported as ground lease intangible assets, netthree and ground lease straight-line rent liabilities on the Condensed Consolidated Balance Sheet at December 31, 2018, were reclassified as of January 1,nine months ended September 30, 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,respectively, 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 |
| (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 0 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 0 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 September 30, 2019, if the Property Management Agreement had been terminated at September 30, 2019, subject to the conditions noted above, the termination fee would have been $22,965.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 0 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 0 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.associated payments related thereto.
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 September 30, 2019, if the Asset Management Agreement had been terminated at September 30, 2019, subject to the conditions noted above, the termination fee would have been $63,306.
Total fees incurred under the Property Management Agreement and Asset Management Agreement arewere as follows:
(in thousands) |
|
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
|
|
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||||||||||||
Type of Fee |
| Financial Statement Presentation |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| Financial Statement Presentation |
| 2020(a) |
|
| 2019 |
|
| 2020(a) |
|
| 2019 |
| ||||||||
Asset management fee |
| Asset management fees |
| $ | 5,610 |
|
| $ | 4,663 |
|
| $ | 16,048 |
|
| $ | 13,119 |
|
| Asset management fees |
| $ | — |
|
| $ | 5,610 |
|
| $ | 2,461 |
|
| $ | 16,048 |
|
Property management fee |
| Property management fees |
|
| 2,098 |
|
|
| 1,680 |
|
|
| 5,918 |
|
|
| 4,792 |
|
| Property management fees |
|
| — |
|
|
| 2,098 |
|
|
| 1,275 |
|
|
| 5,918 |
|
Total management fee expense |
|
|
|
| 7,708 |
|
|
| 6,343 |
|
|
| 21,966 |
|
|
| 17,911 |
|
|
|
|
| — |
|
|
| 7,708 |
|
|
| 3,736 |
|
|
| 21,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing fee (offering costs) |
| Additional paid-in capital |
|
| 703 |
|
|
| 297 |
|
|
| 1,303 |
|
|
| 822 |
|
| Additional paid-in capital |
|
| — |
|
|
| 703 |
|
|
| — |
|
|
| 1,303 |
|
Acquisition fee |
| Capitalized as a component of assets acquired |
|
| 7,932 |
|
|
| 1,105 |
|
|
| 9,937 |
|
|
| 3,491 |
|
| Capitalized as a component of assets acquired |
|
| — |
|
|
| 7,932 |
|
|
| — |
|
|
| 9,937 |
|
Leasing fee |
| Leasing fees, net |
|
| 312 |
|
|
| 148 |
|
|
| 747 |
|
|
| 1,325 |
| ||||||||||||||||||
Leasing fee and re-leasing fees |
| Leasing fees, net |
|
| — |
|
|
| 312 |
|
|
| — |
|
|
| 747 |
| ||||||||||||||||||
Disposition fee |
| Gain on sale of real estate |
|
| 596 |
|
|
| 116 |
|
|
| 947 |
|
|
| 439 |
|
| Gain on sale of real estate |
|
| — |
|
|
| 596 |
|
|
| 109 |
|
|
| 947 |
|
Total management fees |
|
|
| $ | 17,251 |
|
| $ | 8,009 |
|
| $ | 34,900 |
|
| $ | 23,988 |
|
|
|
| $ | — |
|
| $ | 17,251 |
|
| $ | 3,845 |
|
| $ | 34,900 |
|
(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 0 unpaid management fees at September 30, 20192020 and December 31, 2018, are $433 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 obligation 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 consideration amounted to $31,613 at September 30, 2020, of which $13,177 is recorded as Earnout liability, $6,809 is recorded as a component of Additional paid-in capital, and $11,627 is recorded as a component of Non-controlling interests on the Condensed Consolidated Balance Sheets (see Note 2).
Related Party Lease
In connection with the Internalization, the Company assumed the lease agreement relating to its 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 expires on August 31, 2023, and contains 2 five-year renewal options. The annual rent for 2020 is approximately $547, with 2% annual increases thereafter. See further discussion in Note 17.
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 Company paid base consideration of $209,516 at closing and may be required to pay additional earnout consideration of up to $75,000 in the future, as described below. In addition, the Company assumed $90,484 of debt in addition to other assets acquired and liabilities assumed, as detailed in the Allocation of Purchase Price discussion elsewhere in this Note 4.
The consideration paid at closing of the Internalization is summarized in the following table:
(in thousands) |
|
|
|
|
Issuance of 3,124 shares of common stock |
| $ | 66,376 |
|
Issuance of 5,278 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 |
|
According to the terms of the Merger Agreement, the Company may be required to pay additional earnout consideration of up to $75,000 payable in 4 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 same proportions paid in the base consideration. The Company completed its IPO on September 21, 2020.
The earnout tranches, applicable 40-day VWAP of a REIT Share and the applicable Earnout Periods are as follows:
|
|
|
| Number of |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| Shares' |
|
|
|
|
|
| 40-Day |
|
|
| ||
(in thousands, except per share amounts) |
| OP Units |
|
| Approximate |
|
| VWAP of a |
|
|
| |||||
Tranche |
| Earnout Target(a) |
| Payable(b) |
|
| Amount of Cash |
|
| REIT Share |
|
| Applicable Earnout Period | |||
1 |
| $10,000 |
|
| 393 |
|
| $ | 1,646 |
|
| $ | 22.50 |
|
| The two-year period beginning on September 21, 2020. |
2 |
| $15,000 |
|
| 589 |
|
| $ | 2,470 |
|
| $ | 23.75 |
|
| The two-year period beginning on September 21, 2020. |
3 |
| $25,000 |
|
| 983 |
|
| $ | 4,117 |
|
| $ | 24.375 |
|
| 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. |
4 |
| $25,000 |
|
| 983 |
|
| $ | 4,117 |
|
| $ | 25.00 |
|
| 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. |
(a) | Initial contractual value of applicable earnout tranche based on a $21.25 price per share/unit of common stock and OP Units. Does not take into account the actual per share price of common stock and OP Units at the time an applicable earnout tranche may be earned and paid. |
(b) | Calculated based on $21.25 price per share/unit of common stock and OP Units. |
Should all earnout milestones be met, an additional 1,089 shares of common stock and an additional 1,859 OP Units would be issued, in addition to the payment of $12,350 in cash. As of the Internalization date, the Company estimated that the earnout liability had a fair value of $40,119, of which approximately $33,511 related to the potential issuance of common shares and OP Units and approximately $6,608 related to the potential payment of cash. The Company 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 Income (Loss). See Note 2 for further discussion of changes in the fair value of the earnout liability subsequent to the Internalization.
Redemption Rights Agreement
If an IPO did not occur on or before the satisfaction of any Earnout Trigger, then each holder of common shares or OP Units issued in connection with the Internalization had the right to require the Company to repurchase any or all of such holder’s shares or OP Units. Such rights terminated effective with the IPO.
Upon occurrence of the IPO, the common stock and non-controlling interests issued as base consideration in connection with the Internalization and originally classified as mezzanine equity, were reclassified as a component of Common Stock, Additional paid-in capital, and Non-controlling interests on the Condensed Consolidated Balance Sheets.
Allocation of Purchase Price
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 revolving credit facility borrowings and entering into a new $60,000 term loan agreement (see Note 9).
The Company incurred $1,929 and $3,523 in non-recurring costs associated with the Internalization during the three and nine months ended September 30, 2020, respectively, and $923 and $1,195 of such costs during the three and nine months ended September 30, 2019, which were classified as Internalization expenses in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
The effect of the Internalization has been reflected in the Company’s operating results beginning on February 7, 2020. NaN incremental revenues were recorded as a result of the Internalization. Subsequent to the Internalization, during the three and nine months ended September 30, 2020, the Company incurred $5,528 and $13,762, respectively, in expenses as a result of being internalized. Such amounts include general and administrative expenses associated with the Company’s performance of functions previously performed by BRE and the Asset Manager (primarily employee related costs), as well as interest expense associated with the borrowings related to the Internalization. These expenses do not include the Internalization expenses discussed above, or amounts recorded to reflect changes in the fair value of the earnout liability.
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 $1,929 and $8,068 of income, respectively, for the three and nine months ended September 30, 2020 and $9,437 and $23,418 of income, respectively, for the three and nine months ended September 30, 2019. These pro forma adjustments reflect the elimination of Internalization expenses and asset management, property management, and disposition fees between the Company and BRE and the Asset Manager in historic financial 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 September 30, |
|
| For the nine months ended September 30, |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Revenues |
| $ | 80,744 |
|
| $ | 76,401 |
|
| $ | 239,346 |
|
| $ | 213,884 |
|
Net income |
|
| 11,640 |
|
|
| 28,941 |
|
|
| 42,982 |
|
|
| 65,913 |
|
5. Acquisitions of Rental Property
The Company did 0t complete any acquisitions of rental property during the nine months ended September 30, 2020. The Company closed on the following acquisitions of rental property during the nine months ended September 30, 2019:
(in thousands, except number of properties) | (in thousands, except number of properties) |
| Number of |
|
| Real Estate |
|
| (in thousands, except number of properties) |
| Number of |
|
| Real Estate |
|
| ||||||
Date |
| Property Type |
| Properties |
|
| Acquisition Price |
|
|
| Property Type |
| Properties |
|
| Acquisition Price |
|
| ||||
January 31, 2019 |
| Healthcare |
|
| 1 |
|
| $ | 4,747 |
|
|
| Healthcare |
|
| 1 |
|
| $ | 4,747 |
|
|
March 12, 2019 |
| Industrial |
|
| 1 |
|
|
| 10,217 |
|
|
| Industrial |
|
| 1 |
|
|
| 10,217 |
|
|
March 15, 2019 |
| Retail |
|
| 10 |
|
|
| 13,185 |
|
|
| Retail |
|
| 10 |
|
|
| 13,185 |
|
|
March 19, 2019 |
| Retail |
|
| 14 |
|
|
| 19,128 |
|
|
| Retail |
|
| 14 |
|
|
| 19,128 |
|
|
March 26, 2019 |
| Industrial |
|
| 1 |
|
|
| 25,801 |
|
|
| Industrial |
|
| 1 |
|
|
| 25,801 |
|
|
April 30, 2019 |
| Other |
|
| 1 |
|
|
| 76,000 |
| (a) |
| Industrial |
|
| 1 |
|
|
| 76,000 |
| (a) |
May 21, 2019 |
| Retail |
|
| 2 |
|
|
| 6,500 |
|
|
| Retail |
|
| 2 |
|
|
| 6,500 |
|
|
May 31, 2019 |
| Retail |
|
| 1 |
|
|
| 3,192 |
|
|
| Retail |
|
| 1 |
|
|
| 3,192 |
|
|
June 7, 2019 |
| Other |
|
| 1 |
|
|
| 30,589 |
|
|
| Office |
|
| 1 |
|
|
| 30,589 |
|
|
June 26, 2019 |
| Industrial |
|
| 2 |
|
|
| 11,180 |
|
|
| Industrial |
|
| 2 |
|
|
| 11,180 |
|
|
July 15, 2019 |
| Retail |
|
| 1 |
|
|
| 3,214 |
|
|
| Restaurant |
|
| 1 |
|
|
| 3,214 |
|
|
July 15, 2019 |
| Industrial |
|
| 1 |
|
|
| 11,330 |
|
|
| Industrial |
|
| 1 |
|
|
| 11,330 |
|
|
July 31, 2019 |
| Healthcare |
|
| 5 |
|
|
| 27,277 |
|
|
| Healthcare |
|
| 5 |
|
|
| 27,277 |
|
|
August 27, 2019 |
| Industrial |
|
| 1 |
|
|
| 4,404 |
|
|
| Industrial |
|
| 1 |
|
|
| 4,404 |
|
|
August 29, 2019 |
| Industrial/Office/Other |
|
| 23 |
|
|
| 735,740 |
|
|
| Industrial/Office |
|
| 23 |
|
|
| 735,740 |
|
|
September 17, 2019 |
| Industrial |
|
| 1 |
|
|
| 11,185 |
|
|
| Industrial |
|
| 1 |
|
|
| 11,185 |
|
|
|
|
|
|
| 66 |
|
| $ | 993,689 |
| (b) |
|
|
|
| 66 |
|
| $ | 993,689 |
| (b) |
(a) | In conjunction with this acquisition, the Company assumed a mortgage with a principal balance of $49,782 with an interest rate of 4.92% and a maturity date of February 2028 (see Note |
(b) | Acquisition price does not include capitalized acquisition costs of $16,647. |
The Company closed on the following acquisitions during the nine months ended September 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 |
|
|
July 12, 2018 |
| Industrial |
|
| 1 |
|
|
| 11,212 |
|
|
July 17, 2018 |
| Retail |
|
| 5 |
|
|
| 14,845 |
|
|
July 17, 2018 |
| Office |
|
| 1 |
|
|
| 34,670 |
|
|
August 6, 2018 |
| Industrial |
|
| 2 |
|
|
| 4,802 |
|
|
August 10, 2018 |
| Retail |
|
| 20 |
|
|
| 44,977 |
|
|
|
|
|
|
| 70 |
|
| $ | 365,289 |
| (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 nine months ended September 30, |
| |||||
(in thousands) |
| 2019 |
|
| 2018 |
| ||
Land |
| $ | 155,434 |
|
| $ | 47,930 |
|
Land improvements |
|
| 44,929 |
|
|
| 20,815 |
|
Buildings and other improvements |
|
| 745,116 |
|
|
| 271,696 |
|
Equipment |
|
| — |
|
|
| 2,891 |
|
Acquired in-place leases(e) |
|
| 77,868 |
|
|
| 36,342 |
|
Acquired above-market leases(f) |
|
| 2,800 |
|
|
| 3,347 |
|
Acquired below-market leases(g) |
|
| (15,811 | ) |
|
| (10,143 | ) |
Direct financing investments |
|
| — |
|
|
| 430 |
|
Mortgages payable |
|
| (49,782 | ) |
|
| (20,845 | ) |
|
| $ | 960,554 |
|
| $ | 352,463 |
|
(in thousands) |
| For the nine months ended September 30, 2019 |
| |
Land |
| $ | 155,434 |
|
Land improvements |
|
| 44,929 |
|
Buildings and improvements |
|
| 745,116 |
|
Acquired in-place leases(c) |
|
| 77,868 |
|
Acquired above-market leases(d) |
|
| 2,800 |
|
Acquired below-market leases(e) |
|
| (15,811 | ) |
Mortgage payable |
|
| (49,782 | ) |
|
| $ | 960,554 |
|
| The weighted average amortization period for acquired in-place leases is 13 years |
| The weighted average amortization period for acquired above-market leases is 18 years |
| The weighted average amortization period for acquired below-market leases is 10 years |
The above acquisitions were funded using a combination of available cash on hand, revolving credit facility borrowings underand the Company’s unsecured revolving lineissuance of credit and unsecured term loan agreements,loans, and proceeds from equity issuances. All real estate acquisitions closed during the nine months ended September 30, 2019, and 2018, qualified as asset acquisitions and, as such, acquisition costs werehave been capitalized.
Subsequent to September 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 |
| ||
October 31, 2019 |
| Retail/Healthcare |
|
| 3 |
|
| $ | 12,922 |
|
November 7, 2019 |
| Retail |
|
| 1 |
|
|
| 3,142 |
|
|
|
|
|
| 4 |
|
| $ | 16,064 |
|
The Company has not completed the allocation of the acquisition date fair values for the properties acquired subsequent to September 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 September 30, |
|
| For the nine months ended September 30, |
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||||||||||||
(in thousands, except number of properties) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Number of properties disposed |
|
| 16 |
|
|
| 4 |
|
|
| 25 |
|
|
| 15 |
|
|
| 5 |
|
|
| 16 |
|
|
| 18 |
|
|
| 25 |
|
Aggregate sale price |
| $ | 59,691 |
|
| $ | 11,609 |
|
| $ | 94,791 |
|
| $ | 43,951 |
|
| $ | 9,816 |
|
| $ | 59,691 |
|
| $ | 57,539 |
|
| $ | 94,791 |
|
Aggregate carrying value |
|
| (43,920 | ) |
|
| (9,016 | ) |
|
| (73,365 | ) |
|
| (31,710 | ) |
|
| (8,327 | ) |
|
| (43,920 | ) |
|
| (45,085 | ) |
|
| (73,365 | ) |
Additional sales expenses |
|
| (3,186 | ) |
|
| (568 | ) |
|
| (4,654 | ) |
|
| (2,621 | ) |
|
| (429 | ) |
|
| (3,186 | ) |
|
| (2,729 | ) |
|
| (4,654 | ) |
Gain on sale of real estate |
| $ | 12,585 |
|
| $ | 2,025 |
|
| $ | 16,772 |
|
| $ | 9,620 |
|
| $ | 1,060 |
|
| $ | 12,585 |
|
| $ | 9,725 |
|
| $ | 16,772 |
|
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 September 30, 2019,2020, the Company had 642611 real estate properties which were leased under leases that have been classified as operating leases and 1611 that have been classified as direct financing leases. Of the 1611 leases classified as direct financing leases, four3 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) |
| September 30, 2019 |
|
| December 31, 2018 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
Land |
| $ | 551,903 |
|
| $ | 411,043 |
|
| $ | 542,487 |
|
| $ | 548,911 |
|
Land improvements |
|
| 279,629 |
|
|
| 239,701 |
|
|
| 274,786 |
|
|
| 275,470 |
|
Buildings and improvements |
|
| 2,871,761 |
|
|
| 2,186,499 |
|
|
| 2,806,916 |
|
|
| 2,850,571 |
|
Equipment |
|
| 11,492 |
|
|
| 11,492 |
|
|
| 11,870 |
|
|
| 11,492 |
|
|
|
| 3,714,785 |
|
|
| 2,848,735 |
|
|
| 3,636,059 |
|
|
| 3,686,444 |
|
Less accumulated depreciation |
|
| (255,159 | ) |
|
| (206,989 | ) |
|
| (332,057 | ) |
|
| (271,044 | ) |
|
| $ | 3,459,626 |
|
| $ | 2,641,746 |
|
| $ | 3,304,002 |
|
| $ | 3,415,400 |
|
Depreciation expense on investment in rental property was as follows:
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Depreciation |
| $ | 21,843 |
|
| $ | 17,196 |
|
| $ | 60,128 |
|
| $ | 48,345 |
|
| $ | 23,317 |
|
| $ | 21,843 |
|
| $ | 70,392 |
|
| $ | 60,128 |
|
Estimated lease payments to be received under non-cancelable operating leases with tenants at September 30, 20192020 are as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Remainder of 2019 |
| $ | 72,718 |
| ||||
2020 |
|
| 294,220 |
| ||||
Remainder of 2020 |
| $ | 71,570 |
| ||||
2021 |
|
| 298,899 |
|
|
| 289,057 |
|
2022 |
|
| 301,996 |
|
|
| 291,801 |
|
2023 |
|
| 304,828 |
|
|
| 294,743 |
|
2024 |
|
| 290,463 |
| ||||
Thereafter |
|
| 2,562,223 |
|
|
| 2,230,494 |
|
|
| $ | 3,834,884 |
|
| $ | 3,468,128 |
|
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) |
| September 30, 2019 |
|
| December 31, 2018 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
Undiscounted estimated lease payments to be received |
| $ | 73,775 |
|
| $ | 76,829 |
|
| $ | 48,713 |
|
| $ | 72,753 |
|
Estimated unguaranteed residual values |
|
| 20,358 |
|
|
| 20,358 |
|
|
| 16,049 |
|
|
| 20,358 |
|
Unearned income |
|
| (52,213 | ) |
|
| (55,187 | ) |
|
| (33,679 | ) |
|
| (51,221 | ) |
Reserve for credit losses |
|
| (181 | ) |
|
| 0 |
| ||||||||
Net investment in direct financing leases |
| $ | 41,920 |
|
| $ | 42,000 |
|
| $ | 30,902 |
|
| $ | 41,890 |
|
Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at September 30, 20192020 are as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Remainder of 2019 |
| $ | 1,022 |
| ||||
2020 |
|
| 4,194 |
| ||||
Remainder of 2020 |
| $ | 811 |
| ||||
2021 |
|
| 4,283 |
|
|
| 3,304 |
|
2022 |
|
| 4,369 |
|
|
| 3,368 |
|
2023 |
|
| 4,456 |
|
|
| 3,433 |
|
2024 |
|
| 3,493 |
| ||||
Thereafter |
|
| 55,451 |
|
|
| 34,304 |
|
|
| $ | 73,775 |
|
| $ | 48,713 |
|
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 Income:Income (Loss):
|
| For the three months ended |
|
| For the nine months ended |
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||||
(in thousands) |
| September 30, 2019 |
|
| September 30, 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||
Contractual rental amounts billed for operating leases |
| $ | 65,579 |
|
| $ | 184,292 |
|
| $ | 69,270 |
|
| $ | 65,579 |
|
| $ | 209,440 |
|
| $ | 184,292 |
|
Adjustment to recognize contractual operating lease billings on a straight-line basis |
|
| 5,575 |
|
|
| 16,015 |
|
|
| 6,768 |
|
|
| 5,575 |
|
|
| 16,709 |
|
|
| 16,015 |
|
Adjustment to revenue recognized for uncollectible rental amounts billed |
|
| — |
|
|
| (440 | ) | ||||||||||||||||
Total operating lease rental revenues |
|
| 71,154 |
|
|
| 199,867 |
| ||||||||||||||||
Variable rental amounts earned |
|
| 234 |
|
|
| — |
|
|
| 308 |
|
|
| — |
| ||||||||
Earned income from direct financing leases |
|
| 1,005 |
|
|
| 3,014 |
|
|
| 757 |
|
|
| 1,005 |
|
|
| 2,599 |
|
|
| 3,014 |
|
Operating expenses billed to tenants |
|
| 3,811 |
|
|
| 10,572 |
|
|
| 3,389 |
|
|
| 3,811 |
|
|
| 11,456 |
|
|
| 10,572 |
|
Other income from real estate transactions |
|
| 431 |
|
|
| 431 |
|
|
| 64 |
|
|
| 431 |
|
|
| 795 |
|
|
| 431 |
|
Total lease revenues |
| $ | 76,401 |
|
| $ | 213,884 |
| ||||||||||||||||
Adjustment to revenue recognized for uncollectible rental amounts billed |
|
| 262 |
|
|
| — |
|
|
| (1,961 | ) |
|
| (440 | ) | ||||||||
Total Lease revenues, net |
| $ | 80,744 |
|
| $ | 76,401 |
|
| $ | 239,346 |
|
| $ | 213,884 |
|
7.8. Intangible Assets and Liabilities
The following is a summary of intangible assets and liabilities and related accumulated amortization:
(in thousands) |
| September 30, 2019 |
|
| December 31, 2018 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
Lease intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired above-market leases |
| $ | 64,931 |
|
| $ | 64,164 |
|
| $ | 53,563 |
|
| $ | 62,136 |
|
Less accumulated amortization |
|
| (17,275 | ) |
|
| (14,740 | ) |
|
| (18,397 | ) |
|
| (17,433 | ) |
Acquired above-market leases, net |
|
| 47,656 |
|
|
| 49,424 |
|
|
| 35,166 |
|
|
| 44,703 |
|
Acquired in-place leases |
|
| 351,720 |
|
|
| 277,659 |
|
|
| 333,305 |
|
|
| 349,645 |
|
Less accumulated amortization |
|
| (56,898 | ) |
|
| (40,825 | ) |
|
| (79,500 | ) |
|
| (62,454 | ) |
Acquired in-place leases, net |
|
| 294,822 |
|
|
| 236,834 |
|
|
| 253,805 |
|
|
| 287,191 |
|
Total intangible lease assets, net |
| $ | 342,478 |
|
| $ | 286,258 |
|
| $ | 288,971 |
|
| $ | 331,894 |
|
Acquired below-market leases |
| $ | 114,316 |
|
| $ | 101,602 |
|
| $ | 107,625 |
|
| $ | 113,862 |
|
Less accumulated amortization |
|
| (19,813 | ) |
|
| (15,655 | ) |
|
| (26,405 | ) |
|
| (21,640 | ) |
Intangible lease liabilities, net |
| $ | 94,503 |
|
| $ | 85,947 |
|
| $ | 81,220 |
|
| $ | 92,222 |
|
Leasing fees |
| $ | 17,316 |
|
| $ | 17,274 |
|
| $ | 15,655 |
|
| $ | 17,013 |
|
Less accumulated amortization |
|
| (4,065 | ) |
|
| (3,576 | ) |
|
| (4,640 | ) |
|
| (4,166 | ) |
Leasing fees, net |
| $ | 13,251 |
|
| $ | 13,698 |
|
| $ | 11,015 |
|
| $ | 12,847 |
|
Amortization forof intangible lease assets and liabilities iswas as follows:
(in thousands) |
|
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
|
|
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||||||||||||
Intangible |
| Financial Statement Presentation |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| Financial Statement Presentation |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Acquired in-place leases and leasing fees |
| Depreciation and amortization |
| $ | 6,549 |
|
| $ | 4,673 |
|
| $ | 17,861 |
|
| $ | 12,958 |
|
| Depreciation and amortization |
| $ | 8,026 |
|
| $ | 6,549 |
|
| $ | 32,060 |
|
| $ | 17,861 |
|
Above-market and below-market leases |
| Increase (decrease) to lease revenues |
|
| 875 |
|
|
| 255 |
|
|
| 2,335 |
|
|
| (212 | ) |
| Lease revenues, net |
|
| (149 | ) |
|
| 875 |
|
|
| (25 | ) |
|
| 2,335 |
|
Amortization expense for the three and nine months ended September 30, 2020, includes $2,459 and $14,517, respectively, of accelerated amortization resulting from early lease terminations, compared to 0 in the prior year periods.
Estimated future amortization of intangible assets and liabilities at September 30, 20192020 is as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Remainder of 2019 |
| $ | 6,113 |
| ||||
2020 |
|
| 24,267 |
| ||||
Remainder of 2020 |
| $ | 5,700 |
| ||||
2021 |
|
| 23,856 |
|
|
| 22,494 |
|
2022 |
|
| 23,241 |
|
|
| 21,952 |
|
2023 |
|
| 22,862 |
|
|
| 21,626 |
|
2024 |
|
| 20,859 |
| ||||
Thereafter |
|
| 160,887 |
|
|
| 126,135 |
|
|
| $ | 261,226 |
|
| $ | 218,766 |
|
8.9. Unsecured Credit Agreements
The following table summarizes the Company’s unsecured credit agreements:
|
| Outstanding Balance |
|
|
|
|
|
|
|
| Outstanding Balance |
|
|
|
|
|
|
| ||||||||||
(in thousands, except interest rates) |
| September 30, 2019 |
|
| December 31, 2018 |
|
| Interest Rate(d) |
|
| Maturity Date |
| September 30, 2020 |
|
| December 31, 2019 |
|
| Interest Rate(c) |
|
| Maturity Date | ||||||
2019 Unsecured Term Loan(a) |
| $ | — |
|
| $ | 300,000 |
|
| one-month LIBOR + 1.40% |
|
| Feb. 2020(g) | |||||||||||||||
Revolving credit facilities(a) |
| $ | — |
|
| $ | 197,300 |
|
| one-month LIBOR + 1.20% |
|
| (d) | |||||||||||||||
2020 Unsecured Term Loan(a) |
|
| 300,000 |
|
|
| — |
|
| one-month LIBOR + 1.25% |
|
| Aug. 2020(h) |
|
| — |
|
|
| 300,000 |
|
| one-month LIBOR + 1.25% |
|
| Feb. 2021(e) | ||
Unsecured Revolving Credit and Term Loan Agreement(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Revolver(b) |
|
| 303,300 |
|
|
| 141,100 |
|
| one-month LIBOR + 1.20%(e) |
|
| Jan. 2022 | |||||||||||||||
2023 Unsecured Term Loan |
|
| 265,000 |
|
|
| 265,000 |
|
| one-month LIBOR + 1.35% |
|
| Jan. 2023 | |||||||||||||||
2024 Unsecured Term Loan |
|
| 190,000 |
|
|
| 190,000 |
|
| one-month LIBOR + 1.25%(f) |
|
| Jun. 2024 | |||||||||||||||
|
|
| 758,300 |
|
|
| 596,100 |
|
|
|
|
|
|
| ||||||||||||||
2022 Unsecured Term Loan(a) |
|
| 60,000 |
|
|
| — |
|
| one-month LIBOR + 1.25% |
|
| Feb. 2022 | |||||||||||||||
2023 Unsecured Term Loan(a) |
|
| 265,000 |
|
|
| 265,000 |
|
| one-month LIBOR + 1.35% |
|
| Jan. 2023 | |||||||||||||||
2024 Unsecured Term Loan(a) |
|
| 190,000 |
|
|
| 190,000 |
|
| one-month LIBOR + 1.25% |
|
| Jun. 2024 | |||||||||||||||
2026 Unsecured Term Loan(a) |
|
| 450,000 |
|
|
| — |
|
| 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 |
|
| 1,983,300 |
|
|
| 1,371,100 |
|
|
|
|
|
|
|
|
| 1,440,000 |
|
|
| 1,877,300 |
|
|
|
|
|
|
|
Debt issuance costs, net(c) |
|
| (8,489 | ) |
|
| (4,227 | ) |
|
|
|
|
|
| ||||||||||||||
Debt issuance costs, net(b) |
|
| (6,505 | ) |
|
| (7,919 | ) |
|
|
|
|
|
| ||||||||||||||
|
| $ | 1,974,811 |
|
| $ | 1,366,873 |
|
|
|
|
|
|
|
| $ | 1,433,495 |
|
| $ | 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 September 30, |
|
|
|
|
|
|
| The 2020 Unsecured Term Loan was originally due in August 2020, and allows two six-month extensions, at the Company’s option, subject to the Company being in compliance with 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, the Company exercised the first of these options, effective on August 2, 2020, extending the maturity date of the 2020 Unsecured Term Loan to February 2, 2021. The loan was repaid using proceeds from the Company’s IPO. |
On February 27, 2019,September 4, 2020, the Company entered into a $450,000 seven-year unsecured term loanan agreement (the “2026 Unsecured Term Loan”“Revolving Credit Agreement”) for a $900,000 unsecured revolving credit facility (the “Revolving Credit Facility”), with Capital One, National AssociationJPMorgan Chase Bank, N.A., as administrative agent.Administrative Agent. Closing of the Revolving Credit Agreement was subject to certain customary conditions, as well as the closing of the IPO, with a minimum condition on size, and listing of the Company’s common stock, as set forth in the agreement.Closing occurred on September 21, 2020, at which time the Revolving Credit Facility replaced the Company’s then existing $600,000 unsecured revolving credit facility. The 2026 Unsecured Term Loan providesRevolving Credit Agreement includes an accordion feature to increase the aggregate facility size from $900,000 to $2,000,000, subject to the willingness of existing or new lenders to fund such increase and other customary conditions. The Revolving Credit Agreement matures on September 21, 2023. The Company has the option to extend the term of the Revolving Credit Agreement twice for upsix months per extension, subject to a totalcertain conditions, including payment of $550,000 borrowing capacity. The 2026 Unsecured Term Loan has an initial maturity dateextension fee equal to 0.0625% of February 27, 2026.the revolving commitments. Borrowings under the 2026 Unsecured Term LoanRevolving Credit Agreement are subject to interest only payments at variable rates equal to LIBOR plus a margin between 1.45% and 2.40% per annum based on the Operating Company’s credit rating.rating, ranging from 0.825% to 1.55% per annum. Based on the Operating Company’s current investment grade credit rating of Baa3, the applicable margin underwas 1.20% at September 30, 2020. In addition, the 2026 Unsecured Term Loan is 1.85%. The 2026 Unsecured Term LoanRevolving Credit Facility is subject to a facility fee 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 was drawn on August 27, 2019 and used to fund acquisitions.
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.
On July 1, 2019, the Company amended the Unsecured Revolving Credit and Term Loan Agreement. 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%0.125% and 2.45%0.30% per annum with the applicable margin being 1.90% at December 31, 2018. The amendment reduced the margin to a range between 0.85% and 1.65% per annum and basedannum. Based on the Operating Company’s current credit rating, of Baa3, the applicable margin is 1.25% beginning on July 1, 2019. All other termsfacility fee was 0.25% per annum at September 30, 2020. The interest rate spreads and conditionsfacility fee under the Revolving Credit Facility are identical to those of the Unsecured Revolving Credit and Term Loan Agreement remained materially the same as those in effect prior to this amendment.facility that was replaced.
On August 2, 2019,February 7, 2020, the Company entered into a $300,000$60,000 term loan agreement maturing on February 28, 2022 (the “2020“2022 Unsecured Term Loan”) with JP Morgan Chase, Bank, N.A. as administrative agent. The 20202022 Unsecured Term Loan was subject to a fee of 0.25% per annum on the amount of the commitment, reduced by the amount of term loans outstanding. The entire amount of $300,000 wasfully funded on August 28, 2019at closing and used to fund acquisitions.repay a portion of the debt assumed by the Company as part of the Internalization. Borrowings under the 20202022 Unsecured Term Loan are subject to interest only payments at variable rates equal to LIBOR plus a margin based onupon the Operating Company’s credit rating, ranging between 0.85% and 1.65% per annum. Based on the Operating Company’s current credit rating of Baa3, the applicable margin iswas 1.25%. at September 30, 2020.
At September 30, 2019,2020, the weighted average interest rate on all outstanding borrowings was 3.89%. In addition,2.80%, exclusive of interest rate swap agreements.
For the Revolver is subject to a facility fee of 0.25% per annum.
three and nine months ended September 30, 2020, the Company paid $5,918 in debt issuance costs associated with the Revolving Credit Facility. For the three and nine months ended September 30, 2019, the Company paid $1,281 and $6,510, respectively, in debt issuance costs associated with the 2020 Unsecured Term Loan, the 2026 Unsecured Term Loan and the amended Unsecured Revolving Credit and Term Loan Agreement.its prior unsecured revolving credit 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, $5,918 of the debt issuance costs incurred during the three and nine months ended September 30, 2020, and $1,275 and $6,504 of the debt issuance costs incurred induring the three and nine months ended September 30, 2019, respectively, were deemed to be related to the issuance of new debt, or the modification of existing debt, and therefore have been deferred and are being amortized over the term of the associated debt. The remaining $6 of the debt issuance costs incurred in the three and nine months ended September 30, 2019, were deemed to be related to the extinguishment of debt and were expensed and included in Cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.Income (Loss). Additionally, $113 and $328 of unamortized debt issuance costs were expensed induring the three and nine months ended September 30, 2019, respectively,2020, $392 of unamortized debt issuance costs were expensed and included in Cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income. Income (Loss). Such amounts totaled $113 and $328 during the three and nine months ended September 30, 2019, respectively.
Debt issuance costs are amortized as a component of interest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.Income (Loss). The following table summarizes debt issuance cost amortization:
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Debt issuance costs amortization |
| $ | 611 |
|
| $ | 477 |
|
| $ | 1,761 |
|
| $ | 1,410 |
|
| $ | 819 |
|
| $ | 611 |
|
| $ | 2,528 |
|
| $ | 1,761 |
|
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 September 30, 2020, the Company believes it was in compliance with all of its loan covenants. The Company’s continued compliance with these covenants depends on many factors and could be impacted by current or future economic conditions associated with the COVID-19 pandemic (see Note 19), 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 |
|
| September 30, |
|
| December 31, |
|
|
| (in thousands, except interest rates) |
| Date |
| Date |
| Interest |
|
| September 30, |
|
| 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% |
|
| $ | 49,340 |
|
| $ | — |
|
| (a) (b) (c) (n) | Wilmington Trust National Association |
| Apr-19 |
| Feb-28 |
| 4.92% |
|
| $ | 48,234 |
|
| $ | 49,065 |
|
| (a) (b) (c) (k) | ||
(2) | Wilmington Trust National Association |
| Jun-18 |
| Aug-25 |
| 4.36% |
|
|
| 20,409 |
|
|
| 20,674 |
|
| (a) (b) (c) (m) | Wilmington Trust National Association |
| Jun-18 |
| Aug-25 |
| 4.36% |
|
|
| 20,042 |
|
|
| 20,318 |
|
| (a) (b) (c) (j) | ||
(3) | PNC Bank |
| Oct-16 |
| Nov-26 |
| 3.62% |
|
|
| 17,980 |
|
|
| 18,260 |
|
| (b) (c) | PNC Bank |
| Oct-16 |
| Nov-26 |
| 3.62% |
|
|
| 17,597 |
|
|
| 17,885 |
|
| (b) (c) | ||
(4) | Sun Life |
| Mar-12 |
| Oct-21 |
| 5.13% |
|
|
| 10,990 |
|
|
| 11,288 |
|
| (b) (g) | Sun Life |
| Mar-12 |
| Oct-21 |
| 5.13% |
|
|
| 10,575 |
|
|
| 10,888 |
|
| (b) (f) | ||
(5) | Aegon |
| Apr-12 |
| Oct-23 |
| 6.38% |
|
|
| 7,968 |
|
|
| 8,496 |
|
| (b) (h) | Aegon |
| Apr-12 |
| Oct-23 |
| 6.38% |
|
|
| 7,230 |
|
|
| 7,788 |
|
| (b) (g) | ||
(6) | M&T Bank |
| Oct-17 |
| Aug-21 |
| one - month LIBOR+3% |
|
|
| 4,949 |
|
|
| 5,051 |
|
| (b) (d) (i) (j) | M&T Bank |
| Oct-17 |
| Aug-21 |
| one - month LIBOR+3% |
|
|
| 4,807 |
|
|
| 4,913 |
|
| (b) (d) (h) (i) | ||
(7) | Note holders |
| Dec-08 |
| Dec-23 |
| 6.25% |
|
|
| 750 |
|
|
| 750 |
|
| (d) | Note holders |
| Dec-08 |
| Dec-23 |
| 6.25% |
|
|
| 591 |
|
|
| 750 |
|
| (d) (l) | ||
(8) | Standard Insurance Co. |
| Jul-10 |
| Aug-30 |
| 6.75% |
|
|
| 549 |
|
|
| 563 |
|
| (b) (c) (d) (f) | Standard Insurance Co. |
| Jul-10 |
| Aug-30 |
| 6.75% |
|
|
| — |
|
|
| 544 |
|
| (b) (c) (d) (e) | ||
| Symetra Financial |
| Nov-17 |
| Oct-26 |
| 3.65% |
|
|
| — |
|
|
| 6,467 |
|
| (a) (b) (k) (l) |
|
|
|
|
|
|
|
|
|
|
| 109,076 |
|
|
| 112,151 |
|
|
| |
(10) | Columbian Mutual Life Insurance Company |
| Aug-10 |
| Sep-25 |
| 7.00% |
|
|
| — |
|
|
| 1,459 |
|
| (b) (c) (d) | ||||||||||||||||||||
(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) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| 112,935 |
|
|
| 79,451 |
|
|
| Debt issuance costs, net |
|
|
|
|
|
|
|
|
|
| (324 | ) |
|
| (358 | ) |
|
|
| Debt issuance costs, net |
|
|
|
|
|
|
|
|
|
| (373 | ) |
|
| (499 | ) |
|
|
|
|
|
|
|
|
|
|
|
| $ | 108,752 |
|
| $ | 111,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 112,562 |
|
| $ | 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. |
(l) | Notes were repaid in full on October 9, 2020, in connection with the sale of the property. |
At September 30, 2019,2020, investment in rental property of $179,769 is$174,623 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 nine months ended September 30, 2019 |
|
| For the year ended December 31, 2018 |
|
| For the nine months ended September 30, 2020 |
|
| For the year ended December 31, 2019 |
| ||||
Number of mortgages |
| 4 |
|
| 2 |
|
| 1 |
|
| 4 |
| ||||
Outstanding balance of mortgages |
| $ | 13,905 |
|
| $ | 6,666 |
|
| $ | 541 |
|
| $ | 13,905 |
|
The following table summarizes the cost of mortgage extinguishment:
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Cost of mortgage extinguishment |
| $ | 336 |
|
| $ | 50 |
|
| $ | 842 |
|
| $ | 101 |
|
| $ | — |
|
| $ | 336 |
|
| $ | 22 |
|
| $ | 842 |
|
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 September 30, 20192020 are as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Remainder of 2019 |
| $ | 784 |
| ||||
2020 |
|
| 303,210 |
| ||||
Remainder of 2020 |
| $ | 818 |
| ||||
2021 |
|
| 18,028 |
|
|
| 18,006 |
|
2022 |
|
| 306,230 |
|
|
| 62,907 |
|
2023 |
|
| 273,356 |
|
|
| 273,173 |
|
2024 |
|
| 192,260 |
| ||||
Thereafter |
|
| 1,194,627 |
|
|
| 1,001,912 |
|
|
| $ | 2,096,235 |
|
| $ | 1,549,076 |
|
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.
10.11. Interest Rate Swaps
Interest rate swaps were entered into with certain financial institutions in order to mitigate the impact of interest rate variability over the term of the related debt agreements. The interest rate swaps are considered cash flow hedges. In order to reduce counterparty concentration risk, the Company has a diversification policy for institutions that serve as swap counterparties. Under these agreements, the Company receives monthly payments from the counterparties on these interest rate swaps equal to the related variable interest rates multiplied by the outstanding notional amounts. 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 |
|
| September 30, 2019 |
|
| December 31, 2018 |
|
|
| Maturity Date |
| Fixed Rate |
|
| Variable Rate Index |
| Notional Amount |
|
| September 30, 2020 |
|
| December 31, 2019 |
|
| ||||||||
Bank of America, N.A. |
| November 2023 |
|
| 2.80 | % |
| one-month LIBOR |
| $ | 25,000 |
|
| $ | (1,389 | ) |
| $ | (411 | ) |
|
| November 2023 |
|
| 2.80 | % |
| one-month LIBOR |
| $ | 25,000 |
|
| $ | (2,029 | ) |
| $ | (1,136 | ) |
|
Bank of Montreal |
| July 2024 |
|
| 1.16 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| 421 |
|
|
| 2,702 |
|
|
| July 2024 |
|
| 1.16 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| (1,542 | ) |
|
| 740 |
|
|
Bank of Montreal |
| January 2025 |
|
| 1.91 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (694 | ) |
|
| 769 |
|
|
| January 2025 |
|
| 1.91 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,889 | ) |
|
| (402 | ) |
|
Bank of Montreal |
| July 2025 |
|
| 2.32 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,333 | ) |
|
| 222 |
|
|
| July 2025 |
|
| 2.32 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,565 | ) |
|
| (970 | ) |
|
Bank of Montreal |
| January 2026 |
|
| 1.92 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (833 | ) |
|
| 915 |
|
|
| January 2026 |
|
| 1.92 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,255 | ) |
|
| (448 | ) |
|
Bank of Montreal |
| January 2026 |
|
| 2.05 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| (1,643 | ) |
|
| 1,130 |
|
|
| January 2026 |
|
| 2.05 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| (3,880 | ) |
|
| (1,014 | ) |
|
Bank of Montreal |
| December 2026 |
|
| 2.33 | % |
| one-month LIBOR |
|
| 10,000 |
|
|
| (662 | ) |
|
| 132 |
|
|
| December 2026 |
|
| 2.33 | % |
| one-month LIBOR |
|
| 10,000 |
|
|
| (1,281 | ) |
|
| (460 | ) |
|
Bank of Montreal |
| December 2026 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,058 | ) |
|
| — |
|
|
| December 2026 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,664 | ) |
|
| (577 | ) |
|
Bank of Montreal |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,905 | ) |
|
| 355 |
|
|
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,629 | ) |
|
| (1,306 | ) |
|
Bank of Montreal |
| May 2029 |
|
| 2.09 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,502 | ) |
|
| — |
|
|
| May 2029 |
|
| 2.09 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,486 | ) |
|
| (799 | ) |
|
Capital One, National Association |
| December 2021 |
|
| 1.05 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| 133 |
|
|
| 605 |
|
|
| December 2021 |
|
| 1.05 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (174 | ) |
|
| 143 |
|
|
Capital One, National Association |
| December 2024 |
|
| 1.58 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (165 | ) |
|
| 727 |
|
|
| December 2024 |
|
| 1.58 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (885 | ) |
|
| 10 |
|
|
Capital One, National Association |
| January 2026 |
|
| 2.08 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (1,515 | ) |
|
| 930 |
|
|
| January 2026 |
|
| 2.08 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (3,398 | ) |
|
| (911 | ) |
|
Capital One, National Association |
| April 2026 |
|
| 2.68 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (1,243 | ) |
|
| (189 | ) |
|
| April 2026 |
|
| 2.68 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (2,014 | ) |
|
| (944 | ) |
|
Capital One, National Association |
| July 2026 |
|
| 1.32 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| 118 |
|
|
| 2,877 |
|
|
| July 2026 |
|
| 1.32 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (2,101 | ) |
|
| 720 |
|
|
Capital One, National Association |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,932 | ) |
|
| 345 |
|
|
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,601 | ) |
|
| (1,278 | ) |
|
M&T Bank |
| August 2021 |
|
| 1.02 | % |
| one-month LIBOR |
|
| 4,948 |
|
|
| 42 |
|
|
| 177 |
| (a), (b) |
| August 2021 |
|
| 1.02 | % |
| one-month LIBOR |
|
| 4,805 |
|
|
| (35 | ) |
|
| 41 |
| (a), (b) |
M&T Bank |
| September 2022 |
|
| 2.83 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,031 | ) |
|
| (362 | ) |
|
| September 2022 |
|
| 2.83 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,315 | ) |
|
| (862 | ) |
|
M&T Bank |
| November 2023 |
|
| 2.65 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,284 | ) |
|
| (254 | ) |
|
| November 2023 |
|
| 2.65 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,964 | ) |
|
| (1,038 | ) |
|
Regions Bank |
| May 2020 |
|
| 2.12 | % |
| one-month LIBOR |
|
| 50,000 |
|
|
| (104 | ) |
|
| 271 |
|
|
| May 2020 |
|
| 2.12 | % |
| one-month LIBOR |
|
| 50,000 |
|
|
| — |
|
|
| (104 | ) |
|
Regions Bank |
| December 2023 |
|
| 1.18 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 199 |
|
|
| 1,484 |
|
|
| December 2023 |
|
| 1.18 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (854 | ) |
|
| 376 |
|
|
Regions Bank |
| May 2029 |
|
| 2.11 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,562 | ) |
|
| — |
|
|
| May 2029 |
|
| 2.11 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,515 | ) |
|
| (827 | ) |
|
Regions Bank |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,383 | ) |
|
| — |
|
|
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,349 | ) |
|
| (651 | ) |
|
SunTrust Bank |
| April 2024 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (745 | ) |
|
| 554 |
|
| |||||||||||||||||||||
SunTrust Bank |
| April 2025 |
|
| 2.20 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,181 | ) |
|
| 382 |
|
| |||||||||||||||||||||
SunTrust Bank |
| July 2025 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (934 | ) |
|
| 728 |
|
| |||||||||||||||||||||
SunTrust Bank |
| December 2025 |
|
| 2.30 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,474 | ) |
|
| 299 |
|
| |||||||||||||||||||||
SunTrust Bank |
| January 2026 |
|
| 1.93 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (915 | ) |
|
| 903 |
|
| |||||||||||||||||||||
Truist Financial Corporation |
| April 2024 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,632 | ) |
|
| (451 | ) |
| |||||||||||||||||||||
Truist Financial Corporation |
| April 2025 |
|
| 2.20 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,278 | ) |
|
| (781 | ) |
| |||||||||||||||||||||
Truist Financial Corporation |
| July 2025 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,131 | ) |
|
| (524 | ) |
| |||||||||||||||||||||
Truist Financial Corporation |
| December 2025 |
|
| 2.30 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,715 | ) |
|
| (993 | ) |
| |||||||||||||||||||||
Truist Financial Corporation |
| January 2026 |
|
| 1.93 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,230 | ) |
|
| (458 | ) |
| |||||||||||||||||||||
U.S. Bank National Association |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,395 | ) |
|
| — |
|
|
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,393 | ) |
|
| (681 | ) |
|
U.S. Bank National Association |
| August 2029 |
|
| 1.35 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 207 |
|
|
| — |
|
|
| August 2029 |
|
| 1.35 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,902 | ) |
|
| 881 |
|
|
Wells Fargo Bank, N.A. |
| February 2021 |
|
| 2.39 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (385 | ) |
|
| 59 |
|
|
| February 2021 |
|
| 2.39 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (269 | ) |
|
| (302 | ) |
|
Wells Fargo Bank, N.A. |
| October 2024 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (994 | ) |
|
| (222 | ) |
|
| October 2024 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (1,550 | ) |
|
| (795 | ) |
|
Wells Fargo Bank, N.A. |
| April 2027 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,427 | ) |
|
| (382 | ) |
|
| April 2027 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (3,924 | ) |
|
| (1,845 | ) |
|
Wells Fargo Bank, N.A. |
| January 2028 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 75,000 |
|
|
| (5,801 | ) |
|
| 1,067 |
|
|
| January 2028 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 75,000 |
|
|
| (10,877 | ) |
|
| (3,914 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (36,369 | ) |
| $ | 15,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (81,326 | ) |
| $ | (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 Income (Loss), from converting from variable rates to fixed rates under these agreements arewere as follows:
|
|
|
|
|
|
Reclassification from |
|
| Total Interest Expense |
|
|
|
|
|
| Reclassification from |
|
| Total Interest Expense |
| ||||||||
|
| Amount of (Loss) Gain |
|
| Accumulated Other |
|
| Presented in the |
|
| Amount of Gain (Loss) |
|
| Accumulated Other |
|
| Presented in the |
| ||||||||||
|
| Recognized in |
|
| Comprehensive (Loss) Income |
|
| Consolidated Statements of |
|
| Recognized in |
|
| Comprehensive Loss |
|
| Consolidated Statements of |
| ||||||||||
(in thousands) |
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
|
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
| ||||||
For the three months ended September 30, |
| Comprehensive (Loss) Income |
|
| Location |
| Gain (Loss) |
|
| Income |
|
| Comprehensive Loss |
|
| Location |
| (Loss) Gain |
|
| Income (Loss) |
| ||||||
2020 |
| $ | 4,352 |
|
| Interest expense |
| $ | (4,166 | ) |
| $ | 18,511 |
| ||||||||||||||
2019 |
| $ | (16,380 | ) |
| Interest expense |
| $ | 387 |
|
| $ | 18,465 |
|
|
| (16,380 | ) |
| Interest expense |
|
| 387 |
|
|
| 18,465 |
|
2018 |
|
| 6,299 |
|
| Interest expense |
|
| (20 | ) |
|
| 14,484 |
|
|
|
|
|
|
|
Reclassification from |
|
| Total Interest Expense |
|
|
|
|
|
| Reclassification from |
|
| Total Interest Expense |
| ||||||||
|
| Amount of (Loss) Gain |
|
| Accumulated Other |
|
| Presented in the |
|
| Amount of Loss |
|
| Accumulated Other |
|
| Presented in the |
| ||||||||||
|
| Recognized in |
|
| Comprehensive (Loss) Income |
|
| Consolidated Statements of |
|
| Recognized in |
|
| Comprehensive Loss |
|
| Consolidated Statements of |
| ||||||||||
(in thousands) |
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
|
| Accumulated Other |
|
|
|
| Amount of |
|
| Income and Comprehensive |
| ||||||
For the nine months ended September 30, |
| Comprehensive (Loss) Income |
|
| Location |
| Gain (Loss) |
|
| Income |
|
| Comprehensive Loss |
|
| Location |
| (Loss) Gain |
|
| Income (Loss) |
| ||||||
2020 |
| $ | (59,766 | ) |
| Interest expense |
| $ | (8,467 | ) |
| $ | 59,015 |
| ||||||||||||||
2019 |
| $ | (52,182 | ) |
| Interest expense |
| $ | 2,001 |
|
| $ | 51,025 |
|
|
| (52,182 | ) |
| Interest expense |
|
| 2,001 |
|
|
| 51,025 |
|
2018 |
|
| 30,296 |
|
| Interest expense |
|
| (1,287 | ) |
|
| 38,115 |
|
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 $3,688.$16,073. 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 nine months ended September 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 nine months ended September 30, 2019.
12. Credit Risk Concentrations
The Company maintained bank balances that, at times, exceeded the federally insured limit during the nine months ended September 30, 2019.2020. 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 BRE and the Manager and Asset Manager represent 17%represented 0% and 20%2% of total operating expenses for the three and nine months ended September 30, 2019 and 2018,2020, respectively, and 18%17% and 19%18% of total operating expenses for the three and nine months ended September 30, 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 three institutions that comprise 62%comprised 63%, 16%, and 10% of total mortgages and notes payable at September 30, 2019.2020. The Company has mortgages and notes payable with fourthree institutions that comprise 26%comprised 62%, 23%, 14%16%, and 11%10% of total mortgages and notes payable at December 31, 2018.2019. For the three and nine months ended September 30, 20192020 and 2018,2019, the Company had no0 individual tenants or common franchises that accounted for more than 10% of total revenues.
13. Equity
On September 21, 2020, the Corporation completed the IPO and issued 33,500 shares of Class A Common Stock at an initial public offering price of $17.00 per share. As part of the IPO, the underwriters of the IPO were granted an option, exercisable within 30 days from September 21, 2020, to purchase up to an additional 5,025 shares of Class A Common Stock at the IPO price, less underwriting discounts and commissions. The net proceeds from the IPO, after deducting underwriting discounts and commissions of $34,170 and $3,010 of other expenses (including $1,656 of expenses that were recorded in Accounts payable and other liabilities at September 30, 2020), were $532,320 through September 30, 2020. The Company used the net proceeds to repay the remaining $216,488 principal and accrued interest due under the Company’s then existing revolving credit facility and the remaining $240,225 principal and accrued interest due under its 2020 Unsecured Term Loan. The remaining net proceeds will be used for general business purposes, including acquisitions. On October 20, 2020, the underwriters partially exercised their option. See Note 18.
Share Redemption Program
The Company’s Share Redemption Program was terminated effective February 10, 2020, and as a result there were 0 redemptions during the nine months ended September 30, 2020. The following table summarizes redemptions under the Company’s Share Redemption Program:
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||||||||||
(in thousands, except number of redemptions) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| For the three months ended September 30, 2019 |
|
| For the nine months ended September 30, 2019 |
| ||||||
Number of redemptions requested |
| 20 |
|
| 11 |
|
| 49 |
|
| 33 |
|
| 20 |
|
| 49 |
| ||||||
Number of shares |
| 88 |
|
| 32 |
|
| 147 |
|
| 106 |
|
| 353 |
|
| 588 |
| ||||||
Aggregate redemption price |
| $ | 7,361 |
|
| $ | 2,675 |
|
| $ | 12,374 |
|
| $ | 8,564 |
|
| $ | 7,361 |
|
| $ | 12,374 |
|
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 September 30, 20192020 and December 31, 2018,2019, a total of 2,79712,301 and 2,23312,019 shares of common stock, respectively, have been issued under the DRIP.
14. Stock-Based Compensation
On August 4, 2020, the Company awarded 341 shares of restricted common stock under the Equity Incentive Plan to certain officers and employees. The holder of a restricted stock award is generally entitled at all times on and after the date of issuance of the restricted common shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The restricted stock awards vest over a three or four year period from the date of the Internalization, subject to the employee’s continued service through the applicable vesting dates and in accordance with the terms of the individual award agreements. NaNne of the shares of restricted stock were vested at September 30, 2020.
The following table presents information about the Company’s restricted stock awards:
(in thousands) |
| For the three months ended September 30, 2020 |
|
| For the nine months ended September 30, 2020 |
| ||
Compensation cost |
| $ | 796 |
|
| $ | 796 |
|
Dividends declared on unvested restricted stock |
| 46 |
|
| 46 |
|
The following table presents information about the Company’s restricted stock awards at September 30, 2020:
(in thousands, except recognition period) |
|
|
|
|
|
|
Unamortized value of restricted stock awards |
|
|
| $ | 6,194 |
|
Weighted average amortization period (in years) |
|
| 3.0 |
|
The following table presents information about the Company’s restricted stock activity during the nine months ended September 30, 2020:
(in thousands, except per share amounts) |
| Number of Shares |
|
| Weighted Average Grant Date Fair Value per Share |
| ||
Unvested at beginning of period |
|
| — |
|
| $ | — |
|
Granted |
|
| 341 |
|
|
| 20.50 |
|
Vested |
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 341 |
|
| $ | 20.50 |
|
The August 4, 2020 grant date fair value per share of $20.50 was based on the determined share value established by the Board of Directors (“Determined Share Value”). Prior to the IPO, the Company sold shares of common stock in a private offering at a price equal to the Determined Share Value, which was established at least quarterly by the Board of Directors based on the net asset value (“NAV”) of the Company’s portfolio, input from management and third-party consultants, and such other factors as the Board of Directors determined. The Company’s NAV was calculated using its established valuation process, starting with an estimate of the fair value of the properties in the portfolio as of that date based upon, among other factors, the implied market price for each asset based upon a review of market capitalization rates.
14.15. Earnings per Share
The following table summarizes the components used in the calculation of basic and diluted earnings per share (“EPS”):
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||
(in thousands, except per share) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Broadstone Net Lease, Inc. |
| $ | 23,388 |
|
| $ | 21,267 |
|
| $ | 53,460 |
|
| $ | 55,813 |
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Broadstone Net Lease, Inc. |
| $ | 23,388 |
|
| $ | 21,267 |
|
| $ | 53,460 |
|
| $ | 55,813 |
|
Net earnings attributable to non-controlling interests |
|
| 1,650 |
|
|
| 1,797 |
|
|
| 3,942 |
|
|
| 4,631 |
|
|
| $ | 25,038 |
|
| $ | 23,064 |
|
| $ | 57,402 |
|
| $ | 60,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in basic earnings per share |
|
| 24,642 |
|
|
| 20,554 |
|
|
| 23,394 |
|
|
| 19,850 |
|
Effects of convertible membership units |
|
| 1,737 |
|
|
| 1,737 |
|
|
| 1,737 |
|
|
| 1,646 |
|
Weighted average number of common shares outstanding used in diluted earnings per share |
|
| 26,379 |
|
|
| 22,291 |
|
|
| 25,131 |
|
|
| 21,496 |
|
Basic and diluted net earnings per common share |
| $ | 0.95 |
|
| $ | 1.03 |
|
| $ | 2.28 |
|
| $ | 2.81 |
|
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||
(in thousands, except per share amounts) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Broadstone Net Lease, Inc. common shareholders |
| $ | 8,750 |
|
| $ | 23,388 |
|
| $ | 34,919 |
|
| $ | 53,460 |
|
Less: earnings allocated to unvested restricted shares |
|
| (46 | ) |
|
| — |
|
|
| (46 | ) |
|
| — |
|
Net earnings used to compute basic earnings per common share |
| $ | 8,704 |
|
| $ | 23,388 |
|
| $ | 34,873 |
|
| $ | 53,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings used to compute basic earnings per share |
| $ | 8,704 |
|
| $ | 23,388 |
|
| $ | 34,873 |
|
| $ | 53,460 |
|
Net earnings attributable to non-controlling interests |
|
| 961 |
|
|
| 1,650 |
|
|
| 3,738 |
|
|
| 3,942 |
|
Net earnings used to compute diluted earnings per common share |
| $ | 9,665 |
|
| $ | 25,038 |
|
| $ | 38,611 |
|
| $ | 57,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
| 111,371 |
|
|
| 98,568 |
|
|
| 108,300 |
|
|
| 93,575 |
|
Less: weighted average unvested restricted shares (a) |
|
| (216 | ) |
|
| — |
|
|
| (72 | ) |
|
| — |
|
Weighted average number of common shares outstanding used in basic earnings per common share |
|
| 111,155 |
|
|
| 98,568 |
|
|
| 108,228 |
|
|
| 93,575 |
|
Effects of convertible membership units (b) |
|
| 12,226 |
|
|
| 6,948 |
|
|
| 11,519 |
|
|
| 6,948 |
|
Weighted average number of common shares outstanding used in diluted earnings per common share |
|
| 123,381 |
|
|
| 105,516 |
|
|
| 119,747 |
|
|
| 100,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
| $ | 0.08 |
|
| $ | 0.24 |
|
| $ | 0.32 |
|
| $ | 0.57 |
|
Diluted earnings per share |
| $ | 0.08 |
|
| $ | 0.24 |
|
| $ | 0.32 |
|
| $ | 0.57 |
|
(a) | Represents the weighted average effects of 341 unvested restricted shares of common stock as of September 30, 2020, which will be excluded from the computation of earnings per share until they vest. The shares of restricted common stock were not included in the calculation of diluted earnings per share, as the effect of doing so would have been anti-dilutive. |
(b) | Represents the weighted average effects of 12,226 and 6,948 OP Units outstanding at September 30, 2020 and September 30, 2019, respectively. OP Units are included in the diluted earnings per share calculation. However, because such OP Units would also require that the share of the OP income attributable to such OP units also be added back to net income, there is no effect to EPS. |
In the table above, outstanding membership units are included in the diluted earnings per share calculation. However, because such membership units would also require that the share of the Operating Company income attributable to such membership units (which are currently presented as non-controlling interest) also be added back to net income, there is no effect on EPS.
15.16. Supplemental Cash Flow Disclosures
Cash paid for interest was $49,828$50,853 and $33,108$49,828 for the nine months ended September 30, 20192020 and 2018,2019, respectively. Cash paid for state income franchise and foreign taxes was $809$1,385 and $307$809 for the nine months ended September 30, 20192020 and 2018,2019, respectively.
The following are non-cash transactions and have been excluded from the accompanying Condensed Consolidated Statements of Cash Flows:
During the nine months ended September 30, 2019 and 2018, the Corporation issued 550 and 458 shares, respectively, of common stock with a value of approximately $46,084 and $37,055, respectively, under the terms of the DRIP (see Note 13).
• | During the nine months ended September 30, 2020 and 2019, the Corporation issued 275 and 2,199 shares, respectively, of Common Stock with a value of approximately $5,733 and $46,084, respectively, under the terms of the DRIP (see Note 13). |
During the nine months ended September 30, 2018, the Company issued 194 membership units of the Operating Company in exchange for property contributed in UPREIT transactions valued at $15,797 (see Note 11).
• | During the nine months ended September 30, 2020, the Company issued shares 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 Internalization and assumed $90,484 of debt (see Note 4). |
During the nine months ended September 30, 2018, the Corporation cancelled nine thousand shares of common stock with a value of $748 that were pledged as collateral by a tenant. The cancellation of the shares was used to settle $748 in outstanding receivables associated with the tenant.
• | During the nine months ended September 30, 2020, the Company adjusted the carrying value of mezzanine equity non-controlling interests by $2,513, with an offset to Additional paid-in capital. |
At September 30, 2019 and 2018, dividend amounts declared and accrued but not yet paid amounted to $11,932 and $9,722, respectively.
• | During the nine months ended September 30, 2020, the Company reclassified $112,698 of mezzanine equity non-controlling interests to Non-controlling interests. |
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. 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 nine months ended September 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 nine months ended September 30, 2019, the Company assumed tenant improvement allowances of $2,517 in exchange for a reduction to the cash paid to acquire the associated real estate assets.
• | During the nine months ended September 30, 2020, the Company reclassified $66,376 of mezzanine equity common stock, with an offset of $66,375 to Additional paid-in capital and $1 to Common stock. |
• | During the nine months ended September 30, 2020, the Company reclassified $18,436 of the carrying value of the earnout liability, with an offset of $11,627 as a component of Non-controlling interests and $6,809 as a component of Additional paid-in capital (see Note 2). |
• | During the nine months ended September 30, 2020, $1,656 of incurred but unpaid expenses associated with the IPO were recorded as an offset to Additional paid-in capital (see Note 13). |
• | At September 30, 2020 and 2019, dividend amounts declared and accrued but not yet paid amounted to $20,722 and $11,932, respectively. |
• | During the nine months ended September 30, 2020, the Company executed lease modifications that resulted in the lease classification changing from direct financing lease to operating lease for 4 properties. At the modification date, the net investment in the original lease, and therefore the carrying value of the assets recognized, amounted to $9,055. |
• | In connection with real estate transactions conducted during the nine months ended September 30, 2019, the Company accepted tenant improvement allowances of $2,517 in exchange for a reduction to the cash paid for the associated real estate assets. |
• | Upon adoption of ASC 326 on January 1, 2020, described in Note 2, the Company recorded a transition adjustment to record a provision for credit losses associated with its net investment in direct financing leases of $323, with an equal amount recorded as a reduction in retained earnings. The provision for credit losses is included as a component of Investment in rental property, net accounted for using the direct financing method on the Condensed Consolidated Balance Sheets. |
• | Upon adoption of ASC 842 on January 1, 2019, the Company recorded right-of-use assets of $1,687 and lease liabilities of $1,261 associated with ground leases where it is the lessee. The right-of-use asset was recorded net of a straight-line rent liability of $7 and ground lease intangible asset, net of $432 as of the date of adoption. |
16.17. Commitments and Contingencies
Litigation
From time to time, the Company is a party to various litigation matters incidental to the conduct of the Company’s business. While the resolution of such matters cannot be predicted with certainty, based on currently available information, the Company does not believe that the final outcome of any of these matters will have a material effect on its consolidated financial position, results of operations, or liquidity.
Property and Acquisition Related
In connection with ownership and operation of real estate, the Company may potentially be liable for costcosts and damages related to environmental matters. The Company is not aware of any non-compliance, liability, claim, or other environmental condition that would have a material effect on its consolidated financial position, results of operations, or liquidity.
As part of acquisitions closed during the nine months ended September 30, 2019, the company assumed three lease agreements that provided for a total of $2,517 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) |
| September 30, 2019 |
|
| December 31, 2018 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
Tenant improvement allowances |
| $ | 3,664 |
|
| $ | 2,125 |
|
| $ | 1,981 |
|
| $ | 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 September 30, 2020, taxable sales of the applicable properties would trigger liability under the Agreements of approximately $22,300. Based on information available, the Company does not believe that 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 expiration dates ranging from 2021 to 2023. These leases contain provisions for fixed monthly payments, subject to rent escalations. None of the leases are subject to any sublease agreement. The 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 Income:leases:
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
|
|
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| Financial Statement Presentation |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Operating lease costs |
| $ | 35 |
|
| $ | 23 |
|
| $ | 105 |
|
| $ | 26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office leases |
| General and administrative |
| $ | 155 |
|
| $ | — |
|
| $ | 362 |
|
| $ | — |
| ||||||||||||||||
Ground leases |
| Property and operating expense |
|
| 33 |
|
|
| 35 |
|
|
| 100 |
|
|
| 105 |
| ||||||||||||||||
Variable lease costs |
|
| 11 |
|
|
| 11 |
|
|
| 34 |
|
|
| 13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ground leases |
| Property and operating expense |
|
| 13 |
|
|
| 11 |
|
|
| 43 |
|
|
| 34 |
| ||||||||||||||||
Total lease costs |
| $ | 46 |
|
| $ | 34 |
|
| $ | 139 |
|
| $ | 39 |
|
|
|
| $ | 201 |
|
| $ | 46 |
|
| $ | 505 |
|
| $ | 139 |
|
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 September 30, |
|
| For the nine months ended September 30, |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Operating lease payments |
| $ | 27 |
|
| $ | 20 |
|
| $ | 127 |
|
| $ | 23 |
|
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Operating lease payments |
| $ | 179 |
|
| $ | 27 |
|
| $ | 490 |
|
| $ | 127 |
|
Estimated future lease payments required under non-cancelable operating leases at September 30, 2019,2020, and a reconciliation to the lease liabilities, is as follows:
(in thousands) |
|
|
|
|
|
|
|
|
Remainder of 2019 |
| $ | 29 |
| ||||
2020 |
|
| 120 |
| ||||
Remainder of 2020 |
| $ | 176 |
| ||||
2021 |
|
| 122 |
|
|
| 711 |
|
2022 |
|
| 124 |
|
|
| 686 |
|
2023 |
|
| 125 |
|
|
| 505 |
|
2024 |
|
| 120 |
| ||||
Thereafter |
|
| 2,540 |
|
|
| 2,411 |
|
Total undiscounted cash flows |
|
| 3,060 |
|
|
| 4,609 |
|
Less imputed interest |
|
| (1,814 | ) |
|
| (1,822 | ) |
Lease liabilities |
| $ | 1,246 |
|
| $ | 2,787 |
|
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.
17.18. Subsequent Events
Through November 12, 2019,On October 15, 2020, the Company has raised $5,789 equivalentpaid distributions totaling $20,722.
On October 20, 2020, the underwriters of the Company’s IPO partially exercised their option to 69purchase up to an additional 5,025 shares of the Corporation’sCompany’s Class A Common Stock at the IPO price of $17.00. The underwriters ultimately exercised the option by purchasing an additional 3,500 shares of Class A Common stock. The Company subsequently received $55,930 of additional IPO proceeds as a result of the underwriter’s exercise of their option, net of underwriting fees and discounts.
On November 5, 2020, the Board of Directors declared a quarterly distribution of $0.25 per share on the Company’s common stock throughand OP Units for the DRIP. fourth quarter of 2020, which will be payable on or before January 15, 2021 to stockholders and unit holders of record as of December 31, 2020.
Through November 12, 2019, the Company has paid $11,932 in distributions, including dividend reinvestments.
Subsequent to September 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 $16,064 of rental property and associated intangible assets and liabilities. Through November 12, 2019,5, 2020 the Company sold five2 properties with an aggregate carrying value of $10,922approximately $5,019 for total proceeds of $13,731.$8,615. The Company incurred additional expenses related to the sales of approximately $745,$402, resulting in a gain on sale of real estate of approximately $2,064.
On October 31, 2019, the Board of Directors declared a distribution of $0.44 per share on the Corporation’s common stock and approved a distribution of $0.44 per membership unit of the Operating Company for monthly distributions through January 2020. The distributions are payable on or prior to the 15th day of the following month to stockholders and unit holders of record 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 $85.00 per share for the period from November 1, 2019 through January 31, 2020.$3,194.
Subsequent to September 30, 2020, the Company repaid in full the $591 outstanding balance of notes payable (see Note 10).
19. COVID-19 Pandemic
Since its discovery in December 2019, a novel strain of coronavirus, which causes the Operating Company paid off borrowingsviral 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 Revolvertypes of businesses that may continue to operate, which resulted in the aggregate amountclosure of $6,000.
Internalization
On November 11, 2019, the Company entered into a definitive merger agreement (the “Merger Agreement”) with the Manager and other parties providing for the internalization of the external management functions currently performed for the Company by the Manager (the “Internalization”). Upon consummation of the Internalization, the Company’s current management team and corporate staff, who are currently employed by the Manager, will become employed by an indirect subsidiary of the Company, and the Company will become internally managed. Subjectmany businesses deemed to the satisfaction of specified closing conditions, the Internalization is scheduled to close during the first quarter of 2020. The Internalization is not considered a termination event under the Property Management Agreement and the Asset Management Agreement (see Note 3). The Property Management Agreement and Asset Management Agreement, however, will be terminated upon closing of the Internalization, but no fees will be payable under them as a result of that termination. The Internalization will consist of the acquisition of the Manager through a series of mergers pursuant to the Merger Agreement.
The consideration paid pursuant to the Merger Agreement will consist of (i) base consideration of approximately $206 million plus assumption of debt of approximately $94 million, payable upon closing and (ii) additional consideration of up to $75 million payable in four tranches of $10 million, $15 million, $25 million, and $25 million if certain milestones related to either (a) the dollar volume-weighted average price of a sharenon-essential. Many of the Company’s common stock (“VWAP per REIT Share”), followingtenants, in particular those who operate in the completionretail 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, during the second quarter of an initial public offering2020, the Company received a number of requests for rent relief and ultimately granted relief to 15 tenants.
For all but 1 of the Company’s common stock (“IPO”), or (b)15 tenants granted relief, the Company’s adjusted funds from operations (“AFFO”) per share, prior toCompany granted relief in the completion of an IPO, are achieved during specified periods of time following the closing of the Internalization (the
“Earnout Periods”). The consideration will consistform of a combination of cash, shares ofpartial rent deferral. For the Company’s common stock, and Operating Company membership units, at the election of the owners of the Manager.
The earnout tranches, applicable VWAP of a REIT Share and AFFO per share, and the applicable Earnout Periods are as follows:
|
| If the Company has completed an IPO |
| If the Company has not completed an IPO | ||||
Earnout Tranche |
| VWAP of a REIT Share |
| Applicable Earnout Period |
| AFFO per Share |
| Applicable Earnout Period |
$10 million |
| $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 million |
| $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 million |
| $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 million |
| $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. |
Upon closing of the Internalization, the Company’s existing management team, who are currently employees of the Manager, including the Company’s current executive officers, will become employees ofremaining tenant, the Company providingagreed to a seamless transition and clarity as to future senior leadership. Eachpartial abatement of Christopher J. Czarnecki, Ryan M. Albano, John D. Moragne, and Sean T. Cutt are expected to terminate their employmentrent over a nine-month period with the Manager and enter into employment agreements withminimum required rent payable increasing during the Company or its subsidiary to serve as the Company’s Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, and Chief Investment Officer, respectively.
The Merger Agreement contains customary representations, warranties and covenants. Each party’s obligation to consummate the transactions contemplated by the Merger Agreement is subject to customary closing conditions.
The Merger Agreement does not provide that the completion of an IPO is a condition to the closing of the Internalization. Under the terms of the Merger Agreement, however, if the Company does not complete an IPO by December 31, 2020, then the former owners of the Manager who receive shares of the Company’s common stock and/or membership units of the Operating Company will be granted certain redemption rights as a means to provide additional liquidity in the absence of an IPO.
Prior to closing the Internalization, the Company has agreed to repurchase all of the outstanding shares of Company common stock held by the Managerperiod, in exchange for a three-year lease term extension and an upside percentage rent clause during the abatement period. Partial rent deferrals and the abatement represented 0.6% and 1.4% of total contractual base rents due for the three months ended September 30, 2020, respectively.
The partial rent deferrals ranged between two and six months of rent, with a weighted average deferral period of 3.4 months. Repayment periods range from three months to one year, with a weighted average payback period of 5.6 months beginning in July 2020. At September 30, 2020, the weighted average remaining payback period for these deferrals was 4.2 months. The Company has collected 100% of deferred rent that was required to be repaid during the three months ended September 30, 2020 and the balance of rent deferrals remains probable of collection.
For partial rent deferrals expected to be repaid within a short period of time where the deferral of payments made no substantive changes to the total consideration in the original lease agreement, the amount of straight-line lease revenue recognized in the financial statements was not impacted. Deferred rents due under the agreements are recorded as Tenant and other receivables, net in the Condensed Consolidated Balance Sheets. In certain circumstances, as part of the deferral agreements, the Company negotiated lease extensions or the early exercise of tenant renewal options, resulting in cash atflows under the agreements being substantially in excess of the original lease terms. The Company evaluated these agreements on a per share price equallease by lease basis, and accounted for the relief under the modification framework of ASC 842, resulting in adjustments to $85.00, the current Determined Share Value.amount of straight-line lease revenue that will be recorded prospectively. The Company also accounted for the partial abatement under the lease modification framework of ASC 842.
As of and for the nine months ended September 30, 2020, the impact of the COVID-19 pandemic on the Company’s financial condition, and results of operations has been limited to effects of the grants of rent relief discussed above. The full extent of the pandemic on the Company’s future financial conditions, results of operations, liquidity, and ability to pay distributions will ultimately depend on certain developments, including the duration and spread of the outbreak and its impact on the Company’s tenants, all of which are uncertain and cannot be predicted. For further discussion of risks associated with the COVID-19 outbreak, refer to Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q below.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Except where the context suggests otherwise, as used in this Quarterly Report on Form 10-Q, the terms “BNL,” “we,” “us,” “our,” and “our company” refer to Broadstone Net Lease, Inc., a Maryland corporation incorporated on October 18, 2007, and, as required by context, Broadstone Net Lease, LLC, a New York limited liability company (the “OP”), which we refer to as the or our “Operating Company,“OP,” and to their respective subsidiaries.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q may containcontains forward-looking statements, withinwhich reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends, that are intended to be made pursuant to the meaningsafe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding, among other things, our plans, strategies, and prospects, both business and financial.. Forward-looking statements include butall statements that are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results, or other developments. We caution thathistorical facts. In some cases, you can identify these forward-looking statements are not guarantees. 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 from those expressed or implied in any forward-looking statements.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 weassumptions, our actual results, performance, and achievements could differ materially from those expressed in or by the forward-looking statements and may be affected by a variety of risks and other factors. Accordingly, there are or will achieve or realize these plans, intentions, or expectations.
Factorsbe important factors that could cause actual outcomes or results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:statements.
our ability to generate cash flows sufficient to pay our dividends to stockholders or meet our debt service obligations;
our ability to achieve our investment objectives and growth plans;
the risk that the Internalization (as defined below) will not be consummated within the anticipated time period or at all;
the occurrence of any event or circumstanceImportant factors that could give risecause results to the termination of the Merger Agreement (as defined below);
risks related to disruption of management’s attentiondiffer materially from our ongoing business operations due to the pending Internalization;
the effect of the announcement of the Internalization on our operating results and business generally;
the outcome of any legal proceedings relating to the Internalization;
our ability to effectively and efficiently manage the Internalization, if consummated;
the risk that we may not realize the anticipated benefits from the Internalization, if consummated, or that such benefits are less than anticipated as a result of unexpected costs or liabilities that may arise from the Internalization;
our dependence upon the financial health and performance of the Manager and the Asset Manager and their ability to retain or hire key personnel;
conflicts of interest arising out of our relationship with the Manager and its affiliates;
changes in general business and economic conditions, fluctuating interest rates, and volatility and uncertainty in the credit markets and broader financial markets;
competition in the acquisition and disposition of properties and in the leasing of our properties, which may impact our ability to acquire, dispose of, or lease properties on advantageous terms;
risks inherent in investing in real estate, including tenant, geographic, and industry concentrations with respect to our properties, bankruptcies or insolvencies of tenants or from tenant defaults generally, impairments in the value of our real estate assets, the illiquidity of our real estate investments, potential liability relating to environmental matters and potential damages from natural disasters, acts of terrorism, or war;
our access to capital and ability to borrow money in sufficient amounts and on favorable terms;
our success in our deleveraging efforts;
our continued qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes; and
legislative or regulatory changes, including changes to the laws governing the taxation of REITs.
Any of the assumptions underlying the forward-looking statements included herein could be inaccurate,are described in Item 1. “Business,” Item 1A. “Risk Factors,” and readersItem 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Annual Report on Form 10-K, as filed with the SEC on February 27, 2020 and in Part II, Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as filed with the SEC on May 7, 2020.
You are cautioned not to place undue reliance on any forward-looking statements included herein.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 is filed with the Securities and Exchange Commission (the “SEC”), and the risk that actual results, performance, and achievements will differ materially from the expectations expressed hereinin or referenced by this Quarterly Report on Form 10-Q will increase with the passage of time. ExceptWe 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, we do not undertake any obligation to update or revise any forward-looking statements contained inlaw.
Explanatory Note and Certain Defined Terms
Unless the context otherwise requires, the following terms and phrases are used throughout this Form 10-Q for any reason. Important factors that could cause actual results to differ materially from the forward-looking statements are disclosed in Item 1A. “Risk Factors” in our Form 10-K for the year ended December 31, 2018,MD&A as filed with the SEC on March 14, 2019 (the “Form 10-K”).described below:
• | “annualized base rent” or “ABR” means the annualized contractual cash rent due for the last month of the reporting period, excluding the impacts of the short-term rent deferrals and abatements agreed to as a result of tenant requests for rent relief related to the global coronavirus (“COVID-19”) pandemic, and adjusted to remove rent from properties sold during the month and to include a full month of contractual cash rent for properties acquired during the last month. As discussed below, as a result of the COVID-19 pandemic, in the first half 2020 we received requests for rent relief from several tenants and agreed to temporarily defer the receipt of rent, or in limited circumstances to abate rent, for a portion of the remaining lease terms. As a result of these requests, we agreed to partial rent relief requests for 15 tenants related to 93 properties whose total base rents represent approximately 9.8% of our ABR. We have excluded the impact of these deferrals and abatements from the calculation of ABR because they are short term in nature relative to the length of our lease terms and relate to a discrete event, and therefore including them in the calculation would not provide an accurate measure of our relative portfolio composition. |
• | “cash capitalization rate” represents the estimated first year cash yield to be generated on a real estate investment property, which was estimated at the time of investment based on the contractually specified cash base rent for the first full year after the date of the investment, divided by the purchase price for the property; |
• | “CPI” means the Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, All Items, as published by the U.S. Bureau of Labor Statistics, or other similar index which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services; |
• | “gross asset value” means the undepreciated book value of an asset, which represents the fair value of the asset as of the date it was acquired, less any subsequent writedowns due to impairment charges; |
• | “occupancy” or a specified percentage of our portfolio that is “occupied” means the quotient of (1) the total square footage of our properties minus the square footage of our properties that are vacant and from which we are not receiving any rental payment, and (2) the total square footage of our properties as of a specified date; and |
• | “Revolving Credit Facility” means our $900 million unsecured revolving credit facility, dated September 21, 2020, with J.P. Morgan Chase Bank, N.A. and the other lenders party thereto, which replaced our prior $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 currently 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 located primarilythat 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. As of which are leasedSeptember 30, 2020, our portfolio has grown to the properties’ operators under long-term net leases. Under a “net lease,” the tenant occupying the leased627 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.approximately $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 September 30, 2019, we owned a diversified portfolio of 661 individual net leased commercial properties located in 42 U.S. states and one commercial property located in British Columbia, Canada, and comprising approximately 27.5 million rentable square feet of operational space. As of September 30, 2019, all but four of our properties were subject to leases and our properties were 99.7% occupied by 187 different commercial tenants, with no single tenant accounting for moreoperations rather than 2.8% 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 currently retains 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.
During each of the periods covered by this Form 10-Q, we closed 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. There is currently no established equity cap. We anticipate reinstating an equity cap once we are comfortably within the leverage range of the Company’s investment grade credit rating. As a result of a pending transaction, we determined that we would not hold an equity closing as of October 31, 2019. The next equity closing will occur on November 29, 2019.
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 $85.00 per share. For the nine months ended September 30, 2019, we sold 3,609,696 shares of our common stock in our private offering, including 563,864 shares of common stock issued pursuant to our DRIP, for total proceeds of approximately $307.9 million. 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 September 30, 2019, there were 25.5 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.
Q3 2019 Highlights
For the three months ended September 30, 2019, we:ownership.
|
|
|
Generated funds from operations (“FFO”) of $43.3 million, representing a decrease of $1.7 million, or 3.8%, compared to the three months ended September 30, 2018. FFO per diluted share was $1.64 for the three months ended September 30, 2019, representing a decrease of $0.38 per diluted share, or 18.8% the three months ended September 30, 2018.
Generated adjusted funds from operations (“AFFO”) of $38.8 million, representing an increase of $7.5 million, or 24.0%, compared to the three months ended September 30, 2018. AFFO per diluted share was $1.47 for the three months ended September 30, 2019, representing an increase of $0.07 per diluted share, or 5.0%, compared to the three months ended September 30, 2018.
o | Property Type: We are focused primarily on industrial, healthcare, restaurant, office, and retail property types based on our extensive experience in and conviction around these sectors. Within these sectors, we have meaningful concentrations in manufacturing, distribution and warehouse, clinical, casual dining, quick service restaurant, strategic operations, corporate headquarters, food processing, flex/research and development, and cold storage. |
o | Geographic Diversity: Our properties are located in |
o | Tenant and Industry Diversity: Our properties are occupied by approximately 182 different commercial tenants who operate 169 different brands that are diversified across 54 differing industries, with no single tenant accounting for more than 2.5% of our ABR. |
- | Strong In-Place Leases with Significant Remaining Lease Term. As of September 30, 2020, our portfolio was approximately 99.8% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 10.8 years, excluding renewal options. |
- | Standard Contractual Base Rent Escalation. Approximately 98.3% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.1%. |
- | Extensive Tenant Financial Reporting. Approximately 88.4% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 6.4% of our ABR is received from tenants who are not required to provide us with specified financial information under the terms of our lease, but whose financial statements are available publicly, either through SEC filings or otherwise. |
Sold 16 properties, representing 1.6%Further information concerning our real estate portfolio is included in Real Estate Portfolio Information below.
Recent Developments – Stock Split and Initial Public Offering
On September 18, 2020, we effected a four-for-one split on the outstanding shares of our portfoliocommon stock (“Common Stock”). Concurrent with the stock split, the OP effected a four-for-one stock split of its outstanding OP Units. No fractional shares or OP Units were issued as a result of the stock split. All historic share and per share amounts have been adjusted to give retroactive effect to the stock split.
On September 21, 2020, we closed an initial public offering (“IPO”) at $17.00 per share, of 33.5 million shares of a new class of common stock, $0.00025 par value per share (“Class A Common Stock”). Shares of the Class A Common Stock are listed on the New York Stock Exchange under the symbol “BNL”. The terms of the Class A Common Stock are identical to the terms of the Common Stock, except that each share of Class A Common Stock will automatically convert into one share of Common Stock on March 20, 2021. The Common Stock will subsequently be listed on the New York Stock Exchange on March 22, 2021, which represents the first trading day following the 180-day period following the closing of the IPO.
On October 20, 2020, the underwriters of our IPO partially exercised their option to purchase up to an additional 5.025 million shares of our Class A Common Stock at the IPO price of $17.00. The underwriters ultimately exercised such option by purchasing an additional 3.5 million shares of Class A Common stock. We subsequently received $55.9 million of additional IPO proceeds as a result of December 31, 2018,the underwriter’s exercise of their option, net of underwriting fees and discounts.
COVID-19 Pandemic Update
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, including industries in which our tenants operate. In response to the COVID-19 pandemic, many countries and U.S. states, including the areas in which we operate, adopted certain measures to mitigate the ongoing public health crises. Such measures included “shelter in place” or “stay at home” rules, restrictions on travel, and restrictions on the types of businesses that may continue to operate in many countries and U.S. states. Although such restrictions have been or were in the process of being lifted in several locations, the recent resurgence of COVID-19 cases has led to a weighted average capitalization ratereinstatement or partial reinstatement of 6.8%, for net proceedsrestrictions in some locations. We cannot predict whether and to what extent additional states and cities will implement similar restrictions or when restrictions currently in place will expire. Further, the impacts of $56.5 million, recognizing a gainpotential worsening of $12.6 million above carrying value.
Received $157.1 millioneconomic conditions and the continued disruptions to, and volatility in, investments from newthe credit and existing stockholders, including investments made throughfinancial markets, and consumer spending, as well as other unanticipated consequences, remain unknown.
The sections below summarize the impacts of the COVID-19 pandemic on our DRIP.
Collected greater than 99%results of rents dueoperations, liquidity and capital resources, during the quarterthree and based on rentable square footage, maintained a 99.8% leased portfolio as of September 30, 2019.
Amended our credit and term loan agreement to reduce the margin above LIBOR paid on the 2024 Unsecured Term Loan (as defined below) from 1.90% to 1.25%.
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. We fully drew on this facility to partially fund the acquisition of the industrial and office portfolio.
Year-to-Date 2019 Highlights
For the nine months ended September 30, 2019, we:2020, as well as management’s view of potential impacts on our future results of operations, liquidity and capital resources. For more discussion on the risks associated with the COVID-19 outbreak, see Part II, Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 7, 2020.
Impact to Results of Operations
Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that typically impact our results of operations and financial condition, which may be exacerbated by the COVID-19 pandemic, include rental rates and collections, property dispositions, lease renewals and occupancy, acquisition activity, net lease terms, interest expense, general and administrative expenses, tenant bankruptcies, and impairments.
Rental Rates and Collections
Our financial results depend on our ability to timely collect contractual rents due under our long-term net leases. The COVID-19 pandemic’s impact on us has primarily manifested through tenant requests for rent relief, which we received in late March 2020 and during the second quarter from 59 tenants related to 295 properties. As of June 30, 2020, we had resolved all active outstanding requests for rent relief as of that time, and no further requests were received during the third quarter of 2020. In total, we granted partial rent relief requests to 15 tenants related to 93 properties.
We evaluated each request for rent relief as a unique situation, employing a rigorous credit and business analysis focusing on, among other things, industry circumstances, the tenant’s financial performance, liquidity position, lease structure, and geographic location, and regulatory impacts on the tenant’s operations (e.g., stay-at-home orders, essential v. nonessential business designations). Based on our analyses, we granted relief on a select basis only to those tenants we determined to be most in need. In cases where we granted rent relief, we focused on negotiating the shortest possible repayment period and, when possible, lease enhancements (e.g. extensions of term). There were several tenants who requested rent relief that we believed were well positioned to continue making rent payments during the pandemic. Many of those tenants had strong balance sheets and liquidity positions, had applied for or received Paycheck Protection Program loan funding under the CARES Act, or were designated as essential businesses and could continue to operate despite restrictions on other businesses. We declined to agree to any rent relief in those circumstances, and in all such cases the tenants continued to pay all rents due as of September 30, 2020.
The rent relief requests we granted included partial deferral of payment of rent with 14 tenants, and a partial abatement of rent with one tenant. The partial rent deferrals ranged in length between two and six months, with a weighted average deferral of 3.4 months. Amounts deferred will be repaid over periods ranging between three months to one year. At September 30, 2020, the deferral periods for all 14 tenants who received partial rent deferrals have expired, and the weighted average repayment period for remaining deferrals was 4.2 months. The partial abatement represents a portion of rents due over a nine-month period, with the minimum required rent payable increasing during the abatement period. In exchange, we negotiated a three-year lease term extension and an upside percentage rent clause during the abatement period, which we expect to provide us with long-term value accretion.
Increased revenuesIn circumstances where we agreed to $213.9 million, representing growtha rent deferral that is to be repaid over a period of 22.7% comparedtime, and where the terms of the lease and amounts paid under the lease are substantially the same, we will continue to recognize the same amount of GAAP lease revenue each period to the extent the amounts are probable of collection. The amounts we agreed to defer will impact our cash flows from operations.
The following chart summarizes our third quarter 2020 rent collections to date:
1Relates to post-petition rents due from one tenant who had filed for bankruptcy
The following tables summarize our third quarter 2020 rent collection, in total and by tenant industry and property type:
| % of |
|
|
|
|
|
|
| |||||||||||||||
| September |
|
| % Base Rent Collected |
|
| % Base Rent Not Collected |
| |||||||||||||||
Tenant Industry | ABR |
|
| July |
|
| August |
|
| September |
|
| Q3 |
|
| Deferred |
|
| Abated |
|
| Bankruptcy |
|
Restaurants | 15.8% |
|
| 89.6% |
|
| 92.0% |
|
| 92.0% |
|
| 91.2% |
|
| — |
|
| 8.8% |
|
| — |
|
Home Furnishing Retail | 2.8% |
|
| 90.5% |
|
| 100.0% |
|
| 100.0% |
|
| 96.7% |
|
| — |
|
| — |
|
| 3.3% |
|
Specialty Stores | 2.2% |
|
| 89.4% |
|
| 89.4% |
|
| 89.5% |
|
| 89.5% |
|
| 10.5% |
|
| — |
|
| — |
|
Industrial Machinery | 1.9% |
|
| 84.6% |
|
| 100.0% |
|
| 100.0% |
|
| 94.9% |
|
| 5.1% |
|
| — |
|
| — |
|
Life Sciences Tools & Services | 1.4% |
|
| 82.0% |
|
| 100.0% |
|
| 100.0% |
|
| 94.0% |
|
| 6.0% |
|
| — |
|
| — |
|
Movies & Entertainment2 | 1.1% |
|
| 50.0% |
|
| 100.0% |
|
| 100.0% |
|
| 83.5% |
|
| 16.5% |
|
| — |
|
| — |
|
All Other | 74.8% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| — |
|
| — |
|
| — |
|
Grand Total | 100.0% |
|
| 96.7% |
|
| 98.5% |
|
| 98.5% |
|
| 97.9% |
|
| 0.6% |
|
| 1.4% |
|
| 0.1% |
|
2 | Industrial tenant. |
| % of |
|
|
|
|
|
|
| |||||||||||||||
| September |
|
| % Base Rent Collected |
|
| % Base Rent Not Collected |
| |||||||||||||||
Property Type | ABR |
|
| July |
|
| August |
|
| September |
|
| Q3 |
|
| Deferred |
|
| Abated |
|
| Bankruptcy |
|
Industrial | 44.4% |
|
| 97.6% |
|
| 99.5% |
|
| 99.4% |
|
| 98.8% |
|
| 1.2% |
|
| — |
|
| — |
|
Healthcare | 20.1% |
|
| 98.6% |
|
| 99.9% |
|
| 99.9% |
|
| 99.5% |
|
| 0.5% |
|
| — |
|
| — |
|
Restaurant | 15.5% |
|
| 89.4% |
|
| 91.9% |
|
| 91.9% |
|
| 91.1% |
|
| — |
|
| 8.9% |
|
| — |
|
Office | 10.0% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| — |
|
| — |
|
| — |
|
Retail | 8.3% |
|
| 96.2% |
|
| 100.0% |
|
| 100.0% |
|
| 98.7% |
|
| — |
|
| — |
|
| 1.3% |
|
Other | 1.7% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
| — |
|
| — |
|
| — |
|
Grand Total | 100.0% |
|
| 96.7% |
|
| 98.5% |
|
| 98.5% |
|
| 97.9% |
|
| 0.6% |
|
| 1.4% |
|
| 0.1% |
|
Rent collections have remained strong during the fourth quarter to date. As of the date of this filing, we had collected 98.5% of contractual base rents due for October 2020 as well as 100% of amounts due to be repaid in October 2020 under rent deferral agreements. Despite our continued strong rent collections subsequent to the outbreak of the COVID-19 pandemic, the duration of the pandemic and the potential ongoing impacts of the virus on our tenants’ ability to conduct their business should additional governmental restrictions be implemented, could have a significant negative impact on our ability to continue to collect future rents.
Property Dispositions
From time to time, we strategically dispose of properties, primarily when we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives. The resulting gains or losses on dispositions may materially impact our operating results, and the recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market at the time a property is listed for sale. As a result of the COVID-19 pandemic, we have seen a slowdown in real estate transactions and weakening market conditions for several property types resulting from an increase in vacant rental space. Although we have been able to dispose of properties during the first nine months endedof 2020 at advantageous prices, in the short term, the slowdown in market activity may inhibit our ability to further dispose of properties we have identified for disposition, including those leased by tenants that experience significant credit deterioration as a result of the COVID-19 pandemic, and the price at which we are able to sell the properties may be negatively impacted. We will continue to monitor the pandemic’s impact and continue to selectively dispose of properties when advantageous to do so.
Lease Renewals and Occupancy
As of September 30, 2018.
Generated net2020, the ABR weighted average remaining term of our portfolio was approximately 10.8 years, excluding renewal options, and approximately 8.2% 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 $57.4 million, representingproperty taxes and maintaining the property until it is re-leased, which could negatively impact our operating results. Our occupancy rates have remained strong during the COVID-19 pandemic, standing at 99.6% as of September 30, 2020 based on rentable square footage. Additionally, when negotiating COVID-19 related rent relief agreements, we have sought to extend lease terms where possible to preserve the continuity of tenants and long-term cash flows derived from our portfolio. While we believe our portfolio’s diversity should allow us to manage the impact the COVID-19 pandemic may have on lease renewals and occupancy, we continue to monitor the pandemic’s effects on several industries in which our tenants operate, such as bankruptcies by large retailers, continued or increased occupancy limits established by local governments on the casual dining industry, as well as the potential long-term effects on the demand for and utilization of office space as companies consider adopting increased work from home models.
Acquisition Activity
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 decrease of $3.0 million,significant degree, on our ability to identify and complete acquisitions that meet our investment criteria. Changes in capitalization rates, interest rates, or 5.0%, comparedother factors may impact our acquisition opportunities in the future. Market conditions may also impact the total returns we can achieve on our investments. Our acquisition volume also depends on our ability to access third-party debt and equity financing. The COVID-19 pandemic caused a slowdown in acquisition volume, and we did not acquire any new properties during the first nine months ended September 30, 2018. Earnings per diluted share was $2.28of 2020. We have continued to monitor the pandemic’s impact on capitalization rates, interest rates, and access and cost of equity and debt capital.
We currently have a robust pipeline of potential investment opportunities, including two acquisitions that are currently under executed contract. We are a party to two purchase and sale agreements for the nine months ended September 30, 2019, representing a decreasean aggregate purchase price of $0.53 per diluted share, or 18.9%, compared to the nine months ended September 30, 2018.
Generated FFO of $122.1approximately $33 million representing an increase of $7.9 million, or 6.9%, compared to the nine months ended September 30, 2018. FFO per diluted share was $4.86(excluding transaction costs) for the nine months ended September 30, 2019, representing a decrease of $0.45 per diluted share, or 8.5%, compared to the nine months ended September 30, 2018.
Generated AFFO of $107.6 million, representing an increase of $16.1 million, or 17.6%, compared to the nine months ended September 30, 2018. AFFO per diluted share was $4.28 for the nine months ended September 30, 2019, representing an increase of $0.02 per diluted share, or 0.5%, compared to the nine months ended September 30, 2018.
Closed 16 real estate acquisitions totaling $993.7 million, excluding capitalized acquisition costs, adding 66 new properties with a weighted average initial cash capitalization rate of 6.6%approximately 7.03%. We expect that these transactions will close during the fourth quarter of 2020. At the time of acquisition, the properties had awill have an expected weighted average remaining lease term of 12.3approximately 18.2 years and weighted average annual rent increases of 2.1%approximately 1.92%. In connection with these acquisitions, we expect to enter into or assume leases with an initial ABR of approximately $2.3 million. While we regard the completion of these pending acquisitions to be probable, these transactions are subject to customary closing conditions, including the completion of due diligence, and there can be no assurance that these acquisitions will be completed on the terms described above or at all. These acquisitions will be funded using the net proceeds raised pursuant to our initial public offering.
Sold 25 properties, representing 2.6%Net Lease Terms
Substantially all of our portfolioleases are net leases pursuant to which our tenant generally is obligated to pay all expenses associated with the leased property including real estate taxes, insurance, maintenance, repairs, and capital costs. A limited number of leases require that we pay some or all of the property expenses such as the cost of environmental liabilities, roof and structure repairs, real estate taxes, insurance, or certain non-structural repairs and maintenance. Additionally, we seek to use master lease structures where it fits market practice in the particular property type, pursuant to which we seek to lease multiple properties to a single tenant on an all or none basis. Master leases strengthen our ability to preserve rental revenue and prevent costs associated with vacancies for underperforming properties. We believe the master lease structure is most prevalent and applicable to leases in our restaurant and retail property types, while less relevant to our other property types, such as healthcare and industrial. As of September 30, 2020, master leases contributed approximately 34.2% 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), 73.4% of our restaurant property ABR (161 of our 240 restaurant properties), and 51.3% of our retail property ABR (78 of our 128 retail properties).
In instances in which we granted rent relief, we generally preserved the rights afforded to us pursuant to our leases. The ongoing COVID-19 pandemic presents certain risks of modifications to our lease terms, including certain rights we have under master leases. The ongoing impact of the COVID-19 pandemic could also increase the risk of tenants’ failure to meet their lease obligations, including the risk that the prolonged economic downturn forces tenants into bankruptcy. An increase in the number of leases under which we are responsible for some or all property related expenses could negatively influence our operating results.
Interest Expense
We anticipate that we will continue to incur debt to fund future acquisition activity, which will increase the amount of interest expense we incur. In addition, although we attempt to limit our total floating-rate debt exposure, changes in the interest rate environment could either increase or decrease our weighted average interest rate in the future. Any changes to our debt structure or debt financing associated with property acquisitions, could materially influence our operating results depending on the terms of any such debt. A downgrade in our credit rating could also increase the amount of interest we pay under our debt agreements.
Interest rates have continued to decline as the U.S. federal government attempts to combat the economic impacts of the COVID-19 pandemic. We benefited from this dynamic to the extent our floating rate borrowings were unhedged during the third quarter. Such 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 0.15% at September 30, 2020. We repaid $456.3 million of unhedged borrowings with the proceeds of our IPO, and approximately $110 million of our outstanding borrowings at September 30, 2020, remained unhedged. Restrictions in credit markets resulted in increased borrowing spreads across the debt capital markets earlier in the year as compared to the end of 2019, although they have since narrowed. As market conditions evolve and we return to executing against our growth strategy, additional changes in interest rates and our borrowing spreads could influence our operating results.
General and Administrative Expenses
Our general and administrative expenses primarily consist of compensation and related costs, third party legal, accounting, and consulting costs, travel and entertainment, and general office expenses. Since March 16, 2020, we have been primarily operating under a work from home policy. As of the date of this filing, the policy remains in effect. Given our limited headcount, we have not incurred a material amount of cash outlays on information technology or infrastructure to facilitate our remote workforce, and do not believe we will incur significant costs in the future. We have experienced a significant decrease in travel and entertainment expenses, as social distancing guidelines and restrictions have limited corporate travel. These benefits, however, may be outweighed by incremental third party legal, accounting, and consulting costs if the impacts of the COVID-19 pandemic worsen.
Tenant Bankruptcies
Adverse economic conditions, particularly those that 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 tenants and maintain our portfolio’s occupancy. We have historically experienced only a limited number of tenant bankruptcies, which have not been material to our financial results. During the nine months ended September 30, 2020, only one of our tenants was subject to bankruptcy proceedings which resulted in vacancies and our assumption of certain landlord responsibilities. The bankruptcy for this tenant concluded during the third quarter, we successfully re-leased the majority of properties, and reached a court approved settlement whereby we received approximately 86.5% of the total post-petition base rent that had been owed by the tenant. We have yet to see the long-term effects of the pandemic and the extent to which it may impact our tenants in the future. A prolonged exposure to the negative economic impacts of the pandemic may result in additional tenant bankruptcies.
Impairments
We review long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. Significant judgment is made as to if and when impairment should be taken. If our strategy, or one or more of the assumptions described above were to change in the future, an impairment may need to be recognized. Indications of a tenant’s inability to continue as a going concern, changes in our view or strategy relative to a tenant’s business or industry as a result of the COVID-19 pandemic, or changes in our long-term hold strategies, could each be indicative of an impairment triggering event. For the three and nine months ended September 30, 2020, we recognized $14.7 million and $17.4 million, respectively, of impairment charges, mainly resulting from changes in our long-term hold strategy with respect to the individual properties, which was due in part to unfavorable market trends resulting from the COVID-19 pandemic in geographic areas where we have vacant properties being marketed for re-lease or sale. We face the risk of additional impairments depending on the long-term effects of the COVID-19 pandemic and the extent to which it may impact our tenants in the future.
Impact to Liquidity and Capital Resources
Given the economic uncertainty and evolving circumstances related to the COVID-19 pandemic and the potential for further tenant requests for rent relief, we continue to evaluate all options for strengthening our liquidity position. Most recently, our IPO and upsizing of our Revolving Credit Facility during the third quarter have each bolstered our liquidity, reduced our leverage and allowed us to maintain financial flexibility. Earlier in the year, we temporarily suspended our distributions to shareholders based upon the uncertainties surrounding the COVID-19 pandemic. Our board of directors approved a quarterly distribution of $0.135 per share at its August 4, 2020 meeting. At its November 5, 2020 meeting, the board approved a $0.25 distribution per common share and OP Unit to stockholders and OP Unit holders of record as of December 31, 2018,2020, payable on or before January 15, 2021.
In addition to our $109.0 million of cash and restricted cash on hand at a weighted average capitalization rateSeptember 30, 2020, we also have $900 million of 7.0%, for net proceeds of $90.1 million, recognizing a gain of $16.8 million above carrying value.
Received $307.9 million in investments from new and existing stockholders, including investments made throughavailable capacity under our DRIP.
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.
Internalization
On November 12, 2019, we issued a press release announcing that we had entered into a definitive agreement (the “Merger Agreement”) to internalize the external management functions (the “Internalization”) currently performed by the Manager. Upon consummation of the Internalization, our current management team and corporate staff, who are currently employed by the Manager, will become employed by an indirect subsidiary of ours, and we will become internally managed. Subject to the satisfaction of specified closing conditions, the Internalization is scheduled to close during the first quarter of 2020. The Merger Agreement does not provide that the completion of an initial public offering (“IPO”) is a condition to the closing of the Internalization.Revolving Credit Facility. Under the terms of our credit agreements, we must maintain ratios of total indebtedness to total market value, and total unsecured indebtedness to total unencumbered eligible property value (together, “leverage covenant ratios”), of less than 60%, measured as of each quarter end. Taking into consideration our leverage covenant ratios, as of September 30, 2020 we had approximately $738 million of available borrowing capacity under our covenants. Management believes we were in compliance with the Merger Agreement, however, if we do not complete an IPO by December 31, 2020, then the former owners of the Manager who receive sharesterms of our common stock and/or membership unitscovenants as of the Operating Company will be granted certain redemption rights as a means to provide additional liquidity in the absence of an IPO.September 30, 2020.
The consideration paid pursuant to the Merger Agreement will consist of (i) base consideration of approximately $206 million plus assumption of debt of approximately $94 million, payable upon closingWe believe our cash on-hand and (ii) additional consideration of up to $75 million payable in four tranches of $10 million, $15 million, $25 million, and $25 million if certain milestones related to either (a) the 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 AFFO per share, prior to the completion of an IPO, are achieved during specified periods of time following the closing of the Internalization (“Earnout Periods”). The consideration will consist of a combination of cash, shares of the Company’s common stock, and Operating Company membership units, at the election of the owners of the Manager.
The earnout tranches, applicable VWAP of a REIT Share and AFFO per share, and the applicable Earnout Periods are as follows:
Earnout Tranche | If BNL has completed an IPO | If BNL has not completed an IPO | ||
VWAP of a REIT Share | Applicable Earnout Period | AFFO per Share | Applicable Earnout Period | |
$10 million | $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 million | $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 million | $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 million | $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. |
Potential benefits of the Internalization include:
Immediate Cost Savings; Economies of Scale with Growth – Through elimination of the asset, property, and transaction-based fees currently payable under the management agreements with the Manager, and excluding the one-time costs associated with the Internalization, the proposed transaction is expected to result in immediate cost savings and facilitate increasing economies of scale asavailable capacity on our equity and asset base grows.
Simplified Structure – The proposed Internalization will simplify our structure through the unification of all of our investment activity, corporate operations, and resources under a single, transparent corporate structure, and providecredit facilities provides us with the ability to meet all current obligations and to maintain our REIT status. However, the COVID-19 pandemic’s ultimate impact on our tenants is not yet known, and could result in significantly aged delinquencies and tenant defaults, which would have a direct impact on our leverage covenant ratios. 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 key functions that are importantenvironment while migrating our workforce to the growtha work from home dynamic. Our access to technology and online communications has required minimal changes to controls, none of our business. Internalizing management will also mitigate perceived or actual existing conflicts of interest between us and the Manager resulting from the current external management structure.
Continuity of Management Team; Brings Comprehensive Team into the Company – Upon closing of the Internalization,which we deem material. We believe our existing management team, whodisclosure controls are currently employees ofappropriate to address the Manager, including our current executive officers, will become employees of the Company, providing a seamless transition and clarity as to future senior leadership. Each of Christopher J. Czarnecki, Ryan M. Albano, John D. Moragne, and Sean T. Cutt are expected to terminate their employment with the Manager and enter into employment agreements with us or our subsidiary to serve as our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, and Chief Investment Officer, respectively.
Additional information is available in the Current Report on Form 8-K that we filed on November 12, 2019, with the U.S. Securities and Exchange Commission, including a detailed description of the merger agreement and the proposed transaction’s terms, conditions, covenants, and agreements.
Our Properties and Investment Objectives
We target acquisitions of fee simple interests in individual properties priced between $5 million and $75 million. Portfolios may be significantly larger, depending on balance sheet capacity and whether the portfolio is diversified or concentrated by tenant, geography, or brand. Our investment policy (“Investment Policy”) has three primary objectives:
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 acquire freestanding, single-tenant commercial properties primarily 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 approvedreporting complexities presented by the Independent Directors Committee. Our criteria for selecting properties are based on the following underwriting principles:COVID-19 pandemic.
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.
Real Estate Portfolio Information
To achieve an appropriate risk-adjusted return, we intend to maintain a highly diversified portfolio of primarily single-tenant commercial real estate properties spread across multiple property types, geographic locations, tenants, and industries and geographic locations. that have cross-diversification within each.
The following charts summarize our portfolio diversification by property type, tenant, brand, industry and geographic location as of September 30, 2019.2020. The percentages below are calculated based on our NTM RentABR of $288.0 million as of September 30, 2019, divided by total NTM Rent. Late payments, non-payments, or other unscheduled payments are not considered in the calculation. NTM Rent includes the impact of contractual rent escalations.
Property Type, by % of NTM Rent
2020.
Diversification by Property Type
Property Type |
| # Properties |
|
| ABR ($'000s) |
|
| ABR as a % of Total Portfolio |
|
| Square Feet ('000s) |
|
| SF as a % of Total Portfolio |
| |||||
Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
| 55 |
|
| $ | 40,876 |
|
|
| 14.2 | % |
|
| 7,635 |
|
|
| 28.0 | % |
Distribution & Warehouse |
|
| 32 |
|
|
| 39,759 |
|
|
| 13.8 | % |
|
| 7,013 |
|
|
| 25.7 | % |
Food Processing |
|
| 14 |
|
|
| 18,275 |
|
|
| 6.3 | % |
|
| 2,131 |
|
|
| 7.8 | % |
Flex and R&D |
|
| 7 |
|
|
| 16,600 |
|
|
| 5.8 | % |
|
| 1,457 |
|
|
| 5.3 | % |
Cold Storage |
|
| 4 |
|
|
| 12,497 |
|
|
| 4.3 | % |
|
| 933 |
|
|
| 3.4 | % |
Industrial Total |
|
| 112 |
|
|
| 128,007 |
|
|
| 44.4 | % |
|
| 19,169 |
|
|
| 70.2 | % |
Healthcare |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical |
|
| 50 |
|
|
| 25,540 |
|
|
| 8.9 | % |
|
| 1,081 |
|
|
| 3.9 | % |
Surgical |
|
| 15 |
|
|
| 9,701 |
|
|
| 3.4 | % |
|
| 345 |
|
|
| 1.3 | % |
Animal Health Services |
|
| 20 |
|
|
| 8,072 |
|
|
| 2.8 | % |
|
| 314 |
|
|
| 1.1 | % |
Life Science |
|
| 9 |
|
|
| 7,478 |
|
|
| 2.6 | % |
|
| 549 |
|
|
| 2.0 | % |
Healthcare Services |
|
| 26 |
|
|
| 6,771 |
|
|
| 2.4 | % |
|
| 262 |
|
|
| 1.0 | % |
Healthcare Total |
|
| 120 |
|
|
| 57,562 |
|
|
| 20.1 | % |
|
| 2,551 |
|
|
| 9.3 | % |
Restaurant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quick Service Restaurants |
|
| 150 |
|
|
| 24,589 |
|
|
| 8.5 | % |
|
| 506 |
|
|
| 1.9 | % |
Casual Dining |
|
| 90 |
|
|
| 20,117 |
|
|
| 7.0 | % |
|
| 575 |
|
|
| 2.1 | % |
Restaurant Total |
|
| 240 |
|
|
| 44,706 |
|
|
| 15.5 | % |
|
| 1,081 |
|
|
| 4.0 | % |
Office |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic Operations |
|
| 7 |
|
|
| 13,554 |
|
|
| 4.7 | % |
|
| 1,021 |
|
|
| 3.7 | % |
Corporate Headquarters |
|
| 6 |
|
|
| 9,636 |
|
|
| 3.3 | % |
|
| 671 |
|
|
| 2.5 | % |
Call Center |
|
| 4 |
|
|
| 5,683 |
|
|
| 2.0 | % |
|
| 392 |
|
|
| 1.4 | % |
Office Total |
|
| 17 |
|
|
| 28,873 |
|
|
| 10.0 | % |
|
| 2,084 |
|
|
| 7.6 | % |
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive |
|
| 56 |
|
|
| 9,722 |
|
|
| 3.4 | % |
|
| 784 |
|
|
| 2.9 | % |
General Merchandise |
|
| 57 |
|
|
| 8,451 |
|
|
| 2.9 | % |
|
| 677 |
|
|
| 2.5 | % |
Home Furnishings |
|
| 15 |
|
|
| 5,713 |
|
|
| 2.0 | % |
|
| 860 |
|
|
| 3.1 | % |
Retail Total |
|
| 128 |
|
|
| 23,886 |
|
|
| 8.3 | % |
|
| 2,321 |
|
|
| 8.5 | % |
Other |
|
| 11 |
|
|
| 4,963 |
|
|
| 1.7 | % |
|
| 117 |
|
|
| 0.4 | % |
Total |
|
| 628 |
|
| $ | 287,997 |
|
|
| 100.0 | % |
|
| 27,323 |
|
|
| 100.0 | % |
Diversification by Tenant
Tenant |
| Property Type |
| # Properties |
|
| ABR ($'000s) |
|
| ABR as a % of Total Portfolio |
|
| Square Feet ('000s) |
|
| SF as a % of Total Portfolio |
| |||||
Red Lobster Hospitality & Red Lobster Restaurants LLC* |
| Casual Dining |
|
| 24 |
|
| $ | 7,306 |
|
|
| 2.5 | % |
|
| 196 |
|
|
| 0.7 | % |
Jack's Family Restaurants LP* |
| Quick Service Restaurants |
|
| 36 |
|
|
| 6,067 |
|
|
| 2.1 | % |
|
| 121 |
|
|
| 0.5 | % |
Axcelis Technologies, Inc. |
| Flex and R&D |
|
| 1 |
|
|
| 5,730 |
|
|
| 2.0 | % |
|
| 417 |
|
|
| 1.5 | % |
Hensley & Company* |
| Distribution & Warehouse |
|
| 3 |
|
|
| 5,643 |
|
|
| 2.0 | % |
|
| 577 |
|
|
| 2.1 | % |
Outback Steakhouse of Florida LLC*1 |
| Casual Dining |
|
| 23 |
|
|
| 5,313 |
|
|
| 1.8 | % |
|
| 146 |
|
|
| 0.5 | % |
Krispy Kreme Doughnut Corporation |
| Quick Service Restaurants/ Food Processing |
|
| 27 |
|
|
| 5,034 |
|
|
| 1.8 | % |
|
| 156 |
|
|
| 0.6 | % |
BluePearl Holdings, LLC* |
| Animal Health Services |
|
| 12 |
|
|
| 5,009 |
|
|
| 1.7 | % |
|
| 154 |
|
|
| 0.6 | % |
Big Tex Trailer Manufacturing, Inc.* |
| Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters |
|
| 17 |
|
|
| 4,764 |
|
|
| 1.7 | % |
|
| 1,302 |
|
|
| 4.8 | % |
Siemens Medical Solutions USA, Inc. & Siemens Corporation |
| Manufacturing/Flex and R&D |
|
| 2 |
|
|
| 4,646 |
|
|
| 1.6 | % |
|
| 545 |
|
|
| 2.0 | % |
Nestle' Dreyer's Ice Cream Company |
| Cold Storage |
|
| 1 |
|
|
| 4,344 |
|
|
| 1.5 | % |
|
| 310 |
|
|
| 1.1 | % |
Total Top 10 Tenants |
|
|
|
| 146 |
|
|
| 53,856 |
|
|
| 18.7 | % |
|
| 3,924 |
|
|
| 14.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nationwide Mutual Insurance Company* |
| Strategic Operations |
|
| 2 |
|
|
| 4,165 |
|
|
| 1.5 | % |
|
| 407 |
|
|
| 1.5 | % |
Arkansas Surgical Hospital |
| Surgical |
|
| 1 |
|
|
| 4,156 |
|
|
| 1.5 | % |
|
| 129 |
|
|
| 0.5 | % |
American Signature, Inc. |
| Home Furnishings |
|
| 6 |
|
|
| 4,141 |
|
|
| 1.4 | % |
|
| 474 |
|
|
| 1.7 | % |
Cascade Aerospace Inc. |
| Manufacturing |
|
| 1 |
|
|
| 3,884 |
|
|
| 1.3 | % |
|
| 231 |
|
|
| 0.9 | % |
Fresh Express Incorporated |
| Food Processing |
|
| 1 |
|
|
| 3,819 |
|
|
| 1.3 | % |
|
| 335 |
|
|
| 1.2 | % |
Aventiv Technologies, LLC |
| Corporate Headquarters |
|
| 1 |
|
|
| 3,742 |
|
|
| 1.3 | % |
|
| 154 |
|
|
| 0.6 | % |
Bob Evans Restaurants, LLC* |
| Casual Dining |
|
| 23 |
|
|
| 3,728 |
|
|
| 1.3 | % |
|
| 121 |
|
|
| 0.4 | % |
Tractor Supply Company |
| General Merchandise |
|
| 14 |
|
|
| 3,604 |
|
|
| 1.2 | % |
|
| 281 |
|
|
| 1.0 | % |
Centene Management Company, LLC |
| Strategic Operations |
|
| 1 |
|
|
| 3,267 |
|
|
| 1.2 | % |
|
| 220 |
|
|
| 0.8 | % |
Zips Car Wash, LLC* |
| Automotive |
|
| 14 |
|
|
| 3,255 |
|
|
| 1.1 | % |
|
| 57 |
|
|
| 0.2 | % |
Total Top 20 Tenants |
|
|
|
| 210 |
|
| $ | 91,617 |
|
|
| 31.8 | % |
|
| 6,333 |
|
|
| 23.2 | % |
| Tenant’s properties include 21 Outback Steakhouse restaurants and two Carrabba’s Italian Grill restaurants. |
* |
|
Diversification by Brand
Brand |
| Property Type |
| # Properties |
|
| ABR ($'000s) |
|
| ABR as a % of Total Portfolio |
|
| Square Feet ('000s) |
|
| SF as a % of Total Portfolio |
| |||||
Red Lobster* |
| Casual Dining |
|
| 24 |
|
| $ | 7,306 |
|
|
| 2.5 | % |
|
| 196 |
|
|
| 0.7 | % |
Jack's Family Restaurants* |
| Quick Service Restaurants |
|
| 36 |
|
|
| 6,067 |
|
|
| 2.1 | % |
|
| 121 |
|
|
| 0.5 | % |
Axcelis |
| Flex and R&D |
|
| 1 |
|
|
| 5,730 |
|
|
| 2.0 | % |
|
| 417 |
|
|
| 1.5 | % |
Hensley* |
| Distribution & Warehouse |
|
| 3 |
|
|
| 5,643 |
|
|
| 2.0 | % |
|
| 577 |
|
|
| 2.1 | % |
Bob Evans Farms*1 |
| Casual Dining/Food Processing |
|
| 24 |
|
|
| 5,574 |
|
|
| 1.9 | % |
|
| 297 |
|
|
| 1.0 | % |
Wendy's# |
| Quick Service Restaurants |
|
| 39 |
|
|
| 5,568 |
|
|
| 1.9 | % |
|
| 115 |
|
|
| 0.4 | % |
Krispy Kreme |
| Quick Service Restaurants/ Food Processing |
|
| 27 |
|
|
| 5,034 |
|
|
| 1.8 | % |
|
| 156 |
|
|
| 0.6 | % |
BluePearl Veterinary Partners* |
| Animal Health Services |
|
| 12 |
|
|
| 5,009 |
|
|
| 1.7 | % |
|
| 154 |
|
|
| 0.6 | % |
Big Tex Trailers* |
| Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters |
|
| 17 |
|
|
| 4,764 |
|
|
| 1.7 | % |
|
| 1,302 |
|
|
| 4.8 | % |
Siemens |
| Manufacturing/Flex and R&D |
|
| 2 |
|
|
| 4,646 |
|
|
| 1.6 | % |
|
| 545 |
|
|
| 2.0 | % |
Total Top 10 Brands |
|
|
|
| 185 |
|
|
| 55,341 |
|
|
| 19.2 | % |
|
| 3,880 |
|
|
| 14.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outback Steakhouse* |
| Casual Dining |
|
| 21 |
|
|
| 4,624 |
|
|
| 1.6 | % |
|
| 133 |
|
|
| 0.5 | % |
Nestle' |
| Cold Storage |
|
| 1 |
|
|
| 4,344 |
|
|
| 1.5 | % |
|
| 310 |
|
|
| 1.1 | % |
Taco Bell# |
| Quick Service Restaurants |
|
| 32 |
|
|
| 4,169 |
|
|
| 1.5 | % |
|
| 82 |
|
|
| 0.3 | % |
Nationwide Mutual Insurance Co.* |
| Strategic Operations |
|
| 2 |
|
|
| 4,165 |
|
|
| 1.5 | % |
|
| 407 |
|
|
| 1.5 | % |
Arkansas Surgical Hospital |
| Surgical |
|
| 1 |
|
|
| 4,156 |
|
|
| 1.5 | % |
|
| 129 |
|
|
| 0.5 | % |
Value City Furniture |
| Home Furnishings |
|
| 6 |
|
|
| 4,141 |
|
|
| 1.4 | % |
|
| 474 |
|
|
| 1.7 | % |
Cascade Aerospace |
| Manufacturing |
|
| 1 |
|
|
| 3,884 |
|
|
| 1.3 | % |
|
| 231 |
|
|
| 0.9 | % |
Chiquita |
| Food Processing |
|
| 1 |
|
|
| 3,819 |
|
|
| 1.3 | % |
|
| 335 |
|
|
| 1.2 | % |
Securus Technologies |
| Corporate Headquarters |
|
| 1 |
|
|
| 3,742 |
|
|
| 1.3 | % |
|
| 154 |
|
|
| 0.6 | % |
Tractor Supply Co. |
| General Merchandise |
|
| 14 |
|
|
| 3,604 |
|
|
| 1.2 | % |
|
| 281 |
|
|
| 1.0 | % |
Total Top 20 Brands |
|
|
|
| 265 |
|
| $ | 95,989 |
|
|
| 33.3 | % |
|
| 6,416 |
|
|
| 23.5 | % |
* | Subject to a master lease. |
| Includes properties leased by multiple tenants, some, not all, of which are subject to master leases. |
1 |
|
| ||
|
|
| ||
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|
| ||
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|
| ||
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|
| ||
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|
| ||
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|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
|
TenantDiversification by Industry by % of NTM Rent
Industry |
| ABR as a % Total Portfolio |
| |
|
|
| ||
Healthcare Facilities |
|
|
| % |
Restaurants | 15.8 | % | ||
Food Distributors | 4.4 | % | ||
Packaged Foods & Meats |
|
|
|
|
|
|
| ||
|
|
| ||
|
| % | ||
Auto Parts & Equipment |
|
|
| % |
Metal & Glass Containers |
|
|
| % |
Specialized Consumer Services | 3.3 | % | ||
Healthcare Services |
|
| 2.8 | % |
Home Furnishing Retail | 2.8 | % | ||
Aerospace & Defense | 2.6 | % | ||
Distributors | 2.4 | % | ||
Electronic Components | 2.3 | % | ||
Air Freight & Logistics |
|
|
| % |
|
|
| ||
|
|
| ||
|
|
| 2.2 | % |
Industrial Machinery |
|
|
|
|
|
| % | ||
Top 15 Tenant Industries |
|
|
| % |
Other |
|
|
| % |
Total |
|
| 100.0 | % |
Geographic
Diversification by % of NTM RentGeography
State |
| # Properties |
|
| ABR ($'000s) |
|
| ABR as a % of Total Portfolio |
|
| Square Feet ('000s) |
|
| SF as a % of Total Portfolio |
|
|
| State |
| # Properties |
|
|
|
| ABR ($'000s) |
|
|
|
| ABR as a % of Total Portfolio |
|
|
|
| Square Feet ('000s) |
|
|
|
| SF as a % of Total Portfolio |
| ||||||||||
TX |
|
| 53 |
|
| $ | 30,167 |
|
|
| 10.5 | % |
|
| 3,141 |
|
|
| 11.5 | % |
|
| VA |
|
| 13 |
|
|
|
| $ | 4,351 |
|
|
|
|
| 1.5 | % |
|
|
|
| 110 |
|
|
|
|
| 0.4 | % |
IL |
|
| 26 |
|
|
| 18,207 |
|
|
| 6.3 | % |
|
| 1,981 |
|
|
| 7.2 | % |
|
| WA |
|
| 15 |
|
|
|
|
| 4,115 |
|
|
|
|
| 1.4 | % |
|
|
|
| 150 |
|
|
|
|
| 0.6 | % |
CA |
|
| 11 |
|
|
| 15,564 |
|
|
| 5.4 | % |
|
| 1,554 |
|
|
| 5.7 | % |
|
| MO |
|
| 9 |
|
|
|
|
| 3,882 |
|
|
|
|
| 1.3 | % |
|
|
|
| 733 |
|
|
|
|
| 2.7 | % |
WI |
|
| 32 |
|
|
| 15,447 |
|
|
| 5.4 | % |
|
| 1,611 |
|
|
| 5.9 | % |
|
| KY |
|
| 17 |
|
|
|
|
| 3,446 |
|
|
|
|
| 1.2 | % |
|
|
|
| 176 |
|
|
|
|
| 0.6 | % |
FL |
|
| 46 |
|
|
| 15,190 |
|
|
| 5.3 | % |
|
| 792 |
|
|
| 2.9 | % |
|
| LA |
|
| 3 |
|
|
|
|
| 3,122 |
|
|
|
|
| 1.1 | % |
|
|
|
| 175 |
|
|
|
|
| 0.6 | % |
MI |
|
| 35 |
|
|
| 14,413 |
|
|
| 5.0 | % |
|
| 1,439 |
|
|
| 5.3 | % |
|
| NE |
|
| 6 |
|
|
|
|
| 2,958 |
|
|
|
|
| 1.0 | % |
|
|
|
| 509 |
|
|
|
|
| 1.9 | % |
OH |
|
| 35 |
|
|
| 14,024 |
|
|
| 4.9 | % |
|
| 1,369 |
|
|
| 5.0 | % |
|
| MD |
|
| 4 |
|
|
|
|
| 2,856 |
|
|
|
|
| 1.0 | % |
|
|
|
| 293 |
|
|
|
|
| 1.1 | % |
IN |
|
| 29 |
|
|
| 12,385 |
|
|
| 4.3 | % |
|
| 1,738 |
|
|
| 6.4 | % |
|
| NM |
|
| 8 |
|
|
|
|
| 2,730 |
|
|
|
|
| 0.9 | % |
|
|
|
| 96 |
|
|
|
|
| 0.4 | % |
NC |
|
| 28 |
|
|
| 10,607 |
|
|
| 3.7 | % |
|
| 1,139 |
|
|
| 4.2 | % |
|
| IA |
|
| 4 |
|
|
|
|
| 2,644 |
|
|
|
|
| 0.9 | % |
|
|
|
| 622 |
|
|
|
|
| 2.3 | % |
MA |
|
| 4 |
|
|
| 9,551 |
|
|
| 3.3 | % |
|
| 1,009 |
|
|
| 3.7 | % |
|
| SC |
|
| 11 |
|
|
|
|
| 2,435 |
|
|
|
|
| 0.8 | % |
|
|
|
| 289 |
|
|
|
|
| 1.1 | % |
PA |
|
| 16 |
|
|
| 9,372 |
|
|
| 3.3 | % |
|
| 1,071 |
|
|
| 3.9 | % |
|
| UT |
|
| 3 |
|
|
|
|
| 2,289 |
|
|
|
|
| 0.8 | % |
|
|
|
| 280 |
|
|
|
|
| 1.0 | % |
MN |
|
| 20 |
|
|
| 9,075 |
|
|
| 3.2 | % |
|
| 1,225 |
|
|
| 4.5 | % |
|
| MS |
|
| 3 |
|
|
|
|
| 1,866 |
|
|
|
|
| 0.6 | % |
|
|
|
| 258 |
|
|
|
|
| 0.9 | % |
NY |
|
| 15 |
|
|
| 9,048 |
|
|
| 3.1 | % |
|
| 572 |
|
|
| 2.1 | % |
|
| CT |
|
| 2 |
|
|
|
|
| 1,648 |
|
|
|
|
| 0.6 | % |
|
|
|
| 55 |
|
|
|
|
| 0.2 | % |
TN |
|
| 37 |
|
|
| 9,029 |
|
|
| 3.1 | % |
|
| 372 |
|
|
| 1.4 | % |
|
| WV |
|
| 8 |
|
|
|
|
| 1,630 |
|
|
|
|
| 0.6 | % |
|
|
|
| 36 |
|
|
|
|
| 0.1 | % |
AZ |
|
| 8 |
|
|
| 8,434 |
|
|
| 2.9 | % |
|
| 761 |
|
|
| 2.8 | % |
|
| MT |
|
| 7 |
|
|
|
|
| 1,526 |
|
|
|
|
| 0.5 | % |
|
|
|
| 43 |
|
|
|
|
| 0.2 | % |
AL |
|
| 45 |
|
|
| 7,725 |
|
|
| 2.7 | % |
|
| 177 |
|
|
| 0.6 | % |
|
| CO |
|
| 3 |
|
|
|
|
| 1,434 |
|
|
|
|
| 0.5 | % |
|
|
|
| 94 |
|
|
|
|
| 0.3 | % |
AR |
|
| 10 |
|
|
| 7,117 |
|
|
| 2.5 | % |
|
| 278 |
|
|
| 1.0 | % |
|
| NV |
|
| 2 |
|
|
|
|
| 1,307 |
|
|
|
|
| 0.5 | % |
|
|
|
| 81 |
|
|
|
|
| 0.3 | % |
OK |
|
| 21 |
|
|
| 6,923 |
|
|
| 2.4 | % |
|
| 806 |
|
|
| 2.9 | % |
|
| ND |
|
| 2 |
|
|
|
|
| 923 |
|
|
|
|
| 0.3 | % |
|
|
|
| 28 |
|
|
|
|
| 0.1 | % |
GA |
|
| 19 |
|
|
| 5,984 |
|
|
| 2.1 | % |
|
| 968 |
|
|
| 3.5 | % |
|
| DE |
|
| 3 |
|
|
|
|
| 663 |
|
|
|
|
| 0.2 | % |
|
|
|
| 35 |
|
|
|
|
| 0.1 | % |
KS |
|
| 10 |
|
|
| 4,893 |
|
|
| 1.7 | % |
|
| 639 |
|
|
| 2.3 | % |
|
| WY |
|
| 1 |
|
|
|
|
| 307 |
|
|
|
|
| 0.1 | % |
|
|
|
| 21 |
|
|
|
|
| 0.1 | % |
NJ |
|
| 3 |
|
|
| 4,826 |
|
|
| 1.7 | % |
|
| 366 |
|
|
| 1.3 | % |
|
| Total US |
|
| 627 |
|
|
|
| $ | 284,113 |
|
|
|
|
| 98.6 | % |
|
|
|
| 27,092 |
|
|
|
|
| 99.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Canada |
|
| 1 |
|
|
|
|
| 3,884 |
|
|
|
|
| 1.4 | % |
|
|
|
| 231 |
|
|
|
|
| 0.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Grand Total |
|
| 628 |
|
|
|
| $ | 287,997 |
|
|
|
|
| 100.0 | % |
|
|
|
| 27,323 |
|
|
|
|
| 100.0 | % |
AtAs of September 30, 2019,2020, approximately 99.8% of our portfolio’s rentable square footage, representing all but foursix of our properties, iswas subject to a lease, substantially all of which are net leases. We do not currently engage in the development of real estate, which could cause a delay in timing between the funds used to invest in properties and the corresponding cash inflows from rental receipts. Our cash flows from operations are primarily generated through our real estate investment portfolio and the monthly lease payments under our long-term leases with our tenants.
Due to the fact thatlease. Because substantially all of our properties are leased under long-term leases, we are not currently required to perform significant ongoing leasing activities on our properties. The leases for threetwo of our properties, representing less than 1%0.1% of our annual rental streams (calculated based on NTM Rent),ABR, will expire before 2021.during 2020, and leases for an additional six properties, representing approximately 0.5% of our ABR, will expire during 2021 excluding renewal options. During the third quarter of 2020 we extended the terms of leases with two tenants. As of September 30, 2019,2020, the ABR weighted average remaining term of our leases (calculated based on NTM Rent) was approximately 11.7 years, excluding renewal options, which are exercisable at the option of our tenants upon expiration of their base lease term.10.8 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Furthermore, the weighted average remaining lease term on the $993.7 million in properties acquired during the nine months ended September 30, 2019, was 12.3 years at the time of acquisition. More than 59%Approximately 59.1% of our rental revenue iswas derived from leases that will expire during 2030 and thereafter. As of September 30, 2019,thereafter, and no more than 8.9%9.2% of our rental revenue iswas derived from leases that expire in any single year in the next ten years.prior to 2030. The following chart sets forth our lease expirations based upon the terms of ourthe leases in place as of September 30, 2019.2020.
Lease Maturity Schedule,
The following table presents certain information based on lease expirations by %year. Amounts are in thousands, except for number of NTM Rentproperties.
Expiration Year |
| # Properties |
|
| ABR ($'000s) |
|
| ABR as a % of Total Portfolio |
|
| Square Feet ('000s) |
|
| SF as a % of Total Portfolio |
| |||||
2020 |
|
| 2 |
|
| $ | 42 |
|
|
| — |
|
|
| 157 |
|
|
| 0.6 | % |
2021 |
|
| 6 |
|
|
| 1,546 |
|
|
| 0.5 | % |
|
| 89 |
|
|
| 0.3 | % |
2022 |
|
| 4 |
|
|
| 3,347 |
|
|
| 1.2 | % |
|
| 124 |
|
|
| 0.4 | % |
2023 |
|
| 8 |
|
|
| 5,154 |
|
|
| 1.8 | % |
|
| 538 |
|
|
| 2.0 | % |
2024 |
|
| 12 |
|
|
| 13,629 |
|
|
| 4.7 | % |
|
| 1,694 |
|
|
| 6.2 | % |
2025 |
|
| 19 |
|
|
| 7,697 |
|
|
| 2.7 | % |
|
| 682 |
|
|
| 2.5 | % |
2026 |
|
| 33 |
|
|
| 17,985 |
|
|
| 6.2 | % |
|
| 1,394 |
|
|
| 5.1 | % |
2027 |
|
| 30 |
|
|
| 23,098 |
|
|
| 8.0 | % |
|
| 2,029 |
|
|
| 7.4 | % |
2028 |
|
| 33 |
|
|
| 26,392 |
|
|
| 9.2 | % |
|
| 2,708 |
|
|
| 9.9 | % |
2029 |
|
| 60 |
|
|
| 19,020 |
|
|
| 6.6 | % |
|
| 2,529 |
|
|
| 9.3 | % |
2030 |
|
| 89 |
|
|
| 49,394 |
|
|
| 17.2 | % |
|
| 5,046 |
|
|
| 18.5 | % |
2031 |
|
| 16 |
|
|
| 5,078 |
|
|
| 1.8 | % |
|
| 503 |
|
|
| 1.8 | % |
2032 |
|
| 36 |
|
|
| 21,723 |
|
|
| 7.5 | % |
|
| 2,295 |
|
|
| 8.4 | % |
2033 |
|
| 37 |
|
|
| 15,123 |
|
|
| 5.3 | % |
|
| 1,635 |
|
|
| 6.0 | % |
2034 |
|
| 30 |
|
|
| 5,358 |
|
|
| 1.9 | % |
|
| 344 |
|
|
| 1.3 | % |
2035 |
|
| 54 |
|
|
| 17,731 |
|
|
| 6.2 | % |
|
| 1,959 |
|
|
| 7.2 | % |
2036 |
|
| 28 |
|
|
| 9,588 |
|
|
| 3.3 | % |
|
| 811 |
|
|
| 3.0 | % |
2037 |
|
| 19 |
|
|
| 14,794 |
|
|
| 5.1 | % |
|
| 913 |
|
|
| 3.3 | % |
2038 |
|
| 32 |
|
|
| 6,653 |
|
|
| 2.3 | % |
|
| 303 |
|
|
| 1.1 | % |
2039 |
|
| 12 |
|
|
| 8,974 |
|
|
| 3.1 | % |
|
| 933 |
|
|
| 3.4 | % |
Thereafter |
|
| 62 |
|
|
| 15,671 |
|
|
| 5.4 | % |
|
| 570 |
|
|
| 2.1 | % |
Untenanted properties |
|
| 6 |
|
|
| — |
|
|
| — |
|
|
| 67 |
|
|
| 0.2 | % |
Total |
|
| 628 |
|
| $ | 287,997 |
|
|
| 100.0 | % |
|
| 27,323 |
|
|
| 100.0 | % |
Results of Operations
Overview
As of September 30, 2020, our real estate investment portfolio had a gross asset value of approximately $4.0 billion, consisting of investments in 627 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 six of our properties were subject to a lease as of September 30, 2020.
Lease Revenues, net
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| Increase/(Decrease) |
|
| September 30, |
|
| Increase/(Decrease) |
| ||||||||||||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| ||||||||
Contractual rental amounts billed for operating leases |
| $ | 69,270 |
|
| $ | 65,579 |
|
| $ | 3,691 |
|
|
| 5.6 | % |
| $ | 209,440 |
|
| $ | 184,292 |
|
| $ | 25,148 |
|
|
| 13.6 | % |
Adjustment to recognize contractual operating lease billings on a straight-line basis |
|
| 6,768 |
|
|
| 5,575 |
|
|
| 1,193 |
|
|
| 21.4 | % |
|
| 16,709 |
|
|
| 16,015 |
|
|
| 694 |
|
|
| 4.3 | % |
Variable rental amounts earned |
|
| 234 |
|
|
| — |
|
|
| 234 |
|
|
| >100.0 | % |
|
| 308 |
|
|
| — |
|
|
| 308 |
|
|
| >100.0 | % |
Earned income from direct financing leases |
|
| 757 |
|
|
| 1,005 |
|
|
| (248 | ) |
|
| (24.7 | )% |
|
| 2,599 |
|
|
| 3,014 |
|
|
| (415 | ) |
|
| (13.8 | )% |
Operating expenses billed to tenants |
|
| 3,389 |
|
|
| 3,811 |
|
|
| (422 | ) |
|
| (11.1 | )% |
|
| 11,456 |
|
|
| 10,572 |
|
|
| 884 |
|
|
| 8.4 | % |
Other income from real estate transactions |
|
| 64 |
|
|
| 431 |
|
|
| (367 | ) |
|
| (85.2 | )% |
|
| 795 |
|
|
| 431 |
|
|
| 364 |
|
|
| 84.5 | % |
Adjustment to revenue recognized for uncollectible rental amounts billed |
|
| 262 |
|
|
| — |
|
|
| 262 |
|
|
| >100.0 | % |
|
| (1,961 | ) |
|
| (440 | ) |
|
| (1,521 | ) |
|
| >(100.0 | )% |
Total Lease revenues, net |
| $ | 80,744 |
|
| $ | 76,401 |
|
| $ | 4,343 |
|
|
| 5.7 | % |
| $ | 239,346 |
|
| $ | 213,884 |
|
| $ | 25,462 |
|
|
| 11.9 | % |
The increase in Lease revenues, net for the three and nine months ended September 30, 2020, was primarily attributable to growth in our real estate portfolio through accretive property acquisitions during 2019. In 2019, we significantly increased the size of our portfolio, adding 74 new properties at an aggregate cost of approximately $1.0 billion, excluding capitalized acquisition costs. Our acquisitions were largely weighted towards the second half of the year, with the closing of a $735.7 million industrial and office portfolio in August. As of September 30, 2020, our portfolio was 99.8% occupied (based on rentable square footage), with ABR weighted average annual rent increases of 2.1%.
Operating Expenses
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| Increase/(Decrease) |
|
| September 30, |
|
| Increase/(Decrease) |
| ||||||||||||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| ||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 31,363 |
|
| $ | 28,392 |
|
| $ | 2,971 |
|
|
| 10.5 | % |
| $ | 102,503 |
|
| $ | 77,989 |
|
| $ | 24,514 |
|
|
| 31.4 | % |
Asset management fees |
|
| — |
|
|
| 5,610 |
|
|
| (5,610 | ) |
|
| (100.0 | )% |
|
| 2,461 |
|
|
| 16,048 |
|
|
| (13,587 | ) |
|
| (84.7 | )% |
Property management fees |
|
| — |
|
|
| 2,098 |
|
|
| (2,098 | ) |
|
| (100.0 | )% |
|
| 1,275 |
|
|
| 5,918 |
|
|
| (4,643 | ) |
|
| (78.5 | )% |
Property and operating expense |
|
| 4,187 |
|
|
| 3,855 |
|
|
| 332 |
|
|
| 8.6 | % |
|
| 12,492 |
|
|
| 11,497 |
|
|
| 995 |
|
|
| 8.7 | % |
General and administrative |
|
| 7,214 |
|
|
| 1,315 |
|
|
| 5,899 |
|
|
| >100.0 | % |
|
| 18,756 |
|
|
| 3,807 |
|
|
| 14,949 |
|
|
| >100.0 | % |
Provision for impairment of investment in rental properties |
|
| 14,732 |
|
|
| 2,435 |
|
|
| 12,297 |
|
|
| >100.0 | % |
|
| 17,399 |
|
|
| 3,452 |
|
|
| 13,947 |
|
|
| >100.0 | % |
Total operating expenses |
| $ | 57,496 |
|
| $ | 43,705 |
|
| $ | 13,791 |
|
|
| 31.6 | % |
| $ | 154,886 |
|
| $ | 118,711 |
|
| $ | 36,175 |
|
|
| 30.5 | % |
Depreciation and amortization
The increase in depreciation and amortization expense for the three and nine months ended September 30, 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 the aggregate value of our equity on a fully diluted basis, based on the Determined Share Value established by our board of directors. 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 associated with our newly acquired employee base. Following the Internalization, our asset and property management fees were replaced with compensation and related expenses, which totaled $4.6 million and $11.3 million during the three and nine months ended September 30, 2020, respectively, along with associated general and administrative expenses. We are achieving costs savings from our internalized structure, as the increase in general and administrative expenses is less than the combined decrease in asset management, property management, and disposition fees incurred during the three and nine months ended September 30, 2020 under our prior externally managed structure.
Provision for impairment of investment in rental properties
During the three and nine months ended September 30, 2020, we recognized $14.7 million and $17.4 million, respectively, of impairment on our investments in rental properties, compared to $2.4 million and $3.5 million during the three and nine months ended September 30, 2019, respectively. The following table presents the lease expirations by year, includingimpairment charges for their respective periods:
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
(in thousands, except number of properties) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Number of properties |
|
| 3 |
|
|
| 3 |
|
|
| 6 |
|
|
| 4 |
|
Carrying value prior to impairment charge |
| $ | 27,229 |
|
| $ | 12,884 |
|
| $ | 51,445 |
|
| $ | 15,901 |
|
Fair value |
|
| 12,497 |
|
|
| 10,449 |
|
|
| 34,046 |
|
|
| 12,449 |
|
Impairment charge |
| $ | 14,732 |
|
| $ | 2,435 |
|
| $ | 17,399 |
|
| $ | 3,452 |
|
The timing and amount of impairment fluctuates from period to period depending on the number of tenantsspecific facts and properties with leases expiring,circumstances.
Other income (expenses)
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| Increase/(Decrease) |
|
| September 30, |
|
| Increase/(Decrease) |
| ||||||||||||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| ||||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| $ | — |
|
| $ | 5 |
|
| $ | (5 | ) |
|
| (100.0 | )% |
| $ | 20 |
|
| $ | 6 |
|
| $ | 14 |
|
|
| >100.0 | % |
Interest expense |
|
| (18,511 | ) |
|
| (18,465 | ) |
|
| 46 |
|
|
| 0.2 | % |
|
| (59,015 | ) |
|
| (51,025 | ) |
|
| 7,990 |
|
|
| 15.7 | % |
Cost of debt extinguishment |
|
| (392 | ) |
|
| (455 | ) |
|
| (63 | ) |
|
| (13.8 | )% |
|
| (414 | ) |
|
| (1,176 | ) |
|
| (762 | ) |
|
| (64.8 | )% |
Gain on sale of real estate |
|
| 1,060 |
|
|
| 12,585 |
|
|
| (11,525 | ) |
|
| (91.6 | )% |
|
| 9,725 |
|
|
| 16,772 |
|
|
| (7,047 | ) |
|
| (42.0 | )% |
Income taxes |
|
| (129 | ) |
|
| (405 | ) |
|
| (276 | ) |
|
| (68.1 | )% |
|
| (1,080 | ) |
|
| (1,153 | ) |
|
| (73 | ) |
|
| (6.3 | )% |
Internalization expenses |
|
| (1,929 | ) |
|
| (923 | ) |
|
| 1,006 |
|
|
| >100.0 | % |
|
| (3,523 | ) |
|
| (1,195 | ) |
|
| 2,328 |
|
|
| >100.0 | % |
Change in fair value of earnout liability |
|
| 6,362 |
|
|
| — |
|
|
| 6,362 |
|
|
| >100.0 | % |
|
| 8,506 |
|
|
| — |
|
|
| 8,506 |
|
|
| >100.0 | % |
Other gains (losses) |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| >100.0 | % |
|
| (22 | ) |
|
| — |
|
|
| (22 | ) |
|
| >(100.0 | )% |
Interest expense
Increased interest expense during the square footage covered bythree and nine months ended September 30, 2020, as compared to the leases expiring, the NTM Rent,three and the percentage of NTM Rent for the leases expiring. Late payments, non-payments, or other unscheduled payments are not considerednine months ended September 30, 2019, reflects increased average outstanding borrowings in the NTM Rent amounts. NTM Rent includescomparable periods. We incurred incremental revolver and term loan borrowings in August 2019 to fund a significant acquisition and in February 2020 in connection with the impactInternalization. These borrowings were unhedged and bore interest at a variable rate based on LIBOR, which decreased from 1.76% at December 31, 2019 to 0.15% at September 30, 2020. As a result, we benefited from declining interest rates during the period of contractual rent escalations. Amounts aretime they were outstanding. The borrowings were fully repaid in thousands, exceptSeptember 2020 with proceeds from our IPO. As of September 30, 2020, approximately $110.0 million of our borrowings remain unhedged.
Gain on sale of real estate
Our recognition of a gain or loss on the numbersale of tenantsreal estate varies from transaction to transaction based on fluctuations in asset prices and properties. We did not have any significant lease renewalsdemand in the real estate market.During the three months ended September 30, 2020, we recognized gains of $1.1 million on the sale of five properties, compared to gains of $12.6 million on the sale of 16 properties during the three months ended September 30, 2019. During the nine months ended September 30, 2020, we recognized gains of $9.7 million on the sale of 18 properties, compared to gains of $16.8 million on the sale of 25 properties during the nine months ended September 30, 2019.
Year |
| Number of Tenants |
|
| Number of Properties |
|
| Square Footage |
|
| NTM Rent |
|
| Percentage of NTM Rent |
| |||||
2020 |
|
| 4 |
|
|
| 3 |
|
|
| 87 |
|
| $ | 629 |
|
|
| 0.2 | % |
2021 |
|
| 7 |
|
|
| 11 |
|
|
| 99 |
|
|
| 1,931 |
|
|
| 0.6 | % |
2022 |
|
| 5 |
|
|
| 4 |
|
|
| 124 |
|
|
| 3,285 |
|
|
| 1.1 | % |
2023 |
|
| 12 |
|
|
| 13 |
|
|
| 703 |
|
|
| 6,975 |
|
|
| 2.3 | % |
2024 |
|
| 13 |
|
|
| 14 |
|
|
| 1,672 |
|
|
| 13,737 |
|
|
| 4.6 | % |
2025 |
|
| 12 |
|
|
| 21 |
|
|
| 693 |
|
|
| 7,713 |
|
|
| 2.6 | % |
2026 |
|
| 22 |
|
|
| 34 |
|
|
| 1,521 |
|
|
| 18,551 |
|
|
| 6.2 | % |
2027 |
|
| 22 |
|
|
| 32 |
|
|
| 2,006 |
|
|
| 23,043 |
|
|
| 7.8 | % |
2028 |
|
| 24 |
|
|
| 36 |
|
|
| 2,715 |
|
|
| 26,555 |
|
|
| 8.9 | % |
2029 |
|
| 16 |
|
|
| 61 |
|
|
| 2,481 |
|
|
| 18,527 |
|
|
| 6.2 | % |
2030 and thereafter |
|
| 110 |
|
|
| 429 |
|
|
| 15,322 |
|
|
| 176,196 |
|
|
| 59.3 | % |
Untenanted properties |
|
| — |
|
|
| 4 |
|
|
| 51 |
|
|
| — |
|
|
| — |
|
Total |
|
| 247 |
|
|
| 662 |
|
|
| 27,474 |
|
| $ | 297,142 |
|
|
| 100.0 | % |
Internalization expenses
Our top tenantsDuring the three and brands by percentagenine months ended September 30, 2020, we incurred $1.9 million and $3.5 million, respectively, of NTM Rent atthird-party fees and consulting expenses associated with the Internalization, compared to $0.9 million and $1.2 million of such expenses during three and nine months ended September 30, 2019, are listedrespectively. We expect any incremental internalization expenses in the tables below. The percentages of NTM Rent shown are calculated based on the NTM Rent associatedfuture to be limited to third party legal and accounting fees related to residual work in connection with the tenant or brand dividedtransaction.
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 Earnout Periods. We record the fair value of this contingent consideration in the Condensed Consolidated Balance Sheets, and update the fair value at the end of each reporting period. To the extent the change in fair value relates to a portion of the earnout consideration that is classified as a liability, we record the change through earnings. We estimate the fair value of the earnout liability by total NTM Rent.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, and other items that are unobservable and are considered Level 3 inputs in the fair value hierarchy. The change in the fair value of the earnout liability during the three and nine months ended September 30, 2020, reflects the IPO stock price and changes in the peer stock price volatility assumption, which is attributable to changes in economic circumstances impacting global equity markets.
Top Ten Tenants, by % of NTM RentNet income and Net earnings per diluted share
Tenant |
| Property Type |
| % NTM Rent |
|
| Properties |
| ||
Art Van Furniture, LLC |
| Retail |
|
| 2.8 | % |
|
| 10 |
|
Red Lobster Hospitality & Red Lobster Restaurants LLC |
| Retail |
|
| 2.5 | % |
|
| 25 |
|
Jack's Family Restaurants LP |
| Retail |
|
| 2.0 | % |
|
| 36 |
|
Axcelis Technologies, Inc. |
| Other |
|
| 1.9 | % |
|
| 1 |
|
Hensley & Company |
| Industrial |
|
| 1.9 | % |
|
| 3 |
|
Outback Steakhouse of Florida LLC (a) |
| Retail |
|
| 1.9 | % |
|
| 24 |
|
Krispy Kreme Doughnut Corporation |
| Industrial/Retail |
|
| 1.7 | % |
|
| 27 |
|
BluePearl Holdings, LLC |
| Healthcare |
|
| 1.7 | % |
|
| 12 |
|
Big Tex Trailer Manufacturing, Inc. |
| Industrial/Retail/Office |
|
| 1.6 | % |
|
| 17 |
|
Siemens Medical Solutions USA, Inc. & Siemens Corporation |
| Industrial |
|
| 1.6 | % |
|
| 2 |
|
Total Top Ten |
|
|
|
| 19.6 | % |
|
| 157 |
|
All Other |
|
|
|
| 80.4 | % |
|
| 505 |
|
Total |
|
|
|
| 100.0 | % |
|
| 662 |
|
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| Increase/(Decrease) |
|
| September 30, |
|
| Increase/(Decrease) |
| ||||||||||||||||||||
(in thousands, except per share data) |
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
|
| 2020 |
|
| 2019 |
|
| $ |
|
| % |
| ||||||||
Net income |
| $ | 9,711 |
|
| $ | 25,038 |
|
| $ | (15,327 | ) |
|
| (61.2 | )% |
| $ | 38,657 |
|
| $ | 57,402 |
|
| $ | (18,745 | ) |
|
| (32.7 | )% |
Net earnings per diluted share |
|
| 0.08 |
|
|
| 0.24 |
|
|
| (0.16 | ) |
|
| (66.7 | )% |
|
| 0.32 |
|
|
| 0.57 |
|
|
| (0.25 | ) |
|
| (43.9 | )% |
|
|
Top Ten Brands, by % of NTM Rent
Brand |
| Property Type |
| % NTM Rent |
|
| Properties |
| ||
Art Van Furniture |
| Retail |
|
| 2.8 | % |
|
| 10 |
|
Bob Evans Farms (a) |
| Industrial/Retail |
|
| 2.6 | % |
|
| 27 |
|
Red Lobster |
| Retail |
|
| 2.5 | % |
|
| 25 |
|
Wendy's |
| Retail |
|
| 2.1 | % |
|
| 41 |
|
Jack's Family Restaurants |
| Retail |
|
| 2.0 | % |
|
| 36 |
|
Axcelis |
| Other |
|
| 1.9 | % |
|
| 1 |
|
Hensley |
| Industrial |
|
| 1.9 | % |
|
| 3 |
|
Krispy Kreme |
| Industrial/Retail |
|
| 1.7 | % |
|
| 27 |
|
BluePearl Veterinary Partners |
| Healthcare |
|
| 1.7 | % |
|
| 12 |
|
Outback Steakhouse |
| Retail |
|
| 1.6 | % |
|
| 22 |
|
Total Top Ten |
|
|
|
| 20.8 | % |
|
| 204 |
|
All Other |
|
|
|
| 79.2 | % |
|
| 458 |
|
Total |
|
|
|
| 100.0 | % |
|
| 662 |
|
|
|
Moody’s Investors Service (“Moody’s”) has assignedThe decrease in net income for 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 September 30, 2020, as 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 ofthree months ended September 30, 2019, our total outstanding indebtedness was $2,096.2is primarily due to a $12.3 million increase in impairment charges, an $11.5 million decrease in gains on sale of real estate, and a $3.0 million increase in depreciation and amortization expense associated with a larger real estate portfolio. These factors were partially offset by revenue growth of $4.3 million and the ratio of our total indebtedness to the approximate market value of our assets was 47.5%.
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. At its October 31, 2019 meeting, the Independent Directors Committee determined that the Determined Share Value would remain at $85.00 per share through January 31, 2020. 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 |
| ||
November 1, 2019 - January 31, 2020 |
| September 30, 2019 |
| $ | 84.12 |
|
| $ | 85.00 |
|
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 |
|
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):
NAV component: |
| September 30, 2019 |
|
| June 30, 2019 |
| ||
Investment in rental property |
| $ | 4,465,457 |
|
| $ | 3,704,911 |
|
Debt |
|
| (2,180,100 | ) |
|
| (1,529,385 | ) |
Other assets and liabilities, net |
|
| 4,373 |
|
|
| (19,078 | ) |
NAV |
| $ | 2,289,730 |
|
| $ | 2,156,448 |
|
Number of outstanding shares, including noncontrolling interests |
|
| 27,219 |
|
|
| 25,467 |
|
NAV per diluted share |
| $ | 84.12 |
|
| $ | 84.68 |
|
The following table details the implied market capitalization rates (shown on a weighted average basis) used to value the investment in rental property, by property type, as of September 30, 2019, and June 30, 2019, supporting the Determined Share Value in effect for the period from November 1, 2019 through January 31, 2020, and August 1, 2019 through October 31, 2019, respectively:
Market capitalization rates, as of: |
| Retail |
|
| Industrial |
|
| Healthcare |
|
| Office |
|
| Other |
|
| Portfolio Total |
| ||||||
|
| 6.37 | % |
|
| 6.65 | % |
|
| 6.73 | % |
|
| 6.85 | % |
|
| 7.39 | % |
|
| 6.64 | % | |
June 30, 2019 |
|
| 6.40 | % |
|
| 6.89 | % |
|
| 6.73 | % |
|
| 6.90 | % |
|
| 7.36 | % |
|
| 6.72 | % |
While we believe our assumptions are reasonable, a change in these assumptions would impact the calculation of the value of our real estate investments. For example, assuming all other factors remain unchanged, an increase in the weighted average implied market capitalization rate used as of September 30, 2019, of 0.25% would result in a$6.4 million decrease in the fair value of our investmentearnout liability in rental2020 with no comparable adjustment in the prior year. In addition, as a result of the Internalization, increased general and administrative expenses of $5.9 million were offset by $7.7 million lower asset management and property of 3.6%, and our NAV per diluted share would have been $78.18. Conversely, amanagement fees. The decrease in the weighted average implied market capitalization rate used as of September 30, 2019, of 0.25% would result in an increase in the fair value of our investment in rental property of 3.9%, and our NAV per diluted share would have been $90.53.
Distributions and Distribution Reinvestment
At its October 31, 2019 meeting, our board of directors declared monthly distributions of $0.44 per share of our common stock and unit of membership interest to be paid to our stockholders and members of the Operating Company (other than us) of record as follows:
|
| |
|
| |
|
| |
|
|
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 at a per share price equal to 98% 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.
The following table summarizes distributions paid in cash and pursuant to our DRIPnet income for the nine months ended September 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 |
|
July |
| 2019 |
|
| 5,108 |
|
|
| 632 |
|
|
| 5,247 |
|
|
| 133 |
|
|
| 11,120 |
|
August |
| 2019 |
|
| 5,178 |
|
|
| 632 |
|
|
| 5,291 |
|
|
| 133 |
|
|
| 11,234 |
|
September |
| 2019 |
|
| 5,401 |
|
|
| 631 |
|
|
| 5,532 |
|
|
| 132 |
|
|
| 11,696 |
|
Total |
|
|
| $ | 44,661 |
|
| $ | 5,656 |
|
| $ | 46,078 |
|
| $ | 1,188 |
|
| $ | 97,583 |
|
|
|
The following table summarizes our distributions paid, including the source of distributions and a comparison against FFO (in thousands).
|
| For the nine months ended |
| |||||
|
| September 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Distributions: |
|
|
|
|
|
|
|
|
Paid in cash |
| $ | 51,505 |
|
| $ | 44,650 |
|
Reinvested in shares |
|
| 46,078 |
|
|
| 37,055 |
|
Total Distributions |
| $ | 97,583 |
|
| $ | 81,705 |
|
Source of Distributions: |
|
|
|
|
|
|
|
|
Cash flow from operating activities |
| $ | 97,583 |
|
| $ | 81,705 |
|
FFO |
| $ | 122,071 |
|
| $ | 114,188 |
|
For2020, as compared to the nine months ended September 30, 2019, is primarily due to a $24.5 million increase in depreciation and 2018, we paid distributions from our cash flow from operating activities. Refer to Net Incomeamortization expense, a $13.9 million increase in impairment charges, an $8.0 million increase in interest expense, a $7.0 million decrease in gains on sale of real estate, and Non-GAAP Measures (FFOa $2.3 million increase in internalization expenses. These factors were partially offset by revenue growth of $25.5 million and AFFO) below for further discussiona $8.5 million decrease in the fair value of our FFO.earnout liability in 2020 with no comparable adjustment in the prior year. In addition, as a result of the Internalization, increased general and administrative expenses of $14.9 million were offset by $18.2 million lower asset management and property management fees.
We intend to fund future distributions from cash generated by operations; however, we may fund distributions from theGAAP net income includes items such as gain or loss on sale of assets, borrowings, or proceedsreal estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons. These fluctuations, combined with the saleincrease in our weighted average shares outstanding resulting from continued equity raises associated with our deleveraging plans subsequent to a significant acquisition in the third quarter of our securities.2019 and the common shares and OP Units issued in conjunction with the IPO and Internalization, contributed to the $0.16 decrease in net earnings per diluted share for the three months ended September 30, 2020 and the $0.25 decrease in net earnings per diluted share for the nine months ended September 30, 2020.
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 conservative maintaining 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 of Baa3 from Moody’s Investors Service (“Moody’s”), which was reaffirmed in July 2020. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with rating agencies regarding our credit rating.We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As of September 30, 2019, the leverage2020, we had total debt outstanding of $1,549.1 million and a Net Debt to Annualized Adjusted EBITDAre ratio was 47.5% of the approximate market valueapproximately 5.20x.
Net Debt and Annualized Adjusted EBITDAre are non-GAAP financial measures, and Annualized Adjusted EBITDAre is calculated based upon EBITDA, EBITDAre, and Adjusted EBITDAre, each of our assets, compared to 40.2% as of June 30, 2019. The increase was due to incremental borrowings associated with funding the industrial and office portfolio acquisition during the third quarter. We intend 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. As a result of our announcing the industrial and office portfolio acquisition, Moody’s affirmed our investment grade credit rating and stable outlook.
Management and our credit rating agencieswhich is also consider our leverage position as a multiple of Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”), a non-GAAP financial measure. EBITDARefer to Non-GAAP Measures below for further details concerning our calculation of non-GAAP measures and reconciliations to the comparable GAAP measure.
Liquidity/REIT Requirements
Liquidity is a 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 $993.7 million in investments duringREIT taxable income determined without regard to the nine months ended September 30, 2019, $606.8 million in investments during 2018,dividends paid deduction and $683.6 million in investments during 2017, coupled withexcluding 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 continued strategic growth initiatives, historical EBITDA may not provide investors with an adequate picturelong-term liquidity needs, including repayment of debt and the contractual cash inflows associated with these investments. Our investments are typically made throughout the year (historically, a significant portion has occurred later in the year), and therefore the full-year, or “normalized,” cash flows will not be realized until subsequent years. Accordingly,acquisition of additional properties, from our annual taxable income. Instead, we look at contractual, “normalized,” cash flows and EBITDA as an appropriate metricexpect to managemeet our leverage profile. We utilize this analysis inclusivelong-term liquidity needs primarily by relying upon external sources of our focus on debt-to-market value metrics.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 for servicingoperating expenses, including our portfolio, acquisition costs related to the growth of our portfolio, and the general and administrative expenses of operatingas well as interest payments on our business. Since substantially all of our leases are net leases, our tenants are generally responsible for the maintenance, insurance,outstanding debt, 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, wedistributions. We do not currently anticipate making significant capital expenditures or incurring other significant property costs on an aggregate basis during the termbecause of the property leases instrong occupancy levels across our current portfolio. Toportfolio and the extent that we have vacant properties, we will incur certain costsnature of our leases. We expect to operatemeet our short-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 and net cash provided by operating activities, increasedsupplemented by $17.4 million,borrowings under our Revolving Credit Facility.
Long-term Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds necessary to $110.9 million for the nine months ended September 30, 2019, from $93.5 million for the nine months ended September 30, 2018. We funded real estate investment activity with a combination of cash from operations, proceeds from our unsecured revolving credit agreements, borrowing under the 2020 and 2026 Unsecured Term Loans, and proceeds from the issuance of common stock. We paid cash dividends to our stockholders and holders of non-controlling membership units of $52.2 million and $45.0 million for the nine months ended September 30, 2019 and 2018, respectively. The increased dividends between periods were primarily funded by cash provided by our operations. Cash and cash equivalents and restricted cash totaled $44.1 million and $28.0 million at September 30, 2019 and 2018, respectively.
|
| For the nine months ended |
| |||||
|
| September 30, |
| |||||
(In thousands) |
| 2019 |
|
| 2018 |
| ||
Net cash provided by operating activities |
| $ | 110,933 |
|
| $ | 93,517 |
|
Net cash used in investing activities |
|
| (870,227 | ) |
|
| (274,590 | ) |
Net cash provided by financing activities |
|
| 784,420 |
|
|
| 199,002 |
|
Increase in cash and cash equivalents and restricted cash |
| $ | 25,126 |
|
| $ | 17,929 |
|
Substantially all of our cash from operations is generated by our real estate portfolio. As of September 30, 2019, the historical cost basis of our real estate investment portfolio totaled $3,501.5 million, consisting of investments in 662 properties. During the first nine months of 2019, our portfolio generated average monthly straight-line rent revenues of approximately $22.3 million, and average monthly contractual cash revenues of approximately $20.6 million. During the nine months ended September 30, 2019, we closed 16 real estate acquisitions totaling $993.7 million, excluding capitalized acquisition costs, adding 66 new properties to our portfolio. We currently expect the new properties will generate approximately $6.0 million in monthly straight-line rent revenues and approximately $5.5 million in monthly contractual cash revenues over the next twelve months.
We intend 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 nine months ended September 30, 2019, we raised approximately $307.9 million in equity capital to be used in our acquisition activities. See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” of this Form 10-Q for further information.
Debt Capital Resources
additional revenue generating properties. Debt capital is provided through unsecured term notes, revolving debt facilities, and senior unsecured notes. We also, from timeFurther, we anticipate access to time, obtain or assume non-recourse mortgage financing from banksthe public unsecured bond market, which was historically largely unavailable to us, following our IPO.
The source and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active managementmix of our leverage profile. Rather, we enter into mortgages and notes payable as ancillary business transactions on an as-needed basis, most often asdebt capital in the result of lease assumption transactions.
The availability of debt to finance commercial real estate canfuture will be impacted by economicmarket 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 that are beyondfactors. Our acquisition growth strategy significantly depends on our control.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. AsWe 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.
Equity Capital Resources
On September 21, 2020, we growcompleted our IPO and issued 33.5 million shares of stock for net proceeds of $532.3 million. We used $216.5 million of the net proceeds to fully repay the outstanding borrowings and accrued interest under our then existing revolving credit agreement and $240.2 million of the proceeds to fully repay the outstanding principal and accrued interest associated with an unsecured term loan. Subsequent to quarter end, on October 20, 2020, we received an additional $55.9 million in net proceeds as a result of the exercise in part by the underwriters of the IPO of their option to purchase additional shares at the IPO price of $17.00 per share.
Prior to the IPO, equity capital for our real estate portfolio,acquisition activity was provided by proceeds from our private offering, including distributions reinvested through our DRIP. We suspended our private offering on January 10, 2020. 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 quarternine months of 2019,2020. During the nine months ended September 30, 2020, we used proceeds from the longer-term 2026 Unsecured Term Loan (as defined below) to repay a shorter-termraised approximately $5.9 million in equity capital through our DRIP. We announced on January 10, 2020 that we were terminating our DRIP, effective February 10, 2020.
Existing Credit Facilities
The following table sets forth our outstanding Revolving Credit Facility, unsecured term loanloans and Senior Notes at September 30, 2020.
(in thousands, except interest rates) |
| Outstanding Balance |
|
| Interest Rate |
|
| Maturity Date | ||
Revolving Credit Facility |
| $ | — |
|
| one-month LIBOR + 1.20% |
|
| Sept. 2023 | |
2022 Unsecured Term Loan |
|
| 60,000 |
|
| one-month LIBOR + 1.25% |
|
| Feb. 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 | |
2026 Unsecured Term Loan |
|
| 450,000 |
|
| one-month LIBOR + 1.85% |
|
| Feb. 2026 | |
Senior Notes |
|
|
|
|
|
|
|
|
|
|
Series A |
|
| 150,000 |
|
| 4.84% |
|
| Apr. 2027 | |
Series B |
|
| 225,000 |
|
| 5.09% |
|
| Jul. 2028 | |
Series C |
|
| 100,000 |
|
| 5.19% |
|
| Jul. 2030 | |
|
|
| 475,000 |
|
|
|
|
|
|
|
Total |
|
| 1,440,000 |
|
|
|
|
|
|
|
Debt issuance costs, net |
|
| (6,505 | ) |
|
|
|
|
|
|
|
| $ | 1,433,495 |
|
|
|
|
|
|
|
Revolving Credit Facility
In connection with the IPO, in September 2020 we replaced our prior $600.0 million revolving credit facility with the $900.0 million Revolving Credit Facility that had been dueincludes $20.0 million available for issuance of letters of credit. The Revolving Credit Facility has an initial maturity date of September 2023 and provides for two six-month extensions, at our election, subject to certain conditions set forth in 2019 (the “2019 Unsecured Term Loan”). Refer to Contractual Obligations below for further detailsthe agreement and payment of a 0.0625% fee on the maturitiesrevolving commitments. The Revolving Credit Facility contains an applicable facility fee ranging between 0.125% and 0.30% per annum, based on our contractual obligations, including long-term debt maturities.
We achievedcredit rating. Based on our investment gradecurrent credit rating of Baa3, the facility fee is 0.25% per annum as of September 30, 2020. Borrowings on the Revolving Credit Facility bear interest at variable rates based on LIBOR plus a margin based on our conservative leverage profile, diversified real estate investment portfolio, and earnings stability provided by the creditworthiness of our tenants, which we intend to maintain concurrent with our growth objectives. Factors that could negatively impact our credit rating include, but are not limited to: a significant increase in our leverage on a sustained basis, a significant increase in the proportion of secured debt levels, a significant decline in our unencumbered asset base, weakening of our corporate governance structure,ranging between 0.825% and a significant decline in our real estate portfolio diversification. 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 the investment grade credit rating, provides us with an advantageous cost of capital and risk-adjusted return on investment for our stockholders.
Existing Debt Facilities
2020 Unsecured Term Loan
On August 2, 2019 we entered into the 2020 Unsecured Term Loan, under which we could borrow up to $300 million between August 2, 2019 and November 2, 2019. We drew the entire amount available under the 2020 Unsecured Term Loan on August 28, 2019, to partially fund the industrial and office portfolio acquisition. Borrowings under 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 the maturity date 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. The rate of interest payable on borrowings under the 2020 Unsecured Term Loan, at our option, is equal to LIBOR plus a margin.1.55% per annum. Based on our investment gradecurrent credit rating, the applicable margin is currently1.20% as of September 30, 2020.
2022 Unsecured Term Loan
We entered into the 2022 Unsecured Term Loan to partially repay BRE debt that we assumed as part of the Internalization. Borrowings under the 2022 Unsecured Term Loan are subject to interest only payments at variable rates equal to LIBOR plus a margin based on our credit rating, ranging between 0.85% and 1.65% per annum. Based on our current credit rating, the applicable margin is 1.25%. as of September 30, 2020.
2023 Unsecured Term Loan
The 2023 Unsecured Term loan has an initial maturity date of January 2023. Borrowings under the 2023 Unsecured Term Loan bear interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.90% and 1.75% per annum. Based on our current credit rating, the applicable margin is 1.35% as of September 30, 2020.
2024 Unsecured Term Loan
The 2024 Unsecured Term Loan has an initial maturity date of June 2024. Borrowings under the 2024 Unsecured Term Loan are subject to interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.85% and 1.65% per annum. Based on our current credit rating, the applicable margin is 1.25% as of September 30, 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 under the 2026 Term Loan and used the proceeds to fully repay our 2019 Unsecured Term Loan. On August 27, 2019, we borrowed the remaining $150 million to partially fund the industrial and office portfolio acquisition. 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 September 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. On July 1, 2019, we amended the Credit Facility to reduce the margin above LIBOR paid on the 2024 Unsecured Term Loan from 1.90% to 1.25%.
The following table summarizes the amounts drawn and available to be drawn on the Credit Facility and the 2020 and 2026 Unsecured Term Loans as of September 30, 2019 (in thousands, excluding Loan Tranche and Maturity Date).2020.
Loan Tranche |
| Amount Drawn |
|
| Amount Available |
|
| Total Capacity |
|
| Maturity Date | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revolver |
| $ | 303,300 |
|
| $ | 296,700 |
|
| $ | 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 |
2020 Unsecured Term Loan |
|
| 300,000 |
|
|
| — |
|
|
| 300,000 |
|
| August 2, 2020(b) |
2026 Unsecured Term Loan |
|
| 450,000 |
|
|
| — |
|
|
| 450,000 |
|
| February 27, 2026 |
|
|
To mitigate interest rate risk and extend the tenor of a portion of our debt, we have strategically added unsecured, fixed-rate, interest-only senior promissory notes (“Senior Notes”) to our capital structure. At September 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 Notes
On April 18, 2017, we issued $150 million of Senior Notes (the “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
On July 2, 2018, we issued $325 million of Senior Notes in two series: (i) $225 million of 10-year Senior Notes (“Series B Notes”) maturing on July 2, 2028, 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 semiannually during their term, and bear interest at fixed rates of 5.09% per annum and 5.19% per annum, respectively.
In addition to funding acquisitions, a portion of the net proceeds from the The Series B Notes mature on July 2, 2028, and the Series C Notes was used to repay outstanding borrowings under the Revolver as well as $25 million of the outstanding principal balance of our 2019 Unsecured Term Loan.mature on July 2, 2030.
Debt Covenants
We are subject to various covenants and financial reporting requirements pursuant to our loan agreements. The table below summarizes the applicable financial covenants,debt facilities, which are substantially the same across each of the agreements.summarized below. As of September 30, 2019,2020, we believe we were in compliance with all of our covenants.covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders above the annual 90%in excess of dividends required to maintain our REIT taxable income distribution requirement.qualification. For each of the previous three years, we paid dividends out of our cash flows from operations exceededin excess of the distribution amounts required cash dividend distribution amounts.to maintain our REIT qualification. Refer to Recent Developments – COVID-19 Pandemic for additional discussion of the pandemic’s impact on our ability to satisfy our financial covenants.
Covenants |
|
|
| Requirement | ||
| ≤ 0.60 to 1.00 |
| ||||
Secured Indebtedness Ratio |
| ≤ 0.40 to 1.00 |
| |||
Unencumbered Coverage Ratio |
| ≥ 1.75 to 1.00 |
| |||
Fixed Charge Coverage Ratio |
| ≥ 1.50 to 1.00 |
| |||
Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value |
| ≤ 0.60 to 1.00 |
| |||
Dividends and Other Restricted Payments |
| Only applicable in case of default |
|
Cash Flows
Cash and cash equivalents and restricted cash totaled $109.0 million and $44.1 million at September 30, 2020 and 2019, respectively. The table below shows information concerning cash flows for the nine months ended September 30, 2020 and 2019:
|
| For the nine months ended |
| |||||
|
| September 30, |
| |||||
(In thousands) |
| 2020 |
|
| 2019 |
| ||
Net cash provided by operating activities |
| $ | 132,964 |
|
| $ | 110,933 |
|
Net cash provided by (used in) investing activities |
|
| 16,207 |
|
|
| (870,227 | ) |
Net cash (used in) provided by financing activities |
|
| (60,495 | ) |
|
| 784,420 |
|
Increase in cash and cash equivalents and restricted cash |
| $ | 88,676 |
|
| $ | 25,126 |
|
The increase in net cash provided by operating activities during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization.
The change in net cash provided by (used in) investing activities during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, was mainly due to decreased acquisition volume, offset by cash paid in connection with the Internalization and decreased proceeds from the disposal of properties in 2020.
The change in net cash (used in) provided by financing activities during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, mainly reflects a net repayment of debt in 2020, compared to net borrowings in 2019, partially offset by increased proceeds from the sale of common stock.
Distributions and Distribution Reinvestment
In light of the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and then-current tenant rent relief requests, to preserve cash, strengthen our liquidity position, and manage our overall leverage profile, in May 2020 our board of directors determined that we would temporarily suspend our monthly distribution. At its August 4, 2020 meeting, based on our strong collection results and second quarter operating performance, the board voted to reinstate a distribution, announcing that the Company would transition to quarterly distribution payments beginning with the quarter ended September 30, 2020. The board set a $0.135 distribution per common share and OP Unit to stockholders and OP Unit holders of record as of September 30, 2020, which was paid on October 15, 2020. At its November 5, 2020 meeting, the board set a $0.25 distribution per common share and OP Unit to stockholders and OP Unit holders of record as of December 31, 2020, payable on or before January 15, 2021.
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 nine months ended September 30, 2020 (in thousands).
Month |
| Year |
| Cash Distribution − Common Stockholders |
|
| Cash Distribution − Membership Units |
|
| Distribution Paid Pursuant to DRIP on Common Stock (a) |
|
| Distribution Paid Pursuant to DRIP on Membership Units (a) |
|
| Total Amount of Distribution |
| |||||
January |
| 2020 |
| $ | 5,663 |
|
| $ | 632 |
|
| $ | 5,734 |
|
| $ | 133 |
|
| $ | 12,162 |
|
February |
| 2020 |
|
| 11,472 |
|
|
| 764 |
|
|
| — |
|
|
| — |
|
|
| 12,236 |
|
March |
| 2020 |
|
| 11,815 |
|
|
| 1,345 |
|
|
| — |
|
|
| — |
|
|
| 13,160 |
|
April |
| 2020 |
|
| 11,815 |
|
|
| 1,345 |
|
|
| — |
|
|
| — |
|
|
| 13,160 |
|
May |
| 2020 |
|
| 11,816 |
|
|
| 1,345 |
|
|
| — |
|
|
| — |
|
|
| 13,161 |
|
June |
| 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
July |
| 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
August |
| 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
September(b) |
| 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
|
|
| $ | 52,581 |
|
| $ | 5,431 |
|
| $ | 5,734 |
|
| $ | 133 |
|
| $ | 63,879 |
|
(a) |
|
(b) |
|
|
|
|
|
|
|
Capital Strategy
We believeThe following table summarizes our leverage policy and capital structure provide us with several advantages,distributions paid, including the ability to:source of distributions and a comparison against Funds From Operations (“FFO”) (in thousands). Refer to Non-GAAP Measures for further discussion of our FFO.
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 value to our stockholders through earnings growth via a growing pool of assets; and
issue unsecured debt having relatively limited negative financial covenants and maintain the distributions necessary to retain our REIT status in the event of contractual default, which we believe increases our corporate flexibility.
|
| For the nine months ended |
| |||||
|
| September 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Distributions: |
|
|
|
|
|
|
|
|
Paid in cash |
| $ | 58,145 |
|
| $ | 51,505 |
|
Reinvested in shares |
|
| 5,734 |
|
|
| 46,078 |
|
Total Distributions |
| $ | 63,879 |
|
| $ | 97,583 |
|
Source of Distributions: |
|
|
|
|
|
|
|
|
Cash flow from operating activities |
| $ | 63,879 |
|
| $ | 97,583 |
|
FFO |
| $ | 148,783 |
|
| $ | 122,071 |
|
We intend to exercise the extension provisions of our debt instruments, refinance, or replace the existing borrowings as they become due, including through additional private debt placements, all with the goal of limiting future debt service to interest payments only. As a result, we do not intend to make principal payments on these debt obligations in the foreseeable future. Additionally, we may be required to increase our borrowing capacity to partially fund future acquisitions. We assess market conditions and the availability and pricing of debt on an ongoing basis, which are critical inputs in our strategic planning and decision-making process. While we believe the current market conditions provide our stockholders with an advantageous capitalization structure and risk-adjusted return, we believe our conservative capital structure is appropriate to absorb temporary market fluctuations. Significant adverse market conditions could impact the availability of debt to fund future acquisitions, our ability to recognize growth in earnings and return on investment for stockholders, and our ability to recast the debt facilities at cost-advantageous pricing points. In the event of such conditions, we would plan to revise our capitalization structure and strategic initiatives to maximize return on investment for our investors. To the extent that we are unable to recast our debt facilities, our cash flowsdistributions from operations will not be adequate to pay the principal amount of debt, and we may be forced to liquidate properties to satisfy our obligations.
We believe that the cash generated by operations; however, we may fund distributions from the sale of assets, borrowings, or proceeds from the sale of our operations and our ongoing private offering, our cash and cash equivalents at September 30, 2019, our current borrowing capacity under our Credit Facility and accordion feature of 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 real estate to meet our strategic objectives.securities.
The leases in our portfolio are long-term in nature, with a current ABR weighted average remaining lease term of 11.710.8 years as of September 30, 2019. To mitigate2020. 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 September 30, 2020. Many of our leases contain rent escalators that increase rent at a fixed amount and may not be sufficient during periods of high inflation. Leases that contributed approximately 15.8% of our ABR as of September 30, 2020, contained rent escalators based on increases in CPI and the associated increases in rental revenue may be limited during periods of low inflation. The impact of inflation on our fixed revenue streams, we have implementedproperty and operating expenses is limited rent escalation clauses in our leases. As of September 30, 2019,since 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 over 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,are net leases, also shelters us from inflationary fluctuations inand property-level expenses are generally paid by our tenants. To the extent we bear 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 associated 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 increase in costs is greater than their increase in revenue. Where we cannot implement a triple-net lease,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 September 30, 2019,2020, or December 31, 2018.2019.
The following table provides information with respect to our contractual commitments and obligations as of September 30, 2019 (dollar amounts in2020 (in thousands).
Year of Maturity |
| Term Loans(a) |
|
| Revolver(b) |
|
| Senior Notes |
|
| Mortgages and Notes Payable |
|
| Interest Expense(c) |
|
| Tenant Improvement Allowances(d) |
|
| Operating Leases |
|
| Total |
| ||||||||
Remainder of 2019 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 784 |
|
| $ | 21,126 |
|
| $ | — |
|
| $ | 29 |
|
| $ | 21,939 |
|
2020 |
|
| 300,000 |
|
|
| — |
|
|
| — |
|
|
| 3,210 |
|
|
| 79,642 |
|
|
| 3,664 |
|
|
| 120 |
|
|
| 386,636 |
|
2021 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,028 |
|
|
| 73,363 |
|
|
| — |
|
|
| 122 |
|
|
| 91,513 |
|
2022 |
|
| — |
|
|
| 303,300 |
|
|
| — |
|
|
| 2,930 |
|
|
| 61,903 |
|
|
| — |
|
|
| 124 |
|
|
| 368,257 |
|
2023 |
|
| 265,000 |
|
|
| — |
|
|
| — |
|
|
| 8,356 |
|
|
| 52,332 |
|
|
| — |
|
|
| 125 |
|
|
| 325,813 |
|
Thereafter |
|
| 640,000 |
|
|
| — |
|
|
| 475,000 |
|
|
| 79,627 |
|
|
| 162,190 |
|
|
| — |
|
|
| 2,540 |
|
|
| 1,359,357 |
|
Total |
| $ | 1,205,000 |
|
| $ | 303,300 |
|
| $ | 475,000 |
|
| $ | 112,935 |
|
| $ | 450,556 |
|
| $ | 3,664 |
|
| $ | 3,060 |
|
| $ | 2,553,515 |
|
|
|
Year of Maturity |
| Term Loans |
|
| Revolving Credit Facility(a) |
|
| Senior Notes |
|
| Mortgages and Notes Payable |
|
| Interest Expense(b) |
|
| Tenant Improvement Allowances(c) |
|
| Operating Leases |
|
| Total |
| ||||||||
Remainder of 2020 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 818 |
|
| $ | 16,149 |
|
| $ | 396 |
|
| $ | 176 |
|
| $ | 17,539 |
|
2021 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,006 |
|
|
| 63,329 |
|
|
| 1,585 |
|
|
| 711 |
|
|
| 83,631 |
|
2022 |
|
| 60,000 |
|
|
| — |
|
|
| — |
|
|
| 2,907 |
|
|
| 61,485 |
|
|
| — |
|
|
| 686 |
|
|
| 125,078 |
|
2023 |
|
| 265,000 |
|
|
| — |
|
|
| — |
|
|
| 8,173 |
|
|
| 56,096 |
|
|
| — |
|
|
| 505 |
|
|
| 329,774 |
|
2024 |
|
| 190,000 |
|
|
| — |
|
|
| — |
|
|
| 2,260 |
|
|
| 50,481 |
|
|
| — |
|
|
| 120 |
|
|
| 242,861 |
|
Thereafter |
|
| 450,000 |
|
|
| — |
|
|
| 475,000 |
|
|
| 76,912 |
|
|
| 129,228 |
|
|
| — |
|
|
| 2,411 |
|
|
| 1,133,551 |
|
Total |
| $ | 965,000 |
|
| $ | — |
|
| $ | 475,000 |
|
| $ | 109,076 |
|
| $ | 376,768 |
|
| $ | 1,981 |
|
| $ | 4,609 |
|
| $ | 1,932,434 |
|
| We may extend the |
| Interest expense is projected based on the outstanding borrowings and interest rates in effect as of September 30, |
| We expect to pay tenant improvement allowances out of cash flows from operations or from additional borrowings. |
At September 30, 2020 and December 31, 2019, investment in rental property of $179.8$174.6 million isand $178.7 million, respectively, was pledged as collateral against our mortgages and notes payable.
Additionally, as of September 30, 2019, we are a party to three separate Tax Protection Agreements (the “Agreements”)tax protection agreements with the contributing members (the “Protected Members”) of three distinct UPREIT transactions.transactions and we entered into the Founding Owners’ Tax Protection Agreement with our founding owners in connection with the Internalization. The Agreementstax protection agreements require us to pay monetary damagesindemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, or in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause a Protected Membersuch beneficiaries to recognize a Protected Gain, as defined ingain that is protected under the Agreements,agreements, subject to certain exceptions. Based on values as of September 30, 2019,2020, taxable sales of the applicable properties would trigger liability under the Agreementsfour agreements of approximately $12.3$22.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded 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 September 30, 2019, our real estate investment portfolio had grown to a net book value of $3,501.5 million, consisting of investments in 661 commercial real estate properties with locations in 42 U.S. states and one commercial property located in British Columbia, Canada, and leased to tenants in various industries. All but four of our properties were subject to a lease as of September 30, 2019, and substantially all of our leasing activity related to our real estate acquisitions.
Lease Revenues
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
| September 30, |
|
| Increase/(Decrease) |
|
| September 30, |
|
| Increase/(Decrease) |
| |||||||||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||||||
Lease revenues |
| $ | 76,401 |
|
| $ | 61,764 |
|
| $ | 14,637 |
|
|
| 23.7 | % |
| $ | 213,884 |
|
| $ | 174,385 |
|
| $ | 39,499 |
|
|
| 22.7 | % |
The increase in revenues for the three and nine months ended September 30, 2019, 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 from accretive property acquisitions completed since the third quarter of 2018, and continued strong portfolio operating performance. Since the third quarter of 2018, we have acquired 109 new properties for $1.2 billion, excluding capitalized acquisition costs, including 66 new properties acquired for $993.7 million during the first nine months of 2019. During the year, we experienced greater than 99% rent collection and occupancy (based on rentable square footage), and as of September 30, 2019, the weighted average annual rent increases on our properties was 2.0%.
Operating Expenses
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
| September 30, |
|
| Increase/(Decrease) |
|
| September 30, |
|
| Increase/(Decrease) |
| |||||||||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 28,392 |
|
| $ | 21,869 |
|
| $ | 6,523 |
|
|
| 29.8 | % |
| $ | 77,989 |
|
| $ | 61,303 |
|
| $ | 16,686 |
|
|
| 27.2 | % |
Asset management fees |
|
| 5,610 |
|
|
| 4,663 |
|
|
| 947 |
|
|
| 20.3 | % |
|
| 16,048 |
|
|
| 13,119 |
|
|
| 2,929 |
|
|
| 22.3 | % |
Property management fees |
|
| 2,098 |
|
|
| 1,680 |
|
|
| 418 |
|
|
| 24.9 | % |
|
| 5,918 |
|
|
| 4,792 |
|
|
| 1,126 |
|
|
| 23.5 | % |
Property and operating expense |
|
| 3,855 |
|
|
| 2,777 |
|
|
| 1,078 |
|
|
| 38.8 | % |
|
| 11,497 |
|
|
| 7,926 |
|
|
| 3,571 |
|
|
| 45.1 | % |
General and administrative |
|
| 1,315 |
|
|
| 1,664 |
|
|
| (349 | ) |
|
| (21.0 | )% |
|
| 3,807 |
|
|
| 4,451 |
|
|
| (644 | ) |
|
| (14.5 | )% |
State, franchise and foreign tax |
|
| 405 |
|
|
| 58 |
|
|
| 347 |
|
| >100.0 | % |
|
| 1,153 |
|
|
| 811 |
|
|
| 342 |
|
|
| 42.2 | % | |
Provision for impairment of investment in rental properties |
|
| 2,435 |
|
|
| 2,061 |
|
|
| 374 |
|
|
| 18.1 | % |
|
| 3,452 |
|
|
| 2,061 |
|
|
| 1,391 |
|
|
| 67.5 | % |
Total operating expenses |
| $ | 44,110 |
|
| $ | 34,772 |
|
| $ | 9,338 |
|
|
| 26.9 | % |
| $ | 119,864 |
|
| $ | 94,463 |
|
| $ | 25,401 |
|
|
| 26.9 | % |
Depreciation and amortization
The increase in Depreciation and amortization expense for the three and nine months ended September 30, 2019, is primarily due to the growth in our real estate portfolio, as discussed above.
Asset management fees
We pay the Asset Manager a quarterly fee equal to 0.25% of the aggregate value of our equity on a fully diluted basis, based on the Determined Share Value. The increase in asset management fees during the three and nine months ended September 30, 2019, is primarily the result of an increase in our total outstanding equity on a fully diluted basis, which resulted from continued equity capital investments. As of September 30, 2019, there were 27.2 million shares of our common stock and non-controlling membership units outstanding, compared to 22.8 million as of September 30, 2018. The increase in equity capital was used to partially fund the continued growth in our real estate portfolio. In addition to the increase in total outstanding equity, the increase in asset management fees reflects higher average Determined Share Values in effect.
Property and operating expense
The increase in property and operating expense in the three and nine months ended September 30, 2019, 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. We pay a majority of these expenses and are 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.
Provision for impairment of investment in rental properties
During the three and nine months ended September 30, 2019, we recognized $2.4 million and $3.5 million, respectively, of impairment on our investments in rental properties. We review long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If and when such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. The impairments recognized during the nine months ended September 30, 2019, related to four properties whose carrying amounts we determined were not recoverable. In determining the fair value of the assets at the time of measurement, we utilized a capitalization rate of 14.6%, a weighted average discount rate of 8%, and a weighted average price per square foot of $226. During the three and nine months ended September 30, 2018, we recognized $2.1 million of impairment on our investments in rental properties. The impairment related to five properties whose carrying amounts we determined were not recoverable. In determining the fair value of the assets at the time of measurement, we utilized capitalization rates ranging from 7.5% to 10%, and a weighted average discount rate of 8%.
Other income (expenses)
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| Increase/(Decrease) |
|
| September 30, |
|
| Increase/(Decrease) |
| ||||||||||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred distribution income |
| $ | — |
|
| $ | 65 |
|
| $ | (65 | ) |
|
| (100.0 | )% |
| $ | — |
|
| $ | 440 |
|
| $ | (440 | ) |
|
| (100.0 | )% |
Interest income |
|
| 5 |
|
|
| 16 |
|
|
| (11 | ) |
|
| (68.8 | )% |
|
| 6 |
|
|
| 178 |
|
|
| (172 | ) |
|
| (96.6 | )% |
Interest expense |
|
| (18,465 | ) |
|
| (14,484 | ) |
|
| 3,981 |
|
|
| 27.5 | % |
|
| (51,025 | ) |
|
| (38,115 | ) |
|
| 12,910 |
|
|
| 33.9 | % |
Cost of debt extinguishment |
|
| (455 | ) |
|
| (50 | ) |
|
| 405 |
|
| >100.0 | % |
|
| (1,176 | ) |
|
| (101 | ) |
|
| 1,075 |
|
| >100.0 | % | ||
Gain on sale of real estate |
|
| 12,585 |
|
|
| 2,025 |
|
|
| 10,560 |
|
| >100.0 | % |
|
| 16,772 |
|
|
| 9,620 |
|
|
| 7,152 |
|
|
| 74.3 | % | |
Gain on sale of investment in related party |
|
| — |
|
|
| 8,500 |
|
|
| (8,500 | ) |
|
| (100.0 | )% |
|
| — |
|
|
| 8,500 |
|
|
| (8,500 | ) |
|
| (100.0 | )% |
Internalization expenses |
|
| (923 | ) |
|
| — |
|
|
| (923 | ) |
|
| >100.0 | % |
|
| (1,195 | ) |
|
| — |
|
|
| (1,195 | ) |
|
| >100.0 | % |
Interest expense
The increased interest expense during the three and nine months ended September 30, 2019, resulted primarily from a $785.9 million increase in outstanding borrowings from September 30, 2018, used partially to fund additional real estate investments. We continue to focus on strengthening our investment grade 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. While the benefits of our debt capital markets strategy are partially mitigated by higher-costing instruments, we were able to take advantage of the decreasing interest rates during the third quarter of 2019, as our percentage of floating-rate debt increased concurrently with our funding of the $735.7 million industrial and office portfolio. Our weighted average cost of borrowings, inclusive of interest rate swaps, was 3.94% at September 30, 2019, compared to 4.21% at September 30, 2018. We attempt to limit our total floating-rate debt exposure to no more than 5% of the approximate market value of assets, and expect to reduce our current exposure as we look to refinance or replace the short-term borrowings used to finance the acquisition of the industrial and office portfolio.
Gain on sale of real estate
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months ended September 30, 2019, we recognized gains of $12.6 million on the sale of 16 properties, compared to gains of $2.0 million on the sale of four properties during the three months ended September 30, 2018. During the nine months ended September 30, 2019, we recognized gains of $16.8 million on the sale of 25 properties, compared to gains of $9.6 million on the sale of 15 properties during the nine months ended September 30, 2018.
Gain on sale of investment in related party
During the three months ended September 30, 2018, we sold our investment of 100 non-voting convertible preferred units of our Manager, a related party, to another related party of the Manager, for an aggregate sales price of $18.5 million. The preferred units had a carrying value of $10 million at the time of sale, resulting in a gain of $8.5 million. Prior to the sale, we received preferred distribution income on the preferred units.
Internalization expenses
During the three and nine months ended September 30, 2019, we incurred $0.9 million and $1.2 million, respectively, of third-party fees and consulting expenses associated with the pending Internalization.
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,Adjusted Funds From Operations (“AFFO”), we modify the Nareit 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 intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, realized gains or losses on foreign currency transactions, internalization expenses, stock-based compensation expense, severance, extraordinary items, and other specified non-cash items. We believe that such items are not a result of normal operations and thus we believe excluding such items assists management and investors in distinguishing whether changes in our operations are due to growth or decline of operations at our properties or from other factors.
Our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market 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. In situations where we have granted short-term rent deferrals as a result of the COVID-19 pandemic, and such deferrals are probable of collection and expected to be repaid within a short term, we will continue to recognize the same amount of GAAP lease revenues each period. The amounts temporarily deferred are recorded in tenant receivables until they are repaid. Consistent with GAAP lease revenues, the short-term deferrals associated with COVID-19 will not impact our AFFO.
We further exclude contingent consideration expense (income), costs or gains recorded on the extinguishment of debt, non-cash interest expense and gains, the amortization of debt issuance costs, net mortgage premiums, and lease intangibles, realized gains and losses on foreign currency transactions, and internalization expenses, stock-based compensation expense and severance, 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 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 calculation and characterization of AFFO accordingly.
The following table presents ourreconciles net income and our non-GAAP(which is the most comparable GAAP measure) to FFO and AFFO for the threeAFFO:
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
(in thousands, except per share data) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net income |
| $ | 9,711 |
|
| $ | 25,038 |
|
| $ | 38,657 |
|
| $ | 57,402 |
|
Real property depreciation and amortization |
|
| 31,343 |
|
|
| 28,392 |
|
|
| 102,452 |
|
|
| 77,989 |
|
Gain on sale of real estate |
|
| (1,060 | ) |
|
| (12,585 | ) |
|
| (9,725 | ) |
|
| (16,772 | ) |
Provision for impairment on investment in rental properties |
|
| 14,732 |
|
|
| 2,435 |
|
|
| 17,399 |
|
|
| 3,452 |
|
FFO |
| $ | 54,726 |
|
| $ | 43,280 |
|
| $ | 148,783 |
|
| $ | 122,071 |
|
Capital improvements / reserves |
|
| 1,662 |
|
|
| — |
|
|
| 1,662 |
|
|
| (97 | ) |
Straight-line rent adjustment |
|
| (6,943 | ) |
|
| (5,499 | ) |
|
| (14,706 | ) |
|
| (15,882 | ) |
Adjustment to provision for credit losses |
|
| (15 | ) |
|
| — |
|
|
| (142 | ) |
|
| — |
|
Cost of debt extinguishment |
|
| 392 |
|
|
| 455 |
|
|
| 414 |
|
|
| 1,176 |
|
Amortization of debt issuance costs |
|
| 819 |
|
|
| 611 |
|
|
| 2,528 |
|
|
| 1,761 |
|
Amortization of net mortgage premiums |
|
| (34 | ) |
|
| (37 | ) |
|
| (106 | ) |
|
| (108 | ) |
Gain on interest rate swaps and other non-cash interest expense |
|
| (42 | ) |
|
| (41 | ) |
|
| (125 | ) |
|
| (163 | ) |
Amortization of lease intangibles |
|
| 151 |
|
|
| (873 | ) |
|
| 32 |
|
|
| (2,328 | ) |
Internalization expenses |
|
| 1,929 |
|
|
| 923 |
|
|
| 3,523 |
|
|
| 1,195 |
|
Stock-based compensation |
|
| 796 |
|
|
| — |
|
|
| 796 |
|
|
| — |
|
Severance |
|
| — |
|
|
| — |
|
|
| 26 |
|
|
| — |
|
Change in fair value of earnout liability |
|
| (6,362 | ) |
|
| — |
|
|
| (8,506 | ) |
|
| — |
|
Other losses |
|
| (2 | ) |
|
| — |
|
|
| 22 |
|
|
| — |
|
AFFO |
| $ | 47,077 |
|
| $ | 38,819 |
|
| $ | 134,201 |
|
| $ | 107,625 |
|
EBITDA, EBITDAre, Adjusted EBITDAre and nine months ended September 30, 2019Annualized Adjusted EBITDAre
We compute EBITDA as earnings before interest, income taxes and 2018. Our measures of FFOdepreciation and AFFO are computed on the basis of amounts attributable to both us and non-controlling interests. As the non-controlling interests shareamortization. EBITDA is a measure commonly used in our net income on a one-for-one basis, the basicindustry. We believe that this ratio provides investors and diluted per share amounts are the same.
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| Increase/(Decrease) |
|
| September 30, |
|
| Increase/(Decrease) |
| ||||||||||||||||||||
(in thousands, except per share data) |
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||||||
Net income |
| $ | 25,038 |
|
| $ | 23,064 |
|
| $ | 1,974 |
|
|
| 8.6 | % |
| $ | 57,402 |
|
| $ | 60,444 |
|
| $ | (3,042 | ) |
|
| (5.0 | )% |
Net earnings per diluted share |
|
| 0.95 |
|
|
| 1.03 |
|
|
| (0.08 | ) |
|
| (7.8 | )% |
|
| 2.28 |
|
|
| 2.81 |
|
|
| (0.53 | ) |
|
| (18.9 | )% |
FFO |
|
| 43,280 |
|
|
| 44,969 |
|
|
| (1,689 | ) |
|
| (3.8 | )% |
|
| 122,071 |
|
|
| 114,188 |
|
|
| 7,883 |
|
|
| 6.9 | % |
FFO per diluted share |
|
| 1.64 |
|
|
| 2.02 |
|
|
| (0.38 | ) |
|
| (18.8 | )% |
|
| 4.86 |
|
|
| 5.31 |
|
|
| (0.45 | ) |
|
| (8.5 | )% |
AFFO |
|
| 38,819 |
|
|
| 31,315 |
|
|
| 7,504 |
|
|
| 24.0 | % |
|
| 107,625 |
|
|
| 91,513 |
|
|
| 16,112 |
|
|
| 17.6 | % |
AFFO per diluted share |
|
| 1.47 |
|
|
| 1.40 |
|
|
| 0.07 |
|
|
| 5.0 | % |
|
| 4.28 |
|
|
| 4.26 |
|
|
| 0.02 |
|
|
| 0.5 | % |
Diluted WASO(a) |
|
| 26,379 |
|
|
| 22,291 |
|
|
| 4,088 |
|
|
| 18.3 | % |
|
| 25,131 |
|
|
| 21,496 |
|
|
| 3,635 |
|
|
| 16.9 | % |
|
|
For the three months ended September 30, 2019, growth in net income was primarily attributable to revenue growth as discussed above, combinedanalysts with a $10.6 million increasemeasure of our performance that includes our operating results unaffected by the differences in capital structures, capital investment cycles and useful life of related assets compared to other companies in our gain on saleindustry. We compute EBITDAre in accordance with the definition adopted by Nareit, as EBITDA excluding gains (loss) from the sales of real estate. These factors were partially offset by a $6.5 million increase in depreciation and amortization expense associated with a larger real estate portfolio, a $4.0 million increase in interest expense associated with incremental borrowings used to fund our real estate acquisitions, and $0.9 million in internalization expenses incurred in 2019. We also recognized an $8.5 million gain on the sale of an investment in a related party during 2018, with no such activity in 2019. In addition to the factors driving net income for the three months ended September 30, 2019, the decrease in net income for the nine months ended September 30, 2019, is attributable to a $1.1 million increase in cost of debt extinguishment primarily associated with our debt refinancing in the first quarter of 2019.
GAAP net income includes items such as gain or loss on sale of real estatedepreciable property and provisions for impairment among others, which can varyon investment in real estate. We believe EBITDA and EBITDAre are useful to investors and analysts because they provide important supplemental information about our operating performance exclusive of certain non-cash and other costs. EBITDA and EBITDAre are not measures of financial performance under GAAP, and our EBITDA and EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA and EBITDAre as alternatives to net income or cash flows from quarter to quarter and impact period-to-period comparisons. The fluctuations, coupledoperating activities determined in accordance with GAAP.
As we fund new acquisitions initially using our ongoing equity offering, resulted in a $0.08 and $0.53 decrease in net earnings per diluted share for the three and nine months ended September 30, 2019, respectively.
AFFO
The increase in AFFO during the three and nine months ended September 30, 2019, as compared to the same periods 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 third quarter of 2018, and strong portfolio operating performance.
During the first six months of 2019, our per share results were negatively impacted by funding a larger portion of our acquisitions with equity and proceeds recycled from property dispositions. We re-balanced our funding mix for the year with the closing of our $735.7 million industrial and office portfolio acquisition on August 29, 2019, and increased our leverage ratio to 47.5% as of September 30, 2019. The accretive nature of our acquisitions during the year and increase in leverage in the third quarter resulted in a $0.07 increase in AFFO per diluted share as compared to the third quarter of 2018. We expect these factors to contribute to positive fourth quarter results, and are committed to maintaining an investment grade balance sheet through active management ofunsecured Revolving Credit Facility, our leverage profile and overall liquidity positionNet Debt (defined below) are immediately impacted by current quarter acquisitions. However, the full benefit of EBITDAre from newly acquired properties is not received in the same quarter in which the properties are acquired. Additionally, EBITDAre for the quarter includes amounts generated by properties that have been sold during the quarter. Accordingly, the variability in EBITDAre caused by the timing of our acquisitions and dispositions can temporarily distort our leverage ratios. We adjust EBITDAre (“Adjusted EBITDAre”) for the most recently completed quarter (i) to recalculate as if all acquisitions and dispositions had occurred at the beginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either non-cash, such as cost of debt extinguishments or the change in fair value of our earnout liability, or that we believe are one time, or unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future, and (iii) to eliminate the impact of lease termination fees, which are not a result of normal operations. We then annualize quarterly Adjusted EBITDAre by multiplying it by four (“Annualized Adjusted EBITDAre”). You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to be inaccurate. Our actual reported EBITDAre for future periods may be significantly different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.
The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA and EBITDAre:
|
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
| ||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net income |
| $ | 9,711 |
|
| $ | 25,038 |
|
| $ | 38,657 |
|
| $ | 57,402 |
|
Depreciation and amortization |
|
| 31,363 |
|
|
| 28,392 |
|
|
| 102,503 |
|
|
| 77,989 |
|
Interest expense |
|
| 18,511 |
|
|
| 18,465 |
|
|
| 59,015 |
|
|
| 51,025 |
|
Income taxes |
|
| 129 |
|
|
| 405 |
|
|
| 1,080 |
|
|
| 1,153 |
|
EBITDA |
| $ | 59,714 |
|
| $ | 72,300 |
|
| $ | 201,255 |
|
| $ | 187,569 |
|
Provision for impairment of investment in rental properties |
|
| 14,732 |
|
|
| 2,435 |
|
|
| 17,399 |
|
|
| 3,452 |
|
Gain on sale of real estate |
|
| (1,060 | ) |
|
| (12,585 | ) |
|
| (9,725 | ) |
|
| (16,772 | ) |
EBITDAre |
| $ | 73,386 |
|
| $ | 62,150 |
|
| $ | 208,929 |
|
| $ | 174,249 |
|
Reconciliation of Non-GAAP Measures
The following table reconciles EBITDAre to Adjusted EBITDAre. Information is a reconciliation of net incomealso presented with respect to FFOAnnualized EBITDAre and AFFO, which are non-GAAP financial measures. Also presented is information regarding diluted WASO and per diluted share amounts:Annualized Adjusted EBITDAre:
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
(in thousands, except per share data) |
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net income |
| $ | 25,038 |
|
| $ | 23,064 |
|
| $ | 57,402 |
|
| $ | 60,444 |
|
Real property depreciation and amortization |
|
| 28,392 |
|
|
| 21,869 |
|
|
| 77,989 |
|
|
| 61,303 |
|
Gain on sale of real estate |
|
| (12,585 | ) |
|
| (2,025 | ) |
|
| (16,772 | ) |
|
| (9,620 | ) |
Provision for impairment on investment in rental properties |
|
| 2,435 |
|
|
| 2,061 |
|
|
| 3,452 |
|
|
| 2,061 |
|
FFO |
| $ | 43,280 |
|
| $ | 44,969 |
|
| $ | 122,071 |
|
| $ | 114,188 |
|
Capital improvements / reserves |
|
| — |
|
|
| (49 | ) |
|
| (97 | ) |
|
| (147 | ) |
Straight-line rent adjustment |
|
| (5,499 | ) |
|
| (5,337 | ) |
|
| (15,882 | ) |
|
| (15,640 | ) |
Cost of debt extinguishment |
|
| 455 |
|
|
| 50 |
|
|
| 1,176 |
|
|
| 101 |
|
Gain on sale of investment in related party |
|
| — |
|
|
| (8,500 | ) |
|
| — |
|
|
| (8,500 | ) |
Amortization of debt issuance costs |
|
| 611 |
|
|
| 477 |
|
|
| 1,761 |
|
|
| 1,410 |
|
Amortization of net mortgage premiums |
|
| (37 | ) |
|
| (36 | ) |
|
| (108 | ) |
|
| (107 | ) |
Gain on interest rate swaps and other non-cash interest expense |
|
| (41 | ) |
|
| (4 | ) |
|
| (163 | ) |
|
| (4 | ) |
Amortization of lease intangibles |
|
| (873 | ) |
|
| (255 | ) |
|
| (2,328 | ) |
|
| 212 |
|
Internalization expenses |
|
| 923 |
|
|
| — |
|
|
| 1,195 |
|
|
| — |
|
AFFO |
| $ | 38,819 |
|
| $ | 31,315 |
|
| $ | 107,625 |
|
| $ | 91,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted WASO |
|
| 26,379 |
|
|
| 22,291 |
|
|
| 25,131 |
|
|
| 21,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic and diluted |
| $ | 0.95 |
|
| $ | 1.03 |
|
| $ | 2.28 |
|
| $ | 2.81 |
|
FFO per diluted share |
|
| 1.64 |
|
|
| 2.02 |
|
|
| 4.86 |
|
|
| 5.31 |
|
AFFO per diluted share |
|
| 1.47 |
|
|
| 1.40 |
|
|
| 4.28 |
|
|
| 4.26 |
|
|
| For the three months ended September 30, |
| |||||
(in thousands) |
| 2020 |
|
| 2019 |
| ||
EBITDAre |
| $ | 73,386 |
|
| $ | 62,150 |
|
Adjustment for current quarter investment activity (a) |
|
| — |
|
|
| 8,898 |
|
Adjustment for current quarter disposition activity (b) |
|
| (78 | ) |
|
| (549 | ) |
Adjustment to exclude non-recurring expenses (income) (c) |
|
| 1,929 |
|
|
| 923 |
|
Adjustment to exclude change in fair value of earnout liability |
|
| (6,362 | ) |
|
| — |
|
Adjustment to exclude cost of debt extinguishments |
|
| 392 |
|
|
| 455 |
|
Adjustment to exclude lease termination fees |
|
| — |
|
|
| (407 | ) |
Adjusted EBITDAre |
| $ | 69,267 |
|
| $ | 71,470 |
|
Annualized EBITDAre |
| $ | 293,544 |
|
| $ | 248,600 |
|
Annualized Adjusted EBITDAre |
| $ | 277,068 |
|
| $ | 285,880 |
|
(a) | Reflects an adjustment to give effect to all acquisitions during the quarter as if they had been acquired as of the beginning of the quarter. |
(b) | Reflects an adjustment to give effect to all dispositions during the quarter as if they had been sold as of the beginning of the quarter. |
(c) | Amounts represent expense directly associated with the Internalization. |
Net Debt to Annualized EBITDAre and Annualized Adjusted EBITDAre
We define Net Debt as our gross debt (total reported debt plus deferred financing costs) less cash and cash equivalents and restricted cash. We believe that the presentation of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre is useful to investors and analysts because these ratios provide information about gross debt less cash and cash equivalents, which could be useful to repay debt, compared to our performance as measured using EBITDAre. The following table reconciles total debt (which is the most comparable GAAP measure) to Net Debt, and presents the ratio of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre, respectively:
(in thousands) |
| September 30, 2020 |
|
| September 30, 2019 |
| ||
Debt |
|
|
|
|
|
|
|
|
Mortgages and notes payable, net |
| $ | 108,752 |
|
| $ | 112,562 |
|
Unsecured term notes, net |
|
| 1,433,495 |
|
|
| 1,671,511 |
|
Revolving Credit Facility |
|
| — |
|
|
| 303,300 |
|
Debt issuance costs |
|
| 6,829 |
|
|
| 8,862 |
|
Gross Debt |
|
| 1,549,076 |
|
|
| 2,096,235 |
|
Cash and cash equivalents |
|
| (101,787 | ) |
|
| (14,008 | ) |
Restricted cash |
|
| (7,200 | ) |
|
| (30,107 | ) |
Net Debt |
| $ | 1,440,089 |
|
| $ | 2,052,120 |
|
Net Debt to Annualized EBITDAre |
| 4.91x |
|
| 8.25x |
| ||
Net Debt to Annualized Adjusted EBITDAre |
| 5.20x |
|
| 7.18x |
|
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 nine months ended September 30, 2019,2020, 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 Quarterly Report on Form 10-Q.
Item 3.Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to certain market risks, one of the most predominant of which is a change in interest rate risk arising from changesrates. Increases in interest rates on the floating-rate 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 September 30, 2019, we had 34 interest rate swaps outstanding, in an aggregate notional amount of $909.9 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 $1.4 billion and $1.6 billion, respectively, as of September 30, 2020. Changes in market interest rates impact the fair value of our fixed-rate debt and interest rate swaps, but they have no impact on interest incurred or on cash flows. For instance, if interest rates were to increase 1%, and the fixed-rate debt balance were to remain constant, we would expect the fair value of our debt to decrease, similar to how the price of a bond decreases as interest rates rise. A 1% increase in market interest rates would have resulted in a decrease in the fair value of our fixed-rate debt and interest rate swaps of approximately $82.6 million as of September 30, 2020.
Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on LIBOR plus an applicable margin, and totaled $969.8 million as of September 30, 2020, of which $859.8 million was swapped to a fixed rate by our use of interest rate swaps. Taking into account the effect of our interest rate swaps, atinterest expense would have increased by approximately $4.5 million in the nine months ended September 30, 2019.2020, if the applicable LIBOR rate had been 1% higher.
(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 |
|
| $ | (1,389 | ) |
Bank of Montreal |
| July 2024 |
|
| 1.16 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| 421 |
|
Bank of Montreal |
| January 2025 |
|
| 1.91 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (694 | ) |
Bank of Montreal |
| July 2025 |
|
| 2.32 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,333 | ) |
Bank of Montreal |
| January 2026 |
|
| 1.92 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (833 | ) |
Bank of Montreal |
| January 2026 |
|
| 2.05 | % |
| one-month LIBOR |
|
| 40,000 |
|
|
| (1,643 | ) |
Bank of Montreal |
| December 2026 |
|
| 2.33 | % |
| one-month LIBOR |
|
| 10,000 |
|
|
| (662 | ) |
Bank of Montreal |
| December 2026 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,058 | ) |
Bank of Montreal |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,905 | ) |
Bank of Montreal |
| May 2029 |
|
| 2.09 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,502 | ) |
Capital One, National Association |
| December 2021 |
|
| 1.05 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| 133 |
|
Capital One, National Association |
| December 2024 |
|
| 1.58 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (165 | ) |
Capital One, National Association |
| January 2026 |
|
| 2.08 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (1,515 | ) |
Capital One, National Association |
| April 2026 |
|
| 2.68 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (1,243 | ) |
Capital One, National Association |
| July 2026 |
|
| 1.32 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| 118 |
|
Capital One, National Association |
| December 2027 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,932 | ) |
M&T Bank |
| August 2021 |
|
| 1.02 | % |
| one-month LIBOR |
|
| 4,948 |
|
|
| 42 |
|
M&T Bank |
| September 2022 |
|
| 2.83 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,031 | ) |
M&T Bank |
| November 2023 |
|
| 2.65 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,284 | ) |
Regions Bank |
| May 2020 |
|
| 2.12 | % |
| one-month LIBOR |
|
| 50,000 |
|
|
| (104 | ) |
Regions Bank |
| December 2023 |
|
| 1.18 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 199 |
|
Regions Bank |
| May 2029 |
|
| 2.11 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,562 | ) |
Regions Bank |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,383 | ) |
SunTrust Bank |
| April 2024 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (745 | ) |
SunTrust Bank |
| April 2025 |
|
| 2.20 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,181 | ) |
SunTrust Bank |
| July 2025 |
|
| 1.99 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (934 | ) |
SunTrust Bank |
| December 2025 |
|
| 2.30 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,474 | ) |
SunTrust Bank |
| January 2026 |
|
| 1.93 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (915 | ) |
U.S. Bank National Association |
| June 2029 |
|
| 2.03 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (1,395 | ) |
U.S. Bank National Association |
| August 2029 |
|
| 1.35 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| 207 |
|
Wells Fargo Bank, N.A. |
| February 2021 |
|
| 2.39 | % |
| one-month LIBOR |
|
| 35,000 |
|
|
| (385 | ) |
Wells Fargo Bank, N.A. |
| October 2024 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 15,000 |
|
|
| (994 | ) |
Wells Fargo Bank, N.A. |
| April 2027 |
|
| 2.72 | % |
| one-month LIBOR |
|
| 25,000 |
|
|
| (2,427 | ) |
Wells Fargo Bank, N.A. |
| January 2028 |
|
| 2.37 | % |
| one-month LIBOR |
|
| 75,000 |
|
|
| (5,801 | ) |
|
|
|
|
|
|
|
|
|
| $ | 909,948 |
|
| $ | (36,369 | ) |
With the exception of our interest rate swap transactions, we have not engaged in transactions in derivative financial instruments or derivative commodity instruments.
As of September 30, 2019,2020, 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 September 30, 2019,2020, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There werehave been no changes toin our internal control over financial reporting that occurred during the quarter ended September 30, 2019,2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II – OTHEROTHER INFORMATION
From time to time, weItem 1.Legal Proceedings.
We are subject to various legal proceedings and claims that arise in the ordinary course of our business. These matters are generally covered by insurance or are subject to our right to be indemnified by our tenants that we include in our leases. Management is not aware of any material pending legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject, nor are we aware of any such legal proceedings contemplated by government agencies.
There have been no material changes from theItem 1A. Risk Factors.
The risk factors set forthrelating to or impacted by the COVID-19 outbreak that were previously disclosed in our Quarterly Report on Form 10-K, other than10-Q for the following which we have identified as a result of the pending Internalization.
The pendency of the Internalization could adversely affect our business and operations.
Between the date that the Merger Agreement and other documents related to the Internalization were executed and the date that the Internalization is consummated, the attention of our management may be diverted from our day-to-day operations, regardless of whether or not the Internalization is ultimately consummated. The pendency of the Internalization could have an adverse impact on our relationships with other parties, which parties may delay or decline entering into agreements with us as a result of the announcement of our entry into the Merger Agreement. In addition, due to covenants in the Merger Agreement, we may be unable during the pendency of the Internalization to pursue certain transactions or pursue certain other actions that are not in the ordinary course of business, even if such actions would prove beneficial.
There can be no certainty that the Internalization will be consummated and our inability to consummate the Internalization may materially adversely affect our business, financial condition and results of operations.
Consummation of the Internalization is subject to the satisfaction or waiver of a number of conditions. There can be no guarantee that all of these closing conditions will be satisfied or waived and the Internalization consummated. If the Internalization is not consummated, we may be subject to a number of material risks that could materially adversely affect our business, financial condition, and results of operations, including:
|
|
|
|
There may be unexpected delays in the consummation of the pending Internalization.
The consummation of the Internalization may be delayed by a variety of events, including those that are not within our control. Events that could delay the consummation of the Internalization include delays and difficulties in satisfying any closing conditions to which the Internalization is subject. The Merger Agreement provides that either we or the Manager may terminate the Merger Agreement if the Internalization has not occurred bythree months ended March 31, 2020.
We may not manage the Internalization efficiently and effectively or realize its anticipated benefits.
We may not be able to successfully internalize our management in a manner that permits us to realize the anticipated benefits of the Internalization. We may not be able to retain all of the current employees of our Manager that we expect will become our employees as a result of the Internalization. The failure to manage the Internalization efficiently and effectively, including the failure to smoothly transition services or retain employees, could result in the anticipated benefits of the Internalization not being realized in the timeframe currently anticipated or at all.
The Merger Agreement and other agreements entered into in connection with the Internalization were negotiated between a special committee of our Board of Directors composed entirely of independent, disinterested directors (the “Special Committee”) and2020 contained certain of our officers and directors that are affiliated with our Manager,financial-related information which may give rise to conflicts of interests.
Certain of our officers and directors are affiliated with the Manager, including Ms. Amy L. Tait and Mr. Christopher J. Czarnecki, each of whom serve as a member of the Manager’s four-person board of managers. Accordingly, those officers and directors may receive economic benefits as a result of the Internalization that may differ from, and conflict with, our interests and the interests of our stockholders. The terms and conditions of the agreements entered into in connection with the Internalization, which were negotiated between the Special Committee and our Manager, may not be as favorable to us as if they hadhas been negotiated with unaffiliated third parties. Moreover, the representations, warranties, covenants, and indemnities in the Merger Agreement and the other agreements related to the Internalization are subject to limitations and qualifiers, which may limit our ability to enforce any remedy under such agreements.
The Internalization may not be financially beneficial to us and our stockholders and our net income, funds from operations (“FFO”), and adjusted funds from operations (“AFFO”) may decrease as a result of the Internalization.
There is no assurance that the Internalization will be financially beneficial to us and our stockholders. If the expenses we assume as a result of the Internalization are higher than the fees that we have historically paid to the Manager or otherwise higher than we anticipate, we may not realize the anticipated cost savings and other benefits from the Internalization and our net income, FFO per share and AFFO per share could decrease, which could have a material adverse effect on our business, financial condition, and results of operations.
The Internalization will be a time-consuming and costly process and the expenses arising from the Internalization could exceed our current estimates. Further, transactions involving the internalization by a REIT of an external manager affiliated with the REIT’s sponsor have, in some cases, been the subject of litigation. If such litigation arose in connection with the Internalization, we could be forced to spend significant amounts of money and management resources defending the claims (even if such claims were without merit), which would reduce the amount of funds available for us to invest in properties or other investments or to pay distributions. Additionally, while we will no longer effectively bear the costs of the various fees and currently paid to the Manager following the Internalization, our expenses following the Internalization will include the compensation and benefits of our executive officers and employees, as well as overhead currently paid by the Manager or its affiliates in managing our business and operations. Furthermore, the individuals who we expect will be our employees following the Internalization will be providing us with services historically provided by the Manager. There are no assurances that, following the Internalization, these employees will be able or incentivized to provide services at the same level orupdated for the same costs as are currently provided to us by the Manager. There may also be other unforeseen costs, expensesthree months ended September 30, 2020 in Part I, Item 2, Management’s Discussion and difficulties associated with operating as an internally managed company.Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q.
The issuance of shares of our common stock and units of membership interest in the Operating Company in connection with the Internalization would have a dilutive effect on the voting power and relative ownership interest of our current stockholders.
The issuance of shares of our common stock and units of membership interest in the Operating Company in the Internalization will have a dilutive effect on the voting power and relative ownership interest of our current stockholders. In addition, each unit of membership interest in the Operating Company issued in connection with the consummation of the Internalization will be convertible into shares of our common stock, subject to the terms and conditions for such conversions set forth in the limited liability company agreement of the Operating Company. The conversion of such units into shares of our common stock in the future would further dilute the voting power and relative ownership of our current stockholders.
Following the consummation of the Internalization, we may be exposed to risks to which we have not historically been exposed.
The consummation of the Internalization will expose us to risks to which we have not historically been exposed. Pursuant to the Merger Agreement, we will assume certain potential liabilities relating to the assets of the Manager. These liabilities could have a material adverse effect on our business to the extent we have not identified such liabilities or have not accurately estimated the amount of such liabilities. Our overhead will increase as a result of our becoming internally managed following the Internalization. In addition, following the consummation of the Internalization, we will be subject to the potential liabilities commonly faced by employers, including workers disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, and we will bear the costs of the establishment and maintenance of health, retirement, and similar benefit plans for our employees. Finally, there may be other unforeseen costs and expenses associated with operating as an internally managed company.
There is no guarantee that our key employees will remain employed by us for any specified period of time and will not engage in competitive activities if they cease to be employed with or engaged by us.
The execution of employment agreements between us and certain key persons currently employed by the Manager or its affiliate, including Christopher J. Czarnecki, Chief Executive Officer and President; Ryan M. Albano, Chief Financial Officer; John D. Moragne, Chief Operating Officer; and Sean T. Cutt, Chief Investment Officer (the “Senior Employees”), is a condition to the consummation of the Internalization. The employment agreements with each Senior Employee will be structured to incentivize the Senior Employees to remain employed by us, will become effective upon the consummation of the Internalization, and will have a four-year term. However, the departure or the loss of the services of any Senior Employee, or other senior personnel, following the Internalization could have a material adverse effect on our business, financial condition, results of operations and ability to effectively operate our business.
Further, the employment agreements with the Senior Employees will contain restrictions on the activities of such Senior Employees, including restrictions on engaging in activities that are deemed competitive to our business. Although we believe these restrictions to be enforceable under current law, there can be no guarantee that if a Senior Employee were to breach the restrictions and engage in competitive activities, we would be successful in fully enforcing the restrictions. If a Senior Employee were to terminate his or her employment with us and engage in competitive activities, such activities could have a material adverse effect on our business, financial condition and results of operations.
Item 2.Unregistered Sales of EquityEquity Securities and Use of Proceeds.Proceeds from Registered Securities.
Sales of Common Stock and Issuance of MembershipOP Units
We commenced our ongoing private offeringNone.
Awards of Restricted Stock
On August 4, 2020, we entered into restricted stock award agreements for an aggregate of 340,963 shares of Common Stock of the Company (the “2020 Restricted Stock Awards”), which were valued at approximately $7.0 million or $20.50 per common share, with our common stock in 2007.named executive officers and certain other key employees. The first closingawards were issued under the terms of the 2020 Equity Incentive Plan, and the grants had been approved by the Compensation Committee. The grants to the named executive officers, which were made pursuant to the terms of our private offering occurrednamed executive officers’ employment agreements, included (i) restricted stock grants that vest in substantially equal installments on December 31, 2007, and we have conducted additional closings at least once every calendar quarter since then. During each of the periods covered by this Form 10-Q, we closed salesfirst four anniversaries of additional sharesthe completion of our common stock on a monthly basis. 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 monthsInternalization, which represents 40% 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. There is currently no established equity cap. We anticipate reinstating the equity cap once we are comfortably within the leverage range of our investment grade credit rating. As a result of a pending transaction, we determined that we would not hold an equity closing as of October 31, 2019. The next equity closing will occur on November 29, 2019.
If the total subscriptionsaward value for shares of our commoneach participant, and (ii) restricted stock exceed the cap for a month, subscriptions will generally be accepted atgrants that month’s closingvest 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 basedsubstantially equal installments 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 oneeach of the first three closings after receiptanniversaries of the completion of the Internalization, which represents 60% of the total award value for each participant. The grants to other key employees vest 40% on the first anniversary of the Internalization, 30% on the second anniversary of the Internalization, 20% on the third anniversary of the Internalization, and 10% on the fourth anniversary of the Internalization. The restricted stock award agreements provide that vesting is subject to the executive’s continued employment with the Company through each applicable vesting date, except in the event of the executive’s death or disability, in which case, any unvested portion of the awards will become fully vested. In addition, the restricted stock award agreements provide the executive with rights as a stockholder in respect of the awards’ vested and unvested shares, including the right to vote and the right to dividends. In the event of a subscription,termination of the subscriberexecutive’s employment by the Company without “Cause” or by the executive for “Good Reason” within 12 months following a “Change in Control” of the Company (as such terms are defined in the executive’s employment agreement), any unvested portion of the 2020 Restricted Stock Awards will havebecome fully vested at the time of such termination, provided that if the 2020 Restricted Stock Awards are unvested at the time of a Change in Control of the Company and are not assumed or substituted for equivalent awards as part of the Change in Control transaction, the 2020 Restricted Stock Awards will become fully vested at the time of the Change in Control transaction. Under the terms of the 2020 Restricted Stock Awards, the Company shall be entitled, at its option and in addition to any other available remedies, to terminate the Shares in respect of the 2020 Restricted Stock Awards (including any vested Shares) if the executive materially violates the terms of any restrictive covenant agreement between the Company and the executive or if the executive is convicted of a felony against the Company or its affiliates.
The aforementioned securities were issued in reliance on the exemption set forth in Section 4(a)(2) of the Securities Act.
Use of Proceeds from Initial Public Offering
In September 2020, the Company issued and sold 33,500,000 shares of Class A Common Stock in an IPO, at a public offering price of $17.00 per share and on October 20, 2020 the Company issued and sold an additional 3,500,000 shares of Class A Common Stock pursuant to the partial exercise by the underwriters of their over-allotment option to renew its subscription for threepurchase additional closingsshares at the same public offering price.
The offer and maintain its positionsale of all the shares in any equity subscription queue by providing written noticethe IPO, inclusive of the subscriber’s electionunderwriters' partial exercise of their over-allotment option, were registered under the Securities Act pursuant to exercise such option.a registration statement on Form S-11 (File No. 333-240381), as amended, which was declared effective by the SEC on September 16, 2020. J.P. Morgan Securities LLC, Goldman Sachs & Co. LLC, BMO Capital Markets Corp., Morgan Stanley & Co. LLC, Capital One Securities, Inc. and Truist Securities, Inc. acted as joint book-running managers for the offering. The same option will be availableIPO commenced on September 16, 2020 and terminated upon the closing of the sale of shares to the subscriberunderwriters pursuant to their partial exercise of their over-allotment option on October 20, 2020. Upon completion of the IPO, inclusive of the underwriters' partial exercise of their over-allotment option, we received approximately $588.2 million in net proceeds, after deducting underwriting discounts and commissions and other offering expenses payable by us of approximately $3.0 million. No payments for each subsequent three-closing period.
For the nine months ended September 30, 2019, we sold 3.6 million sharesany expenses were made directly or indirectly to (i) any of our common stockofficers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.
There has been no material change in our private offering, including 0.6 million shares of common stock issued pursuant to our DRIP, for gross offering proceeds of approximately $307.9 million. We intend tothe expected use substantially all of the net proceeds from our private offering, supplementedIPO as described in our final prospectus, dated September 16, 2020, filed with additional borrowings, to continue to invest in additional net leased properties, to reduce our outstanding indebtedness, and for general corporate purposes.
The following table provides information regarding the sale of shares of our common stockSEC pursuant to Rule 424(b) relating to our ongoing private offering during the nine months endedregistration statement on Form S-11 filed on September 30, 2019 (in thousands, except year and Determined Share Value amounts).17, 2020.
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 |
|
July |
| 2019 |
|
| 990 |
|
| $ | 86.00 |
|
|
| 85,182 |
|
|
| 64 |
|
| $ | 84.28 |
|
|
| 5,379 |
|
|
| 90,561 |
|
August |
| 2019 |
|
| 466 |
|
| $ | 85.00 |
|
|
| 39,573 |
|
|
| 64 |
|
| $ | 84.28 |
|
|
| 5,430 |
|
|
| 45,003 |
|
September |
| 2019 |
|
| 186 |
|
| $ | 85.00 |
|
|
| 15,828 |
|
|
| 68 |
|
| $ | 83.30 |
|
|
| 5,666 |
|
|
| 21,494 |
|
Total |
|
|
|
| 3,046 |
|
|
|
|
|
| $ | 260,583 |
|
|
| 564 |
|
|
|
|
|
| $ | 47,272 |
|
| $ | 307,855 |
|
|
|
|
|
|
|
None of the shares of our common stock set forth in the table above were registered under the Securities Act, and all of the shares 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 who represented to us in writing that they qualified as an “Accredited Investor” as such term is defined by Regulation D promulgated under the Securities Act, and provided us with additional documentation to assist us in verifying such person’s status as an Accredited Investor.
Repurchases of Equity Securities
DuringWe had previously adopted a share redemption program to provide an opportunity for our stockholders to have shares of our common stock repurchased, 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 of February 10, 2020. Consequently, there were no redemptions of shares of our common stock during the three months ended September 30, 2019, we fulfilled repurchase requests and repurchased shares of our common stock pursuant to our share redemption program as follows. 2020.
Item 3.Defaults Upon Senior Securities.
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 | |||
July 2019 |
|
| — |
|
|
| — |
|
|
| — |
|
| (c) |
August 2019 |
|
| — |
|
|
| — |
|
|
| — |
|
| (c) |
September 2019 |
|
| 88,150 |
|
|
| 88,150 |
|
| $ | 83.51 |
|
| (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 Income. The presentation and disclosure of Lease revenues have been adjusted to reflect these changes for the three and nine months ended September 30, 2019. Refer to Reclassifications in Note 2 of Part I, Item 1. “Financial Statements,” for further details on these updates to significant accounting policies. 5.Other Information.
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 Income included in the Company’s 2018 Annual Report on Form 10-K, as follows (in thousands):
As originally reported
|
| 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 |
|
None.
No. |
| Description |
|
|
|
3.1 |
| |
3.2 | ||
|
|
|
|
| |
|
|
|
|
| |
|
|
|
| ||
|
|
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10.8 |
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31.1* |
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No. | Description | |
32.1*† |
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32.2*† |
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101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* | Filed herewith. |
† | 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.
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| BROADSTONE NET LEASE, INC. |
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Date: November |
| /s/ Christopher J. Czarnecki |
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| Christopher J. Czarnecki |
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| Chief Executive Officer and President |
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Date: November |
| /s/ Ryan M. Albano |
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| Ryan M. Albano |
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| Executive Vice President and Chief Financial Officer |
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