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BNL Broadstone Net Lease

Filed: 24 Feb 21, 7:00pm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

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 1

 

BNL

 

New York Stock Exchange

Class A Common Stock, $0.00025 par value 1

 

BNL

 

New York Stock Exchange

1 Each share of Class A Common Stock will automatically convert to one share of Common Stock on March 20, 2021, the date that is 180 days after the completion of the initial public offering of the Class A Common Stock. The Common Stock will be listed and tradeable on the New York Stock Exchange on March 22, 2021.

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

As of June 30, 2020, there was no established market for the registrant’s shares of common stock.  The registrant subsequently completed its initial public offering on September 21, 2020. There were approximately 105,165,778.82 shares of common stock held by non-affiliates as of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, for an aggregate market value of $2,155,898,466, assuming a market value of $20.50 per share, the offering price per share as of June 30, 2020, in the registrant’s private offering exclusive of any available discounts for certain categories of purchasers.

There were 108,575,660 shares of the Registrant’s Common Stock, $0.00025 par value per share, and 37,000,000 shares of the Registrant’s Class A Common Stock, $0.00025 par value per share, outstanding as of February 23, 2021.

Documents Incorporated by Reference

Part III, Items 10, 11, 12, 13, and 14 of this annual report incorporate by reference certain specific portions of Broadstone Net Lease, Inc.’s definitive proxy statement for its 2021 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year. Only those portions of the proxy statement that are specifically incorporated by reference herein shall constitute a part of this Annual Report on Form 10-K.

 

 


 

 

BROADSTONE NET LEASE, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

3

 

 

 

 

 

 

 

PART I

 

 

 

 

 

 

 

Item 1.

 

Business

 

4

 

 

 

 

 

Item 1A.

 

Risk Factors

 

20

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

48

 

 

 

 

 

Item 2.

 

Properties

 

48

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

48

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

48

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

49

 

 

 

 

 

Item 6.

 

Selected Financial Data

 

52

 

 

 

 

 

Item 7.

 

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

 

54

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

72

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

73

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

142

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

142

 

 

 

 

 

Item 9B.

 

Other Information

 

142

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

143

 

 

 

 

 

Item 11.

 

Executive Compensation

 

143

 

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

143

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

143

 

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

143

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

144

 

 

 

 

 

Item 16.

 

Form 10-K Summary

 

144

 

2


 

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 this Annual Report on Form 10-K. The “Risk Factors” section should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this Annual Report on Form 10-K.

You are cautioned not to place undue reliance on any forward-looking statements included in this Annual Report on Form 10-K. All forward-looking statements are made as of the date of this Annual Report on Form 10-K and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this Annual Report on Form 10-K 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

Except where the context suggests otherwise, as used in this Annual Report on Form 10-K, 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.

Unless the context otherwise requires, the following terms and phrases are used throughout this Annual Report on Form 10-K as described below:

 

“annualized base rent” or “ABR” means the annualized contractual cash rent due for the last month of the reporting period, excluding the impacts of the short-term rent relief agreed to as a result of tenant requests for rent relief related to the global coronavirus (“COVID-19”) pandemic, and adjusted to remove rent from properties sold during the month and to include a full month of contractual cash rent for properties acquired during the last month. We have excluded the impact of the rent relief from the calculation of ABR because it is short term in nature relative to the length of our lease terms and relates to a discrete event, and therefore including it in the calculation would not provide an accurate measure of our relative portfolio composition;

 

“cash capitalization rate” represents the estimated first year cash yield to be generated on a real estate investment property, which was estimated at the time of investment based on the contractually specified cash base rent for the first full year after the date of the investment, divided by the purchase price for the property;

 

“CPI” means the Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, All Items, as published by the U.S. Bureau of Labor Statistics, or other similar index which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services;

 

“gross asset value” means the undepreciated book value of an asset, which represents the fair value of the asset as of the date it was acquired, less any subsequent writedowns due to impairment charges;

 

“occupancy” or a specified percentage of our portfolio that is “occupied” means 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.

 

3


 

 

Part I.

Item 1.

Business

The Company

We are an internally-managed real estate investment trust (“REIT”) that acquires, owns, and manages 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, office, and retail property types, and as of December 31, 2020, our portfolio has grown to 640 properties in 41 U.S. states and one property in Canada, with an aggregate gross asset value of approximately $4.0 billion.

We focus on investing in real estate that is operated by 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 December 31, 2020, our portfolio comprised approximately 28.2 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, office, and retail property types based on our extensive experience in and conviction around these sectors. Within these sectors, we have meaningful concentrations in manufacturing, distribution and warehouse, clinical, casual dining, quick service restaurant, strategic operations, corporate headquarters, food processing, flex/research and development, and cold storage.

 

Geographic Diversity: Our properties are located in 41 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 181 different commercial tenants who operate 167 different brands that are diversified across 55 differing industries, with no single tenant accounting for more than 2.5% of our ABR.

 

Strong In-Place Leases with Significant Remaining Lease Term. As of December 31, 2020, our portfolio was approximately 99.2% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 10.7 years, excluding renewal options.

 

Standard Contractual Base Rent Escalation. Approximately 98.3% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.1%.

 

Extensive Tenant Financial Reporting. Approximately 88.7% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 6.3% of our ABR is received from tenants who are not required to provide us with specified financial information under the terms of our lease, but whose financial statements are available publicly, either through the SEC filings or otherwise.

We conduct substantially all of our activities through, and all of our properties are held directly or indirectly by, the OP, which is commonly referred to as an umbrella partnership real estate investment trust or UPREIT. We are the sole managing member of the OP. As of December 31, 2020, we owned approximately 92.7% of its issued and outstanding membership units of the OP (“OP Units”), with the remaining 7.3% of its OP Units held by persons who were issued OP Units pursuant to the Internalization or in exchange for their interests in properties acquired by the OP.

2020 Highlights

Operating Highlights

 

Completed our initial public offering (“IPO”) on September 21, 2020, and listed our shares on the New York Stock Exchange (“NYSE”), generating net proceeds of $588.3 million, inclusive of the underwriters’ partial exercise of their overallotment option. See “Stock Split and Initial Public Offering” for additional information.

 

IPO proceeds used to repay $456.7 million of outstanding borrowings (including accrued interest), significantly reducing our leverage to 5.15x on a Net Debt to Annualized Adjusted EBITDAre basis at December 31, 2020.

 

Refinanced our unsecured revolving credit facility, which increased our capacity to $900.0 million and extended our debt maturity profile, providing ample liquidity and financial flexibility.

4


 

 

Collected 98.8% and 97.7% of contractual rent due during the quarter and year, respectively.

 

Generated total revenues of $321.6 million.

 

Generated net income of $56.3 million or $0.44 per diluted share for the year ended December 31, 2020.

 

Generated funds from operations (“FFO”) of $193.0 million or $1.50 per diluted share for the year ended December 31, 2020.

 

Generated adjusted funds from operations (“AFFO”) of $181.1 million or $1.41 per diluted share for the year ended December 31, 2020.

 

Closed six real estate acquisitions during the fourth quarter totaling approximately $100.3 million, excluding capitalized acquisition costs, adding 19 new properties with a weighted average initial cash capitalization rate of 6.9%. The properties acquired had an ABR weighted average remaining lease term of 14.4 years at the time of acquisition and ABR weighted average rent increases of 1.9%.

 

Sold 24 properties, representing 1.9% of our gross asset value as of December 31, 2019, at a weighted average cash capitalization rate of 7.7%, for net proceeds of $77.5 million, recognizing a gain of $15.0 million above net book value and a gain of $3.3 million over original purchase price.

 

Received initial credit rating of ‘BBB’ with stable outlook from S&P Global Ratings (“S&P”) in January 2021.

FFO, AFFO, Net Debt, and Annualized Adjusted EBITDAre and leverage are performance measures that are not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We present these non-GAAP measures as we believe certain investors and other users of our financial information use them as part of their evaluation of our historical operating performance. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K under the heading Non-GAAP Measures, which includes discussion of the definition, purpose, and use of these non-GAAP measures as well as a reconciliation of each to the most comparable GAAP measure.

Internalization

On February 7, 2020, we completed our Internalization, and paid aggregate consideration of approximately $209.5 million (in a combination of Common Stock, OP Units, and cash), and the OP assumed approximately $90.5 million of debt. In addition, we may be required to pay “earnout” consideration of up to an aggregate of up to $75 million (payable in four tranches of $10 million, $15 million, $25 million, and $25 million) to the former owners of BRE if certain milestones related to the dollar volume-weighted average price of our common stock on the principal exchange or securities market (or over-the-counter market) on which our common stock are then traded are achieved during specified periods. Should all earnout milestones be met, an additional 1,089,000 shares of common stock and 1,859,273 OP Units would be issued. In connection with the Internalization, we entered into a registration rights agreement with the Founding Owners and Trident BRE, LLC and its affiliates, and a tax protection agreement with the Founding Owners (the “Founding Owners’ Tax Protection Agreement”).

Stock Split and Initial Public Offering

On September 18, 2020, we effected a four-for-one split on the outstanding shares of our common stock (“Common Stock”). Concurrent with the stock split, the OP effected a four-for-one stock split of its outstanding OP Units. No fractional shares or OP Units were issued as a result of the stock split. All historic share and per share amounts have been adjusted to give retroactive effect to the stock split.

On September 21, 2020, we completed our IPO and issued an aggregate of 37 million shares of a new class of common stock, $0.00025 par value per share (“Class A Common Stock”) at $17.00 per share for net proceeds of $588.3 million, which includes shares issued pursuant to the underwriters’ partial exercise of their over-allotment option. Each share of Class A Common Stock will automatically convert into one share of Common Stock on March 20, 2021 and the Common Stock will subsequently be listed on the NYSE on March 22, 2021, which represents the first trading day following the 180-day period following the closing of the IPO.

Our Business and Growth Strategies

Our primary business objectives are to maximize cash flows, the value of our portfolio, and total returns to our stockholders through pursuit of the following business and growth strategies:

 

Internal Growth through Long-Term Net Leases with Strong Contractual Rent Escalations. We seek to enter into long-term net leases that include strong rent escalations over the lease term. As of December 31, 2020, substantially all of our portfolio (based on ABR) was subject to net leases, our leases had an ABR weighted average remaining lease term of approximately 10.7 years, excluding renewal options, and approximately 98.3% of our leases had contractual rent escalations, with an ABR weighted average minimum increase of 2.1%.

5


 

 

Disciplined and Targeted Acquisition Growth while Maintaining Our Diversified Portfolio. We plan to continue our disciplined and targeted acquisition strategy to identify properties that are both individually compelling and contribute to our portfolio’s overall diversification based on property type, geography, tenant, and industry. We believe our reputation, in-depth market knowledge, and extensive network of established relationships in the net lease industry will continue to provide us access to potential attractive investment opportunities.

 

Selectively Identify Attractive Adjacent Opportunities to Our Core Property Types. We have and will continue to seek attractive adjacent opportunities to our core property types in the net lease space, which have historically provided us the opportunity to earn higher relative returns.

 

Actively Manage Our Balance Sheet to Maximize Capital Efficiency. We seek to maintain a prudent balance between debt and equity financing and to maintain funding sources that lock in long-term investment spreads, limit interest rate sensitivity, and align with our lease terms. As of December 31, 2020, we had $1.5 billion of total debt outstanding, Net Debt of $1.4 billion, and a ratio of Net Debt to Annualized Adjusted EBITDAre of 5.15x. In the future, we will seek to maintain, on a sustained basis, a level of Net Debt that is generally less than 6.0x our Annualized Adjusted EBITDAre.

 

Proactively Manage Our Portfolio. We proactively approach asset management and property management to enhance the performance of our portfolio through risk mitigation strategies and opportunistic sales. We regularly review and monitor each of our properties to identify changes in the business performance and credit quality of our tenants, individual property level performance metrics, and the local real estate market conditions. Our proactive approach to asset management helps to identify and address issues, such as tenant credit deterioration, changes in real estate fundamentals, general market disruption (such as from the COVID-19 pandemic), or otherwise, including determining to sell any of our properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives.


6


 

 

Our Real Estate Investment Portfolio

The following charts summarize our portfolio diversification by property type, tenant, brand, industry and geographic location as of December 31, 2020. The percentages below are calculated based on our ABR of $294.3 million as of December 31, 2020.

Diversification by Property Type

 

7


 

 

Property Type

 

#

Properties

 

 

ABR  ($000s)

 

 

ABR as a % of Total Portfolio

 

 

Square Feet (000s)

 

 

SF as a % of Total Portfolio

 

Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

 

56

 

 

$

41,640

 

 

 

14.1

%

 

 

7,732

 

 

 

27.4

%

Distribution & Warehouse

 

 

31

 

 

 

39,902

 

 

 

13.6

%

 

 

7,414

 

 

 

26.3

%

Food Processing

 

 

14

 

 

 

18,334

 

 

 

6.2

%

 

 

2,132

 

 

 

7.6

%

Flex and R&D

 

 

7

 

 

 

16,774

 

 

 

5.7

%

 

 

1,457

 

 

 

5.2

%

Cold Storage

 

 

4

 

 

 

12,562

 

 

 

4.3

%

 

 

933

 

 

 

3.3

%

Services

 

 

18

 

 

 

7,168

 

 

 

2.4

%

 

 

429

 

 

 

1.5

%

Industrial Total

 

 

130

 

 

 

136,380

 

 

 

46.3

%

 

 

20,097

 

 

 

71.3

%

Healthcare

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical

 

 

50

 

 

 

25,097

 

 

 

8.5

%

 

 

1,062

 

 

 

3.8

%

Surgical

 

 

15

 

 

 

9,861

 

 

 

3.4

%

 

 

345

 

 

 

1.2

%

Animal Health Services

 

 

20

 

 

 

8,155

 

 

 

2.8

%

 

 

314

 

 

 

1.1

%

Life Science

 

 

9

 

 

 

7,478

 

 

 

2.5

%

 

 

550

 

 

 

1.9

%

Healthcare Services

 

 

23

 

 

 

6,288

 

 

 

2.1

%

 

 

243

 

 

 

0.9

%

Healthcare Total

 

 

117

 

 

 

56,879

 

 

 

19.3

%

 

 

2,514

 

 

 

8.9

%

Restaurant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quick Service Restaurants

 

 

157

 

 

 

25,583

 

 

 

8.7

%

 

 

533

 

 

 

1.9

%

Casual Dining

 

 

90

 

 

 

20,220

 

 

 

6.9

%

 

 

574

 

 

 

2.0

%

Restaurant Total

 

 

247

 

 

 

45,803

 

 

 

15.6

%

 

 

1,107

 

 

 

3.9

%

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Strategic Operations

 

 

7

 

 

 

13,621

 

 

 

4.6

%

 

 

1,021

 

 

 

3.6

%

Corporate Headquarters

 

 

6

 

 

 

9,713

 

 

 

3.3

%

 

 

671

 

 

 

2.4

%

Call Center

 

 

4

 

 

 

5,716

 

 

 

2.0

%

 

 

392

 

 

 

1.4

%

Office Total

 

 

17

 

 

 

29,050

 

 

 

9.9

%

 

 

2,084

 

 

 

7.4

%

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Merchandise

 

 

59

 

 

 

10,756

 

 

 

3.7

%

 

 

737

 

 

 

2.6

%

Automotive

 

 

56

 

 

 

9,746

 

 

 

3.3

%

 

 

784

 

 

 

2.8

%

Home Furnishings

 

 

15

 

 

 

5,702

 

 

 

1.9

%

 

 

860

 

 

 

3.1

%

Retail Total

 

 

130

 

 

 

26,204

 

 

 

8.9

%

 

 

2,381

 

 

 

8.5

%

Total

 

 

641

 

 

$

294,316

 

 

 

100.0

%

 

 

28,183

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8


 

 

Diversification by Tenant

Tenant

 

Property Type

 

# Properties

 

 

ABR

($'000s)

 

 

ABR as a % of

Total Portfolio

 

 

Square Feet

('000s)

 

 

SF as a % of

Total Portfolio

 

Red Lobster Hospitality & Red Lobster

   Restaurants LLC*

 

Casual Dining

 

 

24

 

 

$

7,307

 

 

 

2.5

%

 

 

196

 

 

 

0.7

%

Jack's Family Restaurants LP*

 

Quick Service Restaurants

 

 

43

 

 

 

7,025

 

 

 

2.4

%

 

 

147

 

 

 

0.5

%

Axcelis Technologies, Inc.

 

Flex and R&D

 

 

1

 

 

 

5,730

 

 

 

2.0

%

 

 

417

 

 

 

1.5

%

Hensley & Company*

 

Distribution & Warehouse

 

 

3

 

 

 

5,643

 

 

 

1.9

%

 

 

577

 

 

 

2.1

%

Outback Steakhouse of Florida LLC*1

 

Casual Dining

 

 

23

 

 

 

5,401

 

 

 

1.8

%

 

 

146

 

 

 

0.5

%

BluePearl Holdings, LLC*

 

Animal Health Services

 

 

12

 

 

 

5,092

 

 

 

1.7

%

 

 

154

 

 

 

0.5

%

Krispy Kreme Doughnut Corporation

 

Quick Service Restaurants/

Food Processing

 

 

27

 

 

 

5,034

 

 

 

1.7

%

 

 

156

 

 

 

0.6

%

Big Tex Trailer Manufacturing, Inc.*

 

Automotive/Distribution &

Warehouse/Manufacturing/ Corporate Headquarters

 

 

17

 

 

 

4,764

 

 

 

1.6

%

 

 

1,302

 

 

 

4.6

%

Siemens Medical Solutions USA, Inc. &

   Siemens Corporation

 

Manufacturing/Flex

and R&D

 

 

2

 

 

 

4,718

 

 

 

1.6

%

 

 

545

 

 

 

1.9

%

Nestle' Dreyer's Ice Cream Company

 

Cold Storage

 

 

1

 

 

 

4,409

 

 

 

1.5

%

 

 

310

 

 

 

1.1

%

Total Top 10 Tenants

 

 

 

 

153

 

 

 

55,123

 

 

 

18.7

%

 

 

3,950

 

 

 

14.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arkansas Surgical Hospital

 

Surgical

 

 

1

 

 

 

4,260

 

 

 

1.5

%

 

 

129

 

 

 

0.5

%

Nationwide Mutual Insurance Company*

 

Strategic Operations

 

 

2

 

 

 

4,165

 

 

 

1.4

%

 

 

407

 

 

 

1.4

%

American Signature, Inc.

 

Home Furnishings

 

 

6

 

 

 

4,142

 

 

 

1.4

%

 

 

474

 

 

 

1.7

%

Cascade Aerospace Inc.

 

Manufacturing

 

 

1

 

 

 

4,073

 

 

 

1.4

%

 

 

231

 

 

 

0.8

%

Aventiv Technologies, LLC

 

Corporate Headquarters

 

 

1

 

 

 

3,819

 

 

 

1.3

%

 

 

154

 

 

 

0.6

%

Fresh Express Incorporated

 

Food Processing

 

 

1

 

 

 

3,819

 

 

 

1.3

%

 

 

336

 

 

 

1.2

%

Bob Evans Restaurants, LLC*

 

Casual Dining

 

 

23

 

 

 

3,728

 

 

 

1.3

%

 

 

121

 

 

 

0.4

%

Tractor Supply Company

 

General Merchandise

 

 

14

 

 

 

3,586

 

 

 

1.2

%

 

 

281

 

 

 

1.0

%

Centene Management Company, LLC

 

Strategic Operations

 

 

1

 

 

 

3,267

 

 

 

1.1

%

 

 

220

 

 

 

0.8

%

Zips Car Wash, LLC*

 

Automotive

 

 

14

 

 

 

3,255

 

 

 

1.1

%

 

 

57

 

 

 

0.2

%

Total Top 20 Tenants

 

 

 

 

217

 

 

$

93,237

 

 

 

31.7

%

 

 

6,360

 

 

 

22.6

%

 

1

Tenant’s properties include 21 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

 

Red Lobster*

 

Casual Dining

 

 

24

 

 

$

7,307

 

 

 

2.5

%

 

 

196

 

 

 

0.7

%

Jack's Family Restaurants*

 

Quick Service Restaurants

 

 

43

 

 

 

7,025

 

 

 

2.4

%

 

 

147

 

 

 

0.5

%

Axcelis

 

Flex and R&D

 

 

1

 

 

 

5,730

 

 

 

2.0

%

 

 

417

 

 

 

1.5

%

Hensley*

 

Distribution & Warehouse

 

 

3

 

 

 

5,643

 

 

 

1.9

%

 

 

577

 

 

 

2.1

%

Bob Evans Farms*1

 

Casual Dining/Food

Processing

 

 

24

 

 

 

5,611

 

 

 

1.9

%

 

 

297

 

 

 

1.1

%

Wendy's#

 

Quick Service Restaurants

 

 

39

 

 

 

5,568

 

 

 

1.9

%

 

 

115

 

 

 

0.4

%

BluePearl Veterinary Partners*

 

Animal Health Services

 

 

12

 

 

 

5,092

 

 

 

1.7

%

 

 

154

 

 

 

0.5

%

Krispy Kreme

 

Quick Service Restaurants/

Food Processing

 

 

27

 

 

 

5,034

 

 

 

1.7

%

 

 

156

 

 

 

0.6

%

Big Tex Trailers*

 

Automotive/Distribution &

Warehouse/Manufacturing/

Corporate Headquarters

 

 

17

 

 

 

4,764

 

 

 

1.6

%

 

 

1,302

 

 

 

4.6

%

Siemens

 

Manufacturing/Flex

and R&D

 

 

2

 

 

 

4,718

 

 

 

1.6

%

 

 

545

 

 

 

1.9

%

Total Top 10 Brands

 

 

 

 

192

 

 

 

56,492

 

 

 

19.2

%

 

 

3,906

 

 

 

13.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outback Steakhouse*

 

Casual Dining

 

 

21

 

 

 

4,701

 

 

 

1.6

%

 

 

132

 

 

 

0.4

%

Nestle'

 

Cold Storage

 

 

1

 

 

 

4,409

 

 

 

1.5

%

 

 

310

 

 

 

1.1

%

Arkansas Surgical Hospital

 

Surgical

 

 

1

 

 

 

4,260

 

 

 

1.5

%

 

 

129

 

 

 

0.5

%

Taco Bell#

 

Quick Service Restaurants

 

 

32

 

 

 

4,202

 

 

 

1.4

%

 

 

82

 

 

 

0.3

%

Nationwide Mutual Insurance Co.*

 

Strategic Operations

 

 

2

 

 

 

4,165

 

 

 

1.4

%

 

 

407

 

 

 

1.4

%

Value City Furniture

 

Home Furnishings

 

 

6

 

 

 

4,142

 

 

 

1.4

%

 

 

474

 

 

 

1.7

%

Cascade Aerospace

 

Manufacturing

 

 

1

 

 

 

4,073

 

 

 

1.4

%

 

 

231

 

 

 

0.8

%

Securus Technologies

 

Corporate Headquarters

 

 

1

 

 

 

3,819

 

 

 

1.3

%

 

 

154

 

 

 

0.6

%

Chiquita

 

Food Processing

 

 

1

 

 

 

3,819

 

 

 

1.3

%

 

 

336

 

 

 

1.2

%

Tractor Supply Co.

 

General Merchandise

 

 

14

 

 

 

3,586

 

 

 

1.2

%

 

 

281

 

 

 

1.0

%

Total Top 20 Brands

 

 

 

 

272

 

 

$

97,668

 

 

 

33.2

%

 

 

6,442

 

 

 

22.9

%

*

Subject to a master lease.

#

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

1 

Brand includes one BEF Foods, Inc property and 23 Bob Evans Restaurants, LLC properties.

9


 

 

Diversification by Industry

 

Industry

 

#

Properties

 

 

ABR  ($000s)

 

 

ABR as a % of Total Portfolio

 

 

Square Feet (000s)

 

 

SF as a % of Total Portfolio

 

Restaurants

 

 

247

 

 

$

46,467

 

 

 

15.8

%

 

 

1,132

 

 

 

4.0

%

Healthcare Facilities

 

 

92

 

 

 

44,812

 

 

 

15.2

%

 

 

1,758

 

 

 

6.2

%

Food Distributors

 

 

7

 

 

 

12,775

 

 

 

4.3

%

 

 

1,556

 

 

 

5.5

%

Packaged Foods & Meats

 

 

6

 

 

 

11,339

 

 

 

3.9

%

 

 

1,130

 

 

 

4.0

%

Auto Parts & Equipment

 

 

31

 

 

 

10,153

 

 

 

3.4

%

 

 

2,190

 

 

 

7.8

%

Metal & Glass Containers

 

 

8

 

 

 

9,602

 

 

 

3.3

%

 

 

2,206

 

 

 

7.8

%

Specialized Consumer Services

 

 

36

 

 

 

9,211

 

 

 

3.1

%

 

 

677

 

 

 

2.4

%

Healthcare Services

 

 

16

 

 

 

8,202

 

 

 

2.8

%

 

 

481

 

 

 

1.7

%

Aerospace & Defense

 

 

6

 

 

 

7,651

 

 

 

2.6

%

 

 

921

 

 

 

3.3

%

Home Furnishing Retail

 

 

14

 

 

 

7,481

 

 

 

2.5

%

 

 

1,022

 

 

 

3.6

%

Distributors

 

 

12

 

 

 

6,870

 

 

 

2.3

%

 

 

966

 

 

 

3.4

%

Specialty Stores

 

 

16

 

 

 

6,611

 

 

 

2.2

%

 

 

869

 

 

 

3.1

%

Electronic Components

 

 

2

 

 

 

6,529

 

 

 

2.2

%

 

 

466

 

 

 

1.7

%

Air Freight & Logistics

 

 

3

 

 

 

6,478

 

 

 

2.2

%

 

 

436

 

 

 

1.5

%

Industrial Machinery

 

 

16

 

 

 

6,005

 

 

 

2.0

%

 

 

1,174

 

 

 

4.2

%

Other (40 industries)

 

 

121

 

 

 

94,130

 

 

 

32.2

%

 

 

10,975

 

 

 

39.0

%

Untenanted properties

 

 

8

 

 

 

 

 

 

 

 

 

224

 

 

 

0.8

%

Total

 

 

641

 

 

$

294,316

 

 

 

100.0

%

 

 

28,183

 

 

 

100.0

%

 


10


 

 

Diversification by Geography

 

 

State

 

# Properties

 

 

ABR

($000s)

 

 

ABR as a % of Total Portfolio

 

 

Square Feet (000s)

 

 

SF as a % of Total Portfolio

 

 

 

State

 

# Properties

 

 

 

 

ABR

($000s)

 

 

 

 

ABR as a % of Total Portfolio

 

 

 

 

Square Feet (000s)

 

 

 

 

SF as a % of Total Portfolio

 

TX

 

 

53

 

 

$

29,985

 

 

 

10.2

%

 

 

3,183

 

 

 

11.3

%

 

 

VA

 

 

13

 

 

 

 

 

4,368

 

 

 

 

 

1.5

%

 

 

 

 

110

 

 

 

 

 

0.4

%

IL

 

 

26

 

 

 

18,350

 

 

 

6.2

%

 

 

1,981

 

 

 

7.0

%

 

 

WA

 

 

15

 

 

 

 

 

4,144

 

 

 

 

 

1.4

%

 

 

 

 

150

 

 

 

 

 

0.5

%

CA

 

 

11

 

 

 

15,683

 

 

 

5.3

%

 

 

1,554

 

 

 

5.5

%

 

 

MO

 

 

9

 

 

 

 

 

3,882

 

 

 

 

 

1.3

%

 

 

 

 

733

 

 

 

 

 

2.6

%

WI

 

 

32

 

 

 

15,622

 

 

 

5.3

%

 

 

1,611

 

 

 

5.7

%

 

 

KY

 

 

16

 

 

 

 

 

3,205

 

 

 

 

 

1.1

%

 

 

 

 

162

 

 

 

 

 

0.6

%

FL

 

 

48

 

 

 

15,530

 

 

 

5.3

%

 

 

811

 

 

 

2.9

%

 

 

LA

 

 

3

 

 

 

 

 

3,122

 

 

 

 

 

1.1

%

 

 

 

 

175

 

 

 

 

 

0.6

%

MI

 

 

35

 

 

 

14,446

 

 

 

4.9

%

 

 

1,439

 

 

 

5.1

%

 

 

NE

 

 

6

 

 

 

 

 

2,958

 

 

 

 

 

1.0

%

 

 

 

 

509

 

 

 

 

 

1.8

%

OH

 

 

35

 

 

 

14,065

 

 

 

4.8

%

 

 

1,369

 

 

 

4.9

%

 

 

MD

 

 

4

 

 

 

 

 

2,863

 

 

 

 

 

1.0

%

 

 

 

 

293

 

 

 

 

 

1.0

%

IN

 

 

30

 

 

 

12,825

 

 

 

4.4

%

 

 

1,757

 

 

 

6.2

%

 

 

SC

 

 

13

 

 

 

 

 

2,730

 

 

 

 

 

0.9

%

 

 

 

 

308

 

 

 

 

 

1.1

%

MN

 

 

20

 

 

 

11,445

 

 

 

3.9

%

 

 

1,757

 

 

 

6.2

%

 

 

NM

 

 

8

 

 

 

 

 

2,730

 

 

 

 

 

0.9

%

 

 

 

 

96

 

 

 

 

 

0.3

%

NC

 

 

31

 

 

 

11,395

 

 

 

3.9

%

 

 

1,227

 

 

 

4.4

%

 

 

IA

 

 

4

 

 

 

 

 

2,658

 

 

 

 

 

0.9

%

 

 

 

 

622

 

 

 

 

 

2.2

%

PA

 

 

17

 

 

 

9,897

 

 

 

3.4

%

 

 

1,149

 

 

 

4.1

%

 

 

MS

 

 

7

 

 

 

 

 

2,637

 

 

 

 

 

0.9

%

 

 

 

 

329

 

 

 

 

 

1.2

%

MA

 

 

4

 

 

 

9,551

 

 

 

3.2

%

 

 

1,009

 

 

 

3.6

%

 

 

UT

 

 

3

 

 

 

 

 

2,328

 

 

 

 

 

0.8

%

 

 

 

 

280

 

 

 

 

 

1.0

%

TN

 

 

38

 

 

 

9,147

 

 

 

3.1

%

 

 

376

 

 

 

1.3

%

 

 

CT

 

 

2

 

 

 

 

 

1,653

 

 

 

 

 

0.6

%

 

 

 

 

55

 

 

 

 

 

0.2

%

NY

 

 

15

 

 

 

9,048

 

 

 

3.1

%

 

 

572

 

 

 

2.0

%

 

 

WV

 

 

8

 

 

 

 

 

1,634

 

 

 

 

 

0.5

%

 

 

 

 

36

 

 

 

 

 

0.1

%

AZ

 

 

8

 

 

 

8,440

 

 

 

2.9

%

 

 

761

 

 

 

2.7

%

 

 

MT

 

 

7

 

 

 

 

 

1,526

 

 

 

 

 

0.5

%

 

 

 

 

43

 

 

 

 

 

0.2

%

AL

 

 

48

 

 

 

8,233

 

 

 

2.8

%

 

 

188

 

 

 

0.7

%

 

 

CO

 

 

3

 

 

 

 

 

1,434

 

 

 

 

 

0.5

%

 

 

 

 

94

 

 

 

 

 

0.3

%

AR

 

 

10

 

 

 

7,229

 

 

 

2.4

%

 

 

278

 

 

 

1.0

%

 

 

NV

 

 

2

 

 

 

 

 

1,311

 

 

 

 

 

0.4

%

 

 

 

 

81

 

 

 

 

 

0.3

%

OK

 

 

19

 

 

 

6,561

 

 

 

2.2

%

 

 

792

 

 

 

2.8

%

 

 

ND

 

 

2

 

 

 

 

 

933

 

 

 

 

 

0.3

%

 

 

 

 

28

 

 

 

 

 

0.1

%

GA

 

 

18

 

 

 

5,911

 

 

 

2.0

%

 

 

973

 

 

 

3.5

%

 

 

DE

 

 

3

 

 

 

 

 

663

 

 

 

 

 

0.2

%

 

 

 

 

35

 

 

 

 

 

0.1

%

NJ

 

 

3

 

 

 

4,900

 

 

 

1.7

%

 

 

366

 

 

 

1.3

%

 

 

WY

 

 

1

 

 

 

 

 

307

 

 

 

 

 

0.1

%

 

 

 

 

21

 

 

 

 

 

0.1

%

KS

 

 

10

 

 

 

4,894

 

 

 

1.7

%

 

 

639

 

 

 

2.3

%

 

 

Total US

 

 

640

 

 

 

 

$

290,243

 

 

 

 

 

98.6

%

 

 

 

 

27,952

 

 

 

 

 

99.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Canada

 

 

1

 

 

 

 

 

4,073

 

 

 

 

 

1.4

%

 

 

 

 

231

 

 

 

 

 

0.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total

 

 

641

 

 

 

 

$

294,316

 

 

 

 

 

100.0

%

 

 

 

 

28,183

 

 

 

 

 

100.0

%

11


 

 

Our Leases

We typically lease our properties pursuant to long-term net leases with initial terms of 10 years or more that often have renewal options. Substantially all of our leases are net, meaning our tenants are generally obligated to pay all expenses associated with the leased property (such as real estate taxes, insurance, maintenance, repairs, and capital costs). We seek to use master lease structures where it fits market practice in the particular property type, pursuant to which we seek to lease multiple properties to a single tenant on an all or none basis. We believe the master lease structure is most prevalent and applicable to leases in our restaurant and retail property type and less relevant to our other property types, such as healthcare and industrial. Additionally, when we acquire properties associated with a tenant that has an existing master lease structure with us, we seek to add the new properties to the existing master lease structure to strengthen the existing lease with such tenant. As of December 31, 2020, master leases contributed approximately 34.4% of our overall ABR (our largest master lease by ABR related to 24 properties and contributed 2.5% of our ABR, and our smallest master lease by ABR related to two properties and contributed 0.1% of our ABR), 74.0% of our restaurant property ABR (168 of our 247 restaurant properties), and 47.2% of our retail property ABR (76 of our 130 properties).

As of December 31, 2020, approximately 99.2% of our portfolio’s rentable square footage, representing all but eight of our properties, was subject to a lease. Because substantially all of our properties are leased under long-term leases, we are not currently required to perform significant ongoing leasing activities on our properties. The leases for five of our properties, representing less than 0.4% of our ABR, will expire during 2021, and leases for an additional three properties, representing approximately 0.8% of our ABR, will expire during 2022. During 2020, we extended the terms of leases with two tenants whose leases were set to expire in 2020, and four tenants whose leases were set to expire in subsequent years. As of December 31, 2020, the ABR weighted average remaining term of our leases was approximately 10.7 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Approximately 43.5% of our rental revenue was derived from leases that will expire after 2030, and no more than 16.7% of our rental revenue was derived from leases that expire in any single year prior to 2031. The following chart sets forth our lease expirations based upon the terms of the leases in place as of December 31, 2020.

Expiration

Year

 

2021

 

2022

 

2023

 

2024

 

2025

 

2026

 

2027

 

2028

 

2029

 

2030

 

2031

 

2032

 

2033

 

2034

 

2035

 

2036

 

2037

 

2038

 

2039

 

2040

 

2041+

Number of

  properties

 

5

 

3

 

7

 

11

 

19

 

33

 

28

 

34

 

60

 

88

 

18

 

37

 

38

 

29

 

14

 

71

 

24

 

32

 

12

 

42

 

28

Number of

   leases

 

5

 

4

 

8

 

11

 

22

 

25

 

24

 

28

 

28

 

41

 

13

 

19

 

12

 

14

 

10

 

7

 

9

 

28

 

7

 

7

 

5

 

12


 

 

The following table presents certain information based on lease expirations by year. Amounts are in thousands, except for number of properties.

Year

 

#

Properties

 

 

ABR  ($000s)

 

 

ABR as a % of Total Portfolio

 

 

Square Feet (000s)

 

 

SF as a % of Total Portfolio

 

2021

 

 

5

 

 

$

1,254

 

 

 

0.4

%

 

 

64

 

 

 

0.2

%

2022

 

 

3

 

 

 

2,409

 

 

 

0.8

%

 

 

86

 

 

 

0.3

%

2023

 

 

7

 

 

 

5,000

 

 

 

1.7

%

 

 

520

 

 

 

1.8

%

2024

 

 

11

 

 

 

13,627

 

 

 

4.6

%

 

 

1,689

 

 

 

6.0

%

2025

 

 

19

 

 

 

7,800

 

 

 

2.7

%

 

 

682

 

 

 

2.4

%

2026

 

 

33

 

 

 

18,029

 

 

 

6.1

%

 

 

1,394

 

 

 

4.9

%

2027

 

 

28

 

 

 

22,991

 

 

 

7.8

%

 

 

2,015

 

 

 

7.2

%

2028

 

 

34

 

 

 

26,961

 

 

 

9.2

%

 

 

2,727

 

 

 

9.7

%

2029

 

 

60

 

 

 

19,080

 

 

 

6.5

%

 

 

2,529

 

 

 

9.0

%

2030

 

 

88

 

 

 

49,126

 

 

 

16.7

%

 

 

4,934

 

 

 

17.5

%

2031

 

 

18

 

 

 

5,815

 

 

 

2.0

%

 

 

588

 

 

 

2.1

%

2032

 

 

37

 

 

 

24,657

 

 

 

8.4

%

 

 

2,949

 

 

 

10.5

%

2033

 

 

38

 

 

 

15,430

 

 

 

5.2

%

 

 

1,654

 

 

 

5.9

%

2034

 

 

29

 

 

 

5,117

 

 

 

1.7

%

 

 

330

 

 

 

1.2

%

2035

 

 

14

 

 

 

10,109

 

 

 

3.4

%

 

 

1,471

 

 

 

5.2

%

2036

 

 

71

 

 

 

16,757

 

 

 

5.7

%

 

 

958

 

 

 

3.4

%

2037

 

 

24

 

 

 

16,882

 

 

 

5.7

%

 

 

1,367

 

 

 

4.8

%

2038

 

 

32

 

 

 

6,653

 

 

 

2.3

%

 

 

303

 

 

 

1.1

%

2039

 

 

12

 

 

 

8,988

 

 

 

3.1

%

 

 

933

 

 

 

3.3

%

2040

 

 

42

 

 

 

7,049

 

 

 

2.4

%

 

 

352

 

 

 

1.2

%

Thereafter

 

 

28

 

 

 

10,582

 

 

 

3.6

%

 

 

414

 

 

 

1.5

%

Untenanted properties

 

 

8

 

 

 

 

 

 

 

 

 

224

 

 

 

0.8

%

Total

 

 

641

 

 

$

294,316

 

 

 

100.0

%

 

 

28,183

 

 

 

100.0

%

Substantially all of our leases provide for periodic contractual rent escalations. As of December 31, 2020, leases contributing 98.3% of our ABR provided for increases in future annual base rent, generally ranging from 1.5% to 2.5% annually, with an ABR weighted average annual minimum increase equal to 2.1% of base rent. Generally, our rent escalators increase rent on specified dates by a fixed percentage. Our escalations provide us with a source of organic growth and a measure of inflation protection. Additional information on lease escalation frequency and weighted average annual escalation rates as of December 31, 2020 is displayed below.

 

Lease Escalation Frequency

 

% of ABR

 

 

Weighted Average Annual Minimum Increase (1)

 

 

Annually

 

 

79.3

%

 

 

2.0

%

 

Every 2 years

 

 

0.1

%

 

 

1.8

%

 

Every 3 years

 

 

3.7

%

 

 

2.4

%

 

Every 4 years

 

 

1.4

%

 

 

2.4

%

 

Every 5 years

 

 

8.4

%

 

 

1.9

%

 

Other escalation frequencies

 

 

5.4

%

 

 

1.8

%

 

Flat

 

 

1.7

%

 

 

 

 

Total/Weighted Average (2)

 

 

100.0

%

 

 

2.1

%

 

 

(1)

Represents the ABR weighted average annual minimum increase of the entire portfolio as if all escalations occurred annually. For leases where rent escalates by the greater of a stated fixed percentage or the change in CPI, we have assumed an escalation equal to the stated fixed percentage in the lease. As of December 31, 2020, leases contributing 10.3% of our ABR provide for rent increases equal to the lesser of a stated fixed percentage or the change in CPI. As any future increase in CPI is unknowable at this time, we have not included an increase in the rent pursuant to these leases in the weighted average annual minimum increase presented.

(2)

Weighted by ABR.


13


 

 

The escalation provisions of our leases (by percentage of ABR) as of December 31, 2020, are displayed in the following chart:

If requested by a tenant, we may, subject to the tenant’s history, creditworthiness, and other relevant considerations, agree to reimburse or provide a loan to the tenant for property expansion or improvement costs that it incurs in connection with improvements at a property, 100% of which it leases from us. In exchange for such reimbursement or loan, we generally receive contractually specified rent that increases proportionally with our funding. For example, we may agree to reimburse a tenant, up to a specified amount, for property expansion or improvement costs that it incurs in improving a commercial facility on its property. Generally, as we reimburse the tenant for property expansion or improvement costs, the rent will increase proportionally with our funding, which generally allows us to achieve a consistent cash yield on our funding throughout improvement.

Investment Guidelines

We seek to acquire primarily freestanding, single-tenant commercial real estate properties located in the United States, with a target size for individual property acquisitions of up to approximately $100 million. We generally seek to invest in properties that are under lease and fully occupied at the time of acquisition. We also seek to maintain our portfolio’s diversification by property type, geography, tenant, and industry in an effort to reduce fluctuations in income caused by under-performing individual real estate assets or adverse economic conditions affecting an entire industry or geographic region. When evaluating whether a property acquisition would contribute to our overall portfolio’s diversification, we expect to take into account the percentage a single property, tenant, or brand would represent in our overall portfolio, as well as geographic concentrations, both by the metropolitan statistical area and by state. While we consider these criteria when evaluating acquisition opportunities, we may also pursue opportunistic investments that do not meet one or more of these factors if we assess that a transaction presents compelling risk-adjusted returns. We intend to primarily acquire portfolios and assets over time that will generally not result in any one tenant representing more than 5% of ABR.

We are focused primarily on investing in the industrial, healthcare, restaurant, retail, and office property types. Within each property type, we target specific acquisition opportunities in a highly selective manner.

 

Industrial. We focus on single-tenant manufacturing, warehouse and distribution facilities, refrigerated storage, flex-space, food processing, and research and development facilities where the tenant has a strong credit profile and experienced management team. We look for industrial assets where the real estate is mission critical to the tenant’s operations, where the property sits on an essential or strategic location for the tenant, and where it would be difficult or more expensive for the tenant to relocate. We look for industrial properties that are located in close proximity to major transportation thoroughfares such as airports, ports, railways, major freeways or interstate highways.

 

Healthcare. We focus on single-tenant medical office buildings, large regional physician practices, and off-campus clinics affiliated with major health systems, as well as laboratories, ambulatory surgical centers, service-type locations such as dental and dialysis centers, and animal health service clinics. We primarily focus on healthcare properties that have substantial tenant investments like special regulatory permits and buildouts that would make relocation difficult or costly. We look for healthcare properties that are mission critical to tenant operations, generally located adjacent to or near hospital

14


 

 

campuses or other medical facilities, and where the tenant has a strong credit profile and is not easily displaced by regulatory changes. In certain instances, we will seek additional credit enhancements to augment the credit of the tenant. In states where a certificate of need statute exists, we ensure that our sites carry this designation to maintain long-term viability.

 

Restaurant. We focus our restaurant investments primarily in single-tenant quick service restaurant and casual dining properties, with an emphasis on restaurants that are located in strong retail markets. We underwrite restaurant properties primarily based on the fundamental value of the underlying real estate, site level performance, corporate owned location or experienced multi-unit franchise operators, and whether the property is subject to a master lease with multiple operating locations.

 

Retail. We focus on e-commerce resistant industries where the presence of a physical location is important to the end consumer and mission critical to the tenant. Our retail investments are primarily in single-tenant, net leased retail establishments in the automotive, general merchandise, and home furnishings industries, with an emphasis on market presence and necessity-based shopping. We underwrite retail properties primarily based on the fundamental value of the underlying real estate, site level performance, corporate owned location or experienced multi-unit franchise operators, and whether the property is subject to a master lease with multiple operating locations.

 

Office. We focus on single-tenant corporate headquarters, call centers, and mission-critical business operations with creditworthy tenants where the property is strategically located or important to the tenant’s business. Key considerations for us when making office investments include a strong tenant credit profile, tenant’s previous investment in the property, occupancy costs relative to the market, divisibility of the space, and cost associated with repositioning the space upon lease expiration.

Competition

The commercial real estate market is highly competitive. We compete for tenants to occupy our properties in all of our markets with other owners and operators of commercial real estate. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs, and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates, and the operating expenses of certain of our properties.

In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and purchasers to buy our properties. These competitors include other REITs, private and institutional real estate investors, sovereign wealth funds, banks, mortgage bankers, insurance companies, investment banking firms, lenders, specialty finance companies, and other entities. Some of these competitors, including larger REITs, have substantially greater financial resources, including lower cost of capital, than we have. The relative size of their portfolios may allow them to absorb properties with lower returns or allow them to accept more risk on a given property than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities may seek financing through similar channels to us. Competition from these REITs and other third-party real estate investors may limit the number of suitable investment opportunities available to us. It also may result in higher prices, lower yields, and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.

Human Capital

As of December 31, 2020, we employed 71 full-time employees, comprised of professional employees engaged in origination, underwriting, closing, accounting and financial reporting, portfolio and asset management, capital markets, and other corporate activities essential to our business.

Our commitment to our employees is central to our ability to continue to deliver strong performance and financial results for our stockholders and other stakeholders. We are as passionate about our people as we are about real estate. We seek to create and cultivate an engaging work environment for our employees, which allows us to attract, retain, and develop top talent to manage our business. To do that, we believe it is essential that we develop and maintain a culture that lives up to our values of respect, integrity, partnership, humility, grateful, and fun. Our goal is to provide our employees with a work environment that is free from discrimination and harassment, that respects and honors their differences and unique life experiences, and that enables employees the opportunity to develop and excel in their role and reach their full potential. We seek to provide a collaborative, creative workplace where people with unique talents can flourish, where their opinions are valued, and where their contributions are rewarded.


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As part of our commitment to our employees, we are focused on the following:

 

Diversity and Inclusion – We are committed to providing equal opportunity in all aspects of employment and cultivating a diverse and inclusive workplace. We believe that diverse backgrounds and experiences help drive our performance and are important assets for our company. We recently created a “Diversity, Equity, and Inclusion” committee that will spearhead our ongoing efforts to deepen our commitment to this important initiative and drive our training, employee engagement, and policy reviews. Given its importance, our efforts to promote greater diversity and inclusion in our workplace has been instituted as a regular reporting item for our board of directors.

 

Career Development – We strive to create an engaging work experience that allows for career development and related opportunities. We offer numerous opportunities for our employees to engage in personal and professional development, including educational support and financial assistance, participating in industry conferences and networking events, individual leadership and management training, access to an online learning library providing an extensive collection of learning and development opportunities, lunch and learn meetings with our CEO and senior management team, group trainings (e.g., underwriting, real estate fundamentals, cyber security, ethics, harassment, computer skills), mentorship opportunities, and reimbursement for continuing education requirements.

 

Employee Wellness – Our employees are our most valuable asset, and their individual and group contributions drive our performance and success. As a result, we are focused on and invest in our team’s overall health, wellness, and engagement. We employ numerous strategies and initiatives to nurture and nourish our employees’ physical, mental, and emotional well-being, including, among other things, competitive employee benefits, generous fringe benefits to make our office environment more comfortable, transparent and open communication and dialogue between our senior executives and our employee base, events and opportunities for social connectedness, particularly during periods where we are working from home, family-friendly corporate events, routine fitness exploration classes, flu shots administered by a third-party health-services provider, yoga and massage sessions, flexible work schedules to meet specific employee needs, and access to an employee assistance program and other emotional and mental health resources.

 

Community Engagement – Giving back to our communities is important to us and our employees. We provide regular volunteer opportunities and fundraising initiatives throughout the year that provide our employees with meaningful civic involvement. Since our inception, we have provided opportunities for our employees to contribute time and resources to benefit local nonprofit organizations. Our community engagement efforts are led by our employees through a dedicated committee that is responsible for planning and organizing for our employees our various volunteer opportunities, civic involvement with non-profit organizations, and corporate donations.

We believe that the initiatives described above will help us attract, hire and retain employees.

Principal Executive Offices

Our principal executive offices are located at 800 Clinton Square, Rochester, New York, 14604, and our telephone number is (585) 287-6500. We occupy approximately 24,072 square feet of space leased from Clinton Asset Holding Associates, L.P. (“CAHA”), an affiliated third party. Amy Tait, our Chairman and a member of our board of directors, and members of her immediate family own interests in CAHA. We believe that our offices are adequate for our present and currently planned future operations and that adequate additional space will be available if needed in the future.

Insurance

Our tenants are generally required to maintain liability and property insurance coverage for the properties they lease from us pursuant to net leases. These leases generally require our tenants to name us (and any of our lenders that have a mortgage on the property leased by the tenant) as additional insureds on their liability policies and additional named insured and/or loss payee (or mortgagee, in the case of our lenders) on their property policies. Depending on the location of the property, certain losses of a catastrophic nature, such as those caused by earthquakes and floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or co-payments that a tenant may not be able to meet. Certain other losses of a catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism or acts of war, may be uninsurable or not economically insurable. In the event there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are irreparably damaged.

 

In addition to being a named insured on our tenants’ liability policies, we separately maintain commercial general liability coverage and, in certain instances, general or specific (e.g., flood) property-level insurance coverage on certain properties or pursuant to the terms of certain of our leases. We also maintain full property coverage on all untenanted properties and other property coverage as may be required by our lenders, which are not required to be carried by our tenants under our leases.

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Government Regulation

General

Our investments are subject to various laws, ordinances, and regulations, including, among other things, fire and safety requirements, zoning regulations, land use controls, and environmental controls relating to air and water quality, noise pollution, and indirect environmental impacts. We believe that we have all permits and approvals necessary under current law to operate our investments.

Americans with Disabilities Act (“ADA”)

Under Title III of the ADA, and rules promulgated thereunder, in order to protect individuals with disabilities, public accommodations must remove architectural and communication barriers that are structural in nature from existing places of public accommodation to the extent “readily achievable.” In addition, under the ADA, alterations to a place of public accommodation or a commercial facility are to be made so that, to the maximum extent feasible, such altered portions are readily accessible to and usable by disabled individuals. The “readily achievable” standard takes into account, among other factors, the financial resources of the affected site and the owner, lessor or other applicable person.

Compliance with the ADA, as well as other federal, state, and local laws, may require modifications to properties we currently own or may purchase, or may restrict renovations of those properties. Failure to comply with these laws or regulations could result in the imposition of fines or an award of damages to private litigants, as well as the incurrence of the costs of making modifications to attain compliance, and future legislation could impose additional obligations or restrictions on our properties. Although our tenants are generally responsible for all maintenance and repairs of the property pursuant to our lease, including compliance with the ADA and other similar laws or regulations, we could be held liable as the owner of the property for a failure of one of our tenants to comply with these laws or regulations.

Environmental Matters

Federal, state, and local environmental laws and regulations regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under various of these laws and regulations, a current or previous owner, operator or tenant of real estate may be required to investigate and clean up or otherwise address hazardous or toxic substances, hazardous wastes or petroleum product releases or threats of releases at the property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up, and monitoring costs incurred by those parties in connection with the actual or threatened contamination. These laws may impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator, or tenant knew of or caused the presence of the contamination. The liability under these laws may be joint and several for the full amount of the investigation, clean-up, and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may seek to obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs. These costs may be substantial, and can exceed the value of the property. In addition, some environmental laws may create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. As the owner or operator of real estate, we also may be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the real estate. The presence of contamination, or the failure to properly remediate contamination, on a property may adversely affect the ability of the owner, operator or tenant to sell or rent that property or to borrow using the property as collateral, and may adversely impact our investment in that property.

Some of our properties contain, have contained, or are adjacent to or near other properties that have contained or currently contain storage tanks for the storage of petroleum products or other hazardous or toxic substances. Similarly, some of our properties currently are or were used in the past for commercial or industrial purposes that involve or involved the use of petroleum products or other hazardous or toxic substances, or are adjacent to or near properties that have been or are used for similar commercial or industrial purposes. These operations create a potential for the release of petroleum products or other hazardous or toxic substances, and we could potentially be required to pay to clean up any contamination. In addition, environmental laws regulate a variety of activities that can occur on a property, including the storage of petroleum products or other hazardous or toxic substances, air emissions, water discharges, and exposure to lead-based paint. Such laws may impose fines or penalties for violations and may require permits or other governmental approvals to be obtained for the operation of a business involving such activities. Any of the foregoing matters could have a material adverse effect on us.

Environmental laws also govern the presence, maintenance, and removal of asbestos-containing materials (“ACM”). Federal regulations require building owners and those exercising control over a building’s management to identify and warn, through signs and labels, of potential hazards posed by workplace exposure to installed ACM in their building. The regulations also have employee training, record keeping, and due diligence requirements pertaining to ACM. Significant fines can be assessed for violation of these regulations. As a result of these regulations, building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to ACM. The regulations may affect the value of a building containing ACM in which we have invested. Federal, state, and local laws and regulations also govern the removal,

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encapsulation, disturbance, handling, and/or disposal of ACM when those materials are in poor condition or in the event of construction, remodeling, renovation, or demolition of a building. These laws may impose liability for improper handling or a release into the environment of ACM and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with ACM.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses, and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants, or others if property damage or personal injury occurs.

Before completing any property acquisition, we typically obtain environmental assessments in order to identify potential environmental concerns at the property. These assessments are carried out in accordance with the Standard Practice for Environmental Site Assessments (ASTM Practice E 1527-13) as set by ASTM International, formerly known as the American Society for Testing and Materials, and generally include a physical site inspection, a review of relevant federal, state, and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title, and review of historical aerial photographs and other information on past uses of the property. These assessments are limited in scope. If, however, recommended in the initial assessments, we may undertake additional assessments such as soil and/or groundwater sampling or other limited subsurface investigations and ACM or mold surveys to test for substances of concern. A prior owner or operator of a property or historical operations at or near our properties may have created a material environmental condition that is not known to us or the independent consultants preparing the site assessments. Material environmental conditions may have arisen after the review was completed or may arise in the future, and future laws, ordinances, or regulations may impose material additional environmental liability. If environmental concerns are not satisfactorily resolved in any initial or additional assessments, we may obtain environmental insurance policies to insure against potential environmental risk or loss depending on the type of property, the availability and cost of the insurance, and various other factors we deem relevant (e.g., an environmental occurrence affects one of our properties where our lessee may not have the financial capability to honor its indemnification obligations to us). Our ultimate liability for environmental conditions may exceed the policy limits on any environmental insurance policies we obtain, if any.

Generally, our leases require the lessee to comply with environmental law and provide that the lessee will indemnify us for any loss or expense we incur as a result of lessee’s violation of environmental law or the presence, use or release of hazardous materials on our property attributable to the lessee. If our lessees do not comply with environmental law, or we are unable to enforce the indemnification obligations of our lessees, our results of operations would be adversely affected.

We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist on the properties in the future. Compliance with existing and new laws and regulations may require us or our tenants to spend funds to remedy environmental problems. If we or our tenants were to become subject to significant environmental liabilities, we could be materially and adversely affected.

Tax Regulation

We elected to be taxed as a REIT under the Internal Revenue Code of 1986, (as amended, the “Code”) beginning with our taxable year ended December 31, 2008. We believe that as of such date we have been organized and have operated in a manner to qualify for taxation as a REIT for U.S. federal income tax purposes. We intend to continue to be organized and operate in such a manner. In order to qualify as a REIT, we are required under the Code, among other things, to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at the corporate rate to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. As a result of our distribution requirements, we rely, in part, on third-party sources to fund our capital needs. Additionally, if we were to lose REIT status we would face significant tax consequences that would substantially reduce our cash available for distribution to our stockholders.

Implications of Being an Emerging Growth Company

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and as such we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Although we

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have not made a determination whether to take advantage of any or all of these exemptions, we have irrevocably opted-out of the extended transition period afforded to emerging growth companies in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As a result, we will comply with new or revised accounting standards on the same time frames as other public companies that are not emerging growth companies.

We expect to remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which we have total annual gross revenue of $1.07 billion or more (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the first sale of our common stock pursuant to an effective registration statement, (iii) the date on which we have, during the previous 3-year period, issued more than $1.0 billion in non-convertible debt, or (iv) the date on which we are deemed to be a “large accelerated filer.” Our Class A Common Stock will automatically convert into Common Stock on March 20, 2021, and on March 22, 2021, our Common Stock will be listed on the NYSE. As a result, we expect to be a large accelerated filer as of June 30, 2021.

Company Information

Our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as our proxy statements, are accessible free of charge at http://investors.bnl.broadstone.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may access materials we file with the SEC through the EDGAR database at the SEC’s website at http://www.sec.gov.

We have adopted our Code of Ethics and Business Conduct Policy to ensure that our business is conducted in accordance with the highest moral, legal, and ethical standards by our officers, directors, and employees. The Code of Ethics and Business Conduct Policy is available on our website, http://investors.bnl.broadstone.com, together with the charters of the Board’s Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. Amendments to, and waivers granted to our directors and executive officers under our Codes of Ethics and Business Conduct Policy, if any, will be posted in this area of our website. Copies of these materials are available in print to any stockholder who requests them. Stockholders should direct such requests in writing to Investor Relations Department, Broadstone Net Lease, Inc., 800 Clinton Square, Rochester, New York 14604. Stockholders may also call (585) 287-6500.

The information about our website and its content is for your convenience only. The content of our website is not deemed to be incorporated by reference in this report or filed with the SEC.

 

 

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Item 1A.

Risk Factors.

Summary Risk Factors

You should carefully consider the matters discussed in the “Risk Factors” section beginning on page 21 of this Annual Report on Form 10-K for factors you should consider before investing in our Common Stock (including our Class A Common Stock). Some of these risks include:

Single-tenant leases involve significant risks of tenant default and tenant vacancies, which could materially and adversely affect us.

 

The failure of tenants to pay rent due to the market disruption caused by the COVID-19 pandemic or any other reason could materially and adversely affect us, including our results of operations.

Actual or perceived threats associated with epidemics, pandemics or public health crises, including the ongoing COVID-19 pandemic, could have a material adverse effect on our results of operations and the businesses of our tenants.

 

We have limited opportunities to increase rents under our long-term leases with tenants, which could impede our growth and materially and adversely affect us.

 

We may not be able to achieve growth through acquisitions at a rate that is comparable to our historical results, including as a result of decreases in real estate transaction activity resulting from the COVID-19 pandemic, which could materially and adversely affect us.

 

We may not be able to effectively manage our growth and any failure to do so could materially and adversely affect us.

 

The departure of any of our key personnel with long-standing business relationships could materially and adversely affect us.

 

Our portfolio is concentrated in certain states, and any adverse developments and economic downturns in these geographic markets resulting from the COVID-19 pandemic or other factors could materially and adversely affect us.

 

The decrease in demand for restaurant, retail, and/or office space resulting from the COVID-19 pandemic or other factors may materially and adversely affect us.

 

Legal restrictions intended to mitigate the impact of the COVID-19 pandemic have had, and may continue to have, a particularly adverse impact on the restaurant, retail, and certain sectors of the healthcare industries, which may materially and adversely affect us.

 

General economic disruption resulting from the COVID-19 pandemic could result in a reduction in the willingness or ability of consumers to use their discretionary income in the businesses of our tenants and potential tenants, which could reduce the demand for our properties and the ability of our tenants to satisfy their obligations to us, and in turn could materially and adversely affect us.

 

We may be unable to renew leases, re-lease properties as leases expire, or lease vacant spaces on favorable terms or at all, which, in each case, could materially and adversely affect us.

 

We could face potential material adverse effects from the bankruptcies or insolvencies of our tenants.

As of December 31, 2020, we had approximately $1.5 billion principal balance of indebtedness outstanding, which may expose us to the risk of default under our debt obligations.

 

Market conditions could adversely affect our ability to refinance existing indebtedness on acceptable terms or at all, which could materially and adversely affect us.

 

Our Revolving Credit Facility and term loan agreements contain various covenants which, if not complied with, could accelerate our repayment obligations, thereby materially and adversely affecting us.

 

We are a holding company with no direct operations and rely on funds received from the OP to pay liabilities.

 

Failure to qualify as a REIT would materially and adversely affect us and the value of our Common Stock (including our Class A Common Stock).

 

The market price and trading volume of shares of our Common Stock (including our Class A Common Stock) may be volatile.

 

We may not be able to make distributions to our stockholders at the times or in the amounts we expect, or at all.

 

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Risk Factors.

The following are some of the risks and uncertainties that could cause our actual results to differ materially from those presented in our forward-looking statements. You should consider carefully the risks described below and the other information in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes. The risks and uncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.

Risks Related to Our Business and Properties

Single-tenant leases involve significant risks of tenant default and tenant vacancies, which could materially and adversely affect us.

Our portfolio consists primarily of single-tenant net leased properties and we are dependent on our tenants for substantially all of our revenue. As a result, our success depends on the financial stability of our tenants. The ability of our tenants to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage, pay real estate taxes, and maintain the properties in a manner so as not to jeopardize their operating licenses or regulatory status depends on the performance of their business and industry, as well as general market and economic conditions, which are outside of our control. At any given time, any tenant may experience a downturn in its business that may weaken its operating results or the overall financial condition of individual properties or its business as whole. As a result, a tenant may fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent, or declare bankruptcy. The financial failure of, or default in payment by, a single tenant under its lease is likely to cause a significant or complete reduction in our rental revenue from that property and a reduction in the value of the property. We may also experience difficulty or a significant delay in re-leasing or selling such property. The occurrence of one or more tenant defaults could materially and adversely affect us.

This risk is magnified in situations where we lease multiple properties to a single tenant under a master lease. As of December 31, 2020, master leases contributed approximately 34.4% of our overall ABR (our largest master lease by ABR related to 24 properties and contributed 2.5% of our ABR, and our smallest master lease by ABR related to two properties and contributed 0.1% of our ABR), 74.0% of our restaurant property ABR (168 of our 247 restaurant properties), and 47.2% of our retail property ABR (76 of our 130 retail properties). A tenant failure or default under a master lease could reduce or eliminate rental revenue from multiple properties and reduce the value of such properties. Although the master lease structure may be beneficial to us because it restricts the ability of tenants to remove individual underperforming assets, there is no guarantee that a tenant will not default in its obligations to us or decline to renew its master lease upon expiration. The default of a tenant that leases multiple properties from us or its decision not to renew its master lease upon expiration could materially and adversely affect us.

The failure of tenants to pay rent due to the market disruption caused by the COVID-19 pandemic or any other reason could materially and adversely affect us, including our results of operations.

Our performance depends on the financial condition of our tenants and their ability to fulfill their lease obligations by paying rent in a timely manner. The COVID-19 pandemic has adversely affected our tenants’ businesses generally. We granted partial rent relief requests to 15 tenants related to 93 properties, which included the partial deferral of payment of rent with 14 tenants, and a partial abatement of rent with one tenant. As of December 31, 2020, all deferral periods have ended, and the balance of rent deferrals yet to be repaid was less than $1 million. The abatement period ended subsequent to year-end in January 2021. 

We cannot predict whether we will receive additional rent relief requests from our tenants in the future, the ultimate resolution of any discussions with our tenants regarding such potential requests, or whether any such negotiations could break down in the future and result in any such tenants refusing to pay all or a substantial portion of the rent due under their leases. In addition, we cannot predict whether additional tenants may declare bankruptcy. The duration of the COVID-19 pandemic and our tenants’ ability to return to business after governmental restrictions are lifted will have a significant impact on our ability to continue to collect rents, and any material disruption in our ability to collect rents could have a material adverse impact on our business and results of operations.

Actual or perceived threats associated with epidemics, pandemics or public health crises, including the ongoing COVID-19 pandemic, could have a material adverse effect on our results of operations and the businesses of our tenants.

In response to the COVID-19 pandemic, many countries and U.S. states, including the areas in which we operate, have adopted certain measures to mitigate the ongoing public health crises. Such measures include “shelter in place” or “stay at home” rules, restrictions on travel, and restrictions on the types of businesses that may continue to operate in many countries and U.S. states. The COVID-19 pandemic has negatively impacted nearly every industry directly or indirectly.


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The COVID-19 pandemic, and future epidemics, pandemics, and other public health crises could materially and adversely affect our and our tenants’ results of operations, liquidity, and ability to access capital markets or pay distributions due to, among other factors:

 

 

 

an ongoing reduction in general economic activity, which may cause one or more of our tenants to be unable to maintain profitability and make timely rental payments to us pursuant to their leases, or to declare bankruptcy;

 

 

 

an increase in property vacancies, which could result in our obligation to pay the associated real estate taxes, insurance, and general property operating expenses;

 

 

 

a continuing complete or partial closure of, or other operational issues at, one or more of our properties resulting from government or tenant action;

 

 

 

delays in the supply of material products or services to us or our tenants from vendors;

 

 

 

a reduction in our tenants’ available workforce as a result of local, state or federal “shelter in place” or “stay at home” rules and restrictions;

 

 

 

indications of a tenant’s inability to continue as a going concern, changes in our view of strategy relative to a tenant’s business or industry, or changes in our long-term hold strategies, which could be indicative of an impairment triggering event with respect to a particular property or properties;

 

 

 

a general decline in business activity and demand for real estate transactions, which could adversely affect our ability to grow our portfolio or sell properties upon desirable terms;

 

 

 

difficulty accessing debt and equity capital on attractive terms, if at all; and

 

 

 

an inability to maintain compliance with financial covenants of credit facility, senior notes, and other loan agreements, which may result in a default of such arrangements and potentially result in an acceleration of indebtedness, or increased interest expense should a waiver be required from the lending institutions.

The extent to which the COVID-19 pandemic impacts our investments and operations will depend on future developments, including, among others, the duration of the pandemic, new information that may emerge concerning the severity of COVID-19, and the actions taken to contain the COVID-19 pandemic or treat the disease. These developments and the full impact of the COVID-19 pandemic on our business are highly uncertain and cannot be predicted with confidence. Nevertheless, the COVID-19 pandemic and any future epidemics, pandemics or public health crises could materially and adversely affect our business, financial condition, liquidity and results of operations, as well as our ability to pay distributions to our stockholders, for the reasons discussed above.

We have limited opportunities to increase rents under our long-term leases with tenants, which could impede our growth and materially and adversely affect us.

We typically lease our properties pursuant to long-term net leases with initial terms of 10 years or more that often have renewal options. As of December 31, 2020, the ABR weighted average remaining term of our leases was approximately 10.7 years, excluding renewal options. Substantially all of our leases provide for periodic rent escalations, but these built-in increases may be less than what we otherwise could achieve in the market. Most of our leases contain rent escalators that increase rent at a fixed amount on fixed dates, which may be less than prevailing market rates over the lease duration. For those leases that contain rent escalators based on CPI changes, our rent increases during periods of low inflation or deflation may be less than what we otherwise could achieve in the market. As a result, the long-term nature of our leases could impede our growth and materially and adversely affect us.

We may not be able to achieve growth through acquisitions at a rate that is comparable to our historical results, including as a result of decreases in real estate transaction activity resulting from the COVID-19 pandemic, which could materially and adversely affect us.

Our growth strategy depends significantly on acquiring new properties. From 2015 to 2019, our team acquired more than $500 million of net leased real estate each year, including approximately $1 billion during 2019. Our ability to continue to grow requires us to identify and complete acquisitions that meet our investment criteria and depends on general market and economic conditions. Although the long-term impact of the COVID-19 pandemic on investment sales markets is currently difficult to predict, the disruption from the pandemic thus far has resulted in a significant decrease in real estate investment sales. Contrary to our experience from 2015 to 2019 when we acquired more than $500 million of net leased real estate each year, including approximately $1 billion during 2019, we acquired $100.3 million in net leased real estate in 2020 due in part to the ongoing impact of the COVID-19 pandemic.

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Changes in the volume of real estate transactions, the availability of acquisition financing, capitalization rates, interest rates, competition, or other factors may negatively impact our acquisition opportunities in 2020 and beyond. If we are unable to achieve growth through acquisitions at a rate that is comparable to our historical results, it could materially and adversely affect us.

We may not achieve the total returns we expect from our future acquisitions, which could materially and adversely affect us.

As we pursue our growth strategy, we may encounter increasingly difficult market conditions that place downward pressure on the total returns we can achieve on our investments. Accordingly, future acquisitions may have lower yield characteristics than past and present opportunities. To the extent that our future growth is achieved through acquisitions that yield lower returns, it could materially and adversely affect us. In addition, if we fund future acquisitions with equity issuances, the dilutive impact could outweigh the benefits of acquisitions that achieve lower returns, which could materially and adversely affect us.

We may not be able to obtain acquisition financing or obtain other capital from third-party sources on favorable terms or at all, which could materially and adversely affect our growth prospects and our business.

In order to qualify as a REIT, we are required under the Code, among other things, to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at the corporate rate to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, or repay debt obligations from operating cash flow. Consequently, we expect to rely, in part, on third-party sources to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Our access to third-party sources of capital depends, in part, on:

 

general market conditions, including the impact of the COVID-19 pandemic;

 

the market’s perception of our growth potential;

 

our current debt levels;

 

our current and expected future earnings;

 

the performance of our portfolio;

 

our cash flow and cash distributions; and

 

the market price per share of our Common Stock (including our Class A Common Stock).

If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, or satisfy our debt service obligations, which could materially and adversely affect us.

 Our acquisition volume may not be consistent on a quarterly basis, which may not meet investors’ expectations and could negatively impact the value of our Common Stock (including our Class A Common Stock).

Our team has acquired more than $500 million of net leased real estate each year from 2015 to 2019, including approximately $1 billion during 2019. However, our acquisition volume within each year has not always been consistent on a quarterly basis, nor can we guarantee it will be consistent in the future. As a result, our acquisition results that we report on a quarterly basis may not meet investors’ expectations and could negatively impact the value of our Common Stock (including our Class A Common Stock).

Any expansion into adjacent opportunities to our core property types may prove to be unsuccessful, which could harm our growth prospects and materially and adversely affect us.

We may seek to capture adjacent opportunities to our core property types in the net lease space. Adjacent property types may not provide us with the opportunity to earn higher returns relative to more traditional assets in our core property types. In order to be successful in capturing adjacent opportunities, we will be required to carefully analyze and develop selection criteria taking into account different competitive and operating conditions. As a result, pursuing adjacent opportunities inherently involves more risk. If we are unsuccessful in identifying compelling opportunities, it could harm our growth prospects and materially and adversely affect us.


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We may not be able to effectively manage our growth and any failure to do so could materially and adversely affect us.

We have grown rapidly and our growth strategy depends significantly on continued growth through acquisitions. Our future operating results will depend on our ability to effectively manage this growth. To accomplish this, we will need to:

 

invest in enhanced operational systems that can scale as our portfolio grows in size;

 

attract, integrate, and retain operations personnel as our Company grows in complexity; and

 

identify and supervise a number of suitable third-parties to provide services to us.

We cannot provide any assurance that we will be able to effectively manage our growth, which could materially and adversely affect us.

As we continue to acquire properties pursuant to our growth strategy, our portfolio may become less diversified which could materially and adversely affect us.

In pursuing our growth strategy, we may acquire properties that cause our portfolio to become less diversified. If our portfolio becomes less diverse, our business may become subject to greater risk, including tenant bankruptcies, adverse industry trends, and economic downturns in a particular geographic area. As a result, if any such risks of a less diversified portfolio are realized, we could be materially and adversely affected.

We face increasing competition for acquiring properties from both publicly-traded REITs and private equity investors that have greater resources than we do, which could materially and adversely affect us.

We are facing increasing competition from other entities engaged in real estate investment activities, including publicly traded REITs, private and institutional real estate investors, sovereign wealth funds, banks, insurance companies, investment banking firms, lenders, specialty finance companies, and other entities. Some of our competitors are larger and may have considerably greater financial, technical, leasing, underwriting, marketing, and other resources than we do. Some competitors may have a lower cost of capital and access to funding sources that may not be available to us. In addition, other competitors may have higher risk tolerances or different risk assessments and may not be subject to the same operating constraints, including maintaining REIT status. This competition may result in fewer acquisitions, higher prices, lower yields, less desirable property types, and acceptance of greater risk. As a result, we cannot provide any assurance that we will be able to successfully execute our growth strategy. Any failure to grow through acquisitions as a result of the increasing competition we face could materially and adversely affect us.

We face significant competition for tenants, which could materially and adversely affect us, including our occupancy, rental rates, results of operations, and business.

We compete with numerous developers, owners, and operators of properties, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, or below-market renewal options to retain tenants when our leases expire. Competition for tenants could decrease or prevent increases of the occupancy and rental rates of our properties, which could materially and adversely affect us.

The departure of any of our key personnel with long-standing business relationships could materially and adversely affect us.

Our success and our ability to manage anticipated future growth depend, in large part, upon the efforts of our key personnel, particularly our Chief Executive Officer, Christopher J. Czarnecki. Mr. Czarnecki has extensive market knowledge and relationships and exercises substantial influence over our operational, financing, acquisition, and disposition activity. If we lost his services, our network of external relationships and resources would be materially diminished.

Our senior management team has worked together and collectively managed our business, operations, and portfolio since 2015 and has a strong investment track record. Many of our other key executive personnel, particularly our senior management team, also have extensive experience and strong reputations in the real estate industry and have been instrumental in setting our strategic direction, operating our business, identifying, recruiting, and training key personnel, and arranging necessary financing. The departure of any member of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities, and weaken our relationships with lenders, business partners, existing and prospective tenants, and industry personnel, which could materially and adversely affect us.

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Our portfolio is concentrated in certain states, particularly Texas, and any adverse developments and economic downturns in these geographic markets resulting from the COVID-19 pandemic or other factors could materially and adversely affect us.

As of December 31, 2020, approximately 32.3% of our ABR came from properties in our top five states: Texas (10.2%), Illinois (6.2%), California (5.3%), Wisconsin (5.3%), and Florida (5.3%). These geographic concentrations could adversely affect our operating performance if conditions become less favorable in any of the states or markets within which we have a concentration of properties. The ongoing COVID-19 pandemic has greatly impacted the United States and to the extent the pandemic continues in those states in which our portfolio is concentrated, our operating performance may be impacted disproportionately. We can provide no assurance that any of our markets will grow, not experience adverse developments, or that underlying real estate fundamentals will be favorable to owners and operators of industrial, healthcare, restaurant, office, and retail properties. The current downturn in the economy resulting from the COVID-19 pandemic is adversely affecting the states or regions in which we have a concentration of properties, or markets within such states or regions, and the slowdown in the demand for our tenants’ businesses caused by adverse economic, regulatory, or other conditions may continue to adversely affect our tenants operating businesses in those states and impair their ability to pay rent to us, which, in turn could materially and adversely affect us.

 Our portfolio is also concentrated in certain property types and any adverse developments relating to one or more of these property types could materially and adversely affect us.

As of December 31, 2020, approximately 46.3% of our ABR came from industrial properties, 19.3% from healthcare properties, 15.6% from restaurant properties, 9.9% from office properties, and 8.9% from retail properties. Any adverse developments in one or more of these property types could materially and adversely affect us. For example, stay-at-home orders and other measures implemented as a result of the COVID-19 pandemic have particularly affected the restaurant and retail sectors. If our restaurant or retail tenants suffer weakening demand for their goods or services, it could adversely affect their ability to meet their rent and other obligations under their leases with us. It also may be difficult and expensive to re-tenant a property designed for a particular property type with a new tenant that operates in an industry requiring a different property type. As a result, any adverse developments in one or more of our concentrated property types could materially and adversely affect us.

The decrease in demand for restaurant, retail, and/or office space resulting from the COVID-19 pandemic or other factors may materially and adversely affect us.

As of December 31, 2020, leases with tenants in the restaurant industry represented approximately 15.6% of our ABR, leases with tenants in the retail industry represented approximately 8.9% of our ABR, and leases with tenants for office space represented approximately 9.9% of our ABR. In the future, we may acquire additional restaurant, retail, and office properties. Accordingly, decreases in the demand for restaurant, retail, and/or office properties may have a greater adverse effect on us than if we had fewer investments in these industries. The market for restaurant, retail, and office properties has been, and could continue to be, adversely affected by weakness in the national, regional, and local economies including the impact of the ongoing COVID-19 pandemic, the adverse financial condition of some large restaurant and retail companies, the ongoing consolidation in the restaurant and retail industries, and the excess amount of restaurant, retail and office space in a number of markets. For example, in recent years a number of companies in the restaurant industry have declared bankruptcy, gone out of business, or significantly reduced the number of their locations. As a result, we have experienced, and expect to continue to experience, challenges with some of our restaurant tenants, and have recorded asset impairments, which were immaterial on a consolidated basis, on certain assets as a result of increased credit losses.

Similarly, the ongoing impacts of the disruption in the retail industry, particularly adverse changes in consumer spending and consumer preferences for particular goods, services, or store-based retailing could severely impact retail tenants’ ability to pay rent. Shifts from in-store to online shopping could increase due to changing consumer shopping patterns and the increase in consumer adoption and use of mobile electronic devices. Further, our assessment that certain businesses are insulated from such e-commerce pressure may prove to be incorrect. To the extent that these conditions continue in the retail and restaurant industries, they are likely to negatively affect market rents for such properties and could materially and adversely affect us.

In recent years, the market for office space has seen a shift in the use of space due to the widespread practices of telecommuting, videoconferencing, and renting shared workspaces. This shift further accelerated during the year ended December 31, 2020 as many companies successfully employed such practices during the COVID-19 pandemic. These trends have led, and may in the future lead, to more efficient office layouts and a decrease in square feet leased per employee. The impact of alternative workspaces and technology could result in tenant downsizings upon renewal, or tenants seeking office space outside of typical central business districts. These trends could cause an increase in vacancy rates at office buildings and a decrease in demand for new supply, and could materially and adversely affect us.


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Legal restrictions intended to mitigate the impact of the COVID-19 pandemic have had, and may continue to have, a particularly adverse impact on casual dining, retail and certain sectors of the healthcare industries, which may materially and adversely affect us.

The legal restrictions adopted by many U.S. states to mitigate the ongoing public health crises related to the COVID-19 pandemic, including “shelter in place” and “stay at home” rules, restrictions on travel, and restrictions on the types of businesses that may continue to operate, have had a particularly acute negative economic impact on casual dining restaurants and retail businesses throughout the areas in which we operate. In addition, restrictions on elective medical procedures had an acute negative impact on certain sectors of the healthcare industry. As of December 31, 2020, leases with tenants in the healthcare industry represented approximately 19.3% of our ABR, leases with tenants in the restaurant industry represented approximately 15.6% of our ABR, and leases with tenants in the retail industry represented 8.9% of our ABR. Accordingly, decreases in the demand for healthcare, casual dining, and/or retail spaces may have a greater adverse effect on us than if we had fewer investments in these industries. For example, if there is an increase in the number of companies in the healthcare, restaurant or retail industries that declare bankruptcy, go out of business, or significantly reduce the number of their locations as a result of the COVID-19 pandemic, then we are likely to experience challenges with our healthcare, casual dining, or retail tenants, and may record asset impairments on certain assets as a result of increased credit losses. To the extent that economic conditions continue to deteriorate in the healthcare, restaurant, and retail industries, they are likely to negatively affect market rents for such properties and could materially and adversely affect us.

General economic disruption resulting from the COVID-19 pandemic could result in a reduction in the willingness or ability of consumers to use their discretionary income in the businesses of our tenants and potential tenants, which could reduce the demand for our properties and the ability of our tenants to satisfy their obligations to us, and in turn could materially and adversely affect us.

A significant portion of our portfolio is leased to tenants operating businesses that rely on discretionary consumer spending. Leases with tenants in the restaurant industry (including quick service and casual and family dining) represent a material portion of our portfolio, and the highest proportion of tenants seeking rent relief at this time are in the restaurant sector. Red Lobster Hospitality, Jack’s Family Restaurants, Outback Steakhouse, and Krispy Kreme are among the most significant tenants in our portfolio. The success of most of these businesses depends on the willingness of consumers to use discretionary income to purchase their products or services. A downturn in the economy resulting from the COVID-19 pandemic could cause consumers to reduce their discretionary spending, which could result in tenant bankruptcies or otherwise have an adverse impact on our tenants’ ability to successfully manage their businesses and pay us amounts due under our lease agreements, thereby materially and adversely affecting us.

The ongoing COVID-19 pandemic has resulted in a sustained period of economic slowdown and declining demand for real estate. It may also result in rising interest rates. Any of the foregoing could cause a general decline in rents or an increased incidence of defaults under existing leases. A lack of demand for rental space could adversely affect our ability to maintain our current tenants and gain new tenants, which may affect our growth and results of operations. Accordingly, the ongoing deterioration in economic conditions resulting from the COVID-19 pandemic could materially and adversely affect us.

If one or more of our top 20 tenants, which together represented approximately 31.7% of our ABR as of December 31, 2020, suffers a downturn in their business, it could materially and adversely affect us.

As of December 31, 2020, our top 20 tenants together represented 31.7% of our ABR. Our largest tenant is Red Lobster, a casual dining restaurant chain, which leases 24 properties that in the aggregate represent approximately 2.5% of our ABR. Our top 20 tenants may experience a material business downturn weakening their financial position resulting in their failure to make timely rent payments and/or default under their leases. As a result, our revenue and cash flow could be materially and adversely affected.

We may be unable to renew leases, re-lease properties as leases expire, or lease vacant spaces on favorable terms or at all, which, in each case, could materially and adversely affect us.

Our results of operations depend on our ability to continue to successfully lease our properties, including renewing expiring leases, re-leasing properties as leases expire, leasing vacant space, optimizing our tenant mix, or leasing properties on more economically favorable terms. As of December 31, 2020, five leases representing approximately 0.4% of our ABR will expire during 2021. Current tenants may decline, or may not have the financial resources available, to renew current leases and we cannot assure you that leases that are renewed will have terms that are as economically favorable to us as the expiring lease terms. If tenants do not renew the leases as they expire, we cannot provide any assurance that we will be able to find new tenants or that our properties will be re-leased at rental rates equal to or above the current average rental rates or that substantial rent abatements, tenant improvement allowances, early termination rights, or below-market renewal options will not be required to attract new tenants. We may experience significant costs in connection with re-leasing a significant number of our properties, which could materially and adversely affect us. As of December 31, 2020, eight of our properties, representing approximately 0.8% of our total rentable square footage, were unoccupied. We may experience difficulties in leasing this vacant space on favorable terms or at all. Any failure to renew leases, re-lease properties as leases expire, or lease vacant space could materially and adversely affect us.

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Our business is subject to significant re-leasing risk, particularly for specialty properties that are suitable for only one use.

The loss of a tenant, either through lease expiration or tenant bankruptcy or insolvency, may require us to spend significant amounts of capital to renovate the property before it is suitable for a new tenant and cause us to incur significant costs. In particular, our specialty properties are designed for a particular type of tenant or tenant use. If tenants of specialty properties do not renew or default on their leases, we may not be able to re-lease properties without substantial capital improvements, which may require significant cost and time to complete. Alternatively, we may not be able to re-lease or sell the property without such improvements or may be required to reduce the rent or selling price significantly. This potential illiquidity may limit our ability to modify quickly our portfolio in response to changes in economic or other conditions, including tenant demand. Such occurrences could materially and adversely affect us.

We may experience a higher number of tenant defaults because we lease most of our properties to unrated tenants.

We depend on the ability of our tenants to meet their obligations to pay rent to us due under our lease for substantially all of our revenue. As of December 31, 2020, only approximately 17.2% of our ABR came from tenants who had an investment grade credit rating. A substantial majority of our properties are leased to unrated tenants. Our investments in properties leased to such tenants may have a greater risk of default than investments in properties leased exclusively to investment grade tenants. The ability of an unrated tenant to meet its rent and other obligations under its lease with us may be subject to greater risk than our tenants that have an investment grade rating. When we invest in properties where the tenant does not have a publicly available credit rating, we will use certain credit-assessment tools as well as rely on our own estimates of the tenant’s credit rating which includes reviewing the tenant’s financial information (e.g., financial ratios, net worth, revenue, cash flows, leverage and liquidity, if applicable). Our methods, however, may not adequately assess the risk of an investment and, if our assessment of credit quality proves to be inaccurate, we may be subject to defaults and investors may view our cash flows as less stable. If one or more of our unrated tenants defaults, it could have a material adverse effect on us.

Our underwriting and risk-management procedures that we use to evaluate a tenant’s credit risk may be faulty, deficient, or otherwise fail to accurately reflect the risk of our investment, which could materially and adversely affect us.

Our underwriting and risk-management procedures that we use to evaluate a tenant’s credit risk may not be sufficient to identify tenant problems in a timely manner or at all. To evaluate tenant credit risk, we utilize a third-party model, S&P Capital IQ, to help us determine a tenant’s implied credit rating when a public rating is not available. However, a rating from S&P Capital IQ is not the same as a published credit rating and lacks extensive company participation that is typically involved when a rating agency publishes a rating. Therefore, such rating may not be as indicative of creditworthiness as a rating published by a nationally recognized statistical rating organization. Tenant credit ratings, public or implied, however, are only one component of how we assess the risk of tenant insolvency. We also use our own internal estimate of the likelihood of an insolvency or default, based on the regularly monitored performance of our properties, our assessment of each tenant’s financial health, including profitability, liquidity, indebtedness, and leverage profile, and our assessment of the health and performance of the tenant’s particular industry. If our assessment of credit quality proves to be inaccurate, we may experience one or more tenant defaults, which could have a material adverse effect on us.

Any failure of one or more tenants to provide accurate or complete financial information could prevent us from identifying tenant problems that could materially and adversely affect us.

We rely on information from our tenants to determine a potential tenant’s credit risk as well as for on-going risk management. As of December 31, 2020, approximately 88.7% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 6.3% of our ABR is received from tenants who are not required to provide us with specified financial information under the terms of our lease, but whose financial statements are available publicly, either through SEC filings or otherwise. Ratings or conclusions derived from both S&P Capital IQ and our internal teams rely on such information provided to us by our tenants and prospective tenants without independent verification on our part, and we must assume the appropriateness of estimates and judgments that were made by the party preparing the financial information. A tenant’s failure to provide appropriate information may interfere with our ability to accurately evaluate a potential tenant’s credit risk or determine an existing tenant’s default risk, the occurrence of either could materially and adversely affect us.

We could face potential material adverse effects from the bankruptcies or insolvencies of our tenants.

If a tenant, or the guarantor of a lease of a tenant, commences, or has commenced against it, any legal or equitable proceeding under any bankruptcy, insolvency, receivership, or other debtor’s relief statute or law (collectively, a “bankruptcy proceeding”), we may be unable to collect all sums due to us under that tenant’s lease or be forced to “take back” a property as a result of a default or a rejection of a lease by a tenant in a bankruptcy proceeding. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease or leases with us. Any claims against such bankrupt tenant for unpaid future rent would be subject to statutory limitations that would likely result in our receipt of rental revenues that are substantially less than the contractually specified rent we

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are owed under the lease or leases. Any or all of the lease obligations of our tenants, or any guarantor of our tenants, could be subject to a bankruptcy proceeding which may bar our efforts to collect pre-bankruptcy debts from these entities or their properties, unless we are able to obtain an enabling order from the bankruptcy court. If our lease is rejected by a tenant in bankruptcy, we may only have a general unsecured claim against the tenant and may not be entitled to any further payments under the lease. We may also be unable to re-lease a terminated or rejected space or to re-lease it on comparable or more favorable terms. A bankruptcy proceeding could hinder or delay our efforts to collect past due balances and ultimately preclude collection of these sums, resulting in a decrease or cessation of rental payments, which could materially and adversely affect us.

On March 8, 2020, Art Van, a home furnishings store and BNL’s largest tenant as of March 31, 2020 (representing 2.9% of our ABR at the time), filed for bankruptcy protection. At the time, BNL leased 10 properties to Art Van, representing approximately 665,000 square feet of operational retail space, with nine properties located in Michigan and one property located in Illinois. On June 30, 2020, at our request, the bankruptcy court rejected seven of these leases, and we successfully re-leased six of these properties (representing approximately 71.3% of our portfolio’s square footage leased to Art Van) to American Signature, Inc. (“American Signature”), the owner of the American Signature and Value City furniture brands, for a ten year term with base rents equivalent to approximately 71.5% of the base rent previously received from Art Van for those six properties. The seventh property (equivalent to approximately 18.4% of our portfolio’s square footage leased to Art Van) was operated by American Signature through September 29, 2020 to conduct going out of business sales for Art Van inventory acquired by American Signature through the bankruptcy proceedings, and on January 27, 2021, the property was re-leased to Steinhafels, Inc., a Wisconsin furniture and mattress retailer, for a ten year term with base rents equivalent to approximately 70% of the base rent previously received from Art Van for the property. The three remaining sites were released from the bankruptcy proceedings on July 31, 2020, and on November 4, 2020, one of the sites was re-leased to Select Comfort Retail Corporation, Inc., a national mattress retailer, for a ten year term commencing in the first quarter of 2021 with a 34% increase in base rents previously received from Art Van for the property. In August 2020, we agreed to a court approved settlement with the Art Van bankruptcy estate pursuant to which we are entitled to receive $2.35 million, which represents approximately 78% of our total post-petition claim through July 31, 2020, and approximately 86.5% of the total post-petition base rent owed to us by Art Van from the period from March 8, 2020, through July 31, 2020. We collected $1.175 million in August 2020 and $1.175 million in October 2020.

Some of our customers operate their businesses under franchise or license agreements, which, if terminated or not renewed prior to the expiration of their leases with us, would likely impair their ability to pay us rent.

As of December 31, 2020, 69.7% of our restaurant property tenants operated their businesses under franchise or license agreements. Generally, these franchise agreements have terms that end earlier than the respective expiration dates of the related leases. In addition, a tenant’s rights as a franchisee or licensee typically may be terminated by the franchisor or licensor and the tenant may be precluded from competing with the franchisor or licensor upon termination. Usually, we have no notice or cure rights with respect to such a termination and have no rights to assignment of any such franchise agreement. This may have an adverse effect on our ability to mitigate losses arising from a default on any of our leases. A franchisor’s or licensor’s termination or refusal to renew a franchise or license agreement would likely have a material adverse effect on the ability of the tenant to make payments under its lease, which could materially and adversely affect us.

Security breaches and other technology disruptions could compromise our information systems and expose us to liability, which could materially and adversely affect us.

Information security risks generally have increased in recent years due to the increased technological sophistication and activities of perpetrators of cyber-attacks. Our business involves the storage and transmission of numerous classes of sensitive and confidential information and intellectual property, including tenants’ information, private information about our stockholders and our employees, and financial and strategic information about us. We face risks associated with security breaches through cyber-attacks or cyber-intrusions, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. If we fail to assess and identify cybersecurity risks associated with our operations, we may become increasingly vulnerable to such risks. Additionally, the measures we have implemented to prevent security breaches and cyber incidents may not be effective. The theft, destruction, loss, misappropriation, or release of sensitive or confidential information or intellectual property, or interference with or disruptions of our IT networks and related systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of tenants, potential liability, and competitive disadvantage. Laws and regulations governing data privacy are constantly evolving. Many of these laws and regulations, including the California Consumer Protection Act, contain detailed requirements regarding collecting and processing personal information, restrict the use and storage of such information, and govern the effectiveness of consumer consent. Any of the above risks could materially and adversely affect us.

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An increase in market interest rates could increase our interest costs on existing and future debt and could adversely affect our stock price, and a decrease in market interest rates could lead to additional competition for the acquisition of real estate, which could adversely affect our results of operations.

If interest rates increase, so could our interest costs for any new debt and our existing variable-rate debt obligations. Absent a simultaneous increase in acquisition yields, this increased cost could make the financing of any acquisition more expensive and lower our current period earnings. Rising interest rates could limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing. See “Risks Related to Debt Financing” for additional information. In addition, an increase in interest rates could decrease the access current and prospective tenants have to credit, thereby decreasing the amount they are willing to pay to lease our assets and consequently limiting our ability, if necessary, to reposition our portfolio promptly in response to changes in economic or other conditions. Furthermore, the distribution yield on our Common Stock (including our Class A Common Stock) will influence the price of such Common Stock (including our Class A Common Stock). Thus, an increase in market interest rates may lead prospective purchasers of our Common Stock (including our Class A Common Stock) to expect a higher distribution yield, which could adversely affect the market price of our common stock. See “Risks Related to Ownership of Our Common Stock (Including Our Class A Common Stock)” for more information. In addition, decreases in interest rates may lead to additional competition for the acquisition of real estate due to a reduction in desirable alternative income-producing investments. Increased competition for the acquisition of real estate may lead to a decrease in the yields on real estate we have targeted for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our results of operations will be adversely affected.

Our properties may be subject to impairment charges.

We routinely evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions and tenant performance. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. Since our investment focus is on properties net leased to a single tenant, the financial failure of, or other default by, a single tenant under its lease(s) may result in a significant impairment loss. If we determine that an impairment has occurred, we would be required to make a downward adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded. Management has recorded impairment charges related to certain properties in each of the years ended December 31, 2020, 2019, and 2018, and may record future impairments based on actual results and changes in circumstances. Negative developments in the real estate market may cause management to reevaluate the business and macro-economic assumptions used in its impairment analysis. Changes in management’s assumptions based on actual results may have a material impact on the Company’s financial statements. See “Critical Accounting Polices – Long-Lived Asset Impairment” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of real estate impairment charges.

Changes in accounting standards may materially and adversely affect us.

From time to time the Financial Accounting Standards Board (“FASB”), and the SEC, who create and interpret appropriate accounting standards, may change the financial accounting and reporting standards or their interpretation and application of these standards that will govern the preparation of our financial statements. These changes could materially and adversely affect our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Similarly, these changes could materially and adversely affect our tenants’ reported financial condition or results of operations and affect their preferences regarding leasing real estate.

We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.

In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for OP Units, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of debt to the contributors to maintain their tax bases. As of December 31, 2020, we were party to tax protection agreements covering three properties. Based on values as of December 31, 2020, taxable sales of the applicable properties would trigger liability under the agreements of approximately $12.3 million. In addition, in connection with the Internalization, we entered into the Founding Owners’ Tax Protection Agreement. These restrictions could limit our ability to sell certain assets or the OP (or our interest in the OP) at a time, or on terms, that would be favorable absent such restrictions.

 Certain provisions of our leases or loan agreements may be unenforceable, which could materially and adversely affect us.

Our rights and obligations with respect to the leases at our properties, mortgage loans, or other loans are governed by written agreements. A court could determine that one or more provisions of such agreements are unenforceable, such as a particular remedy, a

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master lease covenant, a loan prepayment provision, or a provision governing our security interest in the underlying collateral of a borrower or lessee. We could be adversely impacted if this were to happen with respect to an asset or group of assets.

We may become subject to litigation, which could materially and adversely affect us.

In the future we may become subject to litigation, including, but not limited to, claims relating to our operations, past and future securities offerings, corporate transactions, and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We generally intend to vigorously defend ourselves. However, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.

A failure to maintain effective internal controls could materially and adversely affect us.

Effective internal controls over financial reporting, disclosures, and operations are necessary for us to provide reliable financial reports and public disclosures, effectively prevent fraud, and operate successfully. If we cannot provide reliable financial reports and public disclosures or prevent fraud, our reputation and operating results would be harmed. Our internal controls over financial reporting and our operating internal controls may not prevent or detect financial misstatements or loss of assets because of inherent limitations, including the possibility of human error, management override of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to financial statement accuracy, public disclosures, and safeguarding of assets. Any failure of these internal controls, including any failure to implement required new or improved controls as a result of changes to our business or otherwise, or if we experience difficulties in their implementation, could result in decreased investor confidence in the accuracy and completeness of our financial reports and public disclosures, civil litigation, or investigations by the SEC or other regulatory authorities, and we could fail to meet our reporting obligations, which could materially and adversely affect us.

A limited number of our leases may require us to pay property-related expenses that are not the obligations of our tenants, which could materially and adversely affect us.

Under the terms of substantially all of our leases, our tenants are responsible for the payment or reimbursement of property expenses such as real estate taxes, insurance, maintenance, repairs, and capital costs in addition to satisfying their rent obligations. Under the provisions of a limited number of our existing leases and leases that we may enter into in the future, however, we may be required to pay some or all of the expenses of the property, such as the costs of environmental liabilities, roof and structural repairs, real estate taxes, insurance, certain non-structural repairs, and maintenance. If our properties incur significant expenses that must be paid by us under the terms of our leases, our business, financial condition and results of operations may be adversely affected and the amount of cash available to meet expenses and to make distributions to our stockholders and unitholders may be reduced.

 The costs of environmental contamination or liabilities related to environmental laws may materially and adversely affect us.

There may be known or unknown environmental liabilities associated with properties we previously owned, currently own, or may acquire in the future. Under various federal, state, and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from environmental matters, including the presence or discharge of hazardous or toxic substances, waste, or petroleum products at, on, in, under or migrating from such property, including costs to investigate or clean up such contamination and liability for personal injury, property damage, or harm to natural resources. Certain uses of some properties may have a heightened risk of environmental liability because of the hazardous materials used in performing services on those properties, such as industrial properties or auto parts and auto service businesses using petroleum products, paint, machine solvents, and other hazardous materials. We typically undertake customary environmental diligence prior to our acquisition of any property, including obtaining Phase I environmental site assessments. The Phase I environmental site assessments are limited in scope and therefore may not reveal all environmental conditions affecting a property. Therefore, there could be undiscovered environmental liabilities on the properties we own.

The known or potential presence of hazardous substances on a property may adversely affect our ability to sell, lease, or improve the property, or to borrow using the property as collateral. In addition, environmental laws may create liens on contaminated properties in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which they may be used or which businesses may be operated, and these restrictions may require substantial expenditures.

Our environmental liabilities may include property and natural resources damage, personal injury, investigation, and clean-up costs, among other potential environmental liabilities. These costs could be substantial. Although we may obtain insurance for

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environmental liability for certain properties that are deemed to warrant coverage, our insurance may be insufficient to address any particular environmental situation and we may be unable to continue to obtain insurance for environmental matters, at a reasonable cost or at all, in the future. If our environmental liability insurance is inadequate, we may become subject to material losses for environmental liabilities. Our ability to receive the benefits of any environmental liability insurance policy will depend on the financial stability of our insurance company and the position it takes with respect to our insurance policies. If we were to become subject to significant environmental liabilities, we could be materially and adversely affected.

Although our leases generally require our tenants to operate in compliance with all applicable federal, state, and local environmental laws, ordinances, and regulations, and to indemnify us against any environmental liabilities arising from the tenants’ activities on the property, we could nevertheless be subject to liability, as a current or previous owner of real estate, including strict liability, by virtue of our ownership interest and may be required to remove or remediate hazardous or toxic substances on, under, or in a property. Further, there can be no assurance that our tenants, or the guarantor of a lease, could or would satisfy their indemnification obligations under their leases. We may face liability regardless of our knowledge of the contamination, the timing of the contamination, the cause of the contamination, or the party responsible for the contamination of the property. The cost of compliance or defense against claims from a contaminated property could materially and adversely affect us.

We could become subject to liability for asbestos-containing building materials in the buildings on our property, which could cause us to incur additional expenses.

Some of our properties may contain, or may have contained, asbestos-containing building materials. Environmental, health, and safety laws require that owners or operators of or employers in buildings with asbestos-containing materials (“ACM”) properly manage and maintain these materials, adequately inform or train those who may come into contact with ACM, and undertake special precautions, including removal or other abatement, in the event that ACM is disturbed during building maintenance, renovation, or demolition. These laws may impose fines and penalties on employers, building owners, or operators for failure to comply with these laws. In addition, third parties may seek recovery from employers, owners, or operators for personal injury associated with exposure to asbestos. If we become subject to any of these penalties or other liabilities as a result of ACM at one or more of our properties, it could have a material adverse effect on us.

Our properties may contain or develop harmful mold or suffer from other adverse conditions, which could lead to liability for adverse health effects and costs of remediation.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues also can stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological contaminants such as pollen, viruses, and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants, and others if property damage or personal injury occurs. Thus, conditions related to mold or other airborne contaminants could have a material adverse effect on us.

Risks Related to Investments in Real Estate

Our operating results are affected by economic and regulatory changes that impact the commercial real estate market in general.

Our core business is the ownership of commercial real estate that is net leased on a long-term basis to businesses in the industrial, healthcare, restaurant, office, and retail sectors. Accordingly, our performance is subject to risks generally attributable to the ownership of commercial real property, including:

 

inability to collect rents from tenants due to financial hardship, including bankruptcy, financial difficulties, or lease defaults by tenants;

 

changes in global, national, regional, or local economic, demographic, or real estate market conditions in the markets in which we operate, including the supply and demand for single-tenant space in the industrial, healthcare, restaurant, office, and retail sectors;

 

increased competition for real property investments targeted by our investment strategy;

 

changes in consumer trends and preferences that affect the demand for products and services offered by our tenants;

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inability to lease or sell properties upon expiration or termination of existing leases and renewal of leases at lower rental rates;

 

the subjectivity of real estate valuations and changes in such valuations over time;

 

the illiquid nature of real estate compared to most other financial assets;

 

changes in laws, government rules, regulations, and fiscal policies, including changes in tax, real estate, environmental, and zoning laws;

 

changes in interest rates and availability of financing, including changes in the terms of available financing such as more conservative loan-to-value requirements and shorter debt maturities;

 

unexpected expenditures relating to physical or weather-related damage to properties;

 

 •

the potential risk of functional obsolescence of properties over time;

 

acts of terrorism and war;

 

acts of God and other factors beyond our control; and

 

competition from other properties.

The factors described above are out of our control, and we are unable to predict future changes in such factors. Any negative changes in these factors may cause the value of our real estate to decline, which could materially and adversely affect us.

Global market and economic conditions may materially and adversely affect us and the ability of our tenants to make rental payments to us pursuant to our leases.

Our results of operations are sensitive to changes in the overall economic conditions that impact our tenants’ financial condition and leasing practices. Adverse economic conditions such as high unemployment levels, interest rates, tax rates, and fuel and energy costs may have an impact on the results of operations and financial conditions of our tenants. During periods of economic slowdown, rising interest rates and declining demand for real estate may result in a general decline in rents or an increased incidence of defaults under existing leases. A lack of demand for rental space could adversely affect our ability to maintain our current tenants and gain new tenants, which may affect our growth and results of operations. Accordingly, a decline in economic conditions could materially and adversely affect us.

Our real estate investments are illiquid.

Because real estate investments are relatively illiquid, our ability to adjust our portfolio promptly in response to economic, financial, investment, or other conditions may be limited. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of the underlying property. We may be unable to realize our investment objective by sale, other disposition, or refinancing at attractive prices within any given period of time, or we may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions, and changes in laws, regulations, or fiscal policies of the jurisdiction in which the property is located. Further, certain significant expenditures generally do not change in response to economic or other conditions, such as (i) debt service, (ii) real estate taxes, and (iii) operating and maintenance costs. The inability to dispose of a property at an acceptable price or at all, as well as the combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced earnings and could have an adverse effect on our financial condition.

Inflation may materially and adversely affect us and our tenants.

Increased inflation could lead to interest rate increases that could have a negative impact on variable rate debt we currently have or that we may incur in the future. During times when inflation is greater than the increases in rent provided by many of our leases, rent increases will not keep up with the rate of inflation. Increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent owed to us, which in turn could materially and adversely affect us.

Natural disasters, terrorist attacks, other acts of violence or war, or other unexpected events could materially and adversely impact us.

Natural disasters, terrorist attacks, other acts of violence or war, or other catastrophic events (e.g., hurricanes, floods, earthquakes, or other types of natural disasters or wars or other acts of violence) could cause damage to our properties, materially interrupt our business operations (or those of our tenants), cause consumer confidence and spending to decrease, or result in increased volatility in

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the U.S. and worldwide financial markets and economy. Such occurrences also could result in or prolong an economic recession in the United States. We own properties in regions that have historically been impacted by natural disasters and it is probable such regions will continue to be impacted by such events. If a disaster occurs, we could suffer a complete loss of capital invested in, and any profits expected from, the affected properties. Any of these occurrences could materially and adversely affect us.

We face risks associated with climate change, which could materially and adversely impact us.

As a result of climate change, our properties in certain markets could experience increases in storm intensity, flooding, drought, wildfires, rising sea levels, and extreme temperatures. The potential physical impacts of climate change on our properties are uncertain and would be particular to the geographic circumstances in areas in which we own property. Over time, these conditions could result in volatile or decreased demand for certain of our properties or, in extreme cases, the inability of our tenants to operate the properties at all. Climate change may also have indirect effects on our business by increasing the cost of insurance (or making insurance unavailable), increasing the cost of energy at our properties, or requiring us to spend funds to repair and protect our properties against such risks. Moreover, compliance with new laws or regulations related to climate change, including compliance with “green” building codes or other laws or regulations relating to reduction of carbon footprints and/or greenhouse gas emissions, may require us to make improvements to our existing properties or increase taxes and fees assessed on us or our properties. Any of these occurrences could materially and adversely impact us.

Insurance on our properties may not adequately cover all losses and uninsured losses could materially and adversely affect us.

Our tenants are required to maintain comprehensive insurance coverage for the properties they lease from us pursuant to our net leases. Pursuant to such leases, our tenants are required to name us (and any of our lenders that have a mortgage on the property leased by the tenant) as additional insureds on their liability policies and additional named insured and/or loss payee (or mortgagee, in the case of our lenders) on their property policies. All tenants are required to maintain casualty coverage and most carry limits at 100% of replacement cost. Depending on the location of the property, losses of a catastrophic nature, such as those caused by earthquakes and floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or co-payments that a tenant may not be able to meet. In addition, losses of a catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism, or acts of war, may be uninsurable or not economically insurable. In the event there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are irreparably damaged. In addition, if uninsured damages to a property occur or a loss exceeds policy limits and we do not have adequate cash to fund repairs, we may be forced to sell the property at a loss or to borrow capital to fund the repairs.

Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, may make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed. In that situation, the insurance proceeds received may not be adequate to restore our economic position with respect to the affected real property. Furthermore, in the event we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications without significant capital expenditures which may exceed any amounts received pursuant to insurance policies, as reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. The loss of our capital investment in or anticipated future returns from our properties due to material uninsured losses could materially and adversely affect us.

Our costs of compliance with laws and regulations may reduce the investment return of our stockholders.

All real property and the operations conducted on real property are subject to numerous federal, state, and local laws and regulations. We cannot predict what laws or regulations will be enacted in the future, how future laws or regulations will be administered or interpreted, or how future laws or regulations will affect us or our properties, including, but not limited to, environmental laws and regulations and the Americans with Disabilities Act (“ADA”). Compliance with new laws or regulations, or stricter interpretation of existing laws, may require us or our tenants to incur significant expenditures, impose significant liability, restrict or prohibit business activities, and could cause a material adverse effect on us.

Compliance with the ADA may require us to make unanticipated expenditures that materially and adversely affect us.

Our properties are subject to the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. While our tenants are obligated by law to comply with the ADA and typically obligated under our leases to cover costs associated with compliance, if required changes involve greater expenditures than anticipated or if the changes must be made on a more accelerated basis than anticipated, the ability of our tenants to cover costs could be adversely affected. We could be required to expend our own funds to comply with the provisions of the ADA, which could materially and adversely affect us.

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Compliance with fire, safety, environmental, and other regulations may require us to make unanticipated expenditures that materially and adversely affect us.

We are required to operate our properties in compliance with fire and safety regulations, building codes, environmental regulations, and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and may be required to obtain approvals from various authorities with respect to our properties, including prior to acquiring a property or when undertaking improvements of any of our existing properties. There can be no assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or improvements, or that additional regulations will not be adopted that increase such delays or result in additional costs. Additionally, failure to comply with any of these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. While we intend to only acquire properties that we believe are currently in substantial compliance with all regulatory requirements, these requirements may change and new requirements may be imposed which would require significant unanticipated expenditures by us and could materially and adversely affect us.

Risks Related to Debt Financing

As of December 31, 2020, we had approximately $1.5 billion principal balance of indebtedness outstanding, which may expose us to the risk of default under our debt obligations.

As of December 31, 2020, we had approximately $1.5 billion principal balance of indebtedness outstanding. We have incurred, and plan to incur in the future, financing through borrowings under term loans, senior notes, our Revolving Credit Facility, and mortgage loans secured by some or all of our properties. In some cases, the mortgage loans we incur are guaranteed by us, the OP, or both. We may also borrow funds if necessary to satisfy the requirement that we distribute to stockholders as dividends at least 90% of our annual REIT taxable income (computed without regard to the dividends paid deduction and our net capital gains), or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for U.S. federal income tax purposes. Payments of principal and interest on borrowings may leave us with insufficient cash resources to meet our cash needs or make the distributions to our common stockholders currently contemplated or necessary to qualify as a REIT. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

 

 

 

our cash flow may be insufficient to meet our required principal and interest payments;

 

 

 

cash interest expense and financial covenants relating to our indebtedness, including a covenant in our Revolving Credit Facility that restricts us from paying distributions if an event of default exists, other than distributions required to maintain our REIT status, may limit or eliminate our ability to make distributions to our common stockholders;

 

 

 

we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon investment opportunities or meet operational needs;

 

 

 

we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

 

 

because a portion of our debt bears interest at variable rates, increases in interest rates would increase our interest expense;

 

 

 

we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under any hedge agreements we enter into, such agreements may not effectively hedge interest rate fluctuation risk, and, upon the expiration of any hedge agreements we enter into, we would be exposed to then-existing market rates of interest and future interest rate volatility;

 

 

 

we may be forced to dispose of properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;

 

 

 

 

we may default on our obligations and the lenders or mortgagees may foreclose on our properties or our interests in the entities that own the properties that secure their loans and receive an assignment of rents and leases;

 

 

 

we may be restricted from accessing some of our excess cash flow after debt service if certain of our tenants fail to meet certain financial performance metric thresholds;

 

 

 

we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and

 

 

 

our default under any loan with cross default provisions could result in a default on other indebtedness.

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The occurrence of any of these events could materially and adversely affect us. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.

Disruptions in the financial markets and deteriorating economic conditions, due to the COVID-19 pandemic or other factors, could adversely affect our ability to obtain debt financing on commercially reasonable terms and adversely impact our ability to implement our investment strategy and achieve our investment objectives.

The United States and global financial markets have experienced significant volatility and disruption in the past. During the mid-2000s, there was a widespread tightening in overall credit markets, devaluation of the assets underlying certain financial contracts, and increased borrowing by governmental entities. The turmoil in the capital markets resulted in constrained equity and debt capital available for investment in the real estate market, resulting in fewer buyers seeking to acquire properties, increases in capitalization rates, and lower property values. Prior to the onset of the COVID-19 pandemic, capital had been more available, and the overall economy had improved. However, the deteriorating economic conditions arising from the pandemic have disrupted the financial markets and made debt financing for real estate transactions generally less available. Future events or sustained negative conditions may also reduce the availability of financing, make financing terms less attractive, as well as impact the value of our investments in properties. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our planned business activities or take other actions to fund our business activities and repayment of debt such as selling assets or reducing our cash distributions. Uncertainty in the credit markets also could negatively impact our ability to make acquisitions, make it more difficult or impossible for us to sell properties, or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing.

Market conditions could adversely affect our ability to refinance existing indebtedness on acceptable terms or at all, which could materially and adversely affect us.

We use external financing to refinance indebtedness as it matures and to partially fund our acquisitions. Credit markets may experience significant price volatility, displacement, and liquidity disruptions, including the bankruptcy, insolvency, or restructuring of certain financial institutions. As a result, we may be unable to fully refinance maturing indebtedness with new indebtedness, which could materially and adversely affect us. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could materially and adversely affect us and our ability to make distributions to our stockholders.

We may incur mortgage debt on a particular property, which may subject us to certain risks, and the occurrence of any such risk could materially and adversely affect us.

We may incur mortgage debt on a particular property, especially if we believe the property’s projected cash flow is sufficient to service the mortgage debt. In addition, incurring mortgage debt may increase the risk of loss since defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any of the proceeds. We may give full or partial guarantees to lenders to the OP or its affiliates. If we give a guaranty on behalf of the OP, we will be responsible to the lender for satisfaction of the debt if it is not paid by the OP. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one of our real properties may be affected by a default. If any of our properties are foreclosed upon due to a default, we could be materially and adversely affected.

An inability to refinance existing mortgage debt as it matures could materially and adversely affect us.

Since the mortgage loans secured by certain of our properties amortize over a period longer than their maturity, we will owe substantial amounts of principal on the maturity of such loans. If we cannot refinance these loans on favorable terms, more of our cash from operations may be required to service the loans, properties may have to be sold to fund principal repayments, or properties may be lost to foreclosure, which could materially and adversely affect us.

Failure to hedge effectively against interest rate changes may materially and adversely affect us.

To reduce our exposure to variable-rate debt, we enter into interest rate swap agreements to fix the rate of interest as a hedge against interest rate fluctuations on floating-rate debt. These arrangements involve risks and may not be effective in reducing our exposure to interest rate changes. In addition, the counterparties to any hedging arrangements we enter into may not honor their

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obligations. Failure to hedge effectively against changes in interest rates relating to the interest expense of our future floating-rate borrowings may materially and adversely affect us.

 Our Revolving Credit Facility and term loan agreements contain various covenants which, if not complied with, could accelerate our repayment obligations, thereby materially and adversely affecting us.

We are subject to various financial and operational covenants and financial reporting requirements pursuant to the agreements we have entered into governing our Revolving Credit Facility, term loans, and senior notes. These covenants require us to, among other things, maintain certain financial ratios, including leverage, fixed charge coverage, and debt service coverage, among others. As of December 31, 2020, we believe we were in compliance with all of our loan covenants. Our continued compliance with these covenants depends on many factors and could be impacted by current or future economic conditions, and thus there are no assurances that we will continue to comply with these covenants. Failure to comply with these covenants would result in a default which, if we were unable to cure or obtain a waiver from the lenders, could accelerate our repayment obligations and thereby have a material and adverse impact on us.

Further, these covenants, as well as any additional covenants to which we may be subject in the future because of additional borrowings, could cause us to forego investment opportunities, reduce or eliminate distributions to our common stockholders, or obtain financing that is more expensive than financing we could obtain if we were not subject to the covenants. Additionally, these restrictions may adversely affect our operating and financial flexibility and may limit our ability to respond to changes in our business or competitive environment, all of which may materially and adversely affect us.

Failure to maintain our current credit ratings could materially and adversely affect our cost of capital, liquidity, and access to capital markets.

The spread we pay over London Interbank Offered Rate (“LIBOR”) for our unsecured credit facilities is determined based upon our credit ratings. In March 2016, Moody’s assigned the OP an investment grade credit rating of Baa3 with a stable outlook, which was re-affirmed most recently in July 2020. On January 21, 2021, S&P assigned both the Company and the OP an initial investment grade credit rating of BBB with a stable outlook. The ratings are based on a number of factors, including an assessment of our financial strength, portfolio size and diversification, credit and operating metrics, and sustainability of cash flow and earnings. If we are unable to maintain our current credit ratings it could adversely affect our cost of capital, liquidity, and access to capital markets. Factors that could negatively impact our credit ratings include, but are not limited to: a significant increase in our leverage on a sustained basis; a significant increase in the proportion of secured debt levels; a significant decline in our unencumbered asset base; and a significant decline in our portfolio diversification.

We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.

As of December 31, 2020, we had approximately $969.8 million of debt outstanding for which the interest rate was tied to LIBOR. Additionally, as of December 31, 2020, we had entered into interest rate swaps totaling $859.8 million that fix the LIBOR component of our debt through various tenors. On July 27, 2017, the Financial Conduct Authority (the “FCA”) that regulates LIBOR announced its intention to cease sustaining LIBOR after 2021. It is not possible to predict the effect of the FCA’s announcement, and there is currently no definitive information regarding the future utilization of LIBOR, including any changes in the methods by which LIBOR is determined, the frequency in which LIBOR is determined and published, or any other reforms to the determination and publication of LIBOR, or a potential transition from LIBOR to a successor benchmark. As such, the potential effect of any such event on our cost of capital cannot yet be determined and any changes to benchmark interest rates could increase our financing costs, which could impact our results of operations and cash flows.

The Alternative Reference Rates Committee (“ARRC”) has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for USD LIBOR in derivatives and other financial contracts. We are not able to predict whether LIBOR will cease to be available after 2021 or whether SOFR will replace LIBOR as the market benchmark. Any changes adopted by FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.

We are monitoring and evaluating the related risks which arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that it will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. We are in the process of reviewing our long-term debt agreements and interest rate swap contracts to identify those that do not contain fallback language to identify alternate interest rate indices that could be substituted for LIBOR should it be discontinued. All but one of our variable-rate term loan agreements contain such provisions. We plan to ensure that appropriate fallback language is included in future loan and swap contracts, and to amend existing contracts as necessary.

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Risks Related to Our Organizational Structure

Our Charter contains provisions, including ownership and transfer restrictions, that may delay, discourage, or prevent a takeover or change of control transaction that could otherwise result in a premium price to our stockholders.

Our Charter contains various provisions that are intended to facilitate our qualification as a REIT. For example, our Charter restricts the direct or indirect ownership by one person or entity to no more than 9.8% of the value of our then outstanding shares of capital stock and no more than 9.8% of the value or number of shares, whichever is more restrictive, of our then outstanding Common Stock (including our Class A Common Stock) unless exempted by our board of directors. This restriction may discourage a change of control of us and may deter individuals or entities from making tender offers for shares of our Common Stock (including our Class A Common Stock) on terms that might be financially attractive to stockholders or which may cause a change in our management. In addition to deterring potential change of control transactions that may be favorable to our stockholders, these provisions may also decrease our stockholders’ ability to sell their shares of our Common Stock (including our Class A Common Stock). As a result, these charter provisions may negatively impact the market price of our Common Stock (including our Class A Common Stock).

We may issue preferred stock or separate classes or series of Common Stock, which could adversely affect the holders of our Common Stock (including our Class A Common Stock).

Our Charter authorizes us to issue up to 520,000,000 shares of stock, and our board of directors, without any action by our stockholders, may amend our Charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Holders of shares of our Common Stock (including our Class A Common Stock) do not have preemptive rights to acquire any shares issued by us in the future.

In addition, our board of directors may classify or reclassify any unissued shares of our Common Stock (including our Class A Common Stock) or preferred stock and establish the preferences, rights, and powers of any such stock. As a result, our board of directors could authorize the issuance of preferred stock or separate classes or series of Common Stock with terms and conditions that could have priority, with respect to distributions and amounts payable upon our liquidation, over the rights of our Common Stock (including our Class A Common Stock). The issuance of shares of such preferred or separate classes or series of Common Stock could dilute the value of an investment in shares of our Common Stock (including our Class A Common Stock). The issuance of shares of preferred stock or a separate class or series of Common Stock could provide the holders thereof with specified dividend payments and payments upon liquidation prior or senior to those of the Common Stock (including our Class A Common Stock), and could also have the effect of delaying, discouraging, or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer, or sale of all or substantially all of our assets) that might provide a premium price for holders of our Common Stock (including our Class A Common Stock).

Termination of the Employment Agreements with certain members of our senior management team could be costly.

The Employment Agreements with certain members of our senior management team provide that if their employment with us terminates under certain circumstances (including in connection with a change in control of our Company), we may be required to pay them significant amounts of severance compensation, thereby making it costly to terminate their employment.

Our board of directors may change our investment and financing policies without stockholder approval, which could materially and adversely alter the nature of an investment in us.

The methods of implementing our investment policies and strategy may vary as new real estate development trends emerge, new investment techniques are developed, and market conditions evolve. Our investment and financing policies are exclusively determined by our board of directors and senior management team. Accordingly, our stockholders do not control these policies. Further, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Although we are not required to maintain a particular leverage ratio, we generally intend to maintain on a sustained basis a level of Net Debt that is generally less than 6.0x our Annualized Adjusted EBITDAre. However, from time to time, our ratio of Net Debt to our Annualized Adjusted EBITDAre may exceed 6.0x. Our board of directors may alter or eliminate our current policy on borrowing at any time without stockholder approval. If this policy changed, we could become more highly leveraged, which could result in an increase in our debt service costs and obligations. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations, and liquidity risk. Changes to our policies with regard to the foregoing could materially and adversely affect us.

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Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director of a Maryland corporation will not have any liability in that capacity if he or she performs his or her duties in accordance with the applicable standard of conduct. Our Charter limits the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted by Maryland law. Therefore, our directors and officers are subject to monetary liability resulting only from:

 

actual receipt of an improper benefit or profit in money, property, or services; or

 

active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.

As a result, we and our stockholders have rights against our directors and officers that are more limited than might otherwise exist. Accordingly, in the event that actions taken by any of our directors or officers impede the performance of our Company, your and our ability to recover damages from such director or officer will be limited. Our Charter and Second Amended and Restated Bylaws also require us to indemnify and advance expenses to our directors and our officers for losses they may incur by reason of their service in those capacities subject to any limitations under Maryland law or in our Charter. Moreover, we have entered into separate indemnification agreements with each of our directors and executive officers. As a result, we and our stockholders may have more limited rights against these persons than might otherwise exist under common law, which could reduce our stockholders’ and our recovery against such persons. In addition, we may be obligated to fund the defense costs incurred by these persons in some cases, which would reduce the cash available for distributions.

We are a holding company with no direct operations and rely on funds received from the OP to pay liabilities.

We are a holding company and conduct substantially all of our operations through the OP. We do not have, apart from an interest in the OP, any independent operations. As a result, we rely on distributions from the OP to pay any distributions we might declare on shares of our Common Stock (including our Class A Common Stock). We will also rely on distributions from the OP to meet any of our obligations, including any tax liability on taxable income allocated to us from the OP. In addition, because we are a holding company, your claims as stockholders are structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of the OP and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation, or reorganization, our assets and those of the OP and its subsidiaries will be able to satisfy the claims of our stockholders only after all of our and the OP and its subsidiaries’ liabilities and obligations have been paid in full.

Our UPREIT structure may result in potential conflicts of interest between the interests of our stockholders and members in the OP, which may materially and adversely impede business decisions that could benefit our stockholders.

Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the OP or any future member thereof, on the other. Our directors and officers have duties to our Company under applicable Maryland law in connection with the management of our Company. At the same time, we, as the managing member of the OP, will have fiduciary duties and obligations to the OP and its members under New York law and the limited liability company agreement of the OP in connection with the management of the OP. Our fiduciary duties and obligations, as the managing member of the OP, and its members may come into conflict with the duties of our directors and officers to our Company.

 While we intend to avoid situations involving conflicts of interest, there may be situations in which the interests of the OP may conflict with our interests. Our activities specifically authorized by or described in the OP Agreement may be performed by us and will not, in any case or in the aggregate, be deemed a breach of the OP Agreement or any duty owed by us to the OP or any member. In exercising our authority under the OP Agreement, we may, but are under no obligation to, take into account the tax consequences of any action we take. We and the OP have no liability to a non-managing member under any circumstances as a result of an income tax liability incurred by such non-managing member as a result of an action (or inaction) by us pursuant to our authority under the OP Agreement.

The OP Agreement provides that the managing member will not be liable to the OP, its members, or any other person bound by the OP Agreement for monetary damages for losses sustained, liabilities incurred, or benefits not derived by the OP or any member, except for liability for the member’s gross negligence or willful misconduct. Moreover, the OP Agreement provides that the OP is required to indemnify the managing member, its affiliates, and certain related persons, and any manager, officer, stockholder, director, member, employee, representative, or agent of the managing member or its affiliates from and against any and all claims that relate to the operations of the OP, except if (i) the act was committed in bad faith, (ii) the act was the result of active and deliberate dishonesty and was material to the cause of action involved, or (iii) it personally gained in fact a financial income or other advantage to which it was not entitled under law.


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We are an “emerging growth company,” and we cannot be certain if the reduced SEC reporting requirements applicable to emerging growth companies will make our Common Stock (including our Class A Common Stock) less attractive to investors, which could make the market price and trading volume of our Common Stock (including our Class A Common Stock) more volatile and decline significantly.

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which we have total annual gross revenue of $1.07 billion or more (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the first sale of our common stock pursuant to an effective registration statement, (iii) the date on which we have, during the previous 3-year period, issued more than $1.0 billion in non-convertible debt, or (iv) the date on which we are deemed to be a “large accelerated filer.”  We intend to take advantage of exemptions from various reporting requirements that are applicable to most other public companies, whether or not they are classified as “emerging growth companies,” including, but not limited to, an exemption from the provisions of Section 404(b) of Sarbanes-Oxley requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. An attestation report by our auditor would require additional procedures by them that could detect problems with our internal control over financial reporting that are not detected by management. If our system of internal control over financial reporting is not determined to be appropriately designed or operating effectively, it could require us to restate financial statements, cause us to fail to meet reporting obligations, and cause investors to lose confidence in our reported financial information, all of which could lead to a significant decline in the market price of our Common Stock (including our Class A Common Stock).  The JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in the Securities Act, for complying with new or revised accounting standards. However, we have chosen to “opt out” of this extended transition period and, as a result, we will comply with new or revised accounting standards on or prior to the relevant dates on which adoption of such standards is required for all public companies that are not emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We cannot predict if investors will find our Common Stock or our Class A Common Stock, as applicable, less attractive because we intend to rely on certain of these exemptions and benefits under the JOBS Act. If some investors find our Common Stock or Class A Common Stock, as applicable, less attractive as a result, there may be a less active, liquid, and/or orderly trading market for our Common Stock (including our Class A Common Stock) and the market price and trading volume of our Common Stock (including our Class A Common Stock) may be more volatile and decline significantly.

 The value of an investment in our Common Stock (including our Class A Common Stock) may be reduced if we are required to register as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”) and, if we are subject to registration under the Investment Company Act, we will not be able to continue our business.

Neither we, the OP, nor any of our subsidiaries intend to register as an investment company under the Investment Company Act. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that would impose significant and onerous limitations on our operations, as well as require us to comply with various reporting, record keeping, voting, proxy disclosure, and other rules and regulations that would significantly alter our operations and significantly increase our operating expenses.

We believe that we, the OP, and the subsidiaries of the OP do not and will not fall within the definition of investment company under Section 3(a)(1) of the Investment Company Act as we intend to invest primarily in real property through our wholly or majority-owned subsidiaries. Accordingly, we believe that we and the OP are and will be primarily engaged in the non-investment company business of such subsidiaries and therefore will not fall within the aforementioned definition of investment company.

To ensure that neither we nor any of our subsidiaries, including the OP, are required to register as an investment company, each entity may be unable to sell assets that it would otherwise want to sell and may need to sell assets that it would otherwise wish to retain. In addition, we, the OP, or our subsidiaries may be required to acquire additional income- or loss-generating assets that we might not otherwise acquire or forego opportunities to acquire interests in companies that we would otherwise want to acquire. Although we, the OP, and our subsidiaries intend to monitor our portfolio periodically and prior to each acquisition and disposition, any of these entities may not be able to remain outside the definition of investment company or maintain an exclusion from the definition of investment company. If we, the OP, or our subsidiaries are required to register as an investment company but fail to do so, the unregistered entity would be prohibited from engaging in our business, and criminal and civil actions could be brought against such entity. In addition, the contracts of such entity would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of the entity and liquidate its business.

U.S. Federal Income Tax Risks

Failure to qualify as a REIT would materially and adversely affect us and the value of our Common Stock (including our Class A Common Stock).

We elected to be taxed as a REIT under Sections 856 through 860 of the Code and the applicable U.S. Treasury regulations, which contain the requirements for qualifying as a REIT, which we refer to in this Form 10-K as the “REIT Requirements,” beginning with

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our taxable year ended December 31, 2008. We believe that we have been organized and operated in a manner to qualify for taxation as a REIT for U.S. federal income tax purposes commencing with such year, and we intend to continue operating in such a manner. However, we cannot assure you that we have qualified as a REIT, or that we will remain qualified as such in the future. If we lose our REIT status, we will face significant tax consequences that would substantially reduce our cash available for distribution to our stockholders for each of the years involved because:

 

we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to U.S. federal income tax at the corporate rate;

 

we could be subject to the federal alternative minimum tax for taxable years beginning before January 1, 2018, and increased state and local income taxes;

 

unless we are entitled to relief under applicable statutory provisions of the Code, we could not elect to be taxed as a REIT for four taxable years following the year during which qualification was lost; and

 

for the five years following re-election of REIT status, upon a taxable disposition of an asset owned as of such re-election, we would be subject to corporate level tax with respect to any built-in gain inherent in such asset at the time of re-election.

 Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to stockholders. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to our stockholders. If this occurs, we may need to borrow funds or liquidate some of our properties in order to pay any applicable taxes. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to execute our growth strategy and raise capital, and could materially and adversely affect the trading price of our Common Stock (including our Class A Common Stock).

Qualification as a REIT involves the application of technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our stock, requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. In addition, legislation, new regulations, administrative interpretations, or court decisions may materially and adversely affect our investors, our ability to qualify as a REIT for U.S. federal income tax purposes, or the desirability of an investment in a REIT relative to other investments.

Even if we remain qualified as a REIT for U.S. federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to our stockholders.

Even if we remain qualified as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state, and local income, property, and excise taxes on our income or property. For example:

 

 

 

In order to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders (computed without regard to the dividends paid deduction and our net capital gain), and to the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income (computed without regard to the dividends paid deduction and including our net capital gain), we will be subject to U.S. federal corporate income tax on the undistributed income, as well as applicable state and local income taxes.

 

 

 

If we should fail to distribute, or fail to be treated as having distributed, with respect to each calendar year at least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of our REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, we would be subject to a 4% nondeductible excise tax on the excess of such required distribution over the sum of (a) the amounts actually distributed and (b) the amounts we retained and upon which we paid U.S. federal income tax at the corporate level.

 

 

 

If we have (i) net income from the sale or other disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business or (ii) other non-qualifying net income from foreclosure property, we will be subject to tax at the U.S. federal corporate income tax rate on such income. To the extent that income from “foreclosure property” is otherwise qualifying income for purposes of the 75% gross income test, this tax is not applicable.

 

 

 

If we have net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than sales of foreclosure property and sales that qualify for certain statutory safe harbors), such income will be subject to a 100% tax.

 

 

 

We may be subject to tax on gain recognized in a taxable disposition of assets acquired from a non-REIT C corporation by way of a carryover basis transaction, when such gain is recognized on a disposition of an asset during a 5-year period beginning on the date on which we acquired the asset. To the extent of any “built-in gain,” such gain will be subject to U.S. federal income tax at the federal corporate income tax rate. Built-in gain means the excess of (i) the fair market value of the asset as of the beginning of the applicable recognition period over (ii) our adjusted basis in such asset as of the beginning of such recognition period.

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We may perform additional, non-customary services for tenants of our buildings through a taxable REIT subsidiary (“TRS”), including real estate or non-real estate related services; however, any earnings that exceed allowable limits related to such services are subject to federal and state income taxes. In addition, TRSs will be subject to tax as regular corporations in the jurisdictions in which they operate.

If the OP fails to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.

We believe that the OP will be treated as a partnership for U.S. federal income tax purposes. As a partnership, the OP would generally not be subject to U.S. federal income tax on its income. Instead, for U.S. federal income tax purposes, if the OP is treated as a partnership, each of its partners, including us, would be allocated, and may be required to pay tax with respect to, such partner’s share of its income. The OP may be required to determine and pay an imputed underpayment of tax (plus interest and penalties) resulting from an adjustment of the OP’s items of income, gain, loss, deduction, or credit at the partnership level. We cannot assure you that the IRS will not challenge the status of the OP or any other subsidiary in which we own an interest as a disregarded entity or partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the OP or any such other subsidiary as an entity taxable as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of the OP or any subsidiary to qualify as a disregarded entity or partnership could cause it to become subject to U.S. federal and state corporate income tax, which would significantly reduce the amount of cash available for debt service and for distribution to its partners, including us.

To satisfy the REIT distribution requirements, we may be forced to take certain actions to raise funds if we have insufficient cash flow which could materially and adversely affect us and the trading price of our Common Stock (including our Class A Common Stock).

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, computed without regard to the dividends paid deduction and our net capital gains, and we will be subject to corporate income tax on our undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income each year, computed without regard to the dividends paid deduction. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. In order to satisfy these distribution requirements to maintain our REIT status and avoid the payment of income and excise taxes, we may need to take certain actions to raise funds if we have insufficient cash flow, such as borrowing funds, raising additional equity capital, selling a portion of our assets or finding another alternative to make distributions to our stockholders. We may be forced to take those actions even if the then-prevailing market conditions are not favorable for those actions. This situation could arise from, among other things, differences in timing between the actual receipt of cash and recognition of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures or other non-deductible expenses, the creation of reserves, or required debt or amortization payments. Such actions could increase our costs and reduce the value of our Common Stock (including our Class A Common Stock). These sources, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt levels, the market price of our Common Stock (including our Class A Common Stock), and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could materially and adversely affect us and the trading price of our Common Stock (including our Class A Common Stock).

Further, to qualify as a REIT, we must also satisfy tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets, and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT Requirements may hinder our ability to operate solely on the basis of maximizing profits.

The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status or require us to make an unexpected distribution.

We may purchase properties and lease them back to the sellers of such properties. The IRS may take the position that certain of these sale-leaseback transactions that we treat as leases are not “true leases” but are, instead, financing arrangements or loans for U.S. federal income tax purposes.

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If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT asset tests, the income tests, or distribution requirements and consequently lose our REIT status effective with the year of re-characterization unless we elect to make an additional distribution to maintain our REIT status. The primary risk relates to the disallowance of deductions for depreciation and cost recovery relating to such property, which could affect the calculation of our REIT taxable income and could cause us to fail the REIT distribution requirement that requires a REIT to distribute at least 90% of its REIT taxable income, computed without regard to the dividends paid deduction and any net capital gain. In this circumstance, we may elect to distribute an additional dividend of the increased taxable income so as not to fail the REIT distribution test. This distribution would be paid to all stockholders at the time of declaration rather than the stockholders that held our shares in the taxable year affected by the re-characterization.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum U.S. federal income tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts, and estates is 20%. Ordinary dividends payable by REITs, however, generally are not eligible for the 20% rate applicable to “qualified dividends” except to the extent the REIT dividends are attributable to “qualified dividends” received by the REIT itself or generally attributable to income upon which we (or a predecessor) have paid U.S. federal corporate income tax. However, for non-corporate U.S. stockholders, ordinary dividends payable by REITs that are not designated as capital gain dividends or treated as “qualified dividends” generally are eligible for a deduction of 20% of the amount of such ordinary REIT dividends, for taxable years beginning before January 1, 2026. More favorable rates will nevertheless continue to apply for regular corporate “qualified dividends.” Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the 20% rate continues to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may regard investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations.

 The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for U.S. federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.

Complying with the REIT Requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Any income from a hedging transaction that we enter into to manage the risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets, or from certain terminations of such hedging positions, does not constitute “gross income” for purposes of the 75% or 95% gross income tests that apply to REITs, provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or fail to properly identify such transaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of the 75% and 95% gross income tests. As a result of these rules, we may be required to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because any TRS in which we own an interest may be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in any TRS in which we own an interest will generally not provide any tax benefit, except that such losses in some cases may be carried back against past taxable income in the TRS and may be carried forward against future taxable income in the TRS (subject to certain limitations).

Complying with the REIT Requirements may force us to liquidate or forgo otherwise attractive investments.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income, and the amounts we distribute to our stockholders. In connection with the Internalization, we were treated as having acquired substantial amounts of goodwill that may not qualify for the 75% asset test. Compliance with these limitations, particularly given the goodwill that we acquired in the Internalization, may hinder our ability to make, and, in certain cases, maintain ownership of certain attractive investments that might not qualify for the 75% asset test. If we fail to comply with the REIT asset test requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. These actions could have the effect of reducing our income, increasing our income tax liability, and reducing amounts available for distribution to our stockholders. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments (or, in some cases, forego the sale of such investments) that would be otherwise advantageous to us in order to satisfy the REIT

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Requirements. Accordingly, satisfying the REIT Requirements could materially and adversely affect us. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income, or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.

In certain circumstances, we may be liable for certain tax obligations of certain of the members of the OP.

In certain circumstances, we may be liable for tax obligations of certain of the members of the OP. In connection with certain UPREIT transactions, we have entered or will enter into tax protection agreements under which we have agreed to indemnify members of the OP against adverse tax consequences if we were to sell, convey, transfer, or otherwise dispose of our assets in taxable transactions, with specific exceptions and limitations. Pursuant to the tax protection agreements, we have also agreed to ensure that such members of the OP are allocated minimum amounts of the OP’s indebtedness. If we fail to meet our obligations under the tax protection agreements, we may be required to reimburse those members of the OP for the amount of the tax liabilities they incur, subject to certain limitations. We may enter into additional tax protection agreements in the future in connection with other UPREIT transactions. Although it may be in our stockholders’ best interest that we sell a property, it may be economically disadvantageous for us to do so because of these obligations. In order to limit our exposure to a tax obligation, our use of proceeds from any sales or dispositions of certain properties will be limited. With respect to the existing tax protection agreements with property contributors (excluding the Internalization), as of December 31, 2020, our potential indemnification obligation for the taxable sale of those properties is approximately $12.3 million.

In connection with the Internalization, we entered into the Founding Owners’ Tax Protection Agreement, pursuant to which we have agreed to indemnify the Founding Owners against the applicable income tax liabilities resulting from: (1) the sale, exchange, transfer, conveyance, or other disposition of the assets of BRE that we acquired in the Internalization (the “Contributed Property”) in a taxable transaction prior to February 7, 2030; and (2) our failure to offer the Founding Owners the opportunity to guarantee specific types of the OP’s indebtedness in order to enable them to continue to defer the applicable income tax liabilities associated with the allocation of that indebtedness. Our maximum liability under the Founding Owners’ Tax Protection Agreement is capped at $10 million.

The Blocker Corp Mergers may have adverse tax consequences.

As a general matter, notwithstanding that we qualify to be taxed as a REIT for U.S. federal income tax purposes, if we acquire appreciated assets from a non-REIT C corporation in a transaction in which the adjusted tax basis of the assets in its hands is determined by reference to the adjusted tax basis of the assets in the hands of the C corporation, we will be subject to entity-level tax on any gain recognized in connection with a disposition (such as a taxable sale) of any such assets during the 5-year period following such acquisition. In addition, in order to qualify as a REIT, we must not have, at the end of any taxable year, any earnings and profits accumulated in a non-REIT year.

Because each of Trident BRE Holdings I, Inc. and Trident BRE Holdings II, Inc. (the “Blocker Corps”) were taxable as a non-REIT C corporation and we acquired their appreciated assets in connection with the Internalization in transactions (the “Blocker Corp Mergers”) in which the adjusted tax basis of the assets in our hands was determined by reference to the adjusted tax basis of the assets in the hands of each of the Blocker Corps prior to the Blocker Corp Mergers, we will be subject to corporate income tax on the “built-in gain” with respect to the Blocker Corps’ assets at the time of the Blocker Corp Mergers if we dispose of those assets in a taxable transaction within five years following the Blocker Corp Mergers. This built-in gain is measured by the difference between the value of the Blocker Corps’ assets at the time of the Blocker Corp Mergers and the adjusted basis in those assets. We estimate this built-in gain to be approximately $50.7 million. The assets of the Blocker Corps we acquired in the Blocker Corp Mergers are the Blocker Corps’ interests in BRE. When BRE merged into the OP in a tax-deferred transaction and the Blocker Corps received OP Units, the built-in gain associated with the Blocker Corps’ assets became represented as part of an intangible asset on our balance sheet. The disposition of that intangible asset in a taxable transaction within five years following the Blocker Corp Mergers could trigger a corporate income tax on that built-in gain. The most likely transaction in which that intangible asset is disposed of would be a sale of the OP (or our interest in the OP) in a taxable transaction. Thus, if the OP (or our interest in the OP) is sold in a taxable transaction within five years following the Blocker Corp Mergers, we could incur a corporate income tax on approximately $50.7 million of built-in gain.

Because the Blocker Corps were each taxable as a regular C corporation, we assumed any earnings and profits accumulated by the Blocker Corps for taxable periods prior to and including the Blocker Corp Mergers, referred to as “C corporation earnings and profits.” To qualify as a REIT, we cannot have any C corporation earnings and profits at the end of any taxable year. We estimated the C corporation earnings and profits of the Blocker Corps to be approximately $2.3 million in total at the time of the Blocker Corp Mergers and we used a nationally recognized accounting firm to prepare a study to assist management in confirming that calculation. During 2020, we made sufficient distributions in excess of our earnings and profits (including the C corporation earnings and profits from the Blocker Corps) so we would not have to pay a special dividend to eliminate such C corporation earnings and profits. In effect, the inclusion of the C corporation earnings and profits from the Blocker Corps increased the portion of our distributions during 2020 that were taxable as dividends. However, if we were determined to succeed to more C corporation earnings and profits as a result of the Blocker Corp Mergers, we may have to pay a special dividend and/or employ applicable deficiency dividend procedures to eliminate such earnings and profits. If we need to make a special dividend or pay a deficiency dividend and do not otherwise have cash on hand

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to do so, we may need to (i) sell assets at unfavorable prices, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures, or repayment of debt, or (iv) make a taxable distribution of Common Stock (or Class A Common Stock, as applicable) as part of a distribution in which stockholders may elect to receive Common Stock (or Class A Common Stock, as applicable) or cash (subject to a limit measured as a percentage of the total distribution), in order to comply with REIT Requirements. These alternatives could increase our costs or reduce our equity. In addition, if we were to rely upon the remedial deficiency dividend procedures, we would be required to pay interest based on the amount of any such deficiency dividends.

In addition to the foregoing, as a result of the Blocker Corp Mergers, we inherited any liability with respect to unpaid taxes of each of the Blocker Corps for any periods prior to the Blocker Corp Mergers.

Changes to the U.S. federal income tax laws, including the recent enactment of certain tax reform measures, could have a material and adverse effect on us.

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury, which may result in revisions to regulations and interpretations and changes to the application of existing tax rules by U.S. federal, state, local, and foreign governments, in addition to statutory changes, including those contemplated by the new presidential administration in the United States. No assurance can be given as to whether, or in what form, any proposals affecting REITs or their stockholders will be enacted.

In particular, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “TCJA”), for which only limited guidance has been issued to date, significantly reforms the Code with respect to the taxation of both individuals and corporate entities, and there are numerous interpretive issues and ambiguities that are not yet clearly addressed, which require further guidance, including possibly in some cases, technical corrections. It is unclear if and when such guidance will be forthcoming, or in the case of technical corrections, will be enacted. Future regulatory guidance and legislation may significantly affect the impact of the TCJA. Changes to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in our Common Stock (including our Class A Common Stock).

While some of the changes made by the TCJA may adversely affect us, other changes may be beneficial on a going forward basis. The TCJA made numerous other large and small changes to the tax rules that do not affect REITs directly but may affect our stockholders and may indirectly affect us. In addition, federal legislation intended to ameliorate the economic impact of the COVID-19 pandemic has been enacted that makes technical corrections to, or modifies on a temporary basis, certain provisions of the TCJA, including Public Law No. 116-136, known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law on March 27, 2020, and it is possible that additional legislation may be enacted in the future.

There may also be future changes in U.S. federal tax laws, regulations, rules, and judicial and administrative interpretations applicable to us and our business, the effect of which cannot be predicted. Our stockholders and prospective investors are urged to consult with their own tax advisors with respect to the TCJA, the CARES Act and the status of other legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in shares of our Common Stock (including our Class A Common Stock).

 Risks Related to Ownership of Our Common Stock (Including Our Class A Common Stock)

The market price and trading volume of shares of our Common Stock (including our Class A Common Stock) may be volatile.

The market price of shares of our Class A Common Stock and Common Stock following the Class A Conversion may fluctuate. In addition, the trading volume in shares of our Common Stock and Class A Common Stock, as applicable, may fluctuate and cause significant price variations to occur. Historically, these changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our Common Stock and our Class A Common Stock, as applicable, could fluctuate based upon factors that have little or nothing to do with us in particular. If the market price of shares of our Common Stock and our Class A Common Stock, as applicable, declines significantly, you may be unable to resell your shares of our Common Stock or Class A Common Stock, as applicable, at or above the public offering price. We cannot assure you that the market price of shares of our Class A Common Stock or Common Stock following the Class A Conversion will not fluctuate or decline significantly, including a decline below the public offering price, in the future.

Some of the factors that could negatively affect our share price or result in fluctuations in the market price or trading volume of shares of our Common Stock (including our Class A Common Stock) include:

 

 

 

actual or anticipated declines in our quarterly operating results or distributions;

 

 

 

changes in government regulations;

 

 

 

changes in laws affecting REITs and related tax matters;

44


 

 

 

 

 

the announcement of new contracts by us or our competitors;

 

 

 

reductions in our FFO, AFFO, or earnings estimates;

 

 

 

publication of research reports about us or the real estate industry;

 

 

 

increases in market interest rates that lead purchasers of shares of our Common Stock or our Class A Common Stock to demand a higher yield;

 

 

 

the Class A Conversion, pursuant to which our existing Common Stock will become listed on the NYSE and freely tradeable, and the expiration or early release of the lock-up agreements entered into with the underwriters by certain parties described elsewhere under “Shares Eligible for Future Sale—Lock-up Agreements”;

 

 

 

future equity issuances, or the perception that they may occur, including issuances of Common Stock upon exercise or vesting of equity awards or redemption of OP Units;

 

 

 

changes in market valuations of similar companies;

 

 

 

adverse market reaction to any increased indebtedness we incur in the future;

 

 

 

additions or departures of key management personnel;

 

 

 

actions by institutional stockholders;

 

 

 

differences between our actual financial and operating results and those expected by investors and analysts;

 

 

 

changes in analysts’ recommendations or projections;

 

 

 

speculation in the press or investment community; and

 

 

 

the realization of any of the other risk factors presented herein.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on our cash flows, our ability to execute our business strategy, and our ability to make distributions to our stockholder.

We may not be able to make distributions to our stockholders at the times or in the amounts we expect, or at all.

We intend to make cash distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to adjustments, is distributed. However, we may not be able to continue to generate sufficient cash flow from our properties to permit us to make the distributions we expect. Our ability to continue to make distributions in the future may be adversely affected by the risk factors described in this Annual Report on Form 10-K. We can provide no assurance that we will be able to make or maintain distributions and certain agreements relating to our indebtedness may, under certain circumstances, limit or eliminate our ability to make distributions to our common stockholders. For instance, our Revolving Credit Facility contains provisions that restrict us from paying distributions if an event of default exists, other than distributions required to maintain our REIT status. We can give no assurance that rents from our properties will increase, or that future acquisitions of real properties or other investments will increase our cash available for distributions to stockholders. In addition, any distributions will be authorized at the sole discretion of our board of directors, and their form, timing, and amount, if any, will depend upon a number of factors, including our actual and projected results of operations, FFO, AFFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable law, and such other factors as our board of directors deems relevant.

Distributions are expected to be based upon our FFO, AFFO, financial condition, cash flows and liquidity, debt service requirements, and capital expenditure requirements for our properties. If we do not have sufficient cash available for distributions, we may need to fund the shortage out of working capital or borrow to provide funds for such distributions, which would reduce the amount of proceeds available for real estate investments and increase our future interest costs. Our inability to make distributions, or to make distributions at expected levels, could result in a decrease in trading price of our Class A Common Stock or Common Stock following the Class A Conversion.

45


 

We may change the dividend policy for our Common Stock (including our Class A Common Stock) in the future.

The decision to declare and pay dividends on our Common Stock (including our Class A Common Stock), as well as the form, timing, and amount of any such future dividends, will be at the sole discretion of our board of directors and will depend on our earnings, cash flows, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our indebtedness, the annual distribution requirements under the REIT provisions of the Code, state law, and such other factors as our board of directors considers relevant. Any change in our dividend policy could have a material adverse effect on the market price of our Common Stock (including our Class A Common Stock).

Increases in market interest rates may result in a decrease in the value of shares of our Common Stock (including our Class A Common Stock).

One of the factors that will influence the price of shares of our Common Stock (including our Class A Common Stock) will be the distribution yield on shares of our Common Stock (including our Class A Common Stock) (as a percentage of the price of shares of our Common Stock (including our Class A Common Stock)) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of shares of our Common Stock (including our Class A Common Stock) to expect a higher distribution yield and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the per share trading price of our Common Stock (including our Class A Common Stock) to decrease.

There may be future dilution to earnings related to shares of our Common Stock (including our Class A Common Stock).

The market price of shares of our Common Stock (including our Class A Common Stock) could decline as a result of issuances or sales of a large number of shares of our Common Stock in the market, or the perception that such issuances or sales could occur. Additionally, future issuances or sales of substantial amounts of shares of our Common Stock (including our Class A Common Stock) may be at prices below the initial public offering price of the shares of our Class A Common Stock and may result in further dilution in our earnings and FFO per share and/or materially and adversely impact the per share trading price of our Common Stock (including our Class A Common Stock).

Future offerings of debt, which would be senior to shares of our Common Stock (including our Class A Common Stock) upon liquidation, and/or preferred equity securities that may be senior to shares of our Common Stock (including our Class A Common Stock) for purposes of distributions or upon liquidation, may materially and adversely affect the market price of shares of our Common Stock (including our Class A Common Stock).

In the future, we may attempt to increase our capital resources by making additional offerings of debt or preferred equity securities (or causing the OP to issue debt securities). Upon liquidation, holders of our debt securities and preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to our stockholders. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences, and privileges more favorable than those of our Common Stock (including our Class A Common Stock) and may result in dilution to owners of our Common Stock (including our Class A Common Stock). Our stockholders are not entitled to preemptive rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on distribution payments that could limit our right to make distributions to our stockholders. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings. Our stockholders bear the risk of our future offerings reducing the per share trading price of our Common Stock (including our Class A Common Stock).

Sales of substantial amounts of our Common Stock (including our Class A Common Stock) in the public markets, or the perception that they might occur, or the pending Class A Conversion could reduce the price of our Common Stock (including our Class A Common Stock).

Prior to the initial public offering, neither our Class A Common Stock nor our Common Stock was listed on any national securities exchange and the ability of stockholders to liquidate their investments was limited. Additionally, our share redemption program was terminated as of January 10, 2020. As a result, there may be increased demand to sell shares of our Common Stock upon the Class A Conversion, at which time shares of our Common Stock owned by the continuing investors will be listed on the NYSE and freely tradable. A large volume of sales of shares (or short sales) of our Common Stock (or our Class A Common Stock prior to the Class A Conversion) could decrease the prevailing market price of our Common Stock or our Class A Common Stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales of our Common Stock or our Class A Common Stock are not effected, the mere perception of the possibility of these sales could depress the market price of our Common Stock or our Class A Common Stock and have a negative effect on our ability to raise capital in the future.

The shares of our Class A Common Stock that we sold in the initial public offering could be resold immediately in the public market unless they were held by “affiliates,” as that term is defined in Rule 144 of the Securities Act. The Common Stock and OP Units

46


 

issued as consideration in connection with the Internalization are “restricted securities” within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. The Trident Owners and the Founding Owners (as well as our directors and officers) have agreed, subject to certain exceptions, not to sell or otherwise dispose of any of their Common Stock (including any Class A Common Stock) or OP Units (which may be exchanged for our Common Stock) through March 15, 2021, except with the underwriters’ prior written consent. As a result of the Registration Rights Agreement, however, all of these shares, including Common Stock that may be issued in exchange for OP Units, may be eligible for future sale without restriction, subject to applicable lock-up arrangements. See “Shares Eligible for Future Sale—Registration Rights” and “Certain Relationships and Related Transactions—Registration Rights Agreement.” Sales of a substantial number of such shares upon expiration of the lock-up agreements, the perception that such sales may occur, or early release of these agreements, could cause the market price of our Common Stock or our Class A Common Stock to fall or make it more difficult for you to sell your Class A Common Stock (or your Common Stock, as applicable) at a time and price that you deem appropriate.

Sales of substantial amounts of our capital stock in the public markets may dilute your voting power and your ownership interest in us.

Our Charter provides that we may issue up to 500,000,000 shares of Common Stock, of which 60,000,000 shares are designated as Class A Common Stock and 440,000,000 shares are shares of Common Stock without further designation, and 20,000,000 shares of preferred stock, $0.001 par value per share. Moreover, under Maryland law and as provided in our Charter, a majority of our entire board of directors has the power to amend our Charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue without stockholder approval. Future issuances of shares of our Common Stock or our Class A Common Stock, securities convertible or exchangeable into Common Stock, or shares of our preferred stock may dilute the ownership interest of our common stockholders. Because our decision to issue additional equity or convertible or exchangeable securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future issuances. In addition, we are not required to offer any such securities to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future issuances, which may dilute the existing stockholders’ interests in us.

47


 

 

Item 1B.

Unresolved Staff Comments.

There are no unresolved staff comments.

Item 2.

Properties.

Please refer to Item 1. “Business” of this Annual Report on Form 10-K for information concerning our properties.

Item 3.

From time to time, we are subject to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to legal proceedings that we believe would reasonably be expected to have material adverse effect on our business, financial condition or results of operations. We are not aware of any material legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject, nor are we aware of any such legal proceedings contemplated by government agencies.

Item 4.

Mine Safety Disclosures.

None

 

48


 

 

Part II.

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our Class A Common Stock is traded on the NYSE under the ticker symbol “BNL.” Each share of Class A Common Stock will automatically convert to one share of Common Stock on March 20, 2021, the date that is 180 days after the completion of the initial public offering of the Class A Common Stock. The Common Stock will be listed and traded on the NYSE on March 22, 2021.

Stockholders

As of February 23, 2021, there were approximately 3,892 holders of record of our Common Stock and 94 holders of record of our Class A Common Stock. However, because many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, we believe there are considerably more beneficial holders of our Class A Common Stock than record holders.

Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities

Sales of Common Stock and Issuance of OP Units

None.

Awards of Restricted Stock

On August 4, 2020, we entered into restricted stock award agreements for an aggregate of 340,963 shares of Common Stock of the Company (the “2020 Restricted Stock Awards”), which were valued at approximately $7.0 million or $20.50 per common share, with our senior management team and certain other key employees. The awards were issued under the terms of the 2020 Equity Incentive Plan, and the grants were approved by the Compensation Committee. The grants to the senior management team, which were made pursuant to the terms of their respective employment agreements, included (i) restricted stock grants that vest in substantially equal installments on each of the first four anniversaries of February 7, 2020, which represents 40% of the total award value for each participant, and (ii) restricted stock grants that vest in substantially equal installments on each of the first three anniversaries of February 7, 2020, which represents 60% of the total award value for each participant. The grants to other key employees vest 40% on the first anniversary of February 7, 2020, 30% on the second anniversary of February 7, 2020, 20% on the third anniversary of February 7, 2020, and 10% on the fourth anniversary of February 7, 2020. The restricted stock award agreements provide that vesting is subject to the executive’s continued employment with the Company through each applicable vesting date, except in the event of the executive’s death or disability, in which case, any unvested portion of the awards will become fully vested. In addition, the restricted stock award agreements provide the executive with rights as a stockholder in respect of the awards’ vested and unvested shares, including the right to vote and the right to dividends. In the event of a termination of the executive’s employment by the Company without “Cause” or by the executive for “Good Reason” within 12 months following a “Change in Control” of the Company (as such terms are defined in the executive’s employment agreement), any unvested portion of the 2020 Restricted Stock Awards will become fully vested at the time of such termination, provided that if the 2020 Restricted Stock Awards are unvested at the time of a Change in Control of the Company and are not assumed or substituted for equivalent awards as part of the Change in Control transaction, the 2020 Restricted Stock Awards will become fully vested at the time of the Change in Control transaction. Under the terms of the 2020 Restricted Stock Awards, the Company shall be entitled, at its option and in addition to any other available remedies, to terminate the Shares in respect of the 2020 Restricted Stock Awards (including any vested Shares) if the executive materially violates the terms of any restrictive covenant agreement between the Company and the executive or if the executive is convicted of a felony against the Company or its affiliates.

The aforementioned securities were issued in reliance on the exemption set forth in Section 4(a)(2) of the Securities Act.

Use of Proceeds from Initial Public Offering

In September 2020, the Company issued and sold 33,500,000 shares of Class A Common Stock in an IPO, at a public offering price of $17.00 per share and on October 20, 2020 the Company issued and sold an additional 3,500,000 shares of Class A Common Stock pursuant to the partial exercise by the underwriters of their over-allotment option to purchase additional shares at the same public offering price.

The offer and sale of all the shares in the IPO, inclusive of the underwriters' partial exercise of their over-allotment option, were registered under the Securities Act pursuant to a registration statement on Form S-11 (File No. 333-240381), as amended, which was declared effective by the SEC on September 16, 2020. J.P. Morgan Securities LLC, Goldman Sachs & Co. LLC, BMO Capital Markets Corp., Morgan Stanley & Co. LLC, Capital One Securities, Inc. and Truist Securities, Inc. acted as joint book-running managers

49


 

for the offering. The IPO commenced on September 16, 2020 and terminated upon the closing of the sale of shares to the underwriters pursuant to their partial exercise of their over-allotment option on October 20, 2020. Upon completion of the IPO, inclusive of the underwriters' partial exercise of their over-allotment option, we received approximately $588.3 million in net proceeds, after deducting underwriting discounts and commissions and other offering expenses payable by us of approximately $3.0 million. No payments for any expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

There has been no material change in the expected use of the net proceeds from our IPO as described in our final prospectus, dated September 16, 2020, filed with the SEC pursuant to Rule 424(b) relating to our registration statement on Form S-11 filed on September 17, 2020. On September 21, 2020, we completed our IPO and issued 37 million shares of stock for net proceeds of $588.3 million, including shares issued subsequently pursuant to the underwriters’ partial exercise of the over-allotment option. We used $216.5 million of the net proceeds to fully repay the outstanding borrowings and accrued interest under our then existing revolving credit agreement and $240.2 million of the proceeds to fully repay the outstanding principal and accrued interest associated with an unsecured term loan.

As we deploy our net proceeds from our successful IPO and continue to invest in accretive real estate properties, we expect to continue to balance our debt and equity capitalization, while maintaining a Net Debt to Annualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of follow-on equity offerings and an at-the-market (“ATM”) program.

Prior to the IPO, equity capital for our real estate acquisition activity was provided by proceeds from our private offering, including distributions reinvested through our DRIP. We suspended our private offering on January 10, 2020, and did not raise any equity through our private offering during the year ended December 31, 2020. During the year ended December 31, 2020, we raised approximately $5.9 million in equity capital through our DRIP. For the year ended December 31, 2019, we raised $394.4 million in equity capital, of which $329.8 million was received through new cash investments and $64.6 million was raised through our DRIP. We announced on January 10, 2020 that we were terminating our DRIP effective February 10, 2020.

Distributions

Prior to May 2020, we paid distributions to holders of shares of our Common Stock on a monthly basis. In light of the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and then-current tenant rent relief requests, to preserve cash, strengthen our liquidity position, and manage our leverage profile, in May 2020 our board of directors determined to temporarily suspend our monthly distribution. We did not pay a distribution for the months of May, June, and July 2020. We reinstated our distribution in August 2020, announcing that we would transition to quarterly distribution payments, and declared a distribution of $0.135 per share on our Common Stock (including our Class A Common Stock) for the third quarter with a record date of September 30, 2020, and a payment date of October 15, 2020.

Following completion of our IPO, we paid a $0.25 quarterly distribution for the fourth quarter of 2020.  On February 19, 2021, the Board declared a quarterly dividend for the first quarter of 2021 of $0.25 per share, payable to holders of record on March 31, 2021 and to be paid on or about April 15, 2021.

While we intend to continue paying regular quarterly dividends to stockholders, the authorization of future dividend declarations will be at the discretion of our board of directors and will depend on our actual cash flow, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code, and such other factors as our board of directors deems relevant. The actual cash flow available to pay dividends will be affected by a number of factors, including, among others, the risks discussed under “Risk Factors” in Part I, Item 1A and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report.


50


 

 

Performance Graph

The following graph is a comparison of the cumulative total return of shares of our common stock, the Russell 2000, and the MCSI US REIT Index. The graph assumes that $100 was invested on December 31, 2015, in each of shares of our common stock, the Russell 2000 and the MCSI US REIT Index, and that all dividends were reinvested. With respect to shares of our common stock, we have assumed that dividends were reinvested in additional shares of common stock pursuant to our DRIP at a per share price equal to 98% of the Determined Share Value as of the applicable distribution date. There can be no assurance that the performance of our shares will continue in line with the same or similar trends depicted in the graph below. The MCSI US REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index (IMI), its parent index, which captures large, mid, and small capitalization securities. While funds used in this benchmark typically target institutional investors and have characteristics that differ from us (including differing fees), we feel that the MCSI US REIT Index is an appropriate and accepted index for the purpose of evaluating returns on investments in direct real estate funds.

 

 

December 31,

 

 

 

 

2015

 

 

 

2016

 

 

 

2017

 

 

 

2018

 

 

 

2019

 

 

 

2020

 

Broadstone Net Lease

 

 

100.00

 

 

 

111.21

 

 

 

124.66

 

 

 

140.94

 

 

 

148.34

 

 

 

142.58

 

Russell 2000

 

 

100.00

 

 

 

121.31

 

 

 

139.08

 

 

 

123.76

 

 

 

155.35

 

 

 

186.36

 

MSCI US REIT Index

 

 

100.00

 

 

 

108.60

 

 

 

114.11

 

 

 

108.89

 

 

 

137.03

 

 

 

126.65

 

Following the completion of our IPO in September 2020 and the listing of our Class A Common Stock on the NYSE, we now calculate annual total return to include dividends as of their respective ex-dividend date.

The information in this “Performance Graph” section is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except as shall be expressly set forth by specific reference in such filing.

 

51


 

 

Item 6.

Selected Financial Data

The selected financial data as of and for the years ended December 31, 2020, 2019, 2018, 2017, and 2016 presented below should be read in conjunction with our consolidated financial statements and the related notes thereto contained in Item 8. “Financial Statements and Supplementary Data” and in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. The selected financial data presented below has been derived from our audited consolidated financial statements.

Our results of operations for the periods presented below are not indicative of those expected in future periods.

 

 

 

For the Year Ended December 31,

 

(in thousands, except per share data)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Operating Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenues

 

$

321,637

 

 

$

298,815

 

 

$

237,479

 

 

$

181,563

 

 

$

142,869

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

132,685

 

 

 

108,818

 

 

 

83,994

 

 

 

62,263

 

 

 

46,321

 

Asset management fees

 

 

2,461

 

 

 

21,863

 

 

 

18,173

 

 

 

14,754

 

 

 

10,955

 

Property management fees

 

 

1,275

 

 

 

8,256

 

 

 

6,529

 

 

 

4,988

 

 

 

3,939

 

Acquisition expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,880

 

Property and operating expense

 

 

17,478

 

 

 

15,990

 

 

 

11,157

 

 

 

6,505

 

 

 

3,900

 

General and administrative

 

 

27,988

 

 

 

5,456

 

 

 

6,162

 

 

 

4,939

 

 

 

2,790

 

Provision for impairment of

   investment in rental properties

 

 

19,077

 

 

 

3,452

 

 

 

2,061

 

 

 

2,608

 

 

 

 

Total operating expenses

 

 

200,964

 

 

 

163,835

 

 

 

128,076

 

 

 

96,057

 

 

 

78,785

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred distribution income

 

 

 

 

 

 

 

 

440

 

 

 

737

 

 

 

713

 

Interest income

 

 

24

 

 

 

9

 

 

 

179

 

 

 

467

 

 

 

88

 

Interest expense

 

 

(76,138

)

 

 

(72,534

)

 

 

(52,855

)

 

 

(34,751

)

 

 

(29,963

)

Cost of debt extinguishment

 

 

(417

)

 

 

(1,176

)

 

 

(101

)

 

 

(5,151

)

 

 

(133

)

Gain on sale of real estate

 

 

14,985

 

 

 

29,914

 

 

 

10,496

 

 

 

12,992

 

 

 

5,925

 

Income taxes

 

 

(939

)

 

 

(2,415

)

 

 

(857

)

 

 

(624

)

 

 

(446

)

Gain on sale of investment in

   related party

 

 

 

 

 

 

 

 

8,500

 

 

 

 

 

 

 

Internalization expenses

 

 

(3,705

)

 

 

(3,658

)

 

 

 

 

 

 

 

 

 

Change in fair value of earnout

   liability

 

 

1,800

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expenses) income

 

 

(7

)

 

 

(6

)

 

 

(100

)

 

 

379

 

 

 

 

Net income

 

 

56,276

 

 

 

85,114

 

 

 

75,105

 

 

 

59,555

 

 

 

40,268

 

Net income attributable to

   non-controlling interests

 

 

(5,095

)

 

 

(5,720

)

 

 

(5,730

)

 

 

(4,756

)

 

 

(3,914

)

Net income attributable to

   Broadstone Net Lease, Inc.

 

$

51,181

 

 

$

79,394

 

 

$

69,375

 

 

$

54,799

 

 

$

36,354

 

Net Earnings per common share,

   basic and diluted

 

$

0.44

 

 

$

0.83

 

 

$

0.86

 

 

$

0.80

 

 

$

0.69

 

 

52


 

 

 

 

December 31,

 

(In thousands)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in rental property, at cost

 

$

3,734,121

 

 

$

3,728,334

 

 

$

2,890,735

 

 

$

2,376,141

 

 

$

1,790,674

 

Investment in rental property, net

 

 

3,384,144

 

 

 

3,457,290

 

 

 

2,683,746

 

 

 

2,227,758

 

 

 

1,684,971

 

Cash and cash equivalents

 

 

100,486

 

 

 

12,455

 

 

 

18,612

 

 

 

9,355

 

 

 

21,635

 

Total assets

 

 

4,258,483

 

 

 

3,917,858

 

 

 

3,096,797

 

 

 

2,578,756

 

 

 

1,952,054

 

Unsecured revolving credit facility

 

 

 

 

 

197,300

 

 

 

141,100

 

 

 

273,000

 

 

 

102,000

 

Mortgage and notes payable, net

 

 

107,382

 

 

 

111,793

 

 

 

78,952

 

 

 

67,832

 

 

 

106,686

 

Unsecured term notes, net

 

 

1,433,796

 

 

 

1,672,081

 

 

 

1,225,773

 

 

 

836,912

 

 

 

657,891

 

Total liabilities

 

 

1,779,402

 

 

 

2,138,838

 

 

 

1,567,877

 

 

 

1,294,555

 

 

 

953,517

 

Total Broadstone Net Lease, Inc. stockholders’

  equity

 

 

2,299,105

 

 

 

1,667,614

 

 

 

1,417,099

 

 

 

1,186,825

 

 

 

911,788

 

Total equity

 

 

2,479,081

 

 

 

1,779,020

 

 

 

1,528,920

 

 

 

1,284,201

 

 

 

998,537

 

 

 

 

For the Year Ended December 31,

 

(In thousands, except per share amounts)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend declared

 

$

111,435

 

 

$

136,280

 

 

$

112,969

 

 

$

92,768

 

 

$

76,955

 

Dividends declared per common share

 

$

0.83

 

 

$

1.32

 

 

$

1.29

 

 

$

1.24

 

 

$

1.23

 

FFO(1)

 

 

192,981

 

 

 

167,470

 

 

 

150,664

 

 

 

111,434

 

 

 

80,664

 

AFFO(1)

 

 

181,095

 

 

 

149,197

 

 

 

124,065

 

 

 

99,952

 

 

 

78,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Number of properties

 

 

641

 

 

 

646

 

 

 

621

 

 

 

528

 

 

 

417

 

Occupancy at period end

 

 

99.2

%

 

 

99.7

%

 

 

99.7

%

 

 

99.6

%

 

 

98.0

%

 

(1)

Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption Net Income and Non-GAAP Measures (FFO and AFFO) for further discussion of FFO and AFFO, including a reconciliation of net income to FFO and AFFO.

53


 

Item 7.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements appearing in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

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, office, and retail property types. As of December 31, 2020, our portfolio has grown to 640 properties in 41 U.S. states and one property in Canada, with an aggregate gross asset value of approximately $4.0 billion.

We focus on investing in real estate that is operated by 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 December 31, 2020, our portfolio comprised approximately 28.2 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):

 

o

Property Type: We are focused primarily on industrial, healthcare, restaurant, office, and retail property types based on our extensive experience in and conviction around these sectors. Within these sectors, we have meaningful concentrations in manufacturing, distribution and warehouse, clinical, casual dining, quick service restaurant, strategic operations, corporate headquarters, food processing, flex/research and development, and cold storage.

 

o

Geographic Diversity: Our properties are located in 41 U.S. states and British Columbia, Canada, with no single geographic concentration exceeding 10.2% of our ABR.

 

o

Tenant and Industry Diversity: Our properties are occupied by approximately 181 different commercial tenants who operate 167 different brands that are diversified across 55 differing industries, with no single tenant accounting for more than 2.5% of our ABR.

 

-

Strong In-Place Leases with Significant Remaining Lease Term. As of December 31, 2020, our portfolio was approximately 99.2% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 10.7 years, excluding renewal options.

 

-

Standard Contractual Base Rent Escalation. Approximately 98.3% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.1%.

 

-

Extensive Tenant Financial Reporting. Approximately 88.7% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 6.3% of our ABR is received from tenants who are not required to provide us with specified financial information under the terms of our lease, but whose financial statements are available publicly, either through SEC filings or otherwise.

COVID-19 Pandemic

The rapidly evolving circumstances related to the COVID-19 pandemic resulted in deep economic uncertainty and far-reaching impacts on almost every business and industry, including industries in which our tenants operate. In response to the COVID-19 pandemic, many countries and U.S. states, including the areas in which we operate, adopted certain measures to mitigate the ongoing public health crises. Such measures included “shelter in place” or “stay at home” rules, restrictions on travel, and restrictions on the types of businesses that may continue to operate in many countries and U.S. states. Although such restrictions have been or were in the process of being lifted in various locations, the recent resurgence of COVID-19 cases has led to a reinstatement or partial reinstatement of restrictions in some locations. We cannot predict whether and to what extent additional states and cities will implement similar restrictions or when restrictions currently in place will expire. Further, the impacts of a potential worsening of economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, and consumer spending, as well as other unanticipated consequences, remain unknown.

The sections below summarize the typical factors that impact our results of operations, including the actual and potential impacts of the COVID-19 pandemic on our results of operations, liquidity and capital resources, during the year ended December 31, 2020, as well as management’s view of potential impacts on our future results of operations, liquidity and capital resources. For more discussion on the risks associated with the COVID-19 outbreak, see Item 1A. “Risk Factors”.

54


 

Factors That Impact Our Result of Operations

Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that typically impact our results of operations and financial condition, which may be exacerbated by the COVID-19 pandemic, include rental rates and collections, property dispositions, lease renewals and occupancy, acquisition activity, net lease terms, interest expense, general and administrative expenses, tenant bankruptcies, and impairments.

Rental Rates and Collections

Our financial results depend on our ability to timely collect contractual rents due under our long-term net leases. The COVID-19 pandemic’s impact on us has primarily manifested through tenant requests for rent relief. In total, we granted partial rent relief requests to 15 tenants related to 93 properties.

We evaluated each request for rent relief as a unique situation, employing a rigorous credit and business analysis focusing on, among other things, industry circumstances, the tenant’s financial performance, liquidity position, lease structure, and geographic location, and regulatory impacts on the tenant’s operations (e.g., stay-at-home orders, essential v. nonessential business designations). Based on our analyses, we granted relief on a select basis only to those tenants we determined to be most in need. In cases where we granted rent relief, we focused on negotiating the shortest possible repayment period and, when possible, lease enhancements (e.g. extensions of term). There were several tenants who requested rent relief that we believed were well positioned to continue making rent payments during the pandemic. Many of those tenants had strong balance sheets and liquidity positions, had applied for or received Paycheck Protection Program loan funding under the CARES Act, or were designated as essential businesses and could continue to operate despite restrictions on other businesses. We declined to agree to any rent relief in those circumstances, and in all such cases the tenants continued to pay all rents due as of December 31, 2020.

The rent relief requests we granted included partial deferral of payment of rent with 14 tenants, and a partial abatement of rent with one tenant. As of December 31, 2020, all deferral periods have ended, and the balance of rent deferrals yet to be repaid was less than $1 million. The abatement period ended subsequent to year-end in January 2021.

In circumstances where we agreed to a rent deferral that is to be repaid over a period of time, and where the terms of the lease and amounts paid under the lease were substantially the same, we continued to recognize the same amount of GAAP lease revenue each period to the extent the amounts were probable of collection. The amounts we agreed to defer impacted our cash flows from operations.

The following chart summarizes our 2020 rent collections:

 

 

Full Year

 

Q4

 

Q3

 

Q2

 

Q1

Base Rent Received

 

97.7%

 

98.8%

 

97.9%

 

95.5%

 

98.8%

Base Rent Abated

 

0.9%

 

1.0%

 

1.4%

 

1.1%

 

0.0%

Base Rent Deferred

 

0.9%

 

0.0%

 

0.6%

 

3.0%

 

0.0%

Uncollected Rent

 

0.5%

 

0.2%

 

0.1%

 

0.4%

 

1.2%

Total

 

100.0%

 

100.0%

 

100.0%

 

100.0%

 

100.0%

Despite our continued strong rent collections subsequent to the outbreak of the COVID-19 pandemic, the duration of the pandemic and the potential ongoing impacts of the virus on our tenants’ ability to conduct their business should additional governmental restrictions be implemented, could have a significant negative impact on our ability to continue to collect future rents.

Property Dispositions

From time to time, we strategically dispose of properties, primarily when we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives. The resulting gains or losses on dispositions may materially impact our operating results, and the recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market at the time a property is listed for sale. As a result of the COVID-19 pandemic, we have seen a slowdown in real estate transactions and weakening market conditions for several property types resulting from an increase in vacant rental space. Although we were able to dispose of properties during the year ended December 31, 2020 at advantageous prices, in the short term, the slowdown in market activity may inhibit our ability to further dispose of properties we have identified for disposition, including those leased by tenants that experience significant credit deterioration as a result of the COVID-19 pandemic, and the price at which we are able to sell the properties may be negatively impacted. We will continue to monitor the pandemic’s impact and continue to selectively dispose of properties when advantageous to do so.

Lease Renewals and Occupancy

As of December 31, 2020, the ABR weighted average remaining term of our portfolio was approximately 10.7 years, excluding renewal options, and approximately 10.2% of our leases (based on ABR) will expire prior to January 1, 2026. The stability of the rental revenue generated by our properties depends principally on our tenants’ ability to pay rent and our ability to collect rents, renew expiring leases or re-lease space upon the expiration or other termination of leases, lease currently vacant properties, and maintain or increase rental rates at our leased properties. To the extent our properties become vacant and are not subject to a lease, we would forego rental income while remaining responsible for the payment of property taxes and maintaining the property until it is re-leased, which could

55


 

negatively impact our operating results. Our occupancy rates have remained strong during the COVID-19 pandemic, standing at 99.2% as of December 31, 2020 based on rentable square footage. Additionally, when negotiating COVID-19 related rent relief agreements, we have sought to extend lease terms where possible to preserve the continuity of tenants and long-term cash flows derived from our portfolio. While we believe our portfolio’s diversity should allow us to manage the impact the COVID-19 pandemic may have on lease renewals and occupancy, we continue to monitor the pandemic’s effects on several industries in which our tenants operate, such as bankruptcies by large retailers, continued or increased occupancy limits established by local governments on the casual dining industry, as well as the potential long-term effects on the demand for and utilization of office space as more companies consider adopting work from home models.

Acquisition Activity

Our historical growth in revenues and earnings has been achieved through rent escalations associated with existing in-place leases, coupled with rental income generated from accretive property acquisitions. Our ability to grow revenue will depend, to a significant degree, on our ability to identify and complete acquisitions that meet our investment criteria. Changes in capitalization rates, interest rates, or other factors may impact our acquisition opportunities in the future. Market conditions may also impact the total returns we can achieve on our investments. Our acquisition volume also depends on our ability to access third-party debt and equity financing. The COVID-19 pandemic caused a slowdown in acquisition volume, and we did not acquire any new properties during the first ten months of 2020. We returned to growth through acquisitions during the fourth quarter, investing $100.3 million excluding capitalized acquisition expenses in 19 properties at a weighted average initial capitalization rate of 6.9%.

We continue to build and evaluate a robust pipeline of potential investment opportunities, predominantly focused on industrial, healthcare, quick-service restaurant, and select retail property sectors.

Net Lease Terms

Substantially all of our leases are net leases pursuant to which our tenant generally is obligated to pay all expenses associated with the leased property including real estate taxes, insurance, maintenance, repairs, and capital costs. A limited number of leases require that we pay some or all of the property expenses such as roof and structure repairs, real estate taxes, insurance, the cost of environmental liabilities, if any, or certain non-structural repairs and maintenance. Additionally, we seek to use master lease structures where it fits market practice in the particular property type, pursuant to which we seek to lease multiple properties to a single tenant on an all or none basis. Master leases strengthen our ability to preserve rental revenue and prevent costs associated with vacancies for underperforming properties. We believe the master lease structure is most prevalent and applicable to leases in our restaurant and retail property types, while less relevant to our other property types, such as healthcare and industrial. As of December 31, 2020, master leases contributed approximately 34.4% of our overall ABR (our largest master lease by ABR related to 24 properties and contributed 2.5% of our ABR, and our smallest master lease by ABR related to two properties and contributed 0.1% of our ABR), 74.0% of our restaurant property ABR (168 of our 247 restaurant properties), and 47.2% of our retail property ABR (76 of our 130 retail properties).

In instances in which we granted rent relief, we generally preserved the rights afforded to us pursuant to our leases. The ongoing COVID-19 pandemic presents certain risks of modifications to our lease terms, including certain rights we have under master leases. The ongoing impact of the COVID-19 pandemic could also increase the risk of tenants’ failure to meet their lease obligations, including the risk that the prolonged economic downturn forces tenants into bankruptcy. An increase in the number of leases under which we are responsible for some or all property related expenses could negatively influence our operating results.

Interest Expense

We anticipate that we will continue to incur debt to fund future acquisition activity, which will increase the amount of interest expense we incur. In addition, although we attempt to limit our total floating-rate debt exposure, changes in the interest rate environment could either increase or decrease our weighted average interest rate in the future. Any changes to our debt structure or debt financing associated with property acquisitions, could materially influence our operating results depending on the terms of any such debt. In January 2021, we received an initial credit rating of BBB with a stable outlook from S&P, which will have the effect of lowering the applicable margin on our existing $965 million of bank loans by 25 basis points beginning in February 2021, as well as a 20 basis point decrease in the applicable margin on future Revolving Credit Facility borrowings. However, a downgrade in our credit rating could also increase the amount of interest we pay under our debt agreements.

Interest rates declined during 2020 as the U.S. federal government attempts to combat the economic impacts of the COVID-19 pandemic. We benefited from this dynamic to the extent our floating rate borrowings were unhedged. Such borrowings bear interest at variable rates equal to LIBOR plus a margin based on our credit rating. The one-month LIBOR rate decreased from 1.76% at December 31, 2019, to 0.14% at December 31, 2020. We repaid $456.3 million of unhedged borrowings with the proceeds of our IPO, and approximately $110.0 million of our outstanding borrowings at December 31, 2020, remained unhedged. Restrictions in credit markets resulted in increased borrowing spreads across the debt capital markets earlier in the year as compared to the end of 2019,

56


 

although they have since narrowed. As market conditions evolve and we return to executing against our growth strategy, additional changes in interest rates and our borrowing spreads could influence our operating results.  

General and Administrative Expenses

Our general and administrative expenses primarily consist of compensation and related costs, third party legal, accounting, and consulting expenses, travel and entertainment, and general office expenses. Since March 16, 2020, we have been primarily operating under a work from home policy. As of the date of this filing, the policy remains in effect. Given our limited headcount, we have not incurred a material amount of cash outlays on information technology or infrastructure to facilitate our remote workforce, and do not believe we will incur significant costs in the future. We have experienced a significant decrease in travel and entertainment expenses, as social distancing guidelines and restrictions have limited corporate travel. These benefits, however, may be outweighed by incremental third party legal, accounting, and consulting costs if the impacts of the COVID-19 pandemic worsen.

Tenant Bankruptcies

Adverse economic conditions, particularly those that affect the markets in which our properties are located, or downturns in our tenants’ industries could impair our tenants’ ability to meet their lease obligations to us and our ability to renew expiring leases or re-lease space. In particular, the bankruptcy of one or more of our tenants could adversely affect our ability to collect rents from such tenants and maintain our portfolio’s occupancy. We have historically experienced only a limited number of tenant bankruptcies, which have not been material to our financial results. We have yet to see the long-term effects of the pandemic and the extent to which it may impact our tenants in the future. A prolonged exposure to the negative economic impacts of the pandemic may result in additional tenant bankruptcies.

Impairments

We review long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. Significant judgment is made as to if and when impairment should be taken. If our strategy, or one or more of the assumptions described above, changes in the future, we may have to recognize an impairment. Indications of a tenant’s inability to continue as a going concern, changes in our view or strategy relative to a tenant’s business or industry as a result of the COVID-19 pandemic, or changes in our long-term hold strategies, could each be indicative of an impairment triggering event. For the year ended December 31, 2020, we recognized $19.1 million of impairment charges, mainly resulting from changes in our long-term hold strategy with respect to the individual properties, which was due in part to unfavorable market trends resulting from the COVID-19 pandemic in geographic areas where we have vacant properties being marketed for re-lease or sale. We face the risk of additional impairments depending on the long-term effects of the COVID-19 pandemic and the extent to which it may impact our tenants in the future.

Results of Operations

Our historical results of operations for the years ended December 31, 2020 and 2019, discussed below, include the payment of asset and property management fees that we no longer pay following the Internalization, and do not include the full extent of expected direct compensation expense associated with employees employed by us following the Internalization or incremental general and administrative expenses.

Discussion of our Results of Operations for the year ended December 31, 2019 compared to the year ended December 31, 2018 was previously filed in our Annual Report on Form 10-K for the year ended December 31, 2019. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Results of Operations—Year Ended December 31, 2019 Compared to Year Ended year ended December 31, 2018.”

Overview

As of December 31, 2020, our real estate investment portfolio included 640 commercial real estate properties with locations in 41 states and one real estate property located in British Columbia, Canada, and leased to tenants in various industries. All but eight of our properties were subject to a lease as of December 31, 2020.

57


 

Year Ended December 31, 2020 Compared to Year Ended year ended December 31, 2019

Lease revenues, net

 

 

 

Year Ended December 31,

 

 

Increase/(Decrease)

 

(in thousands)

 

2020

 

 

2019

 

 

$

 

 

%

 

Contractual rental amounts billed for operating leases

 

$

281,998

 

 

$

257,695

 

 

$

24,303

 

 

 

9.4

%

Adjustment to recognize contractual operating lease

   billings on a straight-line basis

 

 

20,965

 

 

 

22,109

 

 

 

(1,144

)

 

 

-5.2

%

Variable rental amount earned

 

 

743

 

 

 

152

 

 

 

591

 

 

>100.0

%

Earned income from direct financing leases

 

 

3,355

 

 

 

4,018

 

 

 

(663

)

 

 

-16.5

%

Earned income from sales-type leases

 

 

5

 

 

 

 

 

 

5

 

 

 

100.0

%

Operating expenses billed to tenants

 

 

15,845

 

 

 

14,614

 

 

 

1,231

 

 

 

8.4

%

Other income from real estate transactions

 

 

799

 

 

 

668

 

 

 

131

 

 

 

19.6

%

Adjustment to revenue recognized for uncollectible

   rental amounts billed

 

 

(2,073

)

 

 

(441

)

 

 

(1,632

)

 

>100.0

%

Total Lease revenues, net

 

$

321,637

 

 

$

298,815

 

 

$

22,822

 

 

 

7.6

%

The increase in Lease revenues, net for the year ended December 31, 2020, was primarily attributable to growth in our real estate portfolio through accretive property acquisitions during 2019. In 2019, we significantly increased the size of our portfolio, adding 74 new properties at an aggregate purchase price of approximately $1.0 billion, excluding capitalized acquisition costs. Our acquisitions were largely weighted towards the second half of the year, with the closing of a $735.7 million industrial and office portfolio in August 2019. As of December 31, 2020, our portfolio was 99.2% occupied (based on rentable square footage), with ABR weighted average annual rent increases of 2.1%. During the fourth quarter of 2020, we invested $100.3 million, excluding capitalized acquisition costs, in 19 properties at a weighted average initial cash cap rate of 6.9%. Most of these acquisitions closed during the month of December, and therefore did not contribute meaningfully to the increase in Lease revenues, net for the year ended December 31, 2020.

Operating Expenses

 

 

 

Year Ended December 31,

 

 

Increase/(Decrease)

 

(in thousands)

 

2020

 

 

2019

 

 

$

 

 

%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

132,685

 

 

$

108,818

 

 

$

23,867

 

 

 

21.9

%

Asset management fees

 

 

2,461

 

 

 

21,863

 

 

 

(19,402

)

 

 

(88.7

)%

Property management fees

 

 

1,275

 

 

 

8,256

 

 

 

(6,981

)

 

 

(84.6

)%

Property and operating expense

 

 

17,478

 

 

 

15,990

 

 

 

1,488

 

 

 

9.3

%

General and administrative

 

 

27,988

 

 

 

5,456

 

 

 

22,532

 

 

>100.0

%

Provision for impairment of investment in

   rental properties

 

 

19,077

 

 

 

3,452

 

 

 

15,625

 

 

>100.0

%

Total operating expenses

 

$

200,964

 

 

$

163,835

 

 

$

37,129

 

 

 

22.7

%

Depreciation and amortization

The increase in depreciation and amortization expense for the year ended December 31, 2020, is primarily due to the growth in our real estate portfolio, as discussed above. The amount of depreciation and amortization expense as a percentage of revenue fluctuates period-over-period based on the composition of our property acquisitions each year. We allocate the purchase price of these acquisitions based on the relative fair value of the underlying assets acquired and liabilities assumed, which have differing useful lives impacting the amount of depreciation and amortization expense recognized thereafter. The assets generally include tangible assets, consisting of land and land improvements, buildings and other improvements, and equipment, and identifiable intangible assets and liabilities, including the value of in-place leases and acquired above-market and below-market leases. Our acquisitions and strategic growth strategies have not resulted in meaningful trends in the composition of underlying assets acquired.

Asset management fees and Property management fees

The decline in asset management fees and property management fees was due to the completion of the Internalization. Upon completion of the Internalization, the agreements with the third-party manager were terminated, resulting in a decrease in these expenses as compared to the prior year period.

58


 

Property and operating expense

The increase in property and operating expense was mainly attributable to the number of properties we own for which we are responsible for engaging a third-party manager to manage ongoing property maintenance, along with insurance and real estate taxes associated with those properties. We pay a majority of these expenses and are reimbursed by the tenants under the terms of the respective leases. There was a corresponding increase in operating expenses billed to tenants and included within Lease revenues, net.

General and administrative

The increase in general and administrative expenses mainly reflects the impact of the Internalization associated with our newly acquired employee base. Following the Internalization, our asset and property management fees were replaced with compensation and related expenses, which totaled $16.2 million during the year ended December 31, 2020, along with associated general and administrative expenses. In 2020, we achieved costs savings from our internalized structure, as the increase in general and administrative expenses is less than the combined decrease in asset management, property management, and disposition fees incurred during the year ended December 31, 2020 under our prior externally managed structure.

Provision for impairment of investment in rental properties

During the year ended December 31, 2020, we recognized $19.1 million of impairment on our investments in rental properties, compared to $3.5 million during the year ended December 31, 2019, respectively. The following table presents the impairment charges for their respective periods:

 

 

Year Ended

December 31,

 

(in thousands, except number of properties)

 

2020

 

 

2019

 

Number of properties

 

 

7

 

 

 

4

 

Carrying value prior to impairment charge

 

$

55,674

 

 

$

15,901

 

Fair value

 

 

36,597

 

 

 

12,449

 

Impairment charge

 

$

19,077

 

 

$

3,452

 

The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances. We took a majority of the 2020 impairment during the third quarter, which primarily related to an increased likelihood that we would sell an asset that was vacated through a tenant’s bankruptcy. We continued to market the asset for lease or sale, and subsequent to year end, we signed a long-term lease with a new tenant.  

Other income (expenses)

 

 

 

Year Ended December 31,

 

 

Increase/(Decrease)

 

(in thousands)

 

2020

 

 

2019

 

 

$

 

 

%

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

24

 

 

$

9

 

 

$

15

 

 

>100.0

%

Interest expense

 

 

(76,138

)

 

 

(72,534

)

 

 

3,604

 

 

 

5.0

%

Cost of debt extinguishment

 

 

(417

)

 

 

(1,176

)

 

 

(759

)

 

 

(64.5

)%

Gain on sale of real estate

 

 

14,985

 

 

 

29,914

 

 

 

(14,929

)

 

 

(49.9

)%

Income taxes

 

 

(939

)

 

 

(2,415

)

 

 

(1,476

)

 

 

(61.1

)%

Internalization expenses

 

 

(3,705

)

 

 

(3,658

)

 

 

47

 

 

 

1.3

%

Change in fair value of earnout liability

 

 

1,800

 

 

 

 

 

 

1,800

 

 

>100.0

%

Other expenses

 

 

(7

)

 

 

(6

)

 

 

1

 

 

 

16.7

%

Interest expense

Increased interest expense during the year ended December 31, 2020, as compared to the year ended December 31, 2019, reflects increased average outstanding borrowings in the comparable period. We incurred incremental revolver and term loan borrowings in August 2019 to fund a significant acquisition and in February 2020 in connection with the Internalization. These borrowings were unhedged and bore interest at a variable rate based on LIBOR, which decreased from 1.76% at December 31, 2019 to 0.14% at December 31, 2020. As a result, we benefited from declining interest rates during the period of time they were outstanding. The borrowings were fully repaid in September 2020 with proceeds from our IPO.

59


 

Gain on sale of real estate

Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the year ended December 31, 2020, we recognized gains of $15.0 million on the sale of 24 properties, compared to gains of $29.9 million on the sale of 49 properties during the year ended December 31, 2019. There was an increase in the sale of properties during 2019 as a result of our deleveraging plans following the significant industrial and office portfolio acquisition in August 2019. The decrease in the sale of properties during 2020 was a result of a shift in our deleveraging to employ proceeds from the IPO, rather than gains on sales of properties, to reduce leverage, as well as a general decrease in market activity resulting from the COVID-19 pandemic in 2020.

Income taxes

The decrease in Income taxes during 2020 is mainly attributable to federal and state taxes paid in 2019 by our Taxable REIT Subsidiary as a result of our deleveraging plans subsequent to our significant industrial and office portfolio acquisition in August 2019.

Change in fair value of earnout liability

As part of the Internalization we may be required to pay additional earnout consideration if certain milestones are achieved during the Earnout Periods. During 2020, we recorded the fair value of this contingent consideration in the Consolidated Balance Sheets, and updated the fair value at the end of each reporting period. To the extent the change in fair value relates to a portion of the earnout consideration that is classified as a liability, we record the change through earnings. We estimate the fair value of the earnout liability by considering weighted-average probabilities of likely outcomes, and using a Monte Carlo simulation and discounted cash flow analysis to estimate fair value. These estimates require the Company to make various assumptions about future share prices, and other items that are unobservable and are considered Level 3 inputs in the fair value hierarchy. The change in the fair value of the earnout liability during the year ended December 31, 2020, reflects changes in share prices and our peer stock price volatility assumption, which are attributable to changes in economic circumstances impacting global equity markets.

Net Income and Net earnings per diluted share

 

 

 

Year Ended December 31,

 

 

Increase/(Decrease)

 

(in thousands, except per share data)

 

2020

 

 

2019

 

 

$

 

 

%

 

Net income

 

$

56,276

 

 

$

85,114

 

 

$

(28,838

)

 

 

(33.9

)%

Net earnings per diluted share

 

 

0.44

 

 

 

0.83

 

 

 

(0.39

)

 

 

(47.0

)%

The decrease in net income for the year ended December 31, 2020, as compared to the year ended December 31, 2019, is primarily due to a $23.9 million increase in depreciation and amortization expense, a $15.6 million increase in impairment charges, a $14.9 million decrease in gains on sale of real estate, and a $3.6 million increase in interest expense. These factors were partially offset by revenue growth of $22.8 million and $1.8 million of income from the decrease in the fair value of our earnout liability in 2020 with no comparable adjustment in the prior year. In addition, as a result of the Internalization, increased general and administrative expenses of $22.5 million were offset by $26.4 million lower asset management and property management fees.

GAAP net income includes items such as gain or loss on sale of real estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons. These fluctuations, combined with the increase in our weighted average shares outstanding resulting from the common shares and OP Units issued in conjunction with the IPO and Internalization, contributed to the $0.39 decrease in net earnings per diluted share for the year ended December 31, 2020.

Liquidity and Capital Resources

General

We acquire real estate using a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on maximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our leverage profile and overall liquidity position. We believe our leverage strategy has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our investment grade credit rating of Baa3 from Moody’s Investors Service (“Moody’s”), which was reaffirmed in July 2020, and our initial credit rating of BBB from S&P in January 2021. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with lenders and with rating agencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As of December 31, 2020, we had total debt outstanding of $1.5 billion, Net Debt of $1.4 billion, and a Net Debt to Annualized Adjusted EBITDAre ratio of approximately 5.15x.

60


 

Net Debt and Annualized Adjusted EBITDAre are non-GAAP financial measures, and Annualized Adjusted EBITDAre is calculated based upon EBITDA, EBITDAre, and Adjusted EBITDAre, each of which is also a non-GAAP financial measure. Refer to Non-GAAP Measures below for further details concerning our calculation of non-GAAP measures and reconciliations to the comparable GAAP measure.

Liquidity/REIT Requirements

Liquidity is a measure of our ability to meet potential cash requirements, including our ongoing commitments to repay debt, fund our operations, acquire properties, make distributions to our stockholders, and other general business needs. As a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gain, on an annual basis. As a result, it is unlikely that we will be able to retain substantial cash balances to meet our long-term liquidity needs, including repayment of debt and the acquisition of additional properties, from our annual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital.

Short-term Liquidity Requirements

Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including our general and administrative expenses as well as interest payments on our outstanding debt, and to pay distributions. We do not currently anticipate making significant capital expenditures or incurring other significant property costs because of the strong occupancy levels across our portfolio and the nature of our leases. We expect to meet our short-term liquidity requirements primarily from cash and cash equivalents balances and net cash provided by operating activities, supplemented by borrowings under our Revolving Credit Facility.

Long-term Liquidity Requirements

Our long-term liquidity requirements consist primarily of funds necessary to repay debt and invest in additional revenue generating properties. Debt capital is provided through unsecured term notes, revolving credit facilities, and senior unsecured notes. Further, we anticipate having the ability to access the public unsecured bond market, which was historically largely unavailable to us.

The source and mix of our debt capital in the future will be impacted by market conditions as well as our continued focus on lengthening our debt maturity profile to better align with our portfolio’s lease terms, staggering debt maturities to reduce the risk that a significant amount of debt will mature in any single year in the future, and managing our exposure to interest rate risk.  

We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our capital structure.

Equity Capital Resources

On September 21, 2020, we completed our IPO and issued 37 million shares of stock for net proceeds of $588.3 million, including shares issued subsequently pursuant to the underwriters’ partial exercise of their over-allotment option. We used $216.5 million of the net proceeds to fully repay the outstanding borrowings and accrued interest under our then existing revolving credit agreement and $240.2 million of the proceeds to fully repay the outstanding principal and accrued interest associated with an unsecured term loan.

As we deploy our net proceeds from our successful IPO and continue to invest in accretive real estate properties, we expect to continue to balance our debt and equity capitalization, while maintaining a Net Debt to Annualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of follow-on equity offerings and an at-the-market (“ATM”) program.

Prior to the IPO, equity capital for our real estate acquisition activity was provided by proceeds from our private offering, including distributions reinvested through our DRIP. We suspended our private offering on January 10, 2020, and did not raise any equity through our private offering during the year ended December 31, 2020. During the year ended December 31, 2020, we raised approximately $5.9 million in equity capital through our DRIP. For the year ended December 31, 2019, we raised $394.4 million in equity capital, of which $329.8 million was received through new cash investments and $64.6 million was raised through our DRIP. We announced on January 10, 2020 that we were terminating our DRIP effective February 10, 2020.

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Unsecured Indebtedness

The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and Senior Notes at December 31, 2020.

(in thousands, except interest rates)

 

Outstanding

Balance

 

 

Interest

Rate

 

 

Maturity

Date

Revolving Credit Facility

 

$

 

 

one-month LIBOR + 1.20%

 

 

Sept. 2023

2022 Unsecured Term Loan

 

 

60,000

 

 

one-month LIBOR + 1.25%

 

 

Feb. 2022

2023 Unsecured Term Loan

 

 

265,000

 

 

one-month LIBOR + 1.35%

 

 

Jan. 2023

2024 Unsecured Term Loan

 

 

190,000

 

 

one-month LIBOR + 1.25%

 

 

Jun. 2024

2026 Unsecured Term Loan

 

 

450,000

 

 

one-month LIBOR + 1.85%

 

 

Feb. 2026

Senior Notes

 

 

 

 

 

 

 

 

 

 

Series A

 

 

150,000

 

 

4.84%

 

 

Apr. 2027

Series B

 

 

225,000

 

 

5.09%

 

 

Jul. 2028

Series C

 

 

100,000

 

 

5.19%

 

 

Jul. 2030

 

 

 

475,000

 

 

 

 

 

 

 

Total

 

$

1,440,000

 

 

 

 

 

 

 

Revolving Credit Facility

In connection with our IPO in September 2020, we replaced our prior $600.0 million revolving credit facility with a $900.0 million Revolving Credit Facility that includes $20.0 million available for issuance of letters of credit. The Revolving Credit Facility has an initial maturity date of September 2023 and provides for two six-month extensions, at our election, subject to certain conditions set forth in the agreement and payment of a 0.0625% fee on the revolving commitments. The Revolving Credit Facility contains an applicable facility fee ranging between 0.125% and 0.30% per annum, based on our credit rating. At December 31, 2020, the facility fee was 0.25% per annum based on our credit rating of Baa3 on such date.

Borrowings on the Revolving Credit Facility bear interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.825% and 1.55% per annum. At December 31, 2020, the applicable margin was 1.20% based on our credit rating on such date. 

2022 Unsecured Term Loan

We entered into the 2022 Unsecured Term Loan to partially repay BRE debt that we assumed as part of the Internalization. Borrowings under the 2022 Unsecured Term Loan are subject to interest only payments at variable rates equal to LIBOR plus a margin based on our credit rating, ranging between 0.85% and 1.65% per annum. At December 31, 2020, the applicable margin was 1.25% based on our credit rating on such date.

2023 Unsecured Term Loan

The 2023 Unsecured Term loan has an initial maturity date of January 2023. Borrowings under the 2023 Unsecured Term Loan bear interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.90% and 1.75% per annum. At December 31, 2020, the applicable margin was 1.35% based on our credit rating on such date.

2024 Unsecured Term Loan

The 2024 Unsecured Term Loan has an initial maturity date of June 2024. Borrowings under the 2024 Unsecured Term Loan are subject to interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.85% and 1.65% per annum. At December 31, 2020, the applicable margin was 1.25% based on our credit rating on such date.

2026 Unsecured Term Loan

The 2026 Unsecured Term Loan includes an accordion feature that provides for an increase in the facility size up to a total of $550 million of available capacity. Borrowings under the 2026 Unsecured Term Loan are payable interest only on a monthly basis during the term of the loan, with the principal amount due in February 2026. Borrowings under the 2026 Unsecured Term loan bear

62


 

interest equal to LIBOR plus a margin based on our credit rating ranging between 1.45% and 2.40% per annum. At December 31, 2020, the applicable margin was 1.85% based on our credit rating on such date.

Senior Notes

To mitigate interest rate risk and extend the tenor of a portion of our debt, we have strategically added unsecured, fixed-rate, interest-only senior promissory notes (“Senior Notes”) to our capital structure. The Senior Notes were issued in three series (Series A, B, and C) as described below.

 

Series A Notes

The Series A Notes are payable interest only semiannually during their term, bear interest at a fixed rate of 4.84% per annum, and mature on April 18, 2027.

Series B and Series C Notes

The Series B and Series C Notes are payable interest only semiannually during their term, and bear interest at fixed rates of 5.09% per annum and 5.19% per annum, respectively. The Series B Notes mature on July 2, 2028, and the Series C Notes mature on July 2, 2030.

Debt Covenants

We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of December 31, 2020, we believe we were in compliance with all of our covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification.

 

Covenants

 

Requirement

Leverage Ratio

 

≤ 0.60 to 1.00

Secured Indebtedness Ratio

 

≤ 0.40 to 1.00

Unencumbered Coverage Ratio

 

≥ 1.75 to 1.00

Fixed Charge Coverage Ratio

 

≥ 1.50 to 1.00

Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value

 

≤ 0.60 to 1.00

Dividends and Other Restricted Payments

 

Only applicable in case of default

Derivative Instruments and Hedging Activities

We are exposed to interest rate risk arising from changes in interest rates on the floating-rate borrowings under our unsecured credit facilities and a certain mortgage. Borrowings pursuant to our unsecured credit facilities and the mortgage bear interest at floating rates based on LIBOR plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense, which will in turn, increase or decrease our net income and cash flow.

We attempt to manage our interest rate risk by entering into interest rate swaps. As of December 31, 2020, we had 33 interest rate swaps outstanding in an aggregate notional amount of $859.8 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable-rate borrowings. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes.

63


 

Cash Flows

Cash and cash equivalents and restricted cash totaled $110.7 million, $20.3 million, and $19.0 million at December 31, 2020, 2019, and 2018, respectively. The table below shows information concerning cash flows for the years ended December 31, 2020, 2019, and 2018:

 

 

 

For the Year Ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

 

2018

 

Net cash provided by operating activities

 

$

179,028

 

 

$

147,358

 

 

$

128,011

 

Net cash used in investing activities

 

 

(60,236

)

 

 

(831,707

)

 

 

(510,459

)

Net cash (used in) provided by financing activities

 

 

(28,375

)

 

 

685,671

 

 

 

391,338

 

Increase in cash and cash equivalents and restricted cash

 

$

90,417

 

 

$

1,322

 

 

$

8,890

 

The increase in net cash provided by operating activities during the years ended December 31, 2020 and 2019, as compared to the comparable prior periods, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization.

The change in net cash used in investing activities during the year ended December 31, 2020 as compared to the year ended December 31, 2019, was mainly due to decreased acquisition volume, offset by cash paid in connection with the Internalization and decreased proceeds from the disposal of properties in 2020. The increase in net cash used in investing activities during the year ended December 31, 2019 as compared to the year ended December 31, 2018, reflected increased outflows for the acquisition of properties, most notably a significant acquisition during August 2019. In addition, during the 2018 period, we received $18.5 million from the sale of our investment in preferred units of BRE, with no such cash inflow in 2019. These factors were somewhat offset by increased proceeds from the disposal of properties as we actively manage our balance sheet following the Industrial Portfolio Acquisition.

The change in net cash (used in) provided by financing activities during the year ended December 31, 2020 as compared to the year ended December 31, 2019, mainly reflects a net repayment of debt in 2020 with proceeds from our IPO, compared to net borrowings in 2019 that were partially offset by increased proceeds from the sale of common stock. The increase in net cash provided by financing activities during the year ended December 31, 2019 as compared to the year ended December 31, 2018, mainly reflects net incremental borrowings and increased proceeds from the issuance of our common stock, which were used to fund the increased acquisition activity, partially offset by increased distributions resulting from an increase in the number of shares of common stock outstanding.

Contractual Obligations

The following table provides information with respect to our contractual commitments and obligations as of December 31, 2020 (in thousands).

 

Year of

Maturity

 

Term Loan

 

 

Revolving Credit Facility(1)

 

 

Senior

Notes

 

 

Mortgages

and Notes

Payable

 

 

Interest

Expense(2)

 

 

Tenant

Improvement

Allowances(3)

 

 

Operating

Leases

 

 

Total

 

2021

 

$

 

 

$

 

 

$

 

 

$

18,006

 

 

$

63,323

 

 

$

1,981

 

 

$

719

 

 

$

84,029

 

2022

 

 

60,000

 

 

 

 

 

 

 

 

 

2,907

 

 

 

61,479

 

 

 

 

 

 

686

 

 

 

125,072

 

2023

 

 

265,000

 

 

 

 

 

 

 

 

 

7,582

 

 

 

56,101

 

 

 

 

 

 

505

 

 

 

329,188

 

2024

 

 

190,000

 

 

 

 

 

 

 

 

 

2,260

 

 

 

50,486

 

 

 

 

 

 

120

 

 

 

242,866

 

2025

 

 

 

 

 

 

 

 

 

 

 

20,195

 

 

 

46,715

 

 

 

 

 

 

121

 

 

 

67,031

 

Thereafter

 

 

450,000

 

 

 

 

 

 

475,000

 

 

 

56,717

 

 

 

82,550

 

 

 

 

 

 

2,290

 

 

 

1,066,557

 

Total

 

$

965,000

 

 

$

 

 

$

475,000

 

 

$

107,667

 

 

$

360,654

 

 

$

1,981

 

 

$

4,441

 

 

$

1,914,743

 

 

(1)

We may extend the Revolving Credit Facility twice, each for a six-month period, subject to certain conditions, including the payment of an extension fee equal to 0.0625% of the revolving commitments.

(2)

Interest expense is projected based on the outstanding borrowings and interest rates in effect as of December 31, 2020. This amount includes the impact of interest rate swap agreements, and excludes the expected decrease in the applicable margins for our variable-rate term borrowings as a result of receiving a BBB credit rating from S&P in January 2021.

(3)

We expect to pay tenant improvement allowances out of cash flows from operations or from additional borrowings.

At, December 31, 2020 and 2019, investment in rental property of $173.5 million and $178.7 million, respectively, was pledged as collateral against our mortgages and notes payable.

Additionally, we are a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and we entered into the Founding Owners’ Tax Protection Agreement with our Founding Owners in connection with the Internalization. The tax protection agreements require us to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, or in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. Based on values as of December 31, 2020, taxable sales of the applicable properties would trigger liability under the four agreements of approximately $22.3 million. Based on information available, we do not believe that the events resulting in damages as

64


 

detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above.

Non-GAAP Measures

FFO and AFFO

We compute FFO in accordance with the standards established by the Board of Governors of Nareit, the worldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. To derive AFFO, we modify the Nareit computation of FFO to include other adjustments to GAAP net income related to certain non-cash and non-recurring revenues and expenses, including straight-line rents, the change in fair value of our earnout liability, cost of debt extinguishments, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, realized gains or losses on foreign currency transactions, internalization expenses, stock-based compensation, severance, extraordinary items, and other specified non-cash items. We believe that such items are not a result of normal operations and thus we believe excluding such items assists management and investors in distinguishing whether changes in our operations are due to growth or decline of operations at our properties or from other factors.

Our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market rentals over time. Our leases do not include significant front-loading or back-loading of payments, or significant rent-free periods. Therefore, we find it useful to evaluate rent on a contractual basis as it allows for comparison of existing rental rates to market rental rates. In situations where we granted short-term rent deferrals as a result of the COVID-19 pandemic, and such deferrals were probable of collection and expected to be repaid within a short term, we continued to recognize the same amount of GAAP lease revenues each period. Consistent with GAAP lease revenues, the short-term deferrals associated with COVID-19 did not impact our AFFO.

We further exclude the change in fair value of our earnout liability, costs or gains recorded on the extinguishment of debt, non-cash interest expense and gains, the amortization of debt issuance costs, net mortgage premiums, and lease intangibles, realized gains and losses on foreign currency transactions, internalization expenses, stock-based compensation and severance, as these items are not indicative of ongoing operational results. We use AFFO as a measure of our performance when we formulate corporate goals.

FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers, primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is a useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.

Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate AFFO. In the future, the SEC, Nareit or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of AFFO accordingly.

65


 

The following table reconciles net income (which is the most comparable GAAP measure) to FFO and AFFO:

 

 

 

For the Year Ended December 31,

 

(in thousands, except per share data)

 

2020

 

 

2019

 

 

2018

 

Net income

 

$

56,276

 

 

$

85,114

 

 

$

75,105

 

Real property depreciation and amortization

 

 

132,613

 

 

 

108,818

 

 

 

83,994

 

Gain on sale of real estate

 

 

(14,985

)

 

 

(29,914

)

 

 

(10,496

)

Provision for impairment on investment in rental properties

 

 

19,077

 

 

 

3,452

 

 

 

2,061

 

FFO

 

$

192,981

 

 

$

167,470

 

 

$

150,664

 

Capital improvements / reserves

 

 

1,662

 

 

 

(97

)

 

 

(196

)

Straight-line rent adjustment

 

 

(19,831

)

 

 

(21,943

)

 

 

(19,492

)

Adjustment to provision for credit losses

 

 

(148

)

 

 

 

 

 

 

Cost of debt extinguishment

 

 

417

 

 

 

1,176

 

 

 

101

 

Gain on sale of investment in related party

 

 

 

 

 

 

 

 

(8,500

)

Amortization of debt issuance costs

 

 

3,445

 

 

 

2,685

 

 

 

1,918

 

Amortization of net mortgage premiums

 

 

(142

)

 

 

(143

)

 

 

(142

)

Gain on interest rate swaps and other non-cash interest expense

 

 

(166

)

 

 

(205

)

 

 

(84

)

Amortization of lease intangibles

 

 

(1,118

)

 

 

(3,410

)

 

 

(304

)

Internalization expenses

 

 

3,705

 

 

 

3,658

 

 

 

 

Stock-based compensation

 

 

1,989

 

 

 

 

 

 

 

Severance

 

 

94

 

 

 

 

 

 

 

Change in fair value of earnout liability

 

 

(1,800

)

 

 

 

 

 

 

Other expenses

 

 

7

 

 

 

6

 

 

 

100

 

AFFO

 

$

181,095

 

 

$

149,197

 

 

$

124,065

 

EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre

We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. EBITDA is a measure commonly used in our industry. We believe that this ratio provides investors and analysts with a measure of our performance that includes our operating results unaffected by the differences in capital structures, capital investment cycles and useful life of related assets compared to other companies in our industry. We compute EBITDAre in accordance with the definition adopted by Nareit, as EBITDA excluding gains (loss) from the sales of depreciable property and provisions for impairment on investment in real estate. We believe EBITDA and EBITDAre are useful to investors and analysts because they provide important supplemental information about our operating performance exclusive of certain non-cash and other costs. EBITDA and EBITDAre are not measures of financial performance under GAAP, and our EBITDA and EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA and EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.

We are focused on a disciplined and targeted acquisition strategy, together with active asset management that includes selective sales of properties. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, each discussed further below, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with our lenders and rating agencies regarding our credit rating. As we fund new acquisitions using our unsecured Revolving Credit Facility, our leverage profile and Net Debt will be immediately impacted by current quarter acquisitions. However, the full benefit of EBITDAre from newly acquired properties will not be received in the same quarter in which the properties are acquired. Additionally, EBITDAre for the quarter includes amounts generated by properties that have been sold during the quarter. Accordingly, the variability in EBITDAre caused by the timing of our acquisitions and dispositions can temporarily distort our leverage ratios. We adjust EBITDAre (“Adjusted EBITDAre”) for the most recently completed quarter (i) to recalculate as if all acquisitions and dispositions had occurred at the beginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either non-cash, such as cost of debt extinguishments or the change in fair value of our earnout liability, or that we believe are one time, or unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future, and (iii) to eliminate the impact of lease termination fees and other items that are not a result of normal operations. We then annualize quarterly Adjusted EBITDAre by multiplying it by four (“Annualized Adjusted EBITDAre”). You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to be inaccurate. Our actual reported EBITDAre for future periods may be significantly different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.

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The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA and EBITDAre:

 

 

 

For the Year Ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

 

2018

 

Net income

 

$

56,276

 

 

$

85,114

 

 

$

75,105

 

Depreciation and amortization

 

 

132,685

 

 

 

108,818

 

 

 

83,994

 

Interest expense

 

 

76,138

 

 

 

72,534

 

 

 

52,855

 

Income taxes

 

 

939

 

 

 

2,415

 

 

 

857

 

EBITDA

 

$

266,038

 

 

$

268,881

 

 

$

212,811

 

Provision for impairment of investment in

   rental properties

 

 

19,077

 

 

 

3,452

 

 

 

2,061

 

Gain on sale of real estate

 

 

(14,985

)

 

 

(29,914

)

 

 

(10,496

)

EBITDAre

 

$

270,130

 

 

$

242,419

 

 

$

204,376

 

The following table reconciles EBITDAre to Adjusted EBITDAre. Information is also presented with respect to Annualized EBITDAre and Annualized Adjusted EBITDAre:

 

 

For the Three Months Ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

 

2018

 

Net income

 

$

17,619

 

 

$

27,712

 

 

$

14,660

 

Depreciation and amortization

 

 

30,182

 

 

 

30,829

 

 

 

22,691

 

Interest expense

 

 

17,123

 

 

 

21,509

 

 

 

14,740

 

Income taxes

 

 

(141

)

 

 

1,262

 

 

 

46

 

EBITDA

 

$

64,783

 

 

$

81,312

 

 

$

52,137

 

Provision for impairment of investment in rental properties

 

 

1,678

 

 

 

 

 

 

 

Gain on sale of real estate

 

 

(5,260

)

 

 

(13,142

)

 

 

(876

)

EBITDAre

 

$

61,201

 

 

$

68,170

 

 

$

51,261

 

Adjustment for current quarter acquisition activity (1)

 

 

1,703

 

 

 

346

 

 

 

3,463

 

Adjustment for current quarter disposition activity (2)

 

 

(318

)

 

 

(1,015

)

 

 

(60

)

Adjustment to exclude non-recurring expenses (income) (3)

 

 

182

 

 

 

2,463

 

 

 

 

Adjustment to exclude change in fair value of earnout liability

 

 

6,706

 

 

 

 

 

 

 

Adjustment to exclude write-off of accrued rental income

 

 

242

 

 

 

 

 

 

 

Adjusted EBITDAre

 

$

69,716

 

 

$

69,964

 

 

$

54,664

 

Annualized EBITDAre

 

$

244,805

 

 

$

272,680

 

 

$

205,044

 

Annualized Adjusted EBITDAre

 

$

278,867

 

 

$

279,856

 

 

$

218,656

 

(1)

Reflects an adjustment to give effect to all acquisitions during the quarter as if they had been acquired as of the beginning of the quarter.

(2)

Reflects an adjustment to give effect to all dispositions during the quarter as if they had been sold as of the beginning of the quarter.

(3)

Amounts represent expense directly associated with the Internalization.


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Net Debt, Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre

We define Net Debt as gross debt (total reported debt plus deferred financing costs) less cash and cash equivalents and restricted cash. We believe that the presentation of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre is useful to investors and analysts because these ratios provide information about gross debt less cash and cash equivalents, which could be used to repay debt, compared to our performance as measured using EBITDAre, and is used in communications with lenders and rating agencies regarding our credit rating. The following table reconciles total debt (which is the most comparable GAAP measure) to Net Debt, and presents the ratio of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre, respectively:

 

 

 

As of December 31,

 

(in thousands)

 

2020

 

 

2019

 

Debt

 

 

 

 

 

 

 

 

Mortgages and notes payable, net

 

$

107,382

 

 

$

111,793

 

Unsecured term notes, net

 

 

1,433,796

 

 

 

1,672,081

 

Revolving Credit Facility

 

 

 

 

 

197,300

 

Debt issuance costs

 

 

6,489

 

 

 

8,277

 

Gross Debt

 

 

1,547,667

 

 

 

1,989,451

 

Cash and cash equivalents

 

 

(100,486

)

 

 

(12,455

)

Restricted cash

 

 

(10,242

)

 

 

(7,856

)

Net Debt

 

$

1,436,939

 

 

$

1,969,140

 

Net Debt to Annualized  EBITDAre

 

5.87x

 

 

7.22x

 

Net Debt to Annualized Adjusted EBITDAre

 

5.15x

 

 

7.04x

 

Critical Accounting Policies

The preparation of our consolidated financial statements in conformance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as other disclosures in the financial statements. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, “Summary of Significant Accounting Policies”, contained in Item 8. “Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K. Management believes the following critical accounting policies, among others, affect its more significant estimates and assumptions used in the preparation of our consolidated financial statements.

Investment in Rental Property

Rental property accounted for under operating leases is recorded at cost. Rental property accounted for under direct financing leases and sales-type are recorded at its net investment, which generally represents the cost of the property at the inception of the lease.

We account for acquisitions of real estate as asset acquisitions in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, as substantially all of the fair value of the assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets.

We allocate the purchase price of investments in rental property accounted for as asset acquisitions based on the relative fair value of the assets acquired and liabilities assumed. These generally include tangible assets, consisting of land and land improvements, buildings and other improvements, and equipment, and identifiable intangible assets and liabilities, including the value of in-place leases and acquired above-market and below-market leases. Acquisition costs incurred in connection with investments in real estate accounted for as asset acquisitions are capitalized and included with the allocated purchase price. The results of operations of acquired properties are included in the Consolidated Statements of Income and Comprehensive Income from the respective date of acquisition.

We use multiple sources to estimate fair value, including information obtained about each property as a result of our pre-acquisition due diligence and our marketing and leasing activities. Factors that impact our fair value determination include real estate market conditions, industry conditions that the tenant operates in, and characteristics of the real estate and/or real estate appraisals. Changes in any of these factors could impact the future purchase prices of our investments and the corresponding capitalization rates recognized. We do not believe the assumptions used to fair value the investments upon acquisition have a significant degree of estimation uncertainty.

The estimated fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant. The as-if-vacant value is then allocated to land and land improvements, buildings, and equipment based on comparable sales and other relevant information with respect to the property, as estimated by management. Specifically, the “if vacant” value of buildings and

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equipment is calculated using an income approach. Assumptions used in the income approach to value the buildings include: capitalization and discount rates, lease-up time, market rents, make ready costs, land value, and land improvement value.

The estimated fair value of acquired in-place leases are the costs we would have had to incur to lease the properties to the occupancy level of the properties at the date of acquisition. Such costs include the fair value of leasing commissions and other operating costs that would have been incurred to lease the properties, had they been vacant, to their acquired occupancy level. Acquired in-place leases as of the date of acquisition are amortized over the remaining non-cancellable lease terms of the respective leases to amortization expense.

Acquired above-market and below-market lease values are recorded based on the present value (using an interest rate that reflects the risks associated with the lease acquired) of the differences between the contractual amounts to be paid pursuant to the in-place leases and management’s estimate of fair market value lease rates at the time of acquisition for the corresponding in-place leases. The capitalized above-market and below-market lease values are amortized as adjustments to rental income over the remaining term of the respective leases.

Should a tenant terminate its lease, the unamortized portion of the in-place lease value is charged to amortization expense and the unamortized portion of above-market or below-market lease value is charged to rental income.

Management estimates the fair value of assumed mortgages and notes payable based upon indications of then-current market pricing for similar types of debt with similar maturities. Assumed mortgages and notes payable are initially recorded at their estimated fair value as of the assumption date, and the difference between such estimated fair value and the notes’ outstanding principal balance is amortized to interest expense over the remaining term of the debt.

Expenditures for significant betterments and improvements are capitalized. Maintenance and repairs are charged to expense when incurred. Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized. Real estate taxes, interest costs, and leasing and development costs incurred during construction periods are capitalized. Capitalization is based on qualified expenditures and interest rates. Capitalized real estate taxes, interest costs, and leasing and development costs are amortized over lives which are consistent with the related assets. There were no capitalized interest or real estate taxes during the years ended December 31, 2020, 2019, and 2018.

Long-lived Asset Impairment

We review long-lived assets, other than goodwill, to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. Such cash flows include expected future op