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Broadstone Net Lease (BNL)

Filed: 2 Nov 21, 4:09pm

 

 

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, 2021, or

Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 001-39529

 

BROADSTONE NET LEASE, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

26-1516177

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

800 Clinton Square

Rochester, New York

14604

(Address of principal executive offices)

(Zip Code)

 

(585) 287-6500

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.00025 par value

 

BNL

 

The New York Stock Exchange

 

Indicate by check mark whether the registrant (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 161,266,662 shares of the Registrant’s Common Stock, $0.00025 par value per share, outstanding as of October 29, 2021.

 

 


 

BROADSTONE NET LEASE, INC.

TABLE OF CONTENTS

 

 

Page

Part I - FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets (Unaudited)

1

 

Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)

2

 

Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity (Unaudited)

3

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

5

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

Cautionary Note Regarding Forward-Looking Statements

28

 

Explanatory Note and Certain Defined Terms

28

 

Overview

29

 

Real Estate Portfolio Information

30

 

Results of Operations

36

 

Liquidity and Capital Resources

40

 

Derivative Instruments and Hedging Activities

43

 

Cash Flows

43

 

Contractual Obligations

43

 

Non-GAAP Measures

44

 

Critical Accounting Policies

47

 

Impact of Recent Accounting Pronouncements

47

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 4.

Controls and Procedures

48

Part II - OTHER INFORMATION

49

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 3.

Defaults upon Senior Securities

49

Item 4.

Mine Safety Disclosures

49

Item 5.

Other Information

49

Item 6.

Exhibits

50

 

 


 

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)

 

 

 

September 30,
2021

 

 

December 31,
2020

 

Assets

 

 

 

 

 

 

Accounted for using the operating method, net of accumulated depreciation

 

$

3,674,206

 

 

$

3,354,511

 

Accounted for using the direct financing method

 

 

28,830

 

 

 

29,066

 

Accounted for using the sales-type method

 

 

568

 

 

 

567

 

Investment in rental property, net

 

 

3,703,604

 

 

 

3,384,144

 

Cash and cash equivalents

 

 

16,182

 

 

 

100,486

 

Accrued rental income

 

 

112,163

 

 

 

102,117

 

Tenant and other receivables, net

 

 

940

 

 

 

1,604

 

Prepaid expenses and other assets

 

 

13,819

 

 

 

22,277

 

Goodwill

 

 

339,769

 

 

 

339,769

 

Intangible lease assets, net

 

 

301,046

 

 

 

290,913

 

Debt issuance costs – unsecured revolving credit facility, net

 

 

4,658

 

 

 

6,435

 

Leasing fees, net

 

 

9,791

 

 

 

10,738

 

Total assets

 

$

4,501,972

 

 

$

4,258,483

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

 

 

$

 

Mortgages, net

 

 

97,530

 

 

 

107,382

 

Unsecured term loans, net

 

 

646,458

 

 

 

961,330

 

Senior unsecured notes, net

 

 

843,665

 

 

 

472,466

 

Interest rate swap, liabilities

 

 

36,196

 

 

 

72,103

 

Earnout liability

 

 

0

 

 

 

7,509

 

Accounts payable and other liabilities

 

 

79,606

 

 

 

74,936

 

Accrued interest payable

 

 

9,895

 

 

 

4,023

 

Intangible lease liabilities, net

 

 

72,497

 

 

 

79,653

 

Total liabilities

 

 

1,785,847

 

 

 

1,779,402

 

 

 

 

 

 

 

 

Commitments and contingencies (See Note 18)

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Broadstone Net Lease, Inc. stockholders' equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value; 20,000 shares authorized, 0 shares issued or outstanding

 

 

 

 

 

 

Common stock, $0.00025 par value; 500,000 shares authorized, 161,255 shares issued
   and outstanding at September 30, 2021;
440,000 shares authorized, 108,609 shares issued
   and outstanding at December 31, 2020

 

 

40

 

 

 

27

 

Class A common stock, $0.00025 par value; 0 shares authorized, issued or outstanding at
   September 30, 2021;
60,000 shares authorized, 37,000 shares issued and outstanding at
   December 31, 2020

 

 

0

 

 

 

9

 

Additional paid-in capital

 

 

2,895,219

 

 

 

2,624,997

 

Cumulative distributions in excess of retained earnings

 

 

(305,665

)

 

 

(259,673

)

Accumulated other comprehensive loss

 

 

(37,590

)

 

 

(66,255

)

Total Broadstone Net Lease, Inc. stockholders’ equity

 

 

2,552,004

 

 

 

2,299,105

 

Non-controlling interests

 

 

164,121

 

 

 

179,976

 

Total equity

 

 

2,716,125

 

 

 

2,479,081

 

Total liabilities and equity

 

$

4,501,972

 

 

$

4,258,483

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

(Unaudited)

(in thousands, except per share amounts)

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenues, net

 

$

122,777

 

 

$

80,744

 

 

$

290,234

 

 

$

239,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

36,682

 

 

 

31,363

 

 

 

98,620

 

 

 

102,503

 

Asset management fees

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,461

 

Property management fees

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,275

 

Property and operating expense

 

 

4,842

 

 

 

4,187

 

 

 

14,019

 

 

 

12,492

 

General and administrative

 

 

8,552

 

 

 

7,214

 

 

 

27,840

 

 

 

18,756

 

Provision for impairment of investment in rental properties

 

 

25,989

 

 

 

14,732

 

 

 

28,001

 

 

 

17,399

 

Total operating expenses

 

 

76,065

 

 

 

57,496

 

 

 

168,480

 

 

 

154,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

0

 

 

 

11

 

 

 

20

 

Interest expense

 

 

(15,611

)

 

 

(18,511

)

 

 

(47,149

)

 

 

(59,015

)

Cost of debt extinguishment

 

 

(242

)

 

 

(392

)

 

 

(368

)

 

 

(414

)

Gain on sale of real estate

 

 

1,220

 

 

 

1,060

 

 

 

9,791

 

 

 

9,725

 

Income taxes

 

 

(473

)

 

 

(129

)

 

 

(1,187

)

 

 

(1,080

)

Internalization expenses

 

 

 

 

 

(1,929

)

 

 

 

 

 

(3,523

)

Change in fair value of earnout liability

 

 

(1,059

)

 

 

6,362

 

 

 

(5,539

)

 

 

8,506

 

Other (expenses) income

 

 

(25

)

 

 

2

 

 

 

(11

)

 

 

(22

)

Net income

 

 

30,522

 

 

 

9,711

 

 

 

77,302

 

 

 

38,657

 

Net income attributable to non-controlling interests

 

 

(1,824

)

 

 

(961

)

 

 

(5,167

)

 

 

(3,738

)

Net income attributable to Broadstone Net Lease, Inc.

 

$

28,698

 

 

$

8,750

 

 

$

72,135

 

 

$

34,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

159,226

 

 

 

111,155

 

 

 

150,227

 

 

 

108,228

 

Diluted

 

 

169,587

 

 

 

123,381

 

 

 

161,273

 

 

 

119,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.18

 

 

$

0.08

 

 

$

0.48

 

 

$

0.32

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

30,522

 

 

$

9,711

 

 

$

77,302

 

 

$

38,657

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swaps

 

 

4,559

 

 

 

4,352

 

 

 

30,328

 

 

 

(59,766

)

Realized loss (gain) on interest rate swaps

 

 

85

 

 

 

(42

)

 

 

2

 

 

 

(125

)

Comprehensive income (loss)

 

 

35,166

 

 

 

14,021

 

 

 

107,632

 

 

 

(21,234

)

Comprehensive (income) loss attributable to non-controlling interests

 

 

(2,101

)

 

 

(1,387

)

 

 

(7,313

)

 

 

1,510

 

Comprehensive income (loss) attributable to Broadstone Net Lease, Inc.

 

$

33,065

 

 

$

12,634

 

 

$

100,319

 

 

$

(19,724

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity

(Unaudited)

(in thousands, except per share amounts)

 

 

 

Common
Stock

 

 

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

 

Balance, January 1, 2021

 

$

27

 

 

$

9

 

 

$

2,624,997

 

 

$

(259,673

)

 

$

(66,255

)

 

$

179,976

 

 

$

2,479,081

 

Net income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

22,223

 

 

 

0

 

 

 

1,737

 

 

 

23,960

 

Issuance of 211 shares of common stock

 

 

0

 

 

 

0

 

 

 

233

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

233

 

Offering costs, discounts and commissions

 

 

0

 

 

 

0

 

 

 

(500

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(500

)

Stock-based compensation

 

 

0

 

 

 

0

 

 

 

1,769

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,769

 

Retirement of 45 shares of common stock

 

 

0

 

 

 

0

 

 

 

(832

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(832

)

Conversion of 37,000 Class A common stock to
   
37,000 shares of common stock

 

 

9

 

 

 

(9

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Conversion of 38 OP Units to 38 shares of
   common stock

 

 

0

 

 

 

0

 

 

 

606

 

 

 

0

 

 

 

0

 

 

 

(606

)

 

 

0

 

Distributions declared ($0.250 per share and OP Unit)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(36,690

)

 

 

0

 

 

 

(2,963

)

 

 

(39,653

)

Change in fair value of interest rate swap agreements

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

26,602

 

 

 

2,078

 

 

 

28,680

 

Realized gain on interest rate swap agreements

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(39

)

 

 

(2

)

 

 

(41

)

Adjustment to non-controlling interests

 

 

0

 

 

 

0

 

 

 

(953

)

 

 

0

 

 

 

1,008

 

 

 

(55

)

 

 

0

 

Balance, March 31, 2021

 

$

36

 

 

$

0

 

 

$

2,625,320

 

 

$

(274,140

)

 

$

(38,684

)

 

$

180,165

 

 

$

2,492,697

 

Net income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

21,214

 

 

 

0

 

 

 

1,606

 

 

 

22,820

 

Issuance of 11,659 shares of common stock

 

 

4

 

 

 

0

 

 

 

264,795

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

264,799

 

Issuance of 248 OP Units

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Offering costs, discounts and commissions

 

 

0

 

 

 

0

 

 

 

(11,013

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(11,013

)

Stock-based compensation

 

 

0

 

 

 

0

 

 

 

951

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

951

 

Retirement of 16 shares of common stock

 

 

0

 

 

 

0

 

 

 

(309

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(309

)

Conversion of 1,127 OP Units to 1,127 shares of
   common stock

 

 

0

 

 

 

0

 

 

 

17,859

 

 

 

0

 

 

 

0

 

 

 

(17,859

)

 

 

0

 

Distributions declared ($0.255 per share and OP Unit)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(40,696

)

 

 

0

 

 

 

(2,788

)

 

 

(43,484

)

Change in fair value of interest rate swap agreements

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(2,708

)

 

 

(203

)

 

 

(2,911

)

Realized gain on interest rate swap agreements

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(38

)

 

 

(4

)

 

 

(42

)

Adjustment to non-controlling interests

 

 

0

 

 

 

0

 

 

 

(7,472

)

 

 

0

 

 

 

(466

)

 

 

7,938

 

 

 

0

 

Balance, June 30, 2021

 

$

40

 

 

$

 

 

$

2,890,131

 

 

$

(293,622

)

 

$

(41,896

)

 

$

168,855

 

 

$

2,723,508

 

Net income

 

 

 

 

 

 

 

 

 

 

 

28,698

 

 

 

 

 

 

1,824

 

 

 

30,522

 

Issuance of 957 shares of common stock

 

 

 

 

 

 

 

 

281

 

 

 

 

 

 

 

 

 

 

 

 

281

 

Issuance of 1,611 OP Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering costs, discounts and commissions

 

 

 

 

 

 

 

 

(256

)

 

 

 

 

 

 

 

 

 

 

 

(256

)

Stock-based compensation

 

 

 

 

 

 

 

 

949

 

 

 

 

 

 

 

 

 

 

 

 

949

 

Retirement of three shares of common stock

 

 

 

 

 

 

 

 

(75

)

 

 

 

 

 

 

 

 

 

 

 

(75

)

Forfeiture of five shares of common stock

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

 

 

 

 

 

 

(25

)

Conversion of 1,723 OP Units to 1,723 shares of
   common stock

 

 

 

 

 

 

 

 

27,755

 

 

 

 

 

 

 

 

 

(27,755

)

 

 

 

Distributions declared ($0.255 per share and OP Unit)

 

 

 

 

 

 

 

 

 

 

 

(40,741

)

 

 

 

 

 

(2,682

)

 

 

(43,423

)

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,287

 

 

 

272

 

 

 

4,559

 

Realized loss on interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80

 

 

 

5

 

 

 

85

 

Adjustment to non-controlling interests

 

 

 

 

 

 

 

 

(23,541

)

 

 

 

 

 

(61

)

 

 

23,602

 

 

 

 

Balance, September 30, 2021

 

$

40

 

 

$

 

 

$

2,895,219

 

 

$

(305,665

)

 

$

(37,590

)

 

$

164,121

 

 

$

2,716,125

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


 

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

 

 

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

 

 

$

0

 

 

$

1,895,935

 

 

$

(208,261

)

 

$

(20,086

)

 

$

111,406

 

 

$

1,779,020

 

 

 

$

0

 

 

$

0

 

 

$

0

 

Cumulative effect of accounting change

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(323

)

 

 

0

 

 

 

0

 

 

 

(323

)

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

10,816

 

 

 

 

 

 

710

 

 

 

11,526

 

 

 

 

 

 

 

322

 

 

 

322

 

Issuance of 293 shares of common stock and 3,124 shares
   of mezzanine equity common stock

 

 

 

 

 

 

 

 

6,097

 

 

 

 

 

 

 

 

 

 

 

 

6,097

 

 

 

 

66,376

 

 

 

0

 

 

 

66,376

 

Issuance of 5,278 mezzanine non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

112,159

 

 

 

112,159

 

Adjustment to carrying value of mezzanine equity
   non-controlling interests

 

 

0

 

 

 

0

 

 

 

(2,416

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(2,416

)

 

 

 

 

 

 

2,416

 

 

 

2,416

 

Distributions declared ($0.330 per share and OP Unit)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(35,299

)

 

 

0

 

 

 

(2,100

)

 

 

(37,399

)

 

 

 

0

 

 

 

(1,161

)

 

 

(1,161

)

Change in fair value of interest rate swap agreements

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(53,014

)

 

 

(3,472

)

 

 

(56,486

)

 

 

 

0

 

 

 

(1,576

)

 

 

(1,576

)

Realized gain on interest rate swap agreements

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(38

)

 

 

(2

)

 

 

(40

)

 

 

 

0

 

 

 

(2

)

 

 

(2

)

Balance, March 31, 2020

 

$

26

 

 

$

0

 

 

$

1,899,616

 

 

$

(233,067

)

 

$

(73,138

)

 

$

106,542

 

 

$

1,699,979

 

 

 

$

66,376

 

 

$

112,158

 

 

$

178,534

 

Net income

 

 

 

 

 

 

 

 

 

 

 

15,353

 

 

 

 

 

 

992

 

 

 

16,345

 

 

 

 

 

 

 

753

 

 

 

753

 

Issuance of 11 shares of common stock

 

 

 

 

 

0

 

 

 

232

 

 

 

0

 

 

 

 

 

 

0

 

 

 

232

 

 

 

 

0

 

 

 

0

 

 

 

0

 

Adjustment to carrying value of mezzanine equity
   non-controlling interests

 

 

0

 

 

 

0

 

 

 

(97

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(97

)

 

 

 

 

 

 

97

 

 

 

97

 

Distributions declared ($0.110 per share and OP Unit)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(11,817

)

 

 

0

 

 

 

(701

)

 

 

(12,518

)

 

 

 

0

 

 

 

(581

)

 

 

(581

)

Change in fair value of interest rate swap agreements

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(5,438

)

 

 

(351

)

 

 

(5,789

)

 

 

 

0

 

 

 

(267

)

 

 

(267

)

Realized gain on interest rate swap agreements

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(37

)

 

 

(3

)

 

 

(40

)

 

 

 

0

 

 

 

(1

)

 

 

(1

)

Balance, June 30, 2020

 

$

26

 

 

$

0

 

 

$

1,899,751

 

 

$

(229,531

)

 

$

(78,613

)

 

$

106,479

 

 

$

1,698,112

 

 

 

$

66,376

 

 

$

112,159

 

 

$

178,535

 

Net income

 

 

 

 

 

 

 

 

 

 

 

8,750

 

 

 

 

 

 

587

 

 

 

9,337

 

 

 

 

 

 

 

374

 

 

 

374

 

Issuance of 341 shares of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

796

 

 

 

 

 

 

 

 

 

 

 

 

796

 

 

 

 

 

 

 

 

 

 

 

Issuance of 33,500 shares of Class A common stock

 

 

 

 

 

8

 

 

 

569,492

 

 

 

 

 

 

 

 

 

 

 

 

569,500

 

 

 

 

 

 

 

 

 

 

 

Offering costs, discounts, and commissions

 

 

 

 

 

 

 

 

(37,180

)

 

 

 

 

 

 

 

 

 

 

 

(37,180

)

 

 

 

 

 

 

 

 

 

 

Reclassification of portion of contingent earnout liability

 

 

 

 

 

 

 

 

6,809

 

 

 

 

 

 

 

 

 

11,627

 

 

 

18,436

 

 

 

 

 

 

 

 

 

 

 

Reclassification of 3,124 shares of mezzanine equity
   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 two fractional shares of common stock

 

 

 

 

 

 

 

 

(35

)

 

 

 

 

 

 

 

 

 

 

 

(35

)

 

 

 

 

 

 

 

 

 

 

Repurchase of fractional OP Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

Distributions declared ($0.135 per share and OP Unit)

 

 

 

 

 

 

 

 

 

 

 

(18,739

)

 

 

 

 

 

(1,738

)

 

 

(20,477

)

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,921

 

 

 

264

 

 

 

4,185

 

 

 

 

 

 

 

167

 

 

 

167

 

Realized gain on interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(3

)

 

 

(40

)

 

 

 

 

 

 

(2

)

 

 

(2

)

Balance, September 30, 2020

 

$

27

 

 

$

8

 

 

$

2,506,008

 

 

$

(239,520

)

 

$

(74,729

)

 

$

229,913

 

 

$

2,421,707

 

 

 

$

 

 

$

 

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

For the Nine Months Ended
September 30,

 

 

 

2021

 

 

2020

 

Operating activities

 

 

 

 

 

 

Net income

 

$

77,302

 

 

$

38,657

 

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

 

 

96,312

 

 

 

102,536

 

Provision for impairment of investment in rental properties

 

 

28,001

 

 

 

17,399

 

Amortization of debt issuance costs and original issuance discount charged to interest expense

 

 

2,725

 

 

 

2,421

 

Stock-based compensation expense

 

 

3,644

 

 

 

796

 

Straight-line rent, direct financing and sales-type lease adjustments

 

 

(13,042

)

 

 

(14,696

)

Cost of debt extinguishment

 

 

368

 

 

 

414

 

Gain on sale of real estate

 

 

(9,791

)

 

 

(9,725

)

Change in fair value of earnout liability

 

 

5,539

 

 

 

(8,506

)

Cash paid for earnout liability

 

 

(6,440

)

 

 

0

 

Settlement of interest rate swaps

 

 

(5,580

)

 

 

0

 

Leasing fees paid

 

 

(319

)

 

 

0

 

Adjustment to provision for credit losses

 

 

(1

)

 

 

(142

)

Other non-cash items

 

 

830

 

 

 

420

 

Changes in assets and liabilities, net of acquisition:

 

 

 

 

 

 

Tenant and other receivables

 

 

664

 

 

 

(3,023

)

Prepaid expenses and other assets

 

 

1,690

 

 

 

(4,751

)

Accounts payable and other liabilities

 

 

(456

)

 

 

5,305

 

Accrued interest payable

 

 

5,872

 

 

 

5,859

 

Net cash provided by operating activities

 

 

187,318

 

 

 

132,964

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Acquisition of rental property accounted for using the operating method

 

 

(516,111

)

 

 

(76

)

Cash paid for Internalization

 

 

0

 

 

 

(30,861

)

Capital expenditures and improvements

 

 

(1,451

)

 

 

(7,629

)

Proceeds from disposition of rental property, net

 

 

68,608

 

 

 

54,810

 

Change in deposits on investments in rental property

 

 

575

 

 

 

(37

)

Net cash (used in) provided by investing activities

 

 

(448,379

)

 

 

16,207

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Proceeds from issuance of common stock and Class A common stock, net of $11,194 and $35,514 offering
   costs, discounts, and commissions in 2021 and 2020, respectively

 

 

253,170

 

 

 

534,117

 

Repurchase of fractional shares of common stock

 

 

0

 

 

 

(36

)

Borrowings on mortgages, senior unsecured notes and unsecured term loans

 

 

381,810

 

 

 

60,000

 

Principal payments on mortgages and unsecured term loans

 

 

(332,193

)

 

 

(393,294

)

Borrowings on unsecured revolving credit facility

 

 

216,600

 

 

 

192,000

 

Repayments on unsecured revolving credit facility

 

 

(216,600

)

 

 

(389,300

)

Cash distributions paid to stockholders

 

 

(113,304

)

 

 

(52,447

)

Cash distributions paid to non-controlling interests

 

 

(8,638

)

 

 

(5,395

)

Cash paid for earnout liability

 

 

(6,608

)

 

 

0

 

Debt issuance and extinguishment costs paid

 

 

(3,827

)

 

 

(6,140

)

Net cash provided by (used in) financing activities

 

 

170,410

 

 

 

(60,495

)

Net (decrease) increase in cash and cash equivalents and restricted cash

 

 

(90,651

)

 

 

88,676

 

Cash and cash equivalents and restricted cash at beginning of period

 

 

110,728

 

 

 

20,311

 

Cash and cash equivalents and restricted cash at end of period

 

$

20,077

 

 

$

108,987

 

 

 

 

 

 

 

 

Reconciliation of cash and cash equivalents and restricted cash

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

100,486

 

 

$

12,455

 

Restricted cash at beginning of period

 

 

10,242

 

 

 

7,856

 

Cash and cash equivalents and restricted cash at beginning of period

 

$

110,728

 

 

$

20,311

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

16,182

 

 

$

101,787

 

Restricted cash at end of period

 

 

3,895

 

 

 

7,200

 

Cash and cash equivalents and restricted cash at end of period

 

$

20,077

 

 

$

108,987

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

 

Broadstone Net Lease, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in 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 industrial, healthcare, restaurant, retail, and office commercial properties under long-term lease agreements. At September 30, 2021, the Corporation owned a diversified portfolio of 696 individual commercial properties with 695 properties located in 42 U.S. states and 1 property located in British Columbia, Canada.

Broadstone Net Lease, LLC (the 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 OP. The remaining membership units in the OP (“OP Units”), which are referred to as non-controlling interests, are held by members who were issued OP Units pursuant to the Internalization (defined below) or in exchange for their interests in properties acquired by the OP. As the Corporation conducts substantially all of its operations through the OP, it is structured as what is referred to as an umbrella partnership real estate investment trust (“UPREIT”). The Corporation, the OP, and its consolidated subsidiaries are collectively referred to as the “Company.”

Prior to February 7, 2020, the Corporation was externally managed by Broadstone Real Estate, LLC (“BRE”) and Broadstone Asset Management, LLC (the “Asset Manager”) subject to the direction, oversight, and approval of the Company’s board of directors (the “Board of Directors”). The Asset Manager was a wholly owned subsidiary of BRE and all of the Corporation’s officers were employees of BRE. Accordingly, both BRE and the Asset Manager were 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.

On September 18, 2020, the Corporation effected a 4-for-one stock split on its then outstanding 26,944 shares of common stock (“Common Stock”) that previously had a $0.001 par value. Concurrent with the stock split, the OP effected a four-for-one stock split of its outstanding OP Units. No fractional shares or OP Units were issued as a result of the stock split. All historic share and per share amounts in these Condensed Consolidated Financial Statements have been adjusted to give retroactive effect to the stock split.

On September 21, 2020, the Corporation completed its initial public offering (“IPO”) and issued an aggregate of 37,000 shares of a new class of common stock, $0.00025 par value per share (“Class A Common Stock”) at $17.00 per share, which includes shares issued pursuant to the underwriters’ partial exercise of their over-allotment option on October 20, 2020, pursuant to a registration statement on Form S-11 (File No. 333-240381), as amended, under the Securities Act of 1933, as amended. Shares of Class A Common Stock were listed on the New York Stock Exchange (“NYSE”) under the symbol “BNL.” On March 20, 2021, each share of Class A Common Stock automatically converted into one share of Common Stock, and effective March 22, 2021, all shares of Common Stock were listed and freely tradeable on the NYSE under the symbol “BNL.” See Note 14.

The following table summarizes the outstanding equity and economic ownership interest of the Corporation and the OP:

 

 

 

September 30, 2021

 

 

December 31, 2020

 

(in thousands)

 

Shares of
Common Stock

 

 

OP Units

 

 

Total Diluted
Shares

 

 

Shares of
Common Stock

 

 

OP Units

 

 

Total Diluted
Shares

 

Ownership interest

 

 

161,255

 

 

 

10,370

 

 

 

171,625

 

 

 

145,609

 

 

 

11,399

 

 

 

157,008

 

Percent ownership of OP

 

 

94.0

%

 

 

6.0

%

 

 

100.0

%

 

 

92.7

%

 

 

7.3

%

 

 

100.0

%

Refer to Note 16 for further discussion regarding the calculation of weighted average shares outstanding.

 

6


 

2. Summary of Significant Accounting Policies

Interim Information

The accompanying 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, 2020, included in the Company’s 2020 Annual Report on Form 10-K, filed with the SEC on February 25, 2021. Therefore, the readers of this quarterly report should refer to those audited consolidated financial statements, specifically Note 2, Summary of Significant Accounting Policies, for further discussion of significant accounting policies and estimates. The Corporation believes all adjustments necessary for a fair presentation have been included in these interim Condensed Consolidated Financial Statements (which include only normal recurring adjustments).

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts and operations of the 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 OP. Based on consolidation guidance, the Corporation has concluded that the OP is a VIE as the members in the OP do not possess kick-out rights or substantive participating rights. Accordingly, the Corporation consolidates its interest in the OP. However, because the Corporation holds the majority voting interest in the OP and certain other conditions are met, it qualifies for the exemption from providing certain disclosure requirements associated with investments in VIEs.

The portion of the OP 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 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 tangible 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 provisions for uncollectible rent and credit losses, the fair value of the earnout liability, the fair value of assumed debt, the fair value of the Company’s interest rate swap agreements, and the determination of any uncertain tax positions. Accordingly, actual results may differ from those estimates.

Long-lived Asset Impairment

The Company reviews long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. Such cash flows include 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 its fair value. Significant judgment is made in determining if and when impairment should be taken. The Company’s assessment of impairment as of September 30, 2021 was based on the most current information available to the Company. Certain of the 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, 0 impairment charges were recognized other than those described below. If the operating conditions mentioned above deteriorate or if the Company’s expected holding period for assets changes, subsequent tests for impairments could result in additional impairment charges in the future.

7


 

 

Inputs used in establishing fair value for real estate assets generally fall within Level 3 of the fair value hierarchy, which are characterized as requiring significant judgment as little or no current market activity may be available for validation. The main indicator used to establish the classification of the inputs is current market 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.

The following table summarizes the Company's impairment charges, resulting primarily from changes in the Company's long-term hold strategy with respect to the individual properties:

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands, except number of properties)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Number of properties

 

 

4

 

 

 

3

 

 

 

5

 

 

 

6

 

Impairment charge

 

$

25,989

 

 

$

14,732

 

 

$

28,001

 

 

$

17,399

 

During the three months ended September 30, 2021, the Company executed an early lease termination with an office tenant on two properties in exchange for a fee of $35,000, and simultaneously sold the underlying properties to an unrelated third party for aggregate gross proceeds of $16,000. As the sale of the underlying properties was to an unrelated third party, the Company accounted for the lease termination income and sale of properties as separate transactions in accordance with GAAP.

The Company recognized the termination fee income, net of $1,496 write-off of accrued rental income associated with the lease as other income from real estate transactions, a component of Lease revenues, net, in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss). Refer to the Lease Termination Fee Income accounting policy below for additional information on the Company's accounting for lease terminations. As a result of the early lease termination, the Company accelerated the amortization of the remaining lease intangibles, recognizing $289 in Lease revenues, net and $4,047 in Depreciation and amortization in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

The Company sold the underlying vacant properties for an aggregate sales price of $16,000, and incurred sales expenses of $661. The properties’ carrying value, net of the fully amortized lease intangibles, was $41,085, resulting in a $25,746 loss on sale of the properties. As the lease termination income was recognized separate from the sale of the underlying properties, the $35,000 cash receipt was not able to be factored into the properties' future undiscounted cash flows, and the properties were immediately deemed impaired. As such, the Company recognized the loss as an impairment charge in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

The following summarizes the impact of the above transactions, together with the corresponding financial statement line item:

(in thousands)

 

 

 

Lease revenues, net

 

 

 

Lease termination fee

 

$

35,000

 

Write-off of accrued rental income

 

 

(1,496

)

Accelerated amortization of above-market and below-market lease intangibles

 

 

289

 

 

 

 

33,793

 

Depreciation and amortization

 

 

 

Accelerated amortization of in-place lease intangible

 

 

(4,046

)

Provision for impairment of investment in rental properties

 

 

 

Loss on sale

 

 

(25,746

)

Total impact to net income

 

$

4,001

 

The remaining impairments recognized during the three and nine months ended September 30, 2021 were immaterial.

Lease Termination Fee Income

The Company recognizes lease termination fee income when all conditions of the termination agreement have been met, and collection of the lease termination fee is probable. If the tenant immediately vacates the property upon satisfying the conditions of the termination agreement, the Company recognizes the lease termination fee income net of accrued rental income associated with the lease immediately,

8


 

as other income from real estate transactions, a component of Lease revenues, net, in the Condensed Consolidated Statement of Income and Comprehensive Income (Loss).

Restricted Cash

Restricted cash includes escrow funds the Company maintains pursuant to the terms of certain mortgages, and lease agreements, and undistributed proceeds from the sale of properties under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), and is reported within Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets.

Restricted cash consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2021

 

 

2020

 

Escrow funds and other

 

$

3,895

 

 

$

7,852

 

Undistributed 1031 proceeds

 

 

 

 

 

2,390

 

 

 

$

3,895

 

 

$

10,242

 

Rent Received in Advance

Rent received in advance represents tenant payments received prior to the contractual due date, and is included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets. Rent received in advance consisted of the following:

 

(in thousands)

 

September 30,
2021

 

 

December 31,
2020

 

Rent received in advance

 

$

14,516

 

 

$

13,651

 

Provision for Uncollectible Rent

In accordance with ASC 842, Leases, provisions for uncollectible rent are recorded as an offset to Lease revenues, net on the accompanying Consolidated Statements of Income and Comprehensive Income (Loss).

The following table summarizes the changes in the provision for uncollectible rent:

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Beginning balance

 

$

400

 

 

$

2,222

 

 

$

201

 

 

$

0

 

Provision for uncollectible rent, net

 

 

(150

)

 

 

(262

)

 

 

49

 

 

 

1,961

 

Write-offs

 

 

 

 

 

(1,750

)

 

 

 

 

 

(1,751

)

Ending balance

 

$

250

 

 

$

210

 

 

$

250

 

 

$

210

 

Derivative Instruments

The Company uses interest rate swap agreements to manage risks related to interest rate movements. The interest rate swap agreements, designated and qualifying as cash flow hedges, are reported at fair value. The Company early adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting and Hedging Activities, effective January 1, 2018 on a modified retrospective basis. ASU 2017-12 amended the designation and measurement guidance for qualifying hedging transactions and the presentation of hedge results in an entity’s financial statements.

ASU 2017-12 removed the concept of separately measuring and reporting hedge ineffectiveness and requires a company to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. In accordance with ASU 2017-12, the gain or loss on the qualifying hedges is initially included as a component of other comprehensive income or loss and is subsequently reclassified into earnings when interest payments (the forecasted transactions) on the related debt are incurred and as the swap net settlements occur.

When an existing cash flow hedge is terminated, the Company determines the accounting treatment for the accumulated gain or loss recognized in Accumulated other comprehensive loss based on the probability of the hedged forecasted transaction occurring within the period the cash flow hedge was anticipated to affect earnings. If the Company determines that the hedged forecasted transaction is probable of occurring during the original period, the accumulated gain or loss is reclassified into earnings over the remaining life of the cash flow hedge using a straight-line method. If the Company determines that the hedged forecasted transaction is not probable of occurring during the original period, the entire amount of accumulated gain or loss is reclassified into earnings at such time.

9


 

The Company documents its risk management strategy and hedge effectiveness at the inception of, and during the term of, each hedge. The Company’s interest rate risk management strategy is intended to stabilize cash flow requirements by maintaining interest rate swap agreements to convert certain variable-rate debt to a fixed rate.

Fair Value Measurements

Recurring Fair Value Measurements

Earnout Liability – In connection with the Internalization, the Company recognized an earnout liability that was due and payable to the former owners of BRE once certain milestones were 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.

The Company utilized third-party valuation experts to assist in estimating the fair value of the earnout liability, and developed estimates by considering weighted-average probabilities of likely outcomes, and using a Monte Carlo simulation and discounted cash flow analysis. These estimates required the Company to make various assumptions about share price volatility and, prior to the IPO, about the timing of an IPO and net asset prices, each of which are unobservable and considered Level 3 inputs in the fair value hierarchy. A change in these inputs to a different amount could have resulted in a significantly higher or lower fair value measurement at the reporting date. Specifically, advancements in the estimated IPO date assumption increased the earnout liability’s fair value given the earnout’s fixed time horizon. Peer share price volatilities were used to estimate the Company’s expected share price volatility, and the Company’s corresponding ability to achieve the earnout targets. Increases in the volatility assumption would increase the earnout liability’s fair value. Increases in net asset values would also increase the earnout liability’s fair value.

The Company achieved all four VWAP milestones applicable to the earnout as of September 30, 2021, and therefore 0 remaining earnout liability was recorded at September 30, 2021.

 

The table below provides a summary of the significant 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, which was the date of the Internalization:

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 was 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%.

 

10


 

The following table presents a reconciliation of the change in the earnout liability:

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Beginning balance

 

$

10,063

 

 

$

37,975

 

 

$

7,509

 

 

$

0

 

Allocation of Internalization purchase price at
   February 7, 2020

 

 

 

 

 

 

 

 

 

 

 

40,119

 

Change in fair value subsequent to Internalization

 

 

1,059

 

(b)

 

(6,362

)

 

 

5,539

 

 

 

(8,506

)

Reclassification as a component of additional paid-in
   capital and non-controlling interests

 

 

 

 

 

(18,436

)

 

 

 

 

 

(18,436

)

Payout of tranches earned

 

 

(11,122

)

 

 

 

 

 

(13,048

)

 

 

 

Ending balance

 

$

0

 

 

$

13,177

 

 

$

0

 

 

$

13,177

 

(b)
The $1,059 change in fair value during the three months ended September 30, 2021, represented the difference between the actual cash payments subsequent to June 30, 2021, and the earnout liability's fair value at June 30, 2021.

The balances of financial instruments measured at fair value on a recurring basis are as follows:

 

 

 

September 30, 2021

 

(in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swap, liabilities

 

 

(36,196

)

 

 

 

 

 

(36,196

)

 

 

 

 

 

 

December 31, 2020

 

(in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swap, liabilities

 

$

(72,103

)

 

$

 

 

$

(72,103

)

 

$

 

Earnout liability

 

 

(7,509

)

 

 

 

 

 

 

 

 

(7,509

)

Long-term Debt – The fair value of the Company’s debt was estimated using Level 1, Level 2, and Level 3 inputs based on recent secondary market trades of the Company's 2031 Senior Unsecured Public Notes (defined below), recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate (“LIBOR”), U.S. Treasury obligation interest rates, and 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 Unsecured revolving credit facility, Mortgages, net, Unsecured term loans, net and Senior unsecured notes, net, which reflects the fair value of interest rate swaps:

 

(in thousands)

 

September 30,
2021

 

 

December 31,
2020

 

Carrying amount

 

$

1,597,868

 

 

$

1,547,667

 

Fair value

 

 

1,710,238

 

 

 

1,679,188

 

Non-recurring Fair Value Measurements

The Company’s non-recurring fair value measurements at September 30, 2021 and December 31, 2020 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.

Right-of-Use Assets and Lease Liabilities

The Company is a lessee under non-cancelable operating leases associated with its corporate headquarters and other office spaces as well as with leases of land (“ground leases”). The Company records right-of-use assets and lease liabilities associated with these leases. The lease liability is equal to the net present value of the future payments to be made under the lease, discounted using estimates based on observable market factors. The right-of-use asset is generally equal to the lease liability plus initial direct costs associated with the leases. The Company includes in the recognition of the right-of-use asset and lease liability those renewal periods that are reasonably certain to be exercised, based on the facts and circumstances that exist at lease inception. Amounts associated with percentage rent provisions are considered variable lease costs and are not included in the initial measurement of the right-of-use asset or lease liability. The Company has made an accounting policy election, applicable to all asset types, not to separate lease from nonlease components when allocating contract consideration related to operating leases.

11


 

Right-of-use assets and lease liabilities associated with operating leases were included in the accompanying Condensed Consolidated Balance Sheets as follows:

 

 

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

Financial Statement Presentation

 

2021

 

 

2020

 

Right-of-use assets

 

Prepaid expenses and other assets

 

$

3,250

 

 

$

3,075

 

Lease liabilities

 

Accounts payable and other liabilities

 

 

2,714

 

 

 

2,659

 

 

Stock-Based Compensation

The Company has issued restricted stock awards (“RSAs”) and performance-based restricted stock units (“PRSUs”) under its 2020 Omnibus Equity and Incentive Plan (the “Equity Incentive Plan”). The Company accounts for stock-based incentives in accordance with ASC 718, Compensation – Stock Compensation, which requires that such compensation be recognized in the financial statements based on the award’s estimated grant date fair value. The value of such awards is recognized as compensation expense in General and administrative expenses in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) over the appropriate vesting period on a straight-line basis or at the cumulative amount vested at each balance sheet date, if greater. The Company records forfeitures during the period in which they occur by reversing all previously recorded stock compensation expense associated with the forfeited shares. Dividends declared on RSAs issued under the Equity Incentive Plan are recorded as Cumulative distributions in excess of retained earnings on the Condensed Consolidated Balance Sheets. Accumulated dividends related to forfeited RSAs will be reversed through compensation expense in the period the forfeiture occurs. Dividends accrued on the PRSUs are recorded as Cumulative distributions in excess of retained earnings on the Condensed Consolidated Balance Sheets. Accumulated dividends accrued related to forfeited PRSUs are reversed in the period the forfeiture occurs.

Recently Adopted Accounting Standards

In January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-01, Reference Rate Reform (Topic 848): Scope, which refines the scope of ASC 848, to include all derivative contracts subject to a transition for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest (PAI) as a result of reference rate reform (the “discounting transition”). ASU 2021-01 gives market participants the ability to apply certain aspects of the contract modification and hedge accounting expedients to derivative contracts affected by a discounting transition. ASU 2021-01 permits an entity to elect certain hedging relief if it has designated a derivative as a hedging instrument in a hedging relationship and the terms of the derivative have changed as a result of the discounting transition. The Company will apply the amendments in ASU 2021-01 related to contract modifications and hedging relationships prospectively.

Other Recently Issued Accounting Standards

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in ASU 2020-06 also simplify the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The amendments in ASU 2020-06 are effective for the Company for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The guidance must be adopted as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new guidance.

Reclassifications

The Company reclassified $961,330 of Unsecured term notes, net at December 31, 2020 to Unsecured term loans, net at September 30, 2021 and $472,466 of Unsecured term notes, net at December 31, 2020 to Senior unsecured notes, net at September 30, 2021 on the Condensed Consolidated Balance Sheets, to conform with the current period presentation. The reclassifications are changes from one acceptable presentation to another acceptable presentation.

12


 

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.

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). As of September 30, 2021, the Company achieved all four VWAP milestones applicable to the earnout. As a result, the Company issued 1,089 shares of common stock, 1,859 OP Units and made cash payments of $13,048 to these related parties (see Note 4).

Conversion of OP Units to Common Stock

During the three and nine months ended September 30, 2021, in a non-cash transaction (see Note 17), the Company converted 1,029 and 2,049 OP Units held by an affiliated third party to 1,029 and 2,049 shares of common stock at a total conversion value of $16,586 and $32,761, respectively. There were no related party OP Unit conversions for the three and nine months ended September 30, 2020.

4. Internalization

On February 7, 2020, the Company completed the Internalization and the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP. The effect of the Internalization has been reflected in the Company’s operating results beginning on February 7, 2020.

In accordance with the Internalization, the Company was 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 when certain milestones related to the 40-day VWAP per REIT Share were achieved. The consideration consisted of a combination of cash, shares of the Company’s common stock, and OP Units, based on the same proportions paid in the base consideration.

As of September 30, 2021, the Company achieved all four VWAP milestones, thereby triggering the payout of all earnout tranches. Below is a summary of the shares of common stock and OP Units issued, and cash paid for each earnout tranche:

 

(in thousands, except per share amounts)

 

 

Shares of

 

 

 

 

 

 

 

 

40-Day

 

 

 

 

 

Common Stock

 

 

OP Units

 

 

 

 

 

VWAP of a

 

 

 

Tranche

 

Issued

 

 

Issued

 

 

Cash Paid

 

 

REIT Share

 

 

Achievement Date

1

 

 

145

 

 

 

248

 

 

$

1,926

 

(a)

$

22.50

 

 

June 16, 2021

2

 

 

218

 

 

 

371

 

 

 

2,888

 

(a)

 

23.75

 

 

July 14, 2021

3

 

 

363

 

 

 

620

 

 

 

4,117

 

 

 

24.375

 

 

September 21, 2021

4

 

 

363

 

 

 

620

 

 

 

4,117

 

 

 

25.00

 

 

September 21, 2021

(a)
Cash payments include amounts earned for dividends.

Condensed Pro Forma Financial Information (Unaudited)

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. These pro forma adjustments reflect the elimination of Internalization expenses and asset management, property management, and disposition fees between the Company and BRE and the Asset Manager in historic financial results, and adjustments to reflect compensation and related costs, incremental general and administrative expenses related to the Internalization, and incremental interest expense associated with the borrowing related to the Internalization. This pro forma information is presented for informational purposes only, and may not be indicative of what actual results of operations would have been had the Internalization occurred at the beginning of the period, nor does it purport to represent the results of future operations.

The condensed pro forma financial information is as follows:

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

(in thousands)

 

September 30, 2020

 

 

September 30, 2020

 

Revenues

 

$

80,744

 

 

$

239,346

 

Net income

 

 

11,640

 

 

 

42,982

 

 

13


 

 

5. Acquisitions of Rental Property

The Company closed on the following acquisitions during the nine months ended September 30, 2021:

 

(in thousands, except number of properties)

 

Number of

 

 

Real Estate

 

 

Date

 

Property Type

 

Properties

 

 

Acquisition Price

 

 

February 5, 2021

 

Healthcare

 

 

1

 

 

$

4,843

 

 

February 26, 2021

 

Restaurant

 

(a)

 

 

 

181

 

 

March 11, 2021

 

Retail

 

 

13

 

 

 

26,834

 

 

March 30, 2021

 

Retail

 

 

11

 

 

 

41,324

 

 

March 31, 2021

 

Healthcare

 

 

3

 

 

 

14,140

 

 

June 4, 2021

 

Retail

 

 

2

 

 

 

19,420

 

 

June 9, 2021

 

Industrial

 

 

1

 

 

 

8,500

 

 

June 9, 2021

 

Industrial

 

 

11

 

 

 

106,578

 

 

June 25, 2021

 

Retail

 

 

8

 

 

 

12,131

 

 

June 28, 2021

 

Healthcare

 

 

4

 

 

 

15,300

 

 

June 30, 2021

 

Retail

 

 

1

 

 

 

1,279

 

 

June 30, 2021

 

Healthcare

 

 

7

 

 

 

30,750

 

 

July 2, 2021

 

Industrial

 

(b)

 

 

 

4,500

 

 

July 21, 2021

 

Retail

 

 

1

 

 

 

5,565

 

 

July 29, 2021

 

Retail

 

 

3

 

 

 

4,586

 

 

July 29, 2021

 

Industrial

 

 

1

 

 

 

13,041

 

 

July 30, 2021

 

Industrial

 

 

2

 

 

 

11,011

 

 

August 23, 2021

 

Healthcare

 

 

1

 

 

 

60,000

 

 

September 8, 2021

 

Retail

 

 

2

 

 

 

8,901

 

 

September 17, 2021

 

Retail

 

 

1

 

 

 

1,722

 

 

September 24, 2021

 

Retail

 

 

1

 

 

 

2,456

 

 

September 24, 2021

 

Industrial

 

 

2

 

 

 

48,699

 

 

September 29, 2021

 

Industrial

 

 

1

 

 

 

10,600

 

 

September 30, 2021

 

Industrial

 

 

3

 

 

 

59,343

 

 

 

 

 

 

 

80

 

 

$

511,704

 

(c)

(a)
Acquisition of additional land adjacent to an existing property.
(b)
Acquisition of land related to an existing property.
(c)
Acquisition price does not include capitalized acquisition costs of $4,432.

The Company did 0t complete any acquisitions of rental property during the nine months ended September 30, 2020.

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

 

(in thousands)

 

September 30, 2021

 

Land

 

$

72,829

 

Land improvements

 

 

22,103

 

Buildings and improvements

 

 

379,946

 

Acquired in-place leases(d)

 

 

40,865

 

Acquired above-market lease (e)

 

 

211

 

Right-of-use asset

 

 

663

 

Lease liability

 

 

(481

)

 

 

$

516,136

 

(d)
The weighted average amortization period for acquired in-place leases is 17 years.
(e)
The weighted average amortization period for acquired above-market leases is 10 years.

The above acquisitions were funded using a combination of available cash on hand, revolving credit facility borrowings, and proceeds from the 2031 Senior Unsecured Public Notes (see Note 9). All real estate acquisitions closed during the nine months ended September 30, 2021, qualified as asset acquisitions and, as such, acquisition costs have been capitalized.

 

14


 

Subsequent to September 30, 2021, the Company closed on the following acquisitions (see Note 19):

 

(in thousands, except number of properties)

 

Number of

 

 

Real Estate

 

Date

 

Property Type

 

Properties

 

 

Acquisition Price

 

October 1, 2021

 

Healthcare

 

 

1

 

 

$

3,306

 

October 22, 2021

 

Industrial

 

 

1

 

 

 

5,386

 

October 27, 2021

 

Retail

 

 

3

 

 

 

4,278

 

 

 

 

 

 

5

 

 

$

12,970

 

 

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,

 

(in thousands, except number of properties)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Number of properties disposed

 

 

6

 

 

 

5

 

 

 

25

 

 

 

18

 

Aggregate sale price

 

$

26,567

 

 

$

9,816

 

 

$

71,905

 

 

$

57,539

 

Aggregate carrying value

 

 

(24,244

)

 

 

(8,327

)

 

 

(58,817

)

 

 

(45,085

)

Additional sales expenses

 

 

(1,103

)

 

 

(429

)

 

 

(3,297

)

 

 

(2,729

)

Gain on sale of real estate

 

$

1,220

 

 

$

1,060

 

 

$

9,791

 

 

$

9,725

 

 

7. Investment in Rental Property and Lease Arrangements

The Company generally leases its investment rental property to established tenants in the industrial, healthcare, restaurant, retail, and office property types. At September 30, 2021, the Company had 681 real estate properties which were leased under leases that have been classified as operating leases, 10 that have been classified as direct financing leases, and 1 that has been classified as a sales-type lease. Of the 10 leases classified as direct financing leases, 3 include land portions which are accounted for as operating leases. The sales-type lease includes a land portion which is accounted for as an operating lease. Substantially all leases have initial terms of 10 to 20 years. The Company’s leases generally provide for limited increases in rent as a result of fixed increases, increases in the 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.

Investment in Rental Property – Accounted for Using the Operating Method

Rental property subject to non-cancelable operating leases with tenants was as follows:

 

(in thousands)

 

September 30,
2021

 

 

December 31,
2020

 

Land

 

$

616,917

 

 

$

555,748

 

Land improvements

 

 

291,045

 

 

 

279,360

 

Buildings and improvements

 

 

3,161,728

 

 

 

2,857,510

 

Equipment

 

 

11,870

 

 

 

11,870

 

 

 

 

4,081,560

 

 

 

3,704,488

 

Less accumulated depreciation

 

 

(407,354

)

 

 

(349,977

)

 

 

$

3,674,206

 

 

$

3,354,511

 

Depreciation expense on investment in rental property was as follows:

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Depreciation

 

$

25,232

 

 

$

23,317

 

 

$

73,119

 

 

$

70,392

 

 

15


 

Estimated lease payments to be received under non-cancelable operating leases with tenants at September 30, 2021 are as follows:

 

(in thousands)

 

 

 

Remainder of 2021

 

$

80,375

 

2022

 

 

323,733

 

2023

 

 

327,663

 

2024

 

 

324,289

 

2025

 

 

317,470

 

Thereafter

 

 

2,467,607

 

 

 

$

3,841,137

 

Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future lease payments due during the initial lease terms. Such amounts exclude any potential variable rent increases that are based on changes in the CPI or future variable rents which may be received under the leases based on a percentage of the tenant’s gross sales. Additionally, certain of our leases provide tenants with the option to terminate their leases in exchange for termination penalties, or that are contingent upon the occurrence of a future event. Future lease payments within the table above have not been adjusted for these termination rights.

Investment in Rental Property – Direct Financing Leases

The Company’s net investment in direct financing leases was comprised of the following:

 

(in thousands)

 

September 30,
2021

 

 

December 31,
2020

 

Undiscounted estimated lease payments to be received

 

$

43,397

 

 

$

45,782

 

Estimated unguaranteed residual values

 

 

15,203

 

 

 

15,203

 

Unearned revenue

 

 

(29,605

)

 

 

(31,753

)

Reserve for credit losses

 

 

(165

)

 

 

(166

)

Net investment in direct financing leases

 

$

28,830

 

 

$

29,066

 

Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at September 30, 2021 are as follows:

 

(in thousands)

 

 

 

Remainder of 2021

 

$

795

 

2022

 

 

3,241

 

2023

 

 

3,304

 

2024

 

 

3,361

 

2025

 

 

3,475

 

Thereafter

 

 

29,221

 

 

 

$

43,397

 

The above rental receipts do not include future lease payments for renewal periods, potential variable CPI rent increases, or variable percentage rent payments that may become due in future periods.

 

16


 

The following table summarizes amounts reported as Lease revenues, net on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss):

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Contractual rental amounts billed for operating leases

 

$

78,886

 

 

$

69,270

 

 

$

227,142

 

 

$

209,440

 

Adjustment to recognize contractual operating lease billings on a
   straight-line basis

 

 

4,942

 

 

 

6,768

 

 

 

14,033

 

 

 

16,709

 

Variable rental amounts earned

 

 

130

 

 

 

234

 

 

 

335

 

 

 

308

 

Earned income from direct financing leases

 

 

726

 

 

 

757

 

 

 

2,184

 

 

 

2,599

 

Interest income from sales-type leases

 

 

14

 

 

 

0

 

 

 

43

 

 

 

0

 

Operating expenses billed to tenants

 

 

4,414

 

 

 

3,389

 

 

 

12,998

 

 

 

11,456

 

Other income from real estate transactions (a)

 

 

33,515

 

 

 

64

 

 

 

33,548

 

 

 

795

 

Adjustment to revenue recognized for uncollectible rental
   amounts billed, net

 

 

150

 

 

 

262

 

 

 

(49

)

 

 

(1,961

)

Total Lease revenues, net

 

$

122,777

 

 

$

80,744

 

 

$

290,234

 

 

$

239,346

 

(a)
Refer to the Company's policy footnote on Long-lived Asset Impairment in Note 2 for further discussion of lease termination income recognized through Other income from real estate transactions during the three and nine months ended September 30, 2021.  

8. Intangible Assets and Liabilities

The following is a summary of intangible assets and liabilities and related accumulated amortization:

 

(in thousands)

 

September 30,
2021

 

 

December 31,
2020

 

Lease intangibles:

 

 

 

 

 

 

Acquired above-market leases

 

$

49,195

 

 

$

54,616

 

Less accumulated amortization

 

 

(17,862

)

 

 

(18,928

)

Acquired above-market leases, net

 

 

31,333

 

 

 

35,688

 

Acquired in-place leases

 

 

370,685

 

 

 

340,958

 

Less accumulated amortization

 

 

(100,972

)

 

 

(85,733

)

Acquired in-place leases, net

 

 

269,713

 

 

 

255,225

 

Total intangible lease assets, net

 

$

301,046

 

 

$

290,913

 

Acquired below-market leases

 

$

105,334

 

 

$

107,788

 

Less accumulated amortization

 

 

(32,837

)

 

 

(28,135

)

Intangible lease liabilities, net

 

$

72,497

 

 

$

79,653

 

Leasing fees

 

$

14,776

 

 

$

15,462

 

Less accumulated amortization

 

 

(4,985

)

 

 

(4,724

)

Leasing fees, net

 

$

9,791

 

 

$

10,738

 

 

Amortization of intangible lease assets and liabilities was as follows:

 

(in thousands)

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

Intangible

 

Financial Statement Presentation

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Acquired in-place leases and leasing fees

 

Depreciation and amortization

 

$

11,424

 

 

$

8,026

 

 

$

25,429

 

 

$

32,060

 

Above-market and below-market leases

 

Lease revenues, net

 

 

944

 

 

 

(149

)

 

 

2,362

 

 

 

(25

)

 

17


 

For the three and nine months ended September 30, 2021, amortization expense includes $3,757 of accelerated amortization resulting from early lease terminations. For the three and nine months ended September 30, 2020, amortization expense includes $2,459 and $14,517, of accelerated amortization resulting from early lease termination, respectively.

Estimated future amortization of intangible assets and liabilities at September 30, 2021 is as follows:

 

(in thousands)

 

 

 

Remainder of 2021

 

$

6,482

 

2022

 

 

24,480

 

2023

 

 

24,168

 

2024

 

 

23,410

 

2025

 

 

22,113

 

Thereafter

 

 

137,687

 

 

 

$

238,340

 

 

9. Unsecured Credit Agreements

The following table summarizes the Company’s unsecured credit agreements:

 

 

 

Outstanding Balance

 

 

 

 

 

(in thousands, except interest rates)

 

September 30,
2021

 

 

December 31,
2020

 

 

Interest
Rate
(b) (c)

 

Maturity
Date

Unsecured revolving credit facility(a)

 

$

0

 

 

$

0

 

 

(d) (e)

 

Sep. 2023

Unsecured term loans(a):

 

 

 

 

 

 

 

 

 

 

2022 Unsecured Term Loan

 

 

60,000

 

 

 

60,000

 

 

one-month LIBOR
+
1.00%
(f)

 

Feb. 2022

2023 Unsecured Term Loan

 

 

0

 

 

 

265,000

 

 

one-month LIBOR
+
1.10%
(g)

 

Jan. 2023

2024 Unsecured Term Loan

 

 

190,000

 

 

 

190,000

 

 

one-month LIBOR
+
1.00%
(f)

 

Jun. 2024

2026 Unsecured Term Loan

 

 

400,000

 

 

 

450,000

 

 

one-month LIBOR
+
1.00%
(h)

 

Feb. 2026

Total unsecured term loans

 

 

650,000

 

 

 

965,000

 

 

 

 

 

Unamortized debt issuance costs, net

 

 

(3,542

)

 

 

(3,670

)

 

 

 

 

Total unsecured term loans, net

 

 

646,458

 

 

 

961,330

 

 

 

 

 

Senior unsecured notes(a):

 

 

 

 

 

 

 

 

 

 

2027 Senior Unsecured Notes - Series A

 

 

150,000

 

 

 

150,000

 

 

4.84%

 

Apr. 2027

2028 Senior Unsecured Notes - Series B

 

 

225,000

 

 

 

225,000

 

 

5.09%

 

Jul. 2028

2030 Senior Unsecured Notes - Series C

 

 

100,000

 

 

 

100,000

 

 

5.19%

 

Jul. 2030

2031 Senior Unsecured Public Notes

 

 

375,000

 

 

 

 

 

2.60%

 

Sep. 2031

Total senior unsecured notes

 

 

850,000

 

 

 

475,000

 

 

 

 

 

Unamortized debt issuance costs and
   original issuance discount, net

 

 

(6,335

)

 

 

(2,534

)

 

 

 

 

Total senior unsecured notes, net

 

 

843,665

 

 

 

472,466

 

 

 

 

 

Total unsecured debt, net

 

$

1,490,123

 

 

$

1,433,796

 

 

 

 

 

(a)
The Company believes it was in compliance with all financial covenants for all periods presented.
(b)
At September 30, 2021 and December 31, 2020, one-month LIBOR was 0.08% and 0.14%, respectively. At September 30, 2021 daily LIBOR was 0.07%.
(c)
In January 2021, the Company received a credit rating of BBB, changing the applicable margin on variable rate unsecured debt effective February 1, 2021.
(d)
At September 30, 2021, borrowings on the revolving credit facility were subject to interest at one-month LIBOR plus 1.00% or daily LIBOR rates plus 1.00%.
(e)
At December 31, 2020, interest rate was one-month LIBOR plus 1.20%.
(f)
At December 31, 2020, interest rate was one-month LIBOR plus 1.25%.
(g)
At December 31, 2020, interest rate was one-month LIBOR plus 1.35%.
(h)
At December 31, 2020, interest rate was one-month LIBOR plus 1.85%.

18


 

At September 30, 2021, the weighted average interest rate on all outstanding borrowings was 2.71%, exclusive of interest rate swap agreements.

On September 15, 2021, the Company completed a public offering of $375,000 in aggregate principal amount of 2.60% senior unsecured notes due 2031 (“2031 Senior Unsecured Public Notes”), issued at 99.816% of the principal amount. The 2031 Senior Unsecured Public Notes require semi-annual interest payments through the maturity date of September 15, 2031, unless earlier redeemed. The 2031 Senior Unsecured Public Notes can be redeemed by the Company at par within three months of their respective maturities, or the Company can call the notes at any time for the principal, accrued interest, and a make-whole amount based upon the applicable government bond yield plus 20 basis points. The proceeds were used to repay in full borrowings on the Unsecured revolving credit facility and the 2023 Unsecured Term Loan, and to fund acquisitions.

On March 12, 2021, the Company amended the 2026 Unsecured Term Loan and made a $50,000 paydown on the loan. Prior to the amendment, the borrowings under the 2026 Unsecured Term Loan were subject to interest at variable rates based on LIBOR plus a margin based on the OP’s current credit rating ranging between 1.45% and 2.40% per annum with the applicable margin being 1.60% immediately prior to the amendment. The amendment reduced the margin to a range between 0.85% and 1.65% per annum and based on the OP’s credit rating of BBB, the applicable margin was 1.0% beginning March 12, 2021. All other terms and conditions of the 2026 Unsecured Term Loan remained materially the same as those in effect prior to this amendment.

For the three and nine months ended September 30, 2021, the Company incurred $4,069 and $5,020, respectively, in debt issuance costs and original issuance discount associated with the 2031 Senior Unsecured Public Notes and the amended 2026 Unsecured Term Loan. For the three and nine months ended September 30, 2020, the Company incurred $5,918 in debt issuance costs associated with the Revolving Credit Facility. For each separate debt instrument, on a lender by lender basis, in accordance with ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction 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 the assessment, $3,379 and $4,325 of debt issuance costs incurred during the three and nine months ended September 30, 2021, respectively, were deemed to be related to new debt, and the modification of existing debt, and therefore have been deferred and are being amortized over the term of the associated debt. For the three and nine months ended September 30, 2020, $5,918 of debt issuance costs incurred were related to the issuance of new debt, or the modification of existing debt, and therefore were deferred and are being amortized over the term of the associated debt.

Additionally, during the three and nine months ended September 30, 2021, $214 and $340, respectively, of unamortized debt issuance costs were expensed, and included in Cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss). Such amounts totaled $392 during the three and nine months ended September 30, 2020.

Debt issuance costs and original issuance discounts are amortized as a component of Interest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss). The following table summarizes debt issuance cost and original issuance discount amortization:

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Debt issuance costs and original issuance discount amortization

 

$

962

 

 

$

819

 

 

$

2,832

 

 

$

2,528

 

 

The Company is subject to various financial and operational covenants and financial reporting requirements pursuant to its unsecured credit agreements. These covenants require the Company to maintain certain financial ratios, including leverage, fixed charge coverage, debt service coverage, aggregate debt ratio, consolidated income available for debt to annual debt service charge, total unencumbered assets to total unsecured debt, and secured debt ratio, among others. As of September 30, 2021, the Company believes it was in compliance with all of its loan covenants. Failure to comply with the covenants would result in a default which, if the Company were unable to cure or obtain a waiver from the lenders, could accelerate the repayment of the obligations. Further, in the event of default, the Company may be restricted from paying dividends to its stockholders in excess of dividends required to maintain its REIT qualification. Accordingly, an event of default could have a material and adverse impact on the Company.

 

19


 

10. Mortgages

The Company’s mortgages consist of the following:

 

 

 

Origination

 

Maturity

 

 

 

 

 

 

 

 

 

 

(in thousands, except interest rates)

 

Date

 

Date

 

Interest

 

September 30,

 

 

December 31,

 

 

 

Lender

 

(Month/Year)

 

(Month/Year)

 

Rate

 

2021

 

 

2020

 

 

 

Wilmington Trust National Association

 

Apr-19

 

Feb-28

 

4.92%

 

$

47,064

 

 

$

47,945

 

 

(a) (b) (c) (j)

Wilmington Trust National Association

 

Jun-18

 

Aug-25

 

4.36%

 

 

19,657

 

 

 

19,947

 

 

(a) (b) (c) (i)

PNC Bank

 

Oct-16

 

Nov-26

 

3.62%

 

 

17,196

 

 

 

17,498

 

 

(b) (c)

T2 Durham I, LLC

 

Jul-21

 

Jul-24

 

Greater of Prime + 1.25% or 5.00%

 

 

7,500

 

 

 

0

 

 

(b) (k)

Aegon

 

Apr-12

 

Oct-23

 

6.38%

 

 

6,451

 

 

 

7,039

 

 

(b) (f)

Sun Life

 

Mar-12

 

Oct-21

 

5.13%

 

 

0

 

 

 

10,469

 

 

(b) (e)

M&T Bank

 

Oct-17

 

Aug-21

 

one - month
LIBOR+
3%

 

 

0

 

 

 

4,769

 

 

(b) (d) (g)
(h)

Total mortgages

 

 

 

 

 

 

 

 

97,868

 

 

 

107,667

 

 

 

Debt issuance costs, net

 

 

 

 

 

 

 

 

(338

)

 

 

(285

)

 

 

Mortgages, net

 

 

 

 

 

 

 

$

97,530

 

 

$

107,382

 

 

 

 

(a)
Non-recourse debt includes the indemnification/guaranty of the Corporation and/or OP pertaining to fraud, environmental claims, insolvency, and other matters.
(b)
Debt secured by related rental property and lease rents.
(c)
Debt secured by guaranty of the OP.
(d)
Debt secured by guaranty of the Corporation.
(e)
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.
(f)
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.
(g)
The Company entered into an interest rate swap agreement in connection with the mortgage, as further described in Note 11.
(h)
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.
(i)
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.
(j)
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.
(k)
Mortgage is subject to interest at a daily floating annual rate equal to the Prime Rate plus 1.25%, but no less than 5.00% per annum. At September 30, 2021, the interest rate was 5.00%

 

At September 30, 2021, investment in rental property of $162,642 was pledged as collateral against the Company’s mortgages.

Estimated future principal payments to be made under the above mortgages and the Company’s unsecured credit agreements (see Note 9) at September 30, 2021 are as follows:

(in thousands)

 

 

 

Remainder of 2021

 

$

707

 

2022

 

 

62,907

 

2023

 

 

7,582

 

2024

 

 

199,760

 

2025

 

 

20,195

 

Thereafter

 

 

1,306,717

 

 

 

$

1,597,868

 

Certain of the Company’s mortgage and note payable agreements provide for prepayment fees and can be terminated under certain events of default as defined under the related agreements. These prepayment fees are not reflected as part of the table above.

 

20


 

11. Interest Rate Swaps

Interest rate swaps were entered into with certain financial institutions in order to mitigate the impact of interest rate variability over the term of the related debt agreements. The interest rate swaps are considered cash flow hedges. In order to reduce counterparty concentration risk, the Company has a diversification policy for institutions that serve as swap counterparties. Under these agreements, the Company receives monthly payments from the counterparties on these interest rate swaps equal to the related variable interest rates multiplied by the outstanding notional amounts. All of the Company's interest swaps at September 30, 2021 and December 31, 2020 are tied to the one-month LIBOR rate. Certain interest rate swaps amortize on a monthly basis. In turn, the Company pays the counterparties each month an amount equal to a fixed rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that the Company pays a fixed interest rate on its variable-rate borrowings.

In connection with the issuance of the 2031 Senior Unsecured Public Notes in September 2021 and repayment of outstanding borrowings of variable rate debt indexed to the one-month LIBOR rate (see Note 9), the Company terminated interest rate swap agreements with an aggregate termination value of $5,580. The Company determined that it is not probable the hedge forecasted transactions will not occur during the original periods, and therefore, the $5,580 of accumulated losses held in Other comprehensive income (loss) will be reclassified to interest expense on a straight-line basis over the original lives of the terminated swaps. For the three and nine months ended September 30, 2021, amounts reclassified out of Other comprehensive income (loss) to Interest expense were $126.

The following is a summary of the Company’s outstanding interest rate swap agreements:

(in thousands, except interest rates)

 

 

 

 

September 30, 2021

 

 

December 31, 2020

 

 

Counterparty

 

Maturity Date

 

Fixed
Rate

 

 

Notional
Amount

 

 

Fair
Value

 

 

Notional
Amount

 

 

Fair
Value

 

 

Wells Fargo Bank, N.A.

 

February 2021

 

 

2.39

%

 

$

0

 

 

$

 

 

$

35,000

 

 

$

(70

)

 

M&T Bank

 

August 2021

 

 

1.02

%

 

 

0

 

 

 

 

 

 

4,768

 

 

 

(25

)

(a)

Capital One, National Association

 

December 2021

 

 

1.05

%

 

 

0

 

 

 

 

(b)

 

15,000

 

 

 

(141

)

 

M&T Bank

 

September 2022

 

 

2.83

%

 

 

0

 

 

 

0

 

(b)

 

25,000

 

 

 

(1,139

)

 

Bank of America, N.A.

 

November 2023

 

 

2.80

%

 

 

0

 

 

 

 

(b)

 

25,000

 

 

 

(1,848

)

 

M&T Bank

 

November 2023

 

 

2.65

%

 

 

0

 

 

 

 

(b)

 

25,000

 

 

 

(1,785

)

 

Regions Bank

 

December 2023

 

 

1.18

%

 

 

0

 

 

 

 

(b)

 

25,000

 

 

 

(763

)

 

Truist Financial Corporation

 

April 2024

 

 

1.99

%

 

 

0

 

 

 

 

(b)

 

25,000

 

 

 

(1,487

)

 

Bank of Montreal

 

July 2024

 

 

1.16

%

 

 

0

 

 

 

 

(b)

 

40,000

 

 

 

(1,380

)

 

Wells Fargo Bank, N.A.

 

October 2024

 

 

2.72

%

 

 

15,000

 

 

 

(964

)

 

 

15,000

 

 

 

(1,422

)

 

Capital One, National Association

 

December 2024

 

 

1.58

%

 

 

15,000

 

 

 

(463

)

 

 

15,000

 

 

 

(799

)

 

Bank of Montreal

 

January 2025

 

 

1.91

%

 

 

25,000

 

 

 

(1,044

)

 

 

25,000

 

 

 

(1,725

)

 

Truist Financial Corporation

 

April 2025

 

 

2.20

%

 

 

25,000

 

 

 

(1,324

)

 

 

25,000

 

 

 

(2,084

)

 

Bank of Montreal

 

July 2025

 

 

2.32

%

 

 

25,000

 

 

 

(1,478

)

 

 

25,000

 

 

 

(2,351

)

 

Truist Financial Corporation

 

July 2025

 

 

1.99

%

 

 

25,000

 

 

 

(1,174

)

 

 

25,000

 

 

 

(1,941

)

 

Truist Financial Corporation

 

December 2025

 

 

2.30

%

 

 

25,000

 

 

 

(1,546

)

 

 

25,000

 

 

 

(2,481

)

 

Bank of Montreal

 

January 2026

 

 

1.92

%

 

 

25,000

 

 

 

(1,156

)

 

 

25,000

 

 

 

(2,039

)

 

Bank of Montreal

 

January 2026

 

 

2.05

%

 

 

40,000

 

 

 

(2,062

)

 

 

40,000

 

 

 

(3,523

)

 

Capital One, National Association

 

January 2026

 

 

2.08

%

 

 

35,000

 

 

 

(1,842

)

 

 

35,000

 

 

 

(3,078

)

 

Truist Financial Corporation

 

January 2026

 

 

1.93

%

 

 

25,000

 

 

 

(1,164

)

 

 

25,000

 

 

 

(2,019

)

 

Capital One, National Association

 

April 2026

 

 

2.68

%

 

 

15,000

 

 

 

(1,204

)

 

 

15,000

 

 

 

(1,843

)

 

Capital One, National Association

 

July 2026

 

 

1.32

%

 

 

35,000

 

 

 

(682

)

 

 

35,000

 

 

 

(1,806

)

 

Bank of Montreal

 

December 2026

 

 

2.33

%

 

 

10,000

 

 

 

(692

)

 

 

10,000

 

 

 

(1,156

)

 

Bank of Montreal

 

December 2026

 

 

1.99

%

 

 

25,000

 

 

 

(1,300

)

 

 

25,000

 

 

 

(2,372

)

 

Wells Fargo Bank, N.A.

 

April 2027

 

 

2.72

%

 

 

25,000

 

 

 

(2,287

)

 

 

25,000

 

 

 

(3,555

)

 

Bank of Montreal

 

December 2027

 

 

2.37

%

 

 

25,000

 

 

 

(1,904

)

 

 

25,000

 

 

 

(3,234

)

 

Capital One, National Association

 

December 2027

 

 

2.37

%

 

 

25,000

 

 

 

(1,909

)

 

 

25,000

 

 

 

(3,199

)

 

Wells Fargo Bank, N.A.

 

January 2028

 

 

2.37

%

 

 

75,000

 

 

 

(5,743

)

 

 

75,000

 

 

 

(9,650

)

 

Bank of Montreal

 

May 2029

 

 

2.09

%

 

 

25,000

 

 

 

(1,557

)

 

 

25,000

 

 

 

(2,994

)

 

Regions Bank

 

May 2029

 

 

2.11

%

 

 

25,000

 

 

 

(1,599

)

 

 

25,000

 

 

 

(3,004

)

 

Regions Bank

 

June 2029

 

 

2.03

%

 

 

25,000

 

 

 

(1,459

)

 

 

25,000

 

 

 

(2,843

)

 

U.S. Bank National Association

 

June 2029

 

 

2.03

%

 

 

25,000

 

 

 

(1,456

)

 

 

25,000

 

 

 

(2,902

)

 

U.S. Bank National Association

 

August 2029

 

 

1.35

%

 

 

25,000

 

 

 

(187

)

 

 

25,000

 

 

 

(1,445

)

 

 

 

 

 

 

 

 

$

640,000

 

 

$

(36,196

)

 

$

859,768

 

 

$

(72,103

)

 

(a)
Interest rate swap was assumed in October 2017 as part of an UPREIT transaction.
(b)
Interest rate swap was terminated in September 2021.

 

21


 

At September 30, 2021, the weighted average fixed rate on all outstanding interest rate swaps was 2.11%.

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 were as follows:

 

 

 

 

 

 

Reclassification from

 

 

Total Interest Expense

 

 

 

Amount of Gain

 

 

Accumulated Other

 

 

Presented in the Condensed

 

 

 

Recognized in

 

 

Comprehensive Loss

 

 

Consolidated Statements of

 

(in thousands)

 

Accumulated Other

 

 

 

 

Amount of

 

 

Income and Comprehensive

 

For the Three Months Ended September 30,

 

  Comprehensive Loss

 

 

Location

 

Loss

 

 

Income (Loss)

 

2021

 

$

4,559

 

 

Interest expense

 

$

4,085

 

 

$

15,611

 

2020

 

 

4,352

 

 

Interest expense

 

 

4,166

 

 

 

18,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain

 

 

Reclassification from

 

 

Total Interest Expense

 

 

 

(Loss)

 

 

Accumulated Other

 

 

Presented in the Condensed

 

 

 

Recognized in

 

 

Comprehensive Loss

 

 

Consolidated Statements of

 

(in thousands)

 

Accumulated Other

 

 

 

 

Amount of

 

 

Income and Comprehensive

 

For the Nine Months Ended September 30,

 

  Comprehensive Loss

 

 

Location

 

Loss

 

 

Income (Loss)

 

2021

 

$

30,328

 

 

Interest expense

 

$

12,140

 

 

$

47,149

 

2020

 

 

(59,766

)

 

Interest expense

 

 

8,467

 

 

 

59,015

 

 

Amounts related to the interest rate swaps expected to be reclassified out of Accumulated other comprehensive loss to Interest expense during the next twelve months are estimated to be a loss of $15,477. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes the risk exposure by limiting counterparties to major banks who meet established credit and capital guidelines.

 

12. Non-Controlling Interests

The following table summarizes OP Units exchanged for shares of common stock:

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

OP Units exchanged for shares of common stock

 

 

1,723

 

 

 

0

 

 

 

2,888

 

 

 

0

 

Value of units exchanged

 

$

27,755

 

 

$

0

 

 

$

46,220

 

 

$

0

 

 

As of September 30, 2021, the Company achieved all four VWAP milestones applicable to the earnout. As a result, the Company issued 1,611 and 1,859 OP Units for the three and nine months ended September 30, 2021, respectively (see Note 4).

 

13. Credit Risk Concentrations

The Company maintained bank balances that, at times, exceeded the federally insured limit during the nine months ended September 30, 2021. The Company has not experienced losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts.

The Company has mortgages with two institutions that comprised 68% and 18% of total mortgages at September 30, 2021. The Company had mortgages with three institutions that comprised 63%, 16%, and 10% of total mortgages at December 31, 2020. For the three and nine months ended September 30, 2021 and 2020, the Company had 0 individual tenants or common franchises that accounted for more than 10% of total revenues, excluding lease termination fees.

 

14. Equity

General

On June 28, 2021, the Corporation completed its first public follow-on equity offering and issued 11,500 shares of Common Stock, including shares issued pursuant to the underwriters' full exercise of their over-allotment option, at $23.00 per share. The net proceeds, after deducting underwriting discounts and commissions of $10,580 and $433 of other expenses, were $253,487. The Company used the net proceeds to repay the remaining $160,600 principal due under the Company's revolving credit facility. The remaining net proceeds were used for general business purposes, including acquisitions. As of September 30, 2021, the Company had $242 of accrued offering costs related to the public follow-on equity offering.

22


 

On September 21, 2020, the Corporation completed its IPO and issued 37,000 shares of Class A Common Stock inclusive of the underwriters’ partial exercise of their over-allotment option on October 20, 2020.

Aside from the conversion discussed below, the terms of the Class A Common Stock were identical to the terms of the Common Stock. Each share of Class A Common Stock automatically converted into one share of Common Stock on March 20, 2021, and effective March 22, 2021, all shares of Common Stock were listed and freely tradeable on the NYSE under the ticker “BNL.” The Common Stock and Class A Common Stock are collectively referred to as the Corporation’s “common stock.”

As of September 30, 2021, the Company achieved all four VWAP milestones applicable to the earnout. As a result, the Company issued 944 and 1,089 shares of common stock during the three and nine months ended September 30, 2021, respectively (see Note 4).

On August 23, 2021, the Company established an at-the-market common equity offering program ("ATM Program"), through which it may, from time to time, publicly offer and sell shares of common stock having an aggregate gross sales price of up to $400,000. The ATM Program provides for forward sale agreements, enabling the Company to set the price of shares upon pricing the offering, while delaying the issuance of shares and the receipt of the net proceeds. There was 0 activity relating to the ATM Program during the three and nine months ended September 30, 2021.

15. Stock-Based Compensation

Restricted Stock Awards

On March 1, 2021 and August 4, 2020, the Company awarded 199 and 341 shares of RSAs, respectively, to certain officers and employees under the Equity Incentive Plan. The holder of RSAs is generally entitled at all times on and after the date of issuance of the restricted common shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The RSAs vest over a one, three, or four year period from the date of grant and are subject to the employee’s continued service through the applicable vesting dates and in accordance with the terms of the individual award agreements. The March 1, 2021 grant date fair value per share of $18.66 was based on the market price of the Company’s common stock on the grant date. The August 4, 2020 grant date fair value per share of $20.50 was based on the determined share value established by the Board of Directors ("Determined Share Value"). Prior to the IPO, the Company sold shares of common stock in a private offering at a 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 the date based upon, among other factors, the implied market price for each asset based upon a review of market capitalization rates.

The following table presents information about the Company’s RSAs:

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Compensation cost

 

$

701

 

 

$

796

 

 

$

3,124

 

 

$

796

 

Dividends declared on unvested RSAs

 

 

95

 

 

 

46

 

 

 

296

 

 

46

 

Grant date fair value of shares vested during the period

 

 

0

 

 

 

0

 

 

 

3,296

 

 

 

0

 

 

(in thousands, except recognition period)

 

 September 30, 2021

 

 

 December 31, 2020

 

Unamortized value of RSAs

 

$

5,508

 

 

$

5,001

 

Weighted average amortization period (in years)

 

 

2.6

 

 

 

2.8

 

 

 

23


 

The following table presents information about the Company’s RSA activity:

 

 

 

For the Three Months Ended September 30, 2021

 

 

For the Nine Months Ended September 30, 2021

 

(in thousands, except per share amounts)

 

Number of Shares

 

 

Weighted Average
Grant Date Fair
Value per Share

 

 

Number of Shares

 

 

Weighted Average
Grant Date Fair
Value per Share

 

Unvested at beginning of period

 

 

378

 

 

$

19.60

 

 

 

341

 

 

$

20.50

 

Granted

 

 

1

 

 

 

26.02

 

 

 

202

 

 

 

18.68

 

Vested

 

 

0

 

 

 

0

 

 

 

(164

)

 

 

20.15

 

Forfeited

 

 

(5

)

 

 

19.72

 

 

 

(5

)

 

 

19.72

 

Unvested at end of period

 

 

374

 

 

$

19.61

 

 

 

374

 

 

$

19.61

 

 

 

 

For the Three Months Ended September 30, 2020

 

 

For the Nine Months Ended September 30, 2020

 

(in thousands, except per share amounts)

 

Number of Shares

 

 

Weighted Average
Grant Date Fair
Value per Share

 

 

Number of Shares

 

 

Weighted Average
Grant Date Fair
Value per Share

 

Unvested at beginning of period

 

 

0

 

 

$

0

 

 

 

0

 

 

$

0

 

Granted

 

 

341

 

 

 

20.50

 

 

 

341

 

 

 

20.50

 

Vested

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Forfeited

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Unvested at end of period

 

 

341

 

 

$

20.50

 

 

 

341

 

 

$

20.50

 

Performance-based Restricted Stock Units

On March 1, 2021, the Company issued target grants of 132 PRSUs under the Equity Incentive Plan to the officers of the Company. The awards are non-vested restricted stock units where the vesting percentages and the ultimate number of units vesting will be measured 50% based on the relative total shareholder return (“rTSR”) of the Company’s common stock as compared to the rTSR of peer companies over a three-year period, as identified in the grant agreements, and 50% based on the rTSR of the Company’s common stock as compared to the rTSR of the MSCI US REIT Index over a three year measurement period. The payout schedules can produce vesting percentages ranging from 0% to 200% with a target of 100%. rTSR means the percentage appreciation in the fair market value of one share over the three year measurement period beginning on the date of grant, assuming the reinvestment of dividends on the ex-dividend date. The target number of units is based on achieving a rTSR equal to the 55th percentile of the peer companies and MSCI US REIT Index. Dividends accrue during the measurement period and will be paid on the PRSUs ultimately earned at the end of the measurement period in either cash or common stock, at the direction of the Board’s Compensation Committee. The grant date fair value of the PRSUs was measured using a Monte Carlo simulation model based on assumptions including share price volatility.

 

The following table presents information about the Company’s PRSUs:

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

(in thousands, except recognition period)

 

 September 30, 2021

 

 

 September 30, 2021

 

Compensation cost

 

$

223

 

 

$

520

 

 

 

 

 

 

 

 

 

 

 

 

 

 September 30, 2021

 

Unamortized value of PRSUs

 

 

 

 

$

2,154

 

Weighted average amortization period (in years)

 

 

 

 

 

2.4

 

 

There were 0 PRSUs at September 30, 2020.

 

The following table presents information about the Company’s PRSU activity:

 

 

 

For the Three Months Ended September 30, 2021

 

 

For the Nine Months Ended September 30, 2021

 

(in thousands, except per share amounts)

 

Number of Shares

 

 

Weighted Average
Grant Date Fair
Value per Share

 

 

Number of Shares

 

 

Weighted Average
Grant Date Fair
Value per Share

 

Unvested at beginning of period

 

 

110

 

 

$

24.40

 

 

 

0

 

 

$

0

 

Granted

 

 

0

 

 

 

0

 

 

 

132

 

 

 

24.40

 

Vested

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Forfeited

 

 

0

 

 

 

0

 

 

 

(22

)

 

 

24.40

 

Unvested at end of period

 

 

110

 

 

$

24.40

 

 

 

110

 

 

$

24.40

 

 

24


 

16. Earnings per Share

The following table summarizes the components used in the calculation of basic and diluted earnings per share (“EPS”):

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands, except per share amounts)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Basic earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Broadstone Net Lease, Inc. common
   shareholders

 

$

28,698

 

 

$

8,750

 

 

$

72,135

 

 

$

34,919

 

Less earnings allocated to unvested restricted shares

 

 

(95

)

 

 

(46

)

 

 

(296

)

 

 

(46

)

Net earnings used to compute basic earnings per common share

 

$

28,603

 

 

$

8,704

 

 

$

71,839

 

 

$

34,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings used to compute basic earnings per share

 

$

28,603

 

 

$

8,704

 

 

$

71,839

 

 

$

34,873

 

Net earnings attributable to non-controlling interests

 

 

1,824

 

 

 

961

 

 

 

5,167

 

 

 

3,738

 

Net earnings used to compute diluted earnings per common share

 

$

30,427

 

 

$

9,665

 

 

$

77,006

 

 

$

38,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

159,604

 

 

 

111,371

 

 

 

150,593

 

 

 

108,300

 

Less weighted average unvested restricted shares (a)

 

 

(378

)

 

 

(216

)

 

 

(366

)

 

 

(72

)

Weighted average number of common shares outstanding used in
   basic earnings per common share

 

 

159,226

 

 

 

111,155

 

 

 

150,227

 

 

 

108,228

 

Effects of restricted stock units (b)

 

 

219

 

 

 

0

 

 

 

172

 

 

 

0

 

Effects of convertible membership units (c)

 

 

10,142

 

 

 

12,226

 

 

 

10,874

 

 

 

11,519

 

Weighted average number of common shares outstanding used in
   diluted earnings per common share

 

 

169,587

 

 

 

123,381

 

 

 

161,273

 

 

 

119,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.18

 

 

$

0.08

 

 

$

0.48

 

 

$

0.32

 

Diluted earnings per share

 

$

0.18

 

 

$

0.08

 

 

$

0.48

 

 

$

0.32

 

(a)
Represents the weighted average effects of 374 and 341 unvested restricted shares of common stock as of September 30, 2021 and 2020, respectively, 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 shares of common stock to be issued as though the end of the period were the end of the performance period (see Note 15).
(c)
Represents the weighted average effects of 10,370 and 12,226 OP Units outstanding at September 30, 2021 and 2020, 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 net income attributable to such OP units also be added back to net income, there is no effect to EPS.  

17. Supplemental Cash Flow Disclosures

Cash paid for interest was $38,551 and $50,853 for the nine months ended September 30, 2021 and 2020, respectively. Cash paid for income taxes was $1,144 and $1,385 for the nine months ended September 30, 2021 and 2020, respectively.

The following are non-cash transactions and have been excluded from the accompanying Condensed Consolidated Statements of Cash Flows:

During the nine months ended September 30, 2021, the Company converted 2,888 OP Units valued at $46,220 to 2,888 shares of common stock.
At September 30, 2021 and 2020, dividend amounts declared and accrued but not yet paid amounted to $43,874 and $20,722, respectively.
During the nine months ended September 30, 2020, the Corporation issued 275 shares of Common Stock with a value of approximately $5,733 under the terms of the Distribution Reinvestment Plan (“DRIP”). The Company terminated the DRIP effective February 10, 2020.
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.
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, in accordance with the Company’s accounting policy.

25


 

During the nine months ended September 30, 2020, the Company reclassified $112,698 of mezzanine equity non-controlling interests to Non-controlling interests as a result of the IPO triggering permanent equity classification.
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 as a result of the IPO triggering permanent equity classification.
During the nine months ended September 30, 2020, the Company reclassified $18,346 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.
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.

18. Commitments and Contingencies

Litigation

From time to time, the Company is a party to various litigation matters incidental to the conduct of the Company’s business. While the resolution of such matters cannot be predicted with certainty, based on currently available information, the Company does not believe that the final outcome of any of these matters will have a material effect on its consolidated financial position, results of operations, or liquidity.

Property and Acquisition Related

In connection with ownership and operation of real estate, the Company may potentially be liable for costs 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.

The Company has a commitment to fund a building expansion expected to be completed in 2022, totaling $17,388 as of September 30, 2021, in exchange for an increase in rent contractually scheduled to commence in August 2022.

The Company is a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and to the Founding Owners’ Tax Protection Agreement in connection with the Internalization. The tax protection agreements require the Company to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. The Company is required to allocate an amount of nonrecourse liabilities to each beneficiary that is at least equal to the minimum liability amount, as contained in the agreements. The minimum liability amount and the associated allocation of nonrecourse liabilities are calculated in accordance with applicable tax regulations, are completed at the OP level, and do not represent GAAP accounting. Therefore, there is no impact to the Condensed Consolidated Financial Statements. Based on values as of September 30, 2021, taxable sales of the applicable properties would trigger liability under the agreements of approximately $22,300. Based on information available, the Company does not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future.

In the normal course of business, the Company enters into various types of commitments to purchase real estate properties. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated to purchase the properties.

Obligations Under Operating Leases

Subsequent to the Internalization, the Company leases office space for its corporate headquarters and other locations under non-cancellable operating leases with expiration dates ranging from 2021 to 2023. These leases contain provisions for fixed monthly payments, subject to rent escalations. None of the leases are subject to any sublease agreement.

The Company also leases land at certain properties under non-cancellable operating leases (“ground leases”) with initial lease terms ranging from 2034 to 2069. These leases contain provisions for fixed monthly payments, subject to rent escalations. One lease requires the Company to make annual rent payments calculated based upon sales generated at the property (“percentage rent”). None of the leases are subject to any sublease agreement.

26


 

The following table summarizes the total lease costs associated with operating leases:

 

 

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

Financial Statement Presentation

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Operating lease costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office leases

 

General and administrative

 

$

158

 

 

$

155

 

 

$

473

 

 

$

362

 

Ground leases

 

Property and operating expense

 

 

39

 

 

 

33

 

 

 

106

 

 

 

100

 

Variable lease costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ground leases

 

Property and operating expense

 

 

14

 

 

 

13

 

 

 

42

 

 

 

43

 

Total lease costs

 

 

 

$

211

 

 

$

201

 

 

$

621

 

 

$

505

 

 

The following table summarizes payments associated with obligations under operating leases, reported as Net cash provided by operating activities on the accompanying Condensed Consolidated Statements of Cash Flows:

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Operating lease payments

 

$

191

 

 

$

179

 

 

$

618

 

 

$

490

 

Estimated future lease payments required under non-cancelable operating leases at September 30, 2021, and a reconciliation to the lease liabilities, is as follows:

 

(in thousands)

 

 

 

Remainder of 2021

 

$

186

 

2022

 

 

723

 

2023

 

 

539

 

2024

 

 

153

 

2025

 

 

155

 

Thereafter

 

 

3,777

 

Total undiscounted cash flows

 

 

5,533

 

Less imputed interest

 

 

(2,819

)

Lease liabilities

 

$

2,714

 

The above rental payments include future minimum lease payments due during the initial lease terms. Such amounts exclude any contingent amounts associated with percentage rent that may become due in future periods.

19. Subsequent Events

On October 15, 2021, the Company paid distributions totaling $43,764.

On October 28, 2021, the Board of Directors declared a quarterly distribution of $0.265 per share on the Company’s common stock and OP Units for the fourth quarter of 2021, which will be payable on or before January 15, 2022 to stockholders and unit holders of record as of December 31, 2021.

Subsequent to September 30, 2021, the Company continued to expand its operations through the acquisition of additional rental property and associated intangible assets and liabilities. The Company acquired approximately $12,970 of rental property and associated intangible assets and liabilities (see Note 5).

Subsequent to September 30, 2021, the Company borrowed $38,000 on the Unsecured revolving credit facility, the proceeds of which were used to fund acquisitions and for other general corporate purposes.

27


 

 

 

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 “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 contains forward-looking statements, which 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 safe 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”). Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other comparable words. All of the forward-looking statements included in this Quarterly Report on Form 10-Q are subject to various 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 decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, 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 be important factors that could cause actual outcomes or results to differ materially from such forward-looking statements.

Important factors that could cause results to differ materially from the forward-looking statements are described in Item 1. “Business,” Item 1A. “Risk Factors,” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K, as filed with the SEC on February 25, 2021. The “Risk Factors” of our 2020 Annual Report should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this Quarterly Report on Form 10-Q.

You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report on Form 10-Q. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this Quarterly Report on Form 10-Q will increase with the passage of time. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.

Explanatory Note and Certain Defined Terms

Unless the context otherwise requires, the following terms and phrases are used throughout this MD&A as described below:

“annualized base rent” or “ABR” means the annualized contractual cash rent due for the last month of the reporting period, excluding the impacts of short-term rent deferrals, abatements, free rent, or discounted rent periods 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 month;
“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 excluding capitalized acquisitions costs;
“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;

28


 

“occupancy” or a specified percentage of our portfolio that is “occupied” means as of a specified date the quotient of (1) the total rentable 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; 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.

Overview

We acquire, own, and manage primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, retail, and office property types. During the nine months ended September 30, 2021, we invested $507.2 million, excluding capitalized acquisition costs, in 80 properties at a weighted average initial cash capitalization rate of 6.4%. The acquisitions included properties in industrial (48%, based on ABR), healthcare (27%), and retail (25%) asset classes located across 27 states with a weighted average initial lease term and minimum annual rent increases of 16.4 years and 1.5%, respectively. As of September 30, 2021, our portfolio has grown to 696 properties, with 695 properties located in 42 U.S. states and one property located in British Columbia, Canada.

We focus on investing in real estate that is operated by creditworthy single tenants in industries characterized by positive business drivers and trends. We target properties that are an integral part of the tenants’ businesses and for which there are therefore opportunities to secure long-term net leases. Through long-term net leases, our tenants are able to retain operational control of their strategically important locations, while allocating their debt and equity capital to fund their core business operations rather than real estate ownership.

-
Diversified Portfolio. As of September 30, 2021, our portfolio comprised approximately 31.4 million rentable square feet of operational space, and was highly diversified based on property type, geography, tenant, and industry, and is cross-diversified within each (e.g., property-type diversification within a geographic concentration):
Property Type: We are focused primarily on industrial, healthcare, restaurant, retail, and office 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, quick service restaurant, food processing, casual dining, flex/research and development, and general merchandise.
Geographic Diversity: Our properties are located in 42 U.S. states and British Columbia, Canada, with no single geographic concentration exceeding 10.2% of our ABR.
Tenant and Industry Diversity: Our properties are occupied by approximately 197 different commercial tenants who operate 184 different brands that are diversified across 56 differing industries, with no single tenant accounting for more than 2.2% of our ABR.
-
Strong In-Place Leases with Significant Remaining Lease Term. As of September 30, 2021, our portfolio was approximately 99.8% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 10.6 years, excluding renewal options.
-
Standard Contractual Base Rent Escalation. Approximately 97.7% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.0%.
-
Extensive Tenant Financial Reporting. Approximately 93.9% of our tenants, based on ABR, provide financial reporting, of which 85.1% are required to provide us with specified financial information on a periodic basis, and an additional 8.8% of our tenants report financial statements publicly, either through SEC filings or otherwise.

 

29


 

Regulation FD Disclosures

We use any of the following to comply with our disclosure obligations under Regulation FD: SEC filings, press releases, public conference calls, or our website. We routinely post important information on our website at www.Broadstone.com, including information that may be deemed material. We encourage our shareholders and others interested in our company to monitor these distribution channels for material disclosures. Our website address is included in this Quarterly Report as a textual reference only and the information on the website is not incorporated by reference in this Quarterly Report.

Real Estate Portfolio Information

The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as of September 30, 2021. The percentages below are calculated based on our ABR of $324.6 million as of September 30, 2021.

 

Diversification by Property Type

img143308336_0.jpg 

 

 

 

 

 

 

 

30


 

Property Type

 

# Properties

 

 

ABR
($'000s)

 

 

ABR as a % of
Total Portfolio

 

 

Square Feet
('000s)

 

 

SF as a % of
Total Portfolio

 

Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

 

61

 

 

$

47,962

 

 

 

14.8

%

 

 

8,715

 

 

 

27.8

%

Distribution & Warehouse

 

 

44

 

 

 

47,563

 

 

 

14.6

%

 

 

9,052

 

 

 

28.8

%

Food Processing

 

 

16

 

 

 

21,357

 

 

 

6.6

%

 

 

2,405

 

 

 

7.7

%

Flex and R&D

 

 

7

 

 

 

17,025

 

 

 

5.2

%

 

 

1,457

 

 

 

4.6

%

Cold Storage

 

 

4

 

 

 

12,620

 

 

 

3.9

%

 

 

933

 

 

 

3.0

%

Services

 

 

19

 

 

 

7,787

 

 

 

2.4

%

 

 

446

 

 

 

1.4

%

Industrial Total

 

 

151

 

 

 

154,314

 

 

 

47.5

%

 

 

23,008

 

 

 

73.3

%

Healthcare

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical

 

 

50

 

 

 

25,009

 

 

 

7.7

%

 

 

1,055

 

 

 

3.4

%

Healthcare Services

 

 

28

 

 

 

12,413

 

 

 

3.8

%

 

 

463

 

 

 

1.5

%

Animal Health Services

 

 

27

 

 

 

10,196

 

 

 

3.1

%

 

 

405

 

 

 

1.3

%

Surgical

 

 

11

 

 

 

9,611

 

 

 

3.0

%

 

 

316

 

 

 

1.0

%

Life Science

 

 

9

 

 

 

7,655

 

 

 

2.4

%

 

 

549

 

 

 

1.7

%

Untenanted

 

 

2

 

 

 

 

 

 

0.0

%

 

 

23

 

 

 

0.1

%

Healthcare Total

 

 

127

 

 

 

64,884

 

 

 

20.0

%

 

 

2,811

 

 

 

9.0

%

Restaurant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quick Service Restaurants

 

 

148

 

 

 

24,522

 

 

 

7.5

%

 

 

505

 

 

 

1.6

%

Casual Dining

 

 

82

 

 

 

19,362

 

 

 

6.0

%

 

 

527

 

 

 

1.7

%

Untenanted

 

 

1

 

 

 

 

 

 

0.0

%

 

 

5

 

 

 

0.0

%

Restaurant Total

 

 

231

 

 

 

43,884

 

 

 

13.5

%

 

 

1,037

 

 

 

3.3

%

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Merchandise

 

 

90

 

 

 

15,958

 

 

 

4.9

%

 

 

1,178

 

 

 

3.8

%

Automotive

 

 

68

 

 

 

12,914

 

 

 

4.0

%

 

 

844

 

 

 

2.7

%

Home Furnishings

 

 

13

 

 

 

6,999

 

 

 

2.2

%

 

 

797

 

 

 

2.5

%

Untenanted

 

 

1

 

 

 

 

 

 

0.0

%

 

 

34

 

 

 

0.1

%

Retail Total

 

 

172

 

 

 

35,871

 

 

 

11.1

%

 

 

2,853

 

 

 

9.1

%

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Headquarters

 

 

6

 

 

 

10,221

 

 

 

3.1

%

 

 

671

 

 

 

2.1

%

Strategic Operations

 

 

5

 

 

 

9,587

 

 

 

3.0

%

 

 

615

 

 

 

2.0

%

Call Center

 

 

4

 

 

 

5,853

 

 

 

1.8

%

 

 

391

 

 

 

1.2

%

Office Total

 

 

15

 

 

 

25,661

 

 

 

7.9

%

 

 

1,677

 

 

 

5.3

%

Total

 

 

696

 

 

$

324,614

 

 

 

100.0

%

 

 

31,386

 

 

 

100.0

%

 

31


 

Diversification by Tenant

Tenant

 

Property Type

 

# Properties

 

 

ABR
($'000s)

 

 

ABR as a %
of Total
Portfolio

 

 

Square Feet
('000s)

 

 

SF as a %
of Total
Portfolio

 

Jack's Family Restaurants LP*

 

Quick Service Restaurants

 

 

43

 

 

$

7,026

 

 

 

2.2

%

 

 

147

 

 

 

0.5

%

Red Lobster Hospitality & Red Lobster
   Restaurants LLC*

 

Casual Dining

 

 

22

 

 

 

6,994

 

 

 

2.1

%

 

 

181

 

 

 

0.6

%

Joseph T. Ryerson & Son, Inc

 

Distribution & Warehouse

 

 

11

 

 

 

6,395

 

 

 

2.0

%

 

 

1,537

 

 

 

4.9

%

Axcelis Technologies, Inc.

 

Flex and R&D

 

 

1

 

 

 

5,859

 

 

 

1.8

%

 

 

417

 

 

 

1.4

%

Hensley & Company*

 

Distribution & Warehouse

 

 

3

 

 

 

5,756

 

 

 

1.8

%

 

 

577

 

 

 

1.8

%

BluePearl Holdings, LLC*

 

Animal Health Services

 

 

13

 

 

 

5,309

 

 

 

1.6

%

 

 

160

 

 

 

0.5

%

Outback Steakhouse of Florida LLC*1

 

Casual Dining

 

 

22

 

 

 

5,192

 

 

 

1.6

%

 

 

140

 

 

 

0.4

%

Krispy Kreme Doughnut Corporation

 

Quick Service Restaurants/
Food Processing

 

 

27

 

 

 

5,034

 

 

 

1.5

%

 

 

156

 

 

 

0.5

%

Siemens Medical Solutions USA, Inc. &
   Siemens Corporation

 

Manufacturing/Flex
and R&D

 

 

2

 

 

 

4,862

 

 

 

1.5

%

 

 

545

 

 

 

1.7

%

Big Tex Trailer Manufacturing, Inc.*

 

Automotive/Distribution &
Warehouse/Manufacturing/ Corporate Headquarters

 

 

17

 

 

 

4,860

 

 

 

1.5

%

 

 

1,302

 

 

 

4.1

%

Total Top 10 Tenants

 

 

 

 

161

 

 

 

57,287

 

 

 

17.6

%

 

 

5,162

 

 

 

16.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Santa Cruz Valley Hospital

 

Healthcare Facilities

 

 

1

 

 

 

4,500

 

 

 

1.4

%

 

 

148

 

 

 

0.5

%

Nestle' Dreyer's Ice Cream Company

 

Cold Storage

 

 

1

 

 

 

4,409

 

 

 

1.4

%

 

 

310

 

 

 

1.0

%

Tractor Supply Company

 

General Merchandise

 

 

17

 

 

 

4,406

 

 

 

1.4

%

 

 

341

 

 

 

1.1

%

Arkansas Surgical Hospital

 

Surgical

 

 

1

 

 

 

4,260

 

 

 

1.3

%

 

 

129

 

 

 

0.4

%

American Signature, Inc.

 

Home Furnishings

 

 

6

 

 

 

4,224

 

 

 

1.3

%

 

 

474

 

 

 

1.5

%

Cascade Aerospace Inc.

 

Manufacturing

 

 

1

 

 

 

4,084

 

 

 

1.2

%

 

 

231

 

 

 

0.7

%

Dollar General Corporation

 

General Merchandise

 

 

40

 

 

 

4,077

 

 

 

1.2

%

 

 

371

 

 

 

1.2

%

Fresh Express Incorporated

 

Food Processing

 

 

1

 

 

 

3,869

 

 

 

1.2

%

 

 

335

 

 

 

1.1

%

Aventiv Technologies, LLC

 

Corporate Headquarters

 

 

1

 

 

 

3,819

 

 

 

1.2

%

 

 

154

 

 

 

0.5

%

Kith Kitchens*

 

Manufacturing

 

 

3

 

 

 

3,561

 

 

 

1.1

%

 

 

843

 

 

 

2.7

%

Total Top 20 Tenants

 

 

 

 

233

 

 

$

98,496

 

 

 

30.3

%

 

 

8,498

 

 

 

27.1

%

1 Tenant’s properties include 20 Outback Steakhouse restaurants and two Carrabba’s Italian Grill restaurants.

* Subject to a master lease.

Diversification by Brand

Brand

 

Property Type

 

# Properties

 

 

ABR
($'000s)

 

 

ABR as a %
of Total
Portfolio

 

 

Square Feet
('000s)

 

 

SF as a %
of Total
Portfolio

 

Jack's Family Restaurants*

 

Quick Service Restaurants

 

 

43

 

 

$

7,026

 

 

 

2.2

%

 

 

147

 

 

 

0.5

%

Red Lobster*

 

Casual Dining

 

 

22

 

 

 

6,994

 

 

 

2.1

%

 

 

181

 

 

 

0.6

%

Ryerson

 

Distribution & Warehouse

 

 

11

 

 

 

6,395

 

 

 

2.0

%

 

 

1,537

 

 

 

4.9

%

Axcelis

 

Flex and R&D

 

 

1

 

 

 

5,859

 

 

 

1.8

%

 

 

417

 

 

 

1.4

%

Hensley*

 

Distribution & Warehouse

 

 

3

 

 

 

5,756

 

 

 

1.8

%

 

 

577

 

 

 

1.8

%

BluePearl Veterinary Partners*

 

Animal Health Services

 

 

13

 

 

 

5,309

 

 

 

1.6

%

 

 

160

 

 

 

0.5

%

Bob Evans Farms*1

 

Casual Dining/Food
Processing

 

 

21

 

 

 

5,247

 

 

 

1.6

%

 

 

282

 

 

 

0.9

%

Krispy Kreme

 

Quick Service Restaurants/
Food Processing

 

 

27

 

 

 

5,034

 

 

 

1.5

%

 

 

156

 

 

 

0.5

%

Siemens

 

Manufacturing/Flex
and R&D

 

 

2

 

 

 

4,862

 

 

 

1.5

%

 

 

545

 

 

 

1.7

%

Big Tex Trailers*

 

Automotive/Distribution &
Warehouse/Manufacturing/
Corporate Headquarters

 

 

17

 

 

 

4,860

 

 

 

1.5

%

 

 

1,302

 

 

 

4.1

%

Total Top 10 Brands

 

 

 

 

160

 

 

 

57,342

 

 

 

17.6

%

 

 

5,304

 

 

 

16.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wendy's**

 

Quick Service Restaurants

 

 

31

 

 

 

4,549

 

 

 

1.5

%

 

 

88

 

 

 

0.3

%

Santa Cruz Valley Hospital

 

Healthcare Facilities

 

 

1

 

 

 

4,500

 

 

 

1.4

%

 

 

148

 

 

 

0.5

%

Outback Steakhouse*

 

Casual Dining

 

 

20

 

 

 

4,492

 

 

 

1.4

%

 

 

126

 

 

 

0.4

%

Nestle'

 

Cold Storage

 

 

1

 

 

 

4,409

 

 

 

1.4

%

 

 

310

 

 

 

1.0

%

Tractor Supply Co.

 

General Merchandise

 

 

17

 

 

 

4,406

 

 

 

1.4

%

 

 

341

 

 

 

1.1

%

Arkansas Surgical Hospital

 

Surgical

 

 

1

 

 

 

4,260

 

 

 

1.3

%

 

 

129

 

 

 

0.4

%

Value City Furniture

 

Home Furnishings

 

 

6

 

 

 

4,224

 

 

 

1.3

%

 

 

474

 

 

 

1.5

%

Taco Bell**

 

Quick Service Restaurants

 

 

31

 

 

 

4,122

 

 

 

1.2

%

 

 

80

 

 

 

0.2

%

Cascade Aerospace

 

Manufacturing

 

 

1

 

 

 

4,084

 

 

 

1.2

%

 

 

231

 

 

 

0.7

%

Dollar General

 

General Merchandise

 

 

40

 

 

 

4,077

 

 

 

1.2

%

 

 

371

 

 

 

1.2

%

Total Top 20 Brands

 

 

 

 

309

 

 

$

100,465

 

 

 

30.9

%

 

 

7,602

 

 

 

24.2

%

1 Brand includes one BEF Foods, Inc property and 19 Bob Evans Restaurants, LLC properties.

* Subject to a master lease.

** Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.

32


 

Diversification by Industry

Industry

 

# Properties

 

 

ABR
($'000s)

 

 

ABR as a %
of Total
Portfolio

 

 

Square Feet ('000s)

 

 

ABR as a %
of Total
Portfolio

 

Healthcare Facilities

 

 

100

 

 

$

51,781

 

 

 

16.0

%

 

 

2,022

 

 

 

6.4

%

Restaurants

 

 

232

 

 

 

44,549

 

 

 

13.7

%

 

 

1,067

 

 

 

3.4

%

Packaged Foods & Meats

 

 

8

 

 

 

14,212

 

 

 

4.4

%

 

 

1,404

 

 

 

4.5

%

Distributors

 

 

24

 

 

 

13,906

 

 

 

4.3

%

 

 

2,519

 

 

 

8.0

%

Food Distributors

 

 

7

 

 

 

12,978

 

 

 

4.0

%

 

 

1,556

 

 

 

5.0

%

Auto Parts & Equipment

 

 

39

 

 

 

12,427

 

 

 

3.8

%

 

 

2,387

 

 

 

7.6

%

Specialized Consumer Services

 

 

47

 

 

 

12,078

 

 

 

3.7

%

 

 

720

 

 

 

2.3

%

Metal & Glass Containers

 

 

8

 

 

 

9,796

 

 

 

3.0

%

 

 

2,206

 

 

 

7.0

%

Healthcare Services

 

 

18

 

 

 

9,088

 

 

 

2.8

%

 

 

515

 

 

 

1.6

%

Home Furnishing

 

 

5

 

 

 

8,898

 

 

 

2.7

%

 

 

1,785

 

 

 

5.7

%

Specialty Stores

 

 

21

 

 

 

8,813

 

 

 

2.7

%

 

 

1,064

 

 

 

3.4

%

Home Furnishing Retail

 

 

16

 

 

 

8,794

 

 

 

2.7

%

 

 

1,149

 

 

 

3.7

%

Aerospace & Defense

 

 

7

 

 

 

8,675

 

 

 

2.7

%

 

 

952

 

 

 

3.0

%

Electronic Components

 

 

2

 

 

 

6,658

 

 

 

2.1

%

 

 

466

 

 

 

1.5

%

General Merchandise Stores

 

 

65

 

 

 

6,657

 

 

 

2.1

%

 

 

584

 

 

 

1.9

%

Other (41 industries)

 

 

93

 

 

 

95,304

 

 

 

29.3

%