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BNL Broadstone Net Lease

Filed: 5 May 21, 4:09pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 

For the quarterly period ended March 31, 2021, or 

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

Commission File Number 001-39529

 

BROADSTONE NET LEASE, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

26-1516177

(State or other jurisdiction of
incorporation or organization)

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

 

800 Clinton Square

Rochester, New York

14604

(Address of principal executive offices)

(Zip Code)

 

(585) 287-6500

(Registrant’s telephone number, including area code)

  

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.00025 par value  

 

BNL

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

Emerging growth company  

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

There were 145,811,829 shares of the Registrant’s Common Stock, $0.00025 par value per share, outstanding as of May 3, 2021.

 

 

 


 

 

BROADSTONE NET LEASE, INC.

TABLE OF CONTENTS

 

 

Page

Part I - FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets (Unaudited)

1

 

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

2

 

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

3

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

4

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

5

Item 2.

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

22

 

Cautionary Note Regarding Forward-Looking Statements

22

 

Explanatory Note and Certain Defined Terms

22

 

Overview

23

 

Real Estate Portfolio Information

24

 

Results of Operations

30

 

Liquidity and Capital Resources

34

 

Derivative Instruments and Hedging Activities

36

 

Cash Flows

36

 

Contractual Obligations

37

 

Non-GAAP Measures

37

 

Critical Accounting Policies

40

 

Impact of Recent Accounting Pronouncements

40

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

41

Part II - OTHER INFORMATION

42

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.

Defaults upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

 

 


 

 

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Assets

 

 

 

 

 

 

 

 

Accounted for using the operating method, net of accumulated depreciation

 

$

3,395,609

 

 

$

3,354,511

 

Accounted for using the direct financing method

 

 

28,991

 

 

 

29,066

 

Accounted for using the sales-type method

 

 

567

 

 

 

567

 

Investment in rental property, net

 

 

3,425,167

 

 

 

3,384,144

 

Cash and cash equivalents

 

 

10,205

 

 

 

100,486

 

Accrued rental income

 

 

105,674

 

 

 

102,117

 

Tenant and other receivables, net

 

 

1,022

 

 

 

1,604

 

Prepaid expenses and other assets

 

 

18,862

 

 

 

22,277

 

Interest rate swap, assets

 

 

239

 

 

 

 

Goodwill

 

 

339,769

 

 

 

339,769

 

Intangible lease assets, net

 

 

288,592

 

 

 

290,913

 

Debt issuance costs – unsecured revolving credit facility, net

 

 

5,842

 

 

 

6,435

 

Leasing fees, net

 

 

10,673

 

 

 

10,738

 

Total assets

 

$

4,206,045

 

 

$

4,258,483

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

15,000

 

 

$

 

Mortgages, net

 

 

106,559

 

 

 

107,382

 

Unsecured term notes, net

 

 

1,383,283

 

 

 

1,433,796

 

Interest rate swap, liabilities

 

 

43,662

 

 

 

72,103

 

Earnout liability

 

 

6,385

 

 

 

7,509

 

Accounts payable and other liabilities

 

 

71,072

 

 

 

74,936

 

Accrued interest payable

 

 

9,896

 

 

 

4,023

 

Intangible lease liabilities, net

 

 

77,491

 

 

 

79,653

 

Total liabilities

 

 

1,713,348

 

 

 

1,779,402

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (See Note 17)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Broadstone Net Lease, Inc. stockholders' equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, $0.00025 par value; 500,000 shares authorized, 145,813 shares issued

   and outstanding at March 31, 2021; 440,000 shares authorized, 108,609 shares issued

   and outstanding at December 31, 2020

 

 

36

 

 

 

27

 

Class A common stock, $0.00025 par value; 0 shares authorized, issued or outstanding at

   March 31, 2021; 60,000 shares authorized, 37,000 shares issued and outstanding at

   December 31, 2020

 

 

 

 

 

9

 

Additional paid-in capital

 

 

2,625,320

 

 

 

2,624,997

 

Cumulative distributions in excess of retained earnings

 

 

(274,140

)

 

 

(259,673

)

Accumulated other comprehensive loss

 

 

(38,684

)

 

 

(66,255

)

Total Broadstone Net Lease, Inc. stockholders’ equity

 

 

2,312,532

 

 

 

2,299,105

 

Non-controlling interests

 

 

180,165

 

 

 

179,976

 

Total equity

 

 

2,492,697

 

 

 

2,479,081

 

Total liabilities and equity

 

$

4,206,045

 

 

$

4,258,483

 

 

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

 

1


 

 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

(Unaudited)

(in thousands, except per share amounts)

 

 

 

For the Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Revenues

 

 

 

 

 

 

 

 

Lease revenues, net

 

$

82,698

 

 

$

78,231

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

30,713

 

 

 

31,219

 

Asset management fees

 

 

0

 

 

 

2,461

 

Property management fees

 

 

0

 

 

 

1,275

 

Property and operating expense

 

 

4,605

 

 

 

4,115

 

General and administrative

 

 

10,633

 

 

 

5,842

 

Provision for impairment of investment in rental properties

 

 

2,012

 

 

 

2,133

 

Total operating expenses

 

 

47,963

 

 

 

47,045

 

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

Interest income

 

 

5

 

 

 

9

 

Interest expense

 

 

(16,108

)

 

 

(20,991

)

Cost of debt extinguishment

 

 

(126

)

 

 

(22

)

Gain on sale of real estate

 

 

4,733

 

 

 

7,619

 

Income taxes

 

 

(413

)

 

 

(549

)

Internalization expenses

 

 

0

 

 

 

(1,205

)

Change in fair value of earnout liability

 

 

1,124

 

 

 

(4,177

)

Other income (expenses)

 

 

10

 

 

 

(22

)

Net income

 

 

23,960

 

 

 

11,848

 

Net income attributable to non-controlling interests

 

 

(1,737

)

 

 

(1,032

)

Net income attributable to Broadstone Net Lease, Inc.

 

$

22,223

 

 

$

10,816

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

145,338

 

 

 

106,108

 

Diluted

 

 

156,724

 

 

 

116,210

 

 

 

 

 

 

 

 

 

 

Net earnings per share attributable to common stockholders

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.15

 

 

$

0.10

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

Net income

 

$

23,960

 

 

$

11,848

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

Change in fair value of interest rate swaps

 

 

28,680

 

 

 

(58,062

)

Realized gain on interest rate swaps

 

 

(41

)

 

 

(42

)

Comprehensive income (loss)

 

 

52,599

 

 

 

(46,256

)

Comprehensive (income) loss attributable to non-controlling interests

 

 

(3,813

)

 

 

4,020

 

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

 

$

48,786

 

 

$

(42,236

)

 

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

 

 

2


 

 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity

(Unaudited)

(in thousands, except per share amounts)

 

 

 

Common

Stock

 

 

Class A

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Cumulative

Distributions

in Excess of

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Non-

controlling

Interests

 

 

Total

Stockholders'

Equity

 

 

 

Mezzanine

Equity

Common

Stock

 

 

Mezzanine

Equity

Non-

controlling

Interests

 

 

Total

Mezzanine

Equity

 

Balance, January 1, 2021

 

$

27

 

 

$

9

 

 

$

2,624,997

 

 

$

(259,673

)

 

$

(66,255

)

 

$

179,976

 

 

$

2,479,081

 

 

 

$

 

 

$

 

 

$

 

Net income

 

 

 

 

 

 

 

 

 

 

 

22,223

 

 

 

 

 

 

1,737

 

 

 

23,960

 

 

 

 

 

 

 

 

 

 

 

Issuance of 211 shares of common stock

 

 

 

 

 

 

 

 

233

 

 

 

 

 

 

 

 

 

 

 

 

233

 

 

 

 

 

 

 

 

 

 

 

Offering costs, discounts and commissions

 

 

 

 

 

 

 

 

(500

)

 

 

 

 

 

 

 

 

 

 

 

(500

)

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,769

 

 

 

 

 

 

 

 

 

 

 

 

1,769

 

 

 

 

 

 

 

 

 

 

 

Retirement of 45 shares of restricted common stock

 

 

 

 

 

 

 

 

(832

)

 

 

 

 

 

 

 

 

 

 

 

(832

)

 

 

 

 

 

 

 

 

 

 

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

   common stock

 

 

9

 

 

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of 38 OP Units to 38 shares of common

   stock

 

 

 

 

 

 

 

 

606

 

 

 

 

 

 

 

 

 

(606

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared ($0.25 per share and OP Unit)

 

 

 

 

 

 

 

 

 

 

 

(36,690

)

 

 

 

 

 

(2,963

)

 

 

(39,653

)

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,602

 

 

 

2,078

 

 

 

28,680

 

 

 

 

 

 

 

 

 

 

 

Realized gain on interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(39

)

 

 

(2

)

 

 

(41

)

 

 

 

 

 

 

 

 

 

 

Adjustment to non-controlling interests

 

 

 

 

 

 

 

 

(953

)

 

 

 

 

 

1,008

 

 

 

(55

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2021

 

$

36

 

 

$

 

 

$

2,625,320

 

 

$

(274,140

)

 

$

(38,684

)

 

$

180,165

 

 

$

2,492,697

 

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

Stock

 

 

Class A

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Cumulative

Distributions

in Excess of

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Non-

controlling

Interests

 

 

Total

Stockholders'

Equity

 

 

 

Mezzanine

Equity

Common

Stock

 

 

Mezzanine

Equity

Non-

controlling

Interests

 

 

Total

Mezzanine

Equity

 

Balance, January 1, 2020

 

$

26

 

 

$

 

 

$

1,895,935

 

 

$

(208,261

)

 

$

(20,086

)

 

$

111,406

 

 

$

1,779,020

 

 

 

$

 

 

$

 

 

$

 

Cumulative effect of accounting change (see Note 2)

 

 

 

 

 

 

 

 

 

 

 

(323

)

 

 

 

 

 

 

 

 

(323

)

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

10,816

 

 

 

 

 

 

710

 

 

 

11,526

 

 

 

 

 

 

 

322

 

 

 

322

 

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

   mezzanine equity common stock

 

 

 

 

 

 

 

 

6,097

 

 

 

 

 

 

 

 

 

 

 

 

6,097

 

 

 

 

66,376

 

 

 

 

 

 

66,376

 

Issuance of 5,278 mezzanine non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

112,159

 

 

 

112,159

 

Adjustment to carrying value of mezzanine equity non-controlling

   interests

 

 

 

 

 

 

 

 

(2,416

)

 

 

 

 

 

 

 

 

 

 

 

(2,416

)

 

 

 

 

 

 

2,416

 

 

 

2,416

 

Distributions declared ($0.33 per share and OP Unit)

 

 

 

 

 

 

 

 

 

 

 

(35,299

)

 

 

 

 

 

(2,100

)

 

 

(37,399

)

 

 

 

 

 

 

(1,161

)

 

 

(1,161

)

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(53,014

)

 

 

(3,472

)

 

 

(56,486

)

 

 

 

 

 

 

(1,576

)

 

 

(1,576

)

Realized gain on interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38

)

 

 

(2

)

 

 

(40

)

 

 

 

 

 

 

(2

)

 

 

(2

)

Balance, March 31, 2020

 

$

26

 

 

$

 

 

$

1,899,616

 

 

$

(233,067

)

 

$

(73,138

)

 

$

106,542

 

 

$

1,699,979

 

 

 

$

66,376

 

 

$

112,158

 

 

$

178,534

 

 

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

 

 

3


 

 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

For the Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

23,960

 

 

$

11,848

 

Adjustments to reconcile net income including non-controlling interests to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization including intangibles associated with investment in rental property

 

 

29,985

 

 

 

30,081

 

Provision for impairment of investment in rental properties

 

 

2,012

 

 

 

2,133

 

Amortization of debt issuance costs charged to interest expense

 

 

879

 

 

 

853

 

Stock-based compensation expense

 

 

1,769

 

 

 

 

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

 

 

(4,632

)

 

 

(1,610

)

Cost of debt extinguishment

 

 

126

 

 

 

22

 

Gain on sale of real estate

 

 

(4,733

)

 

 

(7,619

)

Change in fair value of earnout liability

 

 

(1,124

)

 

 

4,177

 

Leasing fees paid

 

 

(286

)

 

 

 

Adjustment to provision for credit losses

 

 

(1

)

 

 

(17

)

Other non-cash items

 

 

192

 

 

 

194

 

Changes in assets and liabilities, net of acquisition:

 

 

 

 

 

 

 

 

Tenant and other receivables

 

 

582

 

 

 

(353

)

Prepaid expenses and other assets

 

 

1,072

 

 

 

291

 

Accounts payable and other liabilities

 

 

(3,894

)

 

 

(5,851

)

Accrued interest payable

 

 

5,873

 

 

 

6,170

 

Net cash provided by operating activities

 

 

51,780

 

 

 

40,319

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Acquisition of rental property accounted for using the operating method

 

 

(88,532

)

 

 

 

Cash paid for Internalization

 

 

 

 

 

(30,861

)

Capital expenditures and improvements

 

 

(1,334

)

 

 

(48

)

Proceeds from disposition of rental property, net

 

 

22,105

 

 

 

35,383

 

Change in deposits on investments in rental property

 

 

100

 

 

 

 

Net cash (used in) provided by investing activities

 

 

(67,661

)

 

 

4,474

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock and Class A common stock, net of offering costs, discounts,

   and commissions

 

 

(173

)

 

 

131

 

Cash paid for deferred offering costs

 

 

 

 

 

(811

)

Borrowings on unsecured term notes

 

 

 

 

 

60,000

 

Principal payments on mortgages and unsecured term notes

 

 

(50,802

)

 

 

(151,781

)

Borrowings on unsecured revolving credit facility

 

 

15,000

 

 

 

167,000

 

Repayments on unsecured revolving credit facility

 

 

 

 

 

(11,000

)

Cash distributions paid to stockholders

 

 

(36,402

)

 

 

(29,148

)

Cash distributions paid to non-controlling interests

 

 

(3,174

)

 

 

(2,681

)

Debt issuance and extinguishment costs paid

 

 

(946

)

 

 

(102

)

Net cash (used in) provided by financing activities

 

 

(76,497

)

 

 

31,608

 

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

 

 

(92,378

)

 

 

76,401

 

Cash and cash equivalents and restricted cash at beginning of period

 

 

110,728

 

 

 

20,311

 

Cash and cash equivalents and restricted cash at end of period

 

$

18,350

 

 

$

96,712

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash and cash equivalents and restricted cash

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

100,486

 

 

$

12,455

 

Restricted cash at beginning of period

 

 

10,242

 

 

 

7,856

 

Cash and cash equivalents and restricted cash at beginning of period

 

$

110,728

 

 

$

20,311

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

10,205

 

 

$

93,151

 

Restricted cash at end of period

 

 

8,145

 

 

 

3,561

 

Cash and cash equivalents and restricted cash at end of period

 

$

18,350

 

 

$

96,712

 

 

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

 

4


 

 

Broadstone Net Lease, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except per share amounts)

1. Business Description

Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008. The Corporation focuses on investing in income-producing, net leased commercial properties, primarily in the United States. The Corporation leases industrial, healthcare, restaurant, office, and retail commercial properties under long-term lease agreements. At March 31, 2021, the Corporation owned a diversified portfolio of 661 individual commercial properties with 660 properties located in 41 U.S. states and 1 property located in British Columbia, Canada.

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

Prior to February 7, 2020, the Corporation was externally managed by Broadstone Real Estate, LLC (“BRE”) and Broadstone Asset Management, LLC (the “Asset Manager”) subject to the direction, oversight, and approval of the Company’s board of directors (the “Board of Directors”). The Asset Manager was a wholly owned subsidiary of BRE and all of the Corporation’s officers were employees of BRE. Accordingly, both BRE and the Asset Manager were related parties of the Company. Refer to Note 3 for further discussion concerning related parties and related party transactions.

On February 7, 2020, the Corporation, the OP, BRE, and certain of their respective subsidiaries and affiliates, completed through a series of mergers (the “Mergers”) the internalization of the external management functions previously performed for the Corporation and the OP by BRE and the Asset Manager (such transactions, collectively, the “Internalization”). Upon consummation of the Internalization, the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP and the Company became internally managed. Upon Internalization, the prior Property Management Agreement and Asset Management Agreement were terminated. The Internalization was not considered a “Termination Event” under the terms of the agreements and therefore 0 fees were paid under them as a result of the Internalization.

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

On September 21, 2020, the Corporation completed its initial public offering (“IPO”) and issued an aggregate of 37,000 shares of a new class of common stock, $0.00025 par value per share (“Class A Common Stock”) at $17.00 per share, which includes shares issued pursuant to the underwriters’ partial exercise of their over-allotment option on October 20, 2020, pursuant to a  registration statement on Form S-11 (File No. 333-240381), as amended, under the Securities Act of 1933, as amended. Shares of Class A Common Stock were listed on the New York Stock Exchange (“NYSE”) under the symbol “BNL.” On March 20, 2021, each share of Class A Common Stock automatically converted into one share of Common Stock, and effective March 22, 2021, all shares of Common Stock were listed and freely tradeable on the NYSE under the symbol “BNL.” See Note 13.

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

 

 

 

March 31, 2021

 

 

December 31, 2020

 

(in thousands)

 

Shares of Common

Stock

 

 

OP Units

 

 

Total Diluted

Shares

 

 

Shares of Common

Stock

 

 

OP Units

 

 

Total Diluted

Shares

 

Ownership interest

 

 

145,813

 

 

 

11,361

 

 

 

157,174

 

 

 

145,609

 

 

 

11,399

 

 

 

157,008

 

Percent ownership of OP

 

 

92.8

%

 

 

7.2

%

 

 

100.0

%

 

 

92.7

%

 

 

7.3

%

 

 

100.0

%

Refer to Note 15 for further discussion regarding the calculation of weighted average shares outstanding.

 

5


 

 

2. Summary of Significant Accounting Policies

Interim Information

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and Article 10 of the Securities and Exchange Commission’s (“SEC”) Regulation S-X. Accordingly, the Corporation has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2020, included in the Company’s 2020 Annual Report on Form 10-K, filed with the SEC on February 25, 2021. Therefore, the readers of this quarterly report should refer to those audited consolidated financial statements, specifically Note 2, Summary of Significant Accounting Policies, for further discussion of significant accounting policies and estimates. The Corporation believes all adjustments necessary for a fair presentation have been included in these interim Condensed Consolidated Financial Statements (which include only normal recurring adjustments).

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts and operations of the Company. All intercompany balances and transactions have been eliminated in consolidation.

To the extent the Corporation has a variable interest in entities that are not evaluated under the variable interest entity (“VIE”) model, the Corporation evaluates its interests using the voting interest entity model. The Corporation has complete responsibility for the day-to-day management of, authority to make decisions for, and control of the OP. Based on consolidation guidance, the Corporation has concluded that the OP is a VIE as the members in the OP do not possess kick-out rights or substantive participating rights. Accordingly, the Corporation consolidates its interest in the OP. However, because the Corporation holds the majority voting interest in the OP and certain other conditions are met, it qualifies for the exemption from providing certain disclosure requirements associated with investments in VIEs.

The portion of the OP not owned by the Corporation is presented as non-controlling interests as of and during the periods presented.

Basis of Accounting

The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP.

Use of Estimates

The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include, but are not limited to, the allocation of purchase price between tangible and intangible assets acquired and liabilities assumed, the value of long-lived assets and goodwill, the provision for impairment, the depreciable lives of rental property, the amortizable lives of intangible assets and liabilities, the provisions for uncollectible rent and credit losses, the fair value of the earnout liability, the fair value of assumed debt, the fair value of the Company’s interest rate swap agreements, and the determination of any uncertain tax positions. Accordingly, actual results may differ from those estimates.

Long-lived Asset Impairment

The Company reviews long-lived assets, other than goodwill, to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. An impairment loss is measured as the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. A significant judgment is made as to if and when impairment should be taken. The Company’s assessment of impairment as of March 31, 2021 was based on the most current information available to the Company. Based upon current market conditions resulting from the COVID-19 pandemic, certain of the Company’s properties may have fair values less than their carrying amounts. However, based on the Company’s plans with respect to each of those properties, the Company believes that their carrying amounts are recoverable and therefore, under applicable GAAP guidance, 0 impairment charges were recognized other than those described below. If the operating conditions mentioned above deteriorate or if the Company’s expected holding period for assets changes, subsequent tests for impairments could result in additional impairment charges in the future. During the three months ended March 31, 2021 and 2020, the Company recorded impairment charges associated with one property in each respective period. Impairment indicators primarily included changes in the Company’s long-term hold strategy with respect to the individual properties.

6


 

 

Inputs used in establishing fair value for real estate assets generally fall within Level 3 of the fair value hierarchy, which are characterized as requiring significant judgment as little or no current market activity may be available for validation. The main indicator used to establish the classification of the inputs is current market conditions, as derived through the use of published commercial real estate market information. The Company determines the valuation of impaired assets using generally accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations, and bona fide purchase offers received from third parties. Management may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.

During the three months ended March 31, 2021 and 2020, the Company recorded impairment charges of $2,012 and $2,133, respectively.

Restricted Cash

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

Restricted cash consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

(in thousands)

 

2021

 

 

2020

 

Escrow funds and other

 

$

8,145

 

 

$

7,852

 

Undistributed 1031 proceeds

 

 

 

 

 

2,390

 

 

 

$

8,145

 

 

$

10,242

 

Rent Received in Advance

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

 

(in thousands)

 

March 31,

2021

 

 

December 31,

2020

 

Rent received in advance

 

$

13,331

 

 

$

13,651

 

Provision for Uncollectible Rent

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

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

 

 

For the Three Months Ended

March 31,

 

(in thousands)

 

2021

 

 

2020

 

Beginning balance

 

$

201

 

 

$

0

 

Provision for uncollectible rent

 

 

142

 

 

 

1,033

 

Ending balance

 

$

343

 

 

$

1,033

 

Fair Value Measurements  

Recurring Fair Value Measurements

Earnout Liability – In connection with the Internalization, the Company recognized an earnout liability that will be due and payable to the former owners of BRE if certain milestones are achieved during specified periods of time following the closing of the Internalization (the “Earnout Periods”). Under the terms of the agreement, the milestones related to either (a) the 40-day dollar volume-weighted average price of a share of the Company’s common stock (“VWAP per REIT Share”), following the completion of an IPO of the Company’s common stock, or (b) the Company’s AFFO per share, prior to the completion of an IPO.

The Company utilizes third-party valuation experts to assist in estimating the fair value of the earnout liability, and develops estimates by considering weighted-average probabilities of likely outcomes, and using a Monte Carlo simulation and discounted cash flow analysis. These estimates require the Company to make various assumptions about share price volatility and, prior to the IPO, about the timing of an IPO and net asset prices, each of which are unobservable and considered Level 3 inputs in the fair value hierarchy. A

7


 

change in these inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date. Specifically, advancements in the estimated IPO date assumption increased the earnout liability’s fair value given the earnout’s fixed time horizon. Peer share price volatilities are used to estimate the Company’s expected share price volatility, and the Company’s corresponding ability to achieve the earnout targets. Increases in the volatility assumption would increase the earnout liability’s fair value. Increases in net asset values would also increase the earnout liability’s fair value.

The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of March 31, 2021:

 

Significant Unobservable Inputs

 

Weighted Average

Assumption Used

 

 

Range

Peer stock price volatility

 

40.0%

 

 

26.11% - 53.79%

 

The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of March 31, 2020:

 

Significant Unobservable Inputs

 

Weighted Average

Assumption Used

 

 

Range

Expected IPO date

 

March 15, 2021

 

 

November 2020 through May 2021

Peer stock price volatility

 

30.0%

 

 

22.96% - 43.91%

 

The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of February 7, 2020, the transaction date:

 

Significant Unobservable Inputs

 

Weighted Average

Assumption Used

 

 

Range

Expected IPO date

 

April 15, 2020

 

 

March 2020 through May 2020

Peer stock price volatility

 

20.0%

 

 

16.22% to 23.09%

Company's net asset value per diluted share

 

$

21.30

 

 

(a)

(a)

The Company’s net asset value per diluted share was primarily based on the fair value of its real estate investment portfolio, together with the fair value of its other assets and liabilities. The fair value of the Company’s real estate investment portfolio as of the measurement date was determined using market capitalization rates that ranged between 6.05% and 7.09%.

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

 

 

 

For the Three Months Ended

March 31,

 

(in thousands)

 

2021

 

 

2020

 

Beginning balance

 

$

7,509

 

 

$

0

 

Allocation of Internalization purchase price at February 7, 2020

 

 

 

 

 

40,119

 

Change in fair value subsequent to Internalization

 

 

(1,124

)

 

 

4,177

 

Ending balance

 

$

6,385

 

 

$

44,296

 

The decrease in fair value subsequent to the Internalization was driven by a lower share price. The decrease was partially offset by an increase in peer stock price volatility, which is attributable to changes in economic circumstances impacting global equity markets.

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

 

 

 

March 31, 2021

 

(in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swap, assets

 

$

239

 

 

$

 

 

$

239

 

 

$

 

Interest rate swap, liabilities

 

 

(43,662

)

 

 

 

 

 

(43,662

)

 

 

 

Earnout liability

 

 

(6,385

)

 

 

 

 

 

 

 

 

(6,385

)

 

 

 

December 31, 2020

 

(in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swap, liabilities

 

$

(72,103

)

 

$

 

 

$

(72,103

)

 

$

 

Earnout liability

 

 

(7,509

)

 

 

 

 

 

 

 

 

(7,509

)

8


 

 

Long-term Debt – The fair value of the Company’s debt was estimated using Level 2 and Level 3 inputs based on recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate (“LIBOR”), U.S. Treasury obligation interest rates, and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect the Company’s judgment as to the approximate current lending rates for loans or groups of loans with similar maturities and assumes that the debt is outstanding through maturity. Market information, as available, or present value techniques were utilized to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist on specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.

The following table summarizes the carrying amount reported on the Condensed Consolidated Balance Sheets and the Company’s estimate of the fair value of the Mortgages, net, Unsecured term notes, net, and Unsecured revolving credit facility, which reflects the fair value of interest rate swaps:

 

(in thousands)

 

March 31,

2021

 

 

December 31,

2020

 

Carrying amount

 

$

1,511,830

 

 

$

1,547,667

 

Fair value

 

 

1,608,249

 

 

 

1,679,188

 

Non-recurring Fair Value Measurements

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

Right-of-Use Assets and Lease Liabilities

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

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

 

 

 

 

 

March 31,

 

 

December 31,

 

(in thousands)

 

Financial Statement Presentation

 

2021

 

 

2020

 

Right-of-use assets

 

Prepaid expenses and other assets

 

$

2,919

 

 

$

3,075

 

Lease liabilities

 

Accounts payable and other liabilities

 

 

2,531

 

 

 

2,659

 

 

Stock-Based Compensation

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

9


 

Recently Adopted Accounting Standards

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

Other Recently Issued Accounting Standards

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

3. Related-Party Transactions

Prior to the Internalization on February 7, 2020, BRE, a related party in which certain directors of the Corporation had either a direct or indirect ownership interest, and the Asset Manager were considered to be related parties.

Earnout Consideration

In connection with the Internalization, the Company incurred a contingent obligation that would be payable to certain members of the Company’s Board of Directors and employees who had previously been owners and/or employees of BRE, upon the occurrence of certain events (see Note 4). The earnout consideration at March 31, 2021, consisted of $6,385 recorded as Earnout liability, $11,380  recorded as a component of Additional paid-in capital, and $19,430 recorded as a component of Non-controlling interests on the Condensed Consolidated Balance Sheets. The earnout consideration at March 31, 2020, consisted of $44,296 recorded as Earnout liability on the Condensed Consolidated Balance Sheets.

4. Internalization

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

Condensed Pro Forma Financial Information (Unaudited)

The following pro forma information summarizes selected financial information from the Company’s combined results of operations, as if the Internalization had occurred on January 1, 2019. These results contain certain adjustments totaling $5,646 of income for the three months ended March 31, 2020. These pro forma adjustments reflect the elimination of Internalization expenses and asset management, property management, and disposition fees between the Company and BRE and the Asset Manager in historic financial results, and adjustments to reflect compensation and related costs, incremental general and administrative expenses related to the Internalization, and incremental interest expense associated with the borrowing related to the Internalization. This pro forma information is presented for informational purposes only, and may not be indicative of what actual results of operations would have been had the Internalization occurred at the beginning of the period, nor does it purport to represent the results of future operations.

10


 

The condensed pro forma financial information is as follows:

 

 

 

For the Three Months Ended

 

(in thousands)

 

March 31, 2020

 

Revenues

 

$

78,231

 

Net income

 

 

13,751

 

 

 

5. Acquisitions of Rental Property

The Company closed on the following acquisitions during the three months ended March 31, 2021:

 

(in thousands, except number of properties)

 

Number of

 

 

Real Estate

 

 

Date

 

Property Type

 

Properties

 

 

Acquisition Price

 

 

February 5, 2021

 

Healthcare

 

 

1

 

 

$

4,843

 

 

February 26, 2021

 

Restaurant

 

(a)

 

 

$

181

 

 

March 11, 2021

 

Retail

 

 

13

 

 

$

26,834

 

 

March 30, 2021

 

Retail

 

 

11

 

 

 

41,324

 

 

March 31, 2021

 

Healthcare

 

 

3

 

 

 

14,140

 

 

 

 

 

 

 

28

 

 

$

87,322

 

(b)

(a)

Acquisition of additional land adjacent to an existing property.

(b)

Acquisition price does not include capitalized acquisition costs of $1,235.

The Company did 0t complete any acquisitions of rental property during the three months ended March 31, 2020.

The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation for completed real estate acquisitions:

 

 

 

For the Three Months Ended

 

(in thousands)

 

March 31, 2021

 

Land

 

$

19,584

 

Land improvements

 

 

4,355

 

Buildings and improvements

 

 

57,893

 

Acquired in-place leases(c)

 

 

6,725

 

 

 

$

88,557

 

(c)

The weighted average amortization period for acquired in-place leases is 16 years for acquisitions completed during the three months ended March 31, 2021.

The above acquisitions were funded using a combination of available cash on hand and revolving credit facility borrowings. All real estate acquisitions closed during the three months ended March 31, 2021, qualified as asset acquisitions and, as such, acquisition costs have been capitalized.

6. Sale of Real Estate

The Company closed on the following sales of real estate, none of which qualified as discontinued operations:

 

 

 

For the Three Months Ended

March 31,

 

(in thousands, except number of properties)

 

2021

 

 

2020

 

Number of properties disposed

 

 

8

 

 

 

10

 

Aggregate sale price

 

$

23,062

 

 

$

37,185

 

Aggregate carrying value

 

 

(17,372

)

 

 

(27,764

)

Additional sales expenses

 

 

(957

)

 

 

(1,802

)

Gain on sale of real estate

 

$

4,733

 

 

$

7,619

 

 

11


 

 

7. Investment in Rental Property and Lease Arrangements

The Company generally leases its investment rental property to established tenants in the industrial, healthcare, restaurant, office, retail, and other industries. At March 31, 2021, the Company had 644 real estate properties which were leased under leases that have been classified as operating leases, 10 that have been classified as direct financing leases, and 1 that has been classified as a sales-type lease. Of the 10 leases classified as direct financing leases, 3 include land portions which are accounted for as operating leases. The sales-type lease includes a land portion which is accounted for as an operating lease. Substantially all leases have initial terms of 10 to 20 years. The Company’s leases generally provide for limited increases in rent as a result of fixed increases, increases in the CPI, or increases in the tenant’s sales volume. Generally, tenants are also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and maintain property and liability insurance coverage. The leases also typically provide for one or more multiple year renewal options, at the election of the tenant, and are subject to generally the same terms and conditions as the initial lease.  

Investment in Rental Property – Accounted for Using the Operating Method

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

 

(in thousands)

 

March 31,

2021

 

 

December 31,

2020

 

Land

 

$

572,381

 

 

$

555,748

 

Land improvements

 

 

282,426

 

 

 

279,360

 

Buildings and improvements

 

 

2,898,615

 

 

 

2,857,510

 

Equipment

 

 

11,870

 

 

 

11,870

 

 

 

 

3,765,292

 

 

 

3,704,488

 

Less accumulated depreciation

 

 

(369,683

)

 

 

(349,977

)

 

 

$

3,395,609

 

 

$

3,354,511

 

Depreciation expense on investment in rental property was as follows:

 

 

For the Three Months Ended

March 31,

 

(in thousands)

 

2021

 

 

2020

 

Depreciation

 

$

23,743

 

 

$

23,515

 

Estimated lease payments to be received under non-cancelable operating leases with tenants at March 31, 2021 are as follows:

 

(in thousands)

 

 

 

 

Remainder of 2021

 

$

224,633

 

2022

 

 

302,580

 

2023

 

 

306,227

 

2024

 

 

302,556

 

2025

 

 

295,351

 

Thereafter

 

 

2,106,544

 

 

 

$

3,537,891

 

Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future lease payments due during the initial lease terms. In addition, such amounts exclude any potential variable rent increases that are based on changes in the CPI or future variable rents which may be received under the leases based on a percentage of the tenant’s gross sales.

Investment in Rental Property – Direct Financing Leases

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

 

(in thousands)

 

March 31,

2021

 

 

December 31,

2020

 

Undiscounted estimated lease payments to be received

 

$

44,989

 

 

$

45,782

 

Estimated unguaranteed residual values

 

 

15,203

 

 

 

15,203

 

Unearned revenue

 

 

(31,035

)

 

 

(31,753

)

Reserve for credit losses

 

 

(166

)

 

 

(166

)

Net investment in direct financing leases

 

$

28,991

 

 

$

29,066

 

12


 

 

Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at March 31, 2021 are as follows:

 

(in thousands)

 

 

 

 

Remainder of 2021

 

$

2,387

 

2022

 

 

3,241

 

2023

 

 

3,304

 

2024

 

 

3,361

 

2025

 

 

3,475

 

Thereafter

 

 

29,221

 

 

 

$

44,989

 

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

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

 

 

 

For the Three Months Ended

March 31,

 

(in thousands)

 

2021

 

 

2020

 

Contractual rental amounts billed for operating leases

 

$

73,245

 

 

$

72,828

 

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

 

 

4,367

 

 

 

1,665

 

Variable rental amounts earned

 

 

91

 

 

 

3

 

Earned income from direct financing leases

 

 

730

 

 

 

987

 

Earned income from sales-type leases

 

 

14

 

 

 

 

Operating expenses billed to tenants

 

 

4,388

 

 

 

3,732

 

Other income from real estate transactions

 

 

5

 

 

 

49

 

Adjustment to revenue recognized for uncollectible rental amounts billed

 

 

(142

)

 

 

(1,033

)

Total Lease revenues, net

 

$

82,698

 

 

$

78,231

 

 

8. Intangible Assets and Liabilities

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

 

(in thousands)

 

March 31,

2021

 

 

December 31,

2020

 

Lease intangibles:

 

 

 

 

 

 

 

 

Acquired above-market leases

 

$

50,206

 

 

$

54,616

 

Less accumulated amortization

 

 

(15,782

)

 

 

(18,928

)

Acquired above-market leases, net

 

 

34,424

 

 

 

35,688

 

Acquired in-place leases

 

 

344,674

 

 

 

340,958

 

Less accumulated amortization

 

 

(90,506

)

 

 

(85,733

)

Acquired in-place leases, net

 

 

254,168

 

 

 

255,225

 

Total intangible lease assets, net

 

$

288,592

 

 

$

290,913

 

Acquired below-market leases

 

$

107,226

 

 

$

107,788

 

Less accumulated amortization

 

 

(29,735

)

 

 

(28,135

)

Intangible lease liabilities, net

 

$

77,491

 

 

$

79,653

 

Leasing fees

 

$

15,517

 

 

$

15,462

 

Less accumulated amortization

 

 

(4,844

)

 

 

(4,724

)

Leasing fees, net

 

$

10,673

 

 

$

10,738

 

 

Amortization of intangible lease assets and liabilities was as follows:

 

(in thousands)

 

 

 

For the Three Months Ended

March 31,

 

Intangible

 

Financial Statement Presentation

 

2021

 

 

2020

 

Acquired in-place leases and leasing fees

 

Depreciation and amortization

 

$

6,947

 

 

$

7,695

 

Above-market and below-market leases

 

Lease revenues, net

 

 

753

 

 

 

1,140

 

 

13


 

 

Amortization expense for the three months ended March 31, 2020, includes $577 of accelerated amortization resulting from early lease terminations, compared to NaN for the three months ended March 31, 2021.

Estimated future amortization of intangible assets and liabilities at March 31, 2021 is as follows:

 

(in thousands)

 

 

 

 

Remainder of 2021

 

$

18,746

 

2022

 

 

22,844

 

2023

 

 

22,531

 

2024

 

 

21,773

 

2025

 

 

20,477

 

Thereafter

 

 

115,403

 

 

 

$

221,774

 

 

9. Unsecured Credit Agreements

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

 

 

 

Outstanding Balance

 

 

 

 

 

 

 

(in thousands, except interest rates)

 

March 31,

2021

 

 

December 31,

2020

 

 

Interest

Rate(c) (d)

 

 

Maturity

Date

Unsecured revolving credit facility(a)

 

$

15,000

 

 

$

 

 

daily LIBOR + 1.00% (e)

 

 

Sep. 2023

2022 Unsecured Term Loan(a)

 

 

60,000

 

 

 

60,000

 

 

one-month LIBOR + 1.00% (f)

 

 

Feb. 2022

2023 Unsecured Term Loan(a)

 

 

265,000

 

 

 

265,000

 

 

one-month LIBOR + 1.10% (g)

 

 

Jan. 2023

2024 Unsecured Term Loan(a)

 

 

190,000

 

 

 

190,000

 

 

one-month LIBOR + 1.00% (f)

 

 

Jun. 2024

2026 Unsecured Term Loan(a)

 

 

400,000

 

 

 

450,000

 

 

one-month LIBOR + 1.00% (h)

 

 

Feb. 2026

Senior Notes(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

 

150,000

 

 

 

150,000

 

 

4.84%

 

 

Apr. 2027

Series B

 

 

225,000

 

 

 

225,000

 

 

5.09%

 

 

Jul. 2028

Series C

 

 

100,000

 

 

 

100,000

 

 

5.19%

 

 

Jul. 2030

 

 

 

475,000

 

 

 

475,000

 

 

 

 

 

 

 

Total

 

 

1,405,000

 

 

 

1,440,000

 

 

 

 

 

 

 

Debt issuance costs, net(b)

 

 

(6,717

)

 

 

(6,204

)

 

 

 

 

 

 

 

 

$

1,398,283

 

 

$

1,433,796

 

 

 

 

 

 

 

(a)

The Company believes it was in compliance with all financial covenants for all periods presented.

(b)

Amounts presented include debt issuance costs, net, related to the unsecured term notes and senior notes only.

(c)

At March 31, 2021 and December 31, 2020, one-month LIBOR was 0.11% and 0.14%, respectively. At March 31, 2021 daily LIBOR was 0.08%.

(d)

In January 2021, the Company received a credit rating of BBB, changing the applicable margin on variable rate unsecured debt effective February 1, 2021.

(e)

At December 31, 2020, interest rate was one-month LIBOR plus 1.20%.

(f)

At December 31, 2020, interest rate was one-month LIBOR plus 1.25%.

(g)

At December 31, 2020, interest rate was one-month LIBOR plus 1.35%.

(h)

At December 31, 2020, interest rate was one-month LIBOR plus 1.85%.

At March 31, 2021, the weighted average interest rate on all outstanding borrowings was 2.45%, exclusive of interest rate swap agreements.  

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

For the three months ended March 31, 2021, the Company paid $951 in debt issuance costs associated with the amended 2026 Unsecured Term Loan. For each separate debt instrument, on a lender by lender basis, in accordance with ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction was deemed to be new debt, a modification of existing debt, or an extinguishment of existing debt. Debt issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred. Based on the assessment, $946 of debt issuance costs incurred in the three months ended March 31, 2021, were deemed to be related to the modification of existing debt, and therefore have been deferred and are being amortized over the term of the associated debt.

14


 

Additionally, $126 of unamortized debt issuance costs were expensed in the three months ended March 31, 2021, and included in Cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

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

 

 

 

For the Three Months Ended

March 31,

 

(in thousands)

 

2021

 

 

2020

 

Debt issuance costs amortization

 

$

914

 

 

$

888

 

 

The Company is subject to various financial and operational covenants and financial reporting requirements pursuant to its unsecured credit agreements. These covenants require the Company to maintain certain financial ratios, including leverage, fixed charge coverage, and debt service coverage, among others. As of March 31, 2021, the Company believes it was in compliance with all of its loan covenants. Failure to comply with the covenants would result in a default which, if the Company were unable to cure or obtain a waiver from the lenders, could accelerate the repayment of the obligations. Further, in the event of default, the Company may be restricted from paying dividends to its stockholders in excess of dividends required to maintain its REIT qualification. Accordingly, an event of default could have a material and adverse impact on the Company.

10. Mortgages

The Company’s mortgages consist of the following:

 

 

 

Origination

 

Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except interest rates)

 

Date

 

Date

 

Interest

 

 

March 31,

 

 

December 31,

 

 

 

Lender

 

(Month/Year)

 

(Month/Year)

 

Rate

 

 

2021

 

 

2020

 

 

 

Wilmington Trust National Association

 

Apr-19

 

Feb-28

 

4.92%

 

 

$

47,646

 

 

$

47,945

 

 

(a) (b) (c) (j)

Wilmington Trust National Association

 

Jun-18

 

Aug-25

 

4.36%

 

 

 

19,848

 

 

 

19,947

 

 

(a) (b) (c) (i)

PNC Bank

 

Oct-16

 

Nov-26

 

3.62%

 

 

 

17,396

 

 

 

17,498

 

 

(b) (c)

Sun Life

 

Mar-12

 

Oct-21

 

5.13%

 

 

 

10,361

 

 

 

10,469

 

 

(b) (e)

Aegon

 

Apr-12

 

Oct-23

 

6.38%

 

 

 

6,846

 

 

 

7,039

 

 

(b) (f)

M&T Bank

 

Oct-17

 

Aug-21

 

one - month

LIBOR+3%

 

 

 

4,733

 

 

 

4,769

 

 

(b) (d) (g) (h)

 

 

 

 

 

 

 

 

 

 

 

106,830

 

 

 

107,667

 

 

 

Debt issuance costs, net

 

 

 

 

 

 

 

 

 

 

(271

)

 

 

(285

)

 

 

 

 

 

 

 

 

 

 

 

 

$

106,559

 

 

$

107,382

 

 

 

(a)

Non-recourse debt includes the indemnification/guaranty of the Corporation and/or OP pertaining to fraud, environmental claims, insolvency and other matters.

(b)

Debt secured by related rental property and lease rents.

(c)

Debt secured by guaranty of the OP.

(d)

Debt secured by guaranty of the Corporation.  

(e)

Mortgage was assumed in March 2012 as part of an UPREIT transaction. The debt was recorded at fair value at the time of the assumption.

(f)

Mortgage was assumed in April 2012 as part of the acquisition of the related property. The debt was recorded at fair value at the time of the assumption.  

(g)

The Company entered into an interest rate swap agreement in connection with the mortgage, as further described in Note 11.

(h)

Mortgage was assumed in October 2017 as part of an UPREIT transaction. The debt was recorded at fair value at the time of the assumption.

(i)

Mortgage was assumed in June 2018 as part of the acquisition of the related property. The debt was recorded at fair value at the time of assumption.

(j)

Mortgage was assumed in April 2019 as part of the acquisition of the related property. The debt was recorded at fair value at the time of assumption.

 

At March 31, 2021, investment in rental property of $172,440 was pledged as collateral against the Company’s mortgages.

Estimated future principal payments to be made under the above mortgages and the Company’s unsecured credit agreements (see Note 9) at March 31, 2021 are as follows:

(in thousands)

 

 

 

 

Remainder of 2021

 

$

17,169

 

2022

 

 

62,907

 

2023

 

 

287,582

 

2024

 

 

192,260

 

2025

 

 

20,195

 

Thereafter

 

 

931,717

 

 

 

$

1,511,830

 

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

15


 

11. Interest Rate Swaps

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

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

 

(in thousands, except interest rates)

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

 

Counterparty

 

Maturity Date

 

Fixed

Rate

 

 

Variable Rate Index

 

Notional

Amount

 

 

March 31,

2021

 

 

December 31,

2020

 

 

Bank of America, N.A.

 

November 2023

 

 

2.80

%

 

one-month LIBOR

 

$

25,000

 

 

$

(1,622

)

 

$

(1,848

)

 

Bank of Montreal

 

July 2024

 

 

1.16

%

 

one-month LIBOR

 

 

40,000

 

 

 

(896

)

 

 

(1,380

)

 

Bank of Montreal

 

January 2025

 

 

1.91

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,236

)

 

 

(1,725

)

 

Bank of Montreal

 

July 2025

 

 

2.32

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,696

)

 

 

(2,351

)

 

Bank of Montreal

 

January 2026

 

 

1.92

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,271

)

 

 

(2,039

)

 

Bank of Montreal

 

January 2026

 

 

2.05

%

 

one-month LIBOR

 

 

40,000

 

 

 

(2,277

)

 

 

(3,523

)

 

Bank of Montreal

 

December 2026

 

 

2.33

%

 

one-month LIBOR

 

 

10,000

 

 

 

(720

)

 

 

(1,156

)

 

Bank of Montreal

 

December 2026

 

 

1.99

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,314

)

 

 

(2,372

)

 

Bank of Montreal

 

December 2027

 

 

2.37

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,858

)

 

 

(3,234

)

 

Bank of Montreal

 

May 2029

 

 

2.09

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,286

)

 

 

(2,994

)

 

Capital One, National Association

 

December 2021

 

 

1.05

%

 

one-month LIBOR

 

 

15,000

 

 

 

(105

)

 

 

(141

)

 

Capital One, National Association

 

December 2024

 

 

1.58

%

 

one-month LIBOR

 

 

15,000

 

 

 

(553

)

 

 

(799

)

 

Capital One, National Association

 

January 2026

 

 

2.08

%

 

one-month LIBOR

 

 

35,000

 

 

 

(2,035

)

 

 

(3,078

)

 

Capital One, National Association

 

April 2026

 

 

2.68

%

 

one-month LIBOR

 

 

15,000

 

 

 

(1,325

)

 

 

(1,843

)

 

Capital One, National Association

 

July 2026

 

 

1.32

%

 

one-month LIBOR

 

 

35,000

 

 

 

(639

)

 

 

(1,806

)

 

Capital One, National Association

 

December 2027

 

 

2.37

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,860

)

 

 

(3,199

)

 

M&T Bank

 

August 2021

 

 

1.02

%

 

one-month LIBOR

 

 

4,731

 

 

 

(14

)

 

 

(25

)

(a), (b)

M&T Bank

 

September 2022

 

 

2.83

%

 

one-month LIBOR

 

 

25,000

 

 

 

(960

)

 

 

(1,139

)

 

M&T Bank

 

November 2023

 

 

2.65

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,524

)

 

 

(1,785

)

 

Regions Bank

 

December 2023

 

 

1.18

%

 

one-month LIBOR

 

 

25,000

 

 

 

(576

)

 

 

(763

)

 

Regions Bank

 

May 2029

 

 

2.11

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,324

)

 

 

(3,004

)

 

Regions Bank

 

June 2029

 

 

2.03

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,167

)

 

 

(2,843

)

 

Truist Financial Corporation

 

April 2024

 

 

1.99

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,200

)

 

 

(1,487

)

 

Truist Financial Corporation

 

April 2025

 

 

2.20

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,543

)

 

 

(2,084

)

 

Truist Financial Corporation

 

July 2025

 

 

1.99

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,345

)

 

 

(1,941

)

 

Truist Financial Corporation

 

December 2025

 

 

2.30

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,719

)

 

 

(2,481

)

 

Truist Financial Corporation

 

January 2026

 

 

1.93

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,280

)

 

 

(2,019

)

 

U.S. Bank National Association

 

June 2029

 

 

2.03

%

 

one-month LIBOR

 

 

25,000

 

 

 

(1,174

)

 

 

(2,902

)

 

U.S. Bank National Association

 

August 2029

 

 

1.35

%

 

one-month LIBOR

 

 

25,000

 

 

 

239

 

 

 

(1,445

)

 

Wells Fargo Bank, N.A.

 

February 2021

 

 

2.39

%

 

one-month LIBOR

 

 

35,000

 

 

 

 

 

 

(70

)

 

Wells Fargo Bank, N.A.

 

October 2024

 

 

2.72

%

 

one-month LIBOR

 

 

15,000

 

 

 

(1,154

)

 

 

(1,422

)

 

Wells Fargo Bank, N.A.

 

April 2027

 

 

2.72

%

 

one-month LIBOR

 

 

25,000

 

 

 

(2,388

)

 

 

(3,555

)

 

Wells Fargo Bank, N.A.

 

January 2028

 

 

2.37

%

 

one-month LIBOR

 

 

75,000

 

 

 

(5,601

)

 

 

(9,650

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(43,423

)

 

$

(72,103

)

 

 

(a)

Notional amount at December 31, 2020 was $4,768.

(b)

Interest rate swap was assumed in October 2017 as part of an UPREIT transaction.

 

16


 

 

The total amounts recognized, and the location in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss), from converting from variable rates to fixed rates under these agreements were as follows:

 

 

 

 

 

 

 

Reclassification from

 

 

Total Interest Expense

 

 

 

Amount of Gain (Loss)

 

 

Accumulated Other

 

 

Presented in the Condensed

 

 

 

Recognized in

 

 

Comprehensive Loss

 

 

Consolidated Statements of

 

(in thousands)

 

Accumulated Other

 

 

 

 

Amount of

 

 

Income and Comprehensive

 

For the Three Months Ended March 31,

 

Comprehensive Loss

 

 

Location

 

Loss

 

 

Income (Loss)

 

2021

 

$

28,680

 

 

Interest expense

 

$

4,016

 

 

$

16,108

 

2020

 

 

(58,062

)

 

Interest expense

 

 

885

 

 

 

20,991

 

 

Amounts related to the interest rate swaps expected to be reclassified out of Accumulated other comprehensive loss to Interest expense during the next twelve months are estimated to be a loss of $15,776. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes the risk exposure by limiting counterparties to major banks who meet established credit and capital guidelines.

12. Credit Risk Concentrations

The Company maintained bank balances that, at times, exceeded the federally insured limit during the three months ended March 31, 2021. The Company has not experienced losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts.

The Company has mortgages with three institutions that comprised 63%, 16%, and 10% of total mortgages at March 31, 2021 and December 31, 2020. For the three months ended March 31, 2021 and 2020, the Company had 0 individual tenants or common franchises that accounted for more than 10% of total revenues.

13. Equity

General

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

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

14. Stock-Based Compensation

Restricted Stock Awards

On March 1, 2021 and August 4, 2020, the Company awarded 199 and 341 shares of RSAs, respectively, under the Equity Incentive Plan to certain officers and employees. The holder of RSAs is generally entitled at all times on and after the date of issuance of the restricted common shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The March 1, 2021 RSAs vest over a one, three or four year period from the date of grant. The August 4, 2020 RSAs vest over a three or four year period from the anniversaries of February 7, 2020. The vesting for the RSAs is subject to the employee’s continued service through the applicable vesting dates and in accordance with the terms of the individual award agreements. The August 4, 2020 grant date fair value per share of $20.50 was based on the determined share value established by the Board of Directors (“Determined Share Value”). Prior to the IPO, the Company sold shares of common stock in a private offering at a price equal to the Determined Share Value, which was established at least quarterly by the Board of Directors based on the net asset value (“NAV”) of the Company’s portfolio, input from management and third-party consultants, and such other factors as the Board of Directors determined.  The Company’s NAV was calculated using its established valuation process, starting with an estimate of the fair value of the properties in the portfolio as of that date based upon, among other factors, the implied market price for each asset based upon a review of market capitalization rates. The March 1, 2021 grant date fair value per share of $18.66 was based on the market price of the Company’s common stock on the grant date.

17


 

 

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

 

 

 

For the Three Months Ended

 

(in thousands)

 

March 31, 2021

 

Compensation cost

 

$

1,695

 

Dividends declared on unvested RSAs

 

 

104

 

Grant date fair value of shares vested during the period

 

 

2,522

 

There were 0 RSAs at March 31, 2020.

 

(in thousands, except recognition period)

 

March 31, 2021

 

 

December 31, 2020

 

Unamortized value of RSAs

 

$

6,999

 

 

$

5,001

 

Weighted average amortization period (in years)

 

 

3.0

 

 

 

2.8

 

 

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

 

 

 

For the Three Months Ended March 31, 2021

 

(in thousands, except per share amounts)

 

Number of Shares

 

 

Weighted Average Grant

Date Fair Value per Share

 

Unvested at beginning of period

 

 

341

 

 

$

20.50

 

Granted

 

 

199

 

 

 

18.66

 

Vested

 

 

124

 

 

 

20.26

 

Forfeited

 

 

 

 

 

 

Unvested at end of period

 

 

416

 

 

$

19.62

 

 

There were 0 unvested shares at March 31, 2020.

Restricted Stock Units

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

 

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

 

 

 

For the Three Months Ended

 

(in thousands, except recognition period)

 

March 31, 2021

 

Compensation cost

 

$

74

 

 

 

 

 

 

 

 

March 31, 2021

 

Unamortized value of PRSUs

 

$

2,600

 

Weighted average amortization period (in years)

 

 

2.9

 

 

There were 0 PRSUs at March 31, 2020.

18


 

 

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

 

 

 

For the Three Months Ended March 31, 2021

 

(in thousands, except per share amounts)

 

Number of Shares

 

 

Weighted Average Grant

Date Fair Value per Share

 

Unvested at beginning of period

 

 

 

 

$

 

Granted

 

 

132

 

 

 

24.40

 

Vested

 

 

 

 

 

 

Forfeited

 

 

(22

)

 

 

24.40

 

Unvested at end of period

 

 

110

 

 

$

24.40

 

 

15. Earnings per Share

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

 

 

 

For the Three Months Ended

March 31,

 

(in thousands, except per share amounts)

 

2021

 

 

2020

 

Basic earnings:

 

 

 

 

 

 

 

 

Net earnings attributable to Broadstone Net Lease, Inc. common

   shareholders

 

$

22,223

 

 

$

10,816

 

Less earnings allocated to unvested restricted shares

 

 

(104

)

 

 

 

Net earnings used to compute basic earnings per common share

 

$

22,119

 

 

$

10,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings:

 

 

 

 

 

 

 

 

Net earnings used to compute basic earnings per share

 

$

22,119

 

 

$

10,816

 

Net earnings attributable to non-controlling interests

 

 

1,737

 

 

 

1,032

 

Net earnings used to compute diluted earnings per common share

 

$

23,856

 

 

$

11,848

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

145,672

 

 

 

106,108

 

Less weighted average unvested restricted shares (a)

 

 

(334

)

 

 

 

Weighted average number of common shares outstanding used in

   basic earnings per common share

 

 

145,338

 

 

 

106,108

 

Effects of convertible membership units (b)

 

 

11,386

 

 

 

10,102

 

Weighted average number of common shares outstanding used in

   diluted earnings per common share

 

 

156,724

 

 

 

116,210

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.15

 

 

$

0.10

 

Diluted earnings per share

 

$

0.15

 

 

$

0.10

 

(a)

Represents the weighted average effects of 416 unvested restricted shares of common stock as of March 31, 2021, which will be excluded from the computation of earnings per share until they vest. The shares of restricted common stock were not included in the calculation of diluted earnings per share, as the effect of doing so would have been anti-dilutive.

(b)

Represents the weighted average effects of 11,361 and 12,226 OP Units outstanding at March 31, 2021 and 2020, respectively. OP Units are included in the diluted earnings per share calculation. However, because such OP Units would also require that the share of the net income attributable to such OP units also be added back to net income, there is no effect to EPS.  

16. Supplemental Cash Flow Disclosures

Cash paid for interest was $9,397 and $14,010 for the three months ended March 31, 2021 and 2020, respectively. Cash paid for income taxes was $237 and $195 for the three months ended March 31, 2021 and 2020, respectively.

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

 

During the three months ended March 31, 2020, the Corporation issued 69 shares of Common Stock with a value of approximately $5,733 under the terms of the Distribution Reinvestment Plan (“DRIP”). The Company terminated the DRIP effective February 10, 2020.

19


 

 

 

During the three months ended March 31, 2020, the Company issued shares of Common Stock and OP Units, with a total value of approximately $178,535, and earnout consideration with a fair value of $40,119 as consideration for the Internalization and assumed $90,484 of debt.

 

During the three months ended March 31, 2020, the Company adjusted the carrying value of mezzanine equity non-controlling interests by $2,416, with an offset to Additional paid-in capital, in accordance with the Company’s accounting policy.

 

At March 31, 2021 and 2020, dividend amounts declared and accrued but not yet paid amounted to $39,329 and $13,160, respectively.

17. Commitments and Contingencies

Litigation

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

Property and Acquisition Related

In connection with ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company is not aware of any non-compliance, liability, claim, or other environmental condition that would have a material effect on its consolidated financial position, results of operations, or liquidity.

Balances associated with tenant improvement allowances are included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets as follows:

 

(in thousands)

 

March 31,

2021

 

 

December 31,

2020

 

Tenant improvement allowances

 

$

903

 

 

$

1,981

 

The Company is a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and to the Founding Owners’ Tax Protection Agreement in connection with the Internalization. The tax protection agreements require the Company to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. The Company is required to allocate an amount of nonrecourse liabilities to each beneficiary that is at least equal to the minimum liability amount, as contained in the agreements. The minimum liability amount and the associated allocation of nonrecourse liabilities are calculated in accordance with applicable tax regulations, are completed at the OP level, and do not represent GAAP accounting. Therefore, there is no impact to the Condensed Consolidated Financial Statements. Based on values as of March 31, 2021, taxable sales of the applicable properties would trigger liability under the agreements of approximately $22,300. Based on information available, the Company does not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future.

Obligations Under Operating Leases

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

The Company also leases land at certain properties under non-cancellable operating leases (“ground leases”) with initial lease terms ranging from 2034 to 2066. These leases contain provisions for fixed monthly payments, subject to rent escalations. One lease requires the Company to make annual rent payments calculated based upon sales generated at the property (“percentage rent”). None of the leases are subject to any sublease agreement.

20


 

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

 

 

 

 

 

For the Three Months Ended

March 31,

 

(in thousands)

 

Financial Statement Presentation

 

2021

 

 

2020

 

Operating lease costs

 

 

 

 

 

 

 

 

 

 

Office leases

 

General and administrative

 

$

158

 

 

$

52

 

Ground leases

 

Property and operating expense

 

 

33

 

 

 

33

 

Variable lease costs

 

 

 

 

 

 

 

 

 

 

Ground leases

 

Property and operating expense

 

 

14

 

 

 

18

 

Total lease costs

 

 

 

$

205

 

 

$

103

 

 

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

 

 

 

For the Three Months Ended

March 31,

 

(in thousands)

 

2021

 

 

2020

 

Operating lease payments

 

$

241

 

 

$

128

 

Estimated future lease payments required under non-cancelable operating leases at March 31, 2021, and a reconciliation to the lease liabilities, is as follows:

 

(in thousands)

 

 

 

 

Remainder of 2021

 

$

548

 

2022

 

 

690

 

2023

 

 

505

 

2024

 

 

120

 

2025

 

 

121

 

Thereafter

 

 

2,290

 

Total undiscounted cash flows

 

 

4,274

 

Less imputed interest

 

 

(1,743

)

Lease liabilities

 

$

2,531

 

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

18. Subsequent Events

On April 15, 2021, the Company paid distributions totaling $39,293.

On April 30, 2021, the Board of Directors declared a quarterly distribution of $0.255 per share on the Company’s common stock and OP Units for the second quarter of 2021, which will be payable on or before July 15, 2021 to stockholders and unit holders of record as of June 30, 2021.

Subsequent to March 31, 2021, the Company drew additional borrowings on the Revolving Credit Facility in the aggregate amount of $24,000.

 

21


 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except where the context suggests otherwise, as used in this Quarterly Report on Form 10-Q, the terms “BNL,” “we,” “us,” “our,” and “our company” refer to Broadstone Net Lease, Inc., a Maryland corporation incorporated on October 18, 2007, and, as required by context, Broadstone Net Lease, LLC, a New York limited liability company (the “OP”), which we refer to as the or our “OP,” and to their respective subsidiaries.

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

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends, that are intended to be made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other comparable words. All of the forward-looking statements included in this Quarterly Report on Form 10-Q are subject to various risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results, performance, and achievements could differ materially from those expressed in or by the forward-looking statements and may be affected by a variety of risks and other factors. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from such forward-looking statements.

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

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

Explanatory Note and Certain Defined Terms

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

 

“annualized base rent” or “ABR” means the annualized contractual cash rent due for the last month of the reporting period, excluding the impacts of short-term rent deferrals, abatements, free rent, or discounted rent periods and adjusted to remove rent from properties sold during the month and to include a full month of contractual cash rent for properties acquired during the last month.

 

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

 

“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;

 

“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.

22


 

 

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 March 31, 2021, our portfolio has grown to 661 properties, with 660 properties located in 41 U.S. states and one property located in British Columbia, Canada.

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

 

-

Diversified Portfolio. As of March 31, 2021, our portfolio comprised approximately 28.4 million rentable square feet of operational space, and was highly diversified based on property type, geography, tenant, and industry, and is cross-diversified within each (e.g., property-type diversification within a geographic concentration):

 

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 185 different commercial tenants who operate 171 different brands that are diversified across 55 differing industries, with no single tenant accounting for more than 2.4% of our ABR.

 

-

Strong In-Place Leases with Significant Remaining Lease Term. As of March 31, 2021, our portfolio was approximately 99.7% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 10.6 years, excluding renewal options.

 

-

Standard Contractual Base Rent Escalation. Approximately 98.2% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.1%.

 

-

Extensive Tenant Financial Reporting. Approximately 88.1% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 7.1% 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.


23


 

 

Real Estate Portfolio Information

The following charts summarize our portfolio diversification by property type, tenant, brand, industry and geographic location as of March 31, 2021. The percentages below are calculated based on our ABR of $302.3 million as of March 31, 2021.

 

Diversification by Property Type

 

 

24


 

 

 

Property Type

 

# Properties

 

 

ABR

($'000s)

 

 

ABR as a % of

Total Portfolio

 

 

Square Feet

('000s)

 

 

SF as a % of

Total Portfolio

 

Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

 

56

 

 

$

42,455

 

 

 

14.0

%

 

 

7,732

 

 

 

27.3

%

Distribution & Warehouse

 

 

31

 

 

 

40,250

 

 

 

13.3

%

 

 

7,414

 

 

 

26.1

%

Food Processing

 

 

14

 

 

 

18,386

 

 

 

6.1

%

 

 

2,132

 

 

 

7.5

%

Flex and R&D

 

 

7

 

 

 

16,934

 

 

 

5.6

%

 

 

1,457

 

 

 

5.1

%

Cold Storage

 

 

4

 

 

 

12,578

 

 

 

4.2

%

 

 

933

 

 

 

3.3

%

Services

 

 

18

 

 

 

7,168

 

 

 

2.4

%

 

 

429

 

 

 

1.5

%

Industrial Total

 

 

130

 

 

 

137,771

 

 

 

45.6

%

 

 

20,097

 

 

 

70.8

%

Healthcare

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical

 

 

50

 

 

 

24,958

 

 

 

8.3

%

 

 

1,062

 

 

 

3.7

%

Surgical

 

 

11

 

 

 

9,166

 

 

 

3.0

%

 

 

306

 

 

 

1.1

%

Animal Health Services

 

 

20

 

 

 

8,209

 

 

 

2.7

%

 

 

314

 

 

 

1.1

%

Life Science

 

 

9

 

 

 

7,994

 

 

 

2.6

%

 

 

550

 

 

 

1.9

%

Healthcare Services

 

 

26

 

 

 

7,520

 

 

 

2.5

%

 

 

302

 

 

 

1.1

%

Healthcare Total

 

 

116

 

 

 

57,847

 

 

 

19.1

%

 

 

2,534

 

 

 

8.9

%

Restaurant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quick Service Restaurants

 

 

156

 

 

 

25,495

 

 

 

8.4

%

 

 

530

 

 

 

1.9

%

Casual Dining

 

 

88

 

 

 

19,858

 

 

 

6.6

%

 

 

563

 

 

 

2.0

%

Restaurant Total

 

 

244

 

 

 

45,353

 

 

 

15.0

%

 

 

1,093

 

 

 

3.9

%

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automotive

 

 

68

 

 

 

12,767

 

 

 

4.2

%

 

 

844

 

 

 

3.0

%

General Merchandise

 

 

71

 

 

 

12,215

 

 

 

4.1

%

 

 

855

 

 

 

3.0

%

Home Furnishings

 

 

15

 

 

 

6,932

 

 

 

2.3

%

 

 

860

 

 

 

3.0

%

Retail Total

 

 

154

 

 

 

31,914

 

 

 

10.6

%

 

 

2,559

 

 

 

9.0

%

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Strategic Operations

 

 

7

 

 

 

13,639

 

 

 

4.5

%

 

 

1,021

 

 

 

3.6

%

Corporate Headquarters

 

 

6

 

 

 

10,016

 

 

 

3.3

%

 

 

671

 

 

 

2.4

%

Call Center

 

 

4

 

 

 

5,716

 

 

 

1.9

%

 

 

392

 

 

 

1.4

%

Office Total

 

 

17

 

 

 

29,371

 

 

 

9.7

%

 

 

2,084

 

 

 

7.4

%

Total

 

 

661

 

 

$

302,256

 

 

 

100.0

%

 

 

28,367

 

 

 

100.0

%

 


25


 

 

Diversification by Tenant

Tenant

 

Property Type

 

# Properties

 

 

ABR

($'000s)

 

 

ABR as a % of

Total Portfolio

 

 

Square Feet

('000s)

 

 

SF as a % of

Total Portfolio

 

Red Lobster Hospitality & Red Lobster

   Restaurants LLC*

 

Casual Dining

 

 

24

 

 

$

7,306

 

 

 

2.4

%

 

 

196

 

 

 

0.7

%

Jack's Family Restaurants LP*

 

Quick Service Restaurants

 

 

43

 

 

 

7,026

 

 

 

2.3

%

 

 

147

 

 

 

0.5

%

Axcelis Technologies, Inc.

 

Flex and R&D

 

 

1

 

 

 

5,859

 

 

 

1.9

%

 

 

417

 

 

 

1.5

%

Hensley & Company*

 

Distribution & Warehouse

 

 

3

 

 

 

5,756

 

 

 

1.9

%

 

 

577

 

 

 

2.0

%

Outback Steakhouse of Florida LLC*1

 

Casual Dining

 

 

22

 

 

 

5,192

 

 

 

1.7

%

 

 

140

 

 

 

0.5

%

BluePearl Holdings, LLC*

 

Animal Health Services

 

 

12

 

 

 

5,137

 

 

 

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

 

 

 

4,860

 

 

 

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

 

 

 

 

152

 

 

 

55,297

 

 

 

18.3

%

 

 

3,944

 

 

 

13.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arkansas Surgical Hospital

 

Surgical

 

 

1

 

 

 

4,260

 

 

 

1.4

%

 

 

129

 

 

 

0.4

%

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

 

 

 

4,122

 

 

 

1.4

%

 

 

231

 

 

 

0.8

%

Tractor Supply Company

 

General Merchandise

 

 

15

 

 

 

3,872

 

 

 

1.3

%

 

 

300

 

 

 

1.1

%

Aventiv Technologies, LLC

 

Corporate Headquarters

 

 

1

 

 

 

3,819

 

 

 

1.2

%

 

 

154

 

 

 

0.5

%

Fresh Express Incorporated

 

Food Processing

 

 

1

 

 

 

3,819

 

 

 

1.2

%

 

 

335

 

 

 

1.2

%

Bob Evans Restaurants, LLC*

 

Casual Dining

 

 

22

 

 

 

3,566

 

 

 

1.2

%

 

 

116

 

 

 

0.4

%

Zips Car Wash, LLC*

 

Automotive

 

 

14

 

 

 

3,292

 

 

 

1.1

%

 

 

57

 

 

 

0.2

%

Centene Management Company, LLC

 

Strategic Operations

 

 

1

 

 

 

3,267

 

 

 

1.1

%

 

 

220

 

 

 

0.8

%

Total Top 20 Tenants

 

 

 

 

216

 

 

$

93,621

 

 

 

31.0

%

 

 

6,367

 

 

 

22.4

%

 

1

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

*

Subject to a master lease.

Diversification by Brand

Brand

 

Property Type

 

# Properties

 

 

ABR

($'000s)

 

 

ABR as a % of

Total Portfolio

 

 

Square Feet

('000s)

 

 

SF as a % of

Total Portfolio

 

Red Lobster*

 

Casual Dining

 

 

24

 

 

$

7,306

 

 

 

2.4

%

 

 

196

 

 

 

0.7

%

Jack's Family Restaurants*

 

Quick Service Restaurants

 

 

43

 

 

 

7,026

 

 

 

2.3

%

 

 

147

 

 

 

0.5

%

Axcelis

 

Flex and R&D

 

 

1

 

 

 

5,859

 

 

 

1.9

%

 

 

417

 

 

 

1.5

%

Hensley*

 

Distribution & Warehouse

 

 

3

 

 

 

5,756

 

 

 

1.9

%

 

 

577

 

 

 

2.0

%

Bob Evans Farms*1

 

Casual Dining/Food

Processing

 

 

23

 

 

 

5,449

 

 

 

1.8

%

 

 

292

 

 

 

1.0

%

Wendy's#

 

Quick Service Restaurants

 

 

38

 

 

 

5,433

 

 

 

1.8

%

 

 

113

 

 

 

0.4

%

BluePearl Veterinary Partners*

 

Animal Health Services

 

 

12

 

 

 

5,137

 

 

 

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

 

 

 

4,860

 

 

 

1.6

%

 

 

1,302

 

 

 

4.6

%

Siemens

 

Manufacturing/Flex

and R&D

 

 

2

 

 

 

4,718

 

 

 

1.6

%

 

 

545

 

 

 

1.9

%

Total Top 10 Brands

 

 

 

 

190

 

 

 

56,578

 

 

 

18.7

%

 

 

3,899

 

 

 

13.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outback Steakhouse*

 

Casual Dining

 

 

20

 

 

 

4,492

 

 

 

1.5

%

 

 

126

 

 

 

0.5

%

Nestle'

 

Cold Storage

 

 

1

 

 

 

4,409

 

 

 

1.5

%

 

 

310

 

 

 

1.1

%

Arkansas Surgical Hospital

 

Surgical

 

 

1

 

 

 

4,260

 

 

 

1.4

%

 

 

129

 

 

 

0.4

%

Taco Bell#

 

Quick Service Restaurants

 

 

32

 

 

 

4,226

 

 

 

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

 

 

 

4,122

 

 

 

1.4

%

 

 

231

 

 

 

0.8

%

Tractor Supply Co.

 

General Merchandise

 

 

15

 

 

 

3,872

 

 

 

1.3

%

 

 

300

 

 

 

1.1

%

Securus Technologies

 

Corporate Headquarters

 

 

1

 

 

 

3,819

 

 

 

1.2

%

 

 

154

 

 

 

0.5

%

Chiquita

 

Food Processing

 

 

1

 

 

 

3,819

 

 

 

1.2

%

 

 

335

 

 

 

1.2

%

Total Top 20 Brands

 

 

 

 

270

 

 

$

97,904

 

 

 

32.4

%

 

 

6,447

 

 

 

22.7

%

*

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 22 Bob Evans Restaurants, LLC properties.

26


 

 

Diversification by Industry

 

Industry

 

# Properties

 

 

ABR

($'000s)

 

 

ABR as a % of Total Portfolio

 

 

Square Feet ('000s)

 

 

ABR as a % of

Total Portfolio

 

Restaurants

 

 

244

 

 

$

46,018

 

 

 

15.2

%

 

 

1,118

 

 

 

4.0

%

Healthcare Facilities

 

 

88

 

 

 

44,345

 

 

 

14.7

%

 

 

1,738

 

 

 

6.1

%

Food Distributors

 

 

7

 

 

 

12,907

 

 

 

4.3

%

 

 

1,556

 

 

 

5.5

%

Auto Parts & Equipment

 

 

39

 

 

 

12,369

 

 

 

4.1

%

 

 

2,387

 

 

 

8.4

%

Specialized Consumer Services

 

 

47

 

 

 

11,790

 

 

 

3.9

%

 

 

720

 

 

 

2.5

%

Packaged Foods & Meats

 

 

6

 

 

 

11,371

 

 

 

3.7

%

 

 

1,130

 

 

 

4.0

%

Metal & Glass Containers

 

 

8

 

 

 

9,686

 

 

 

3.2

%

 

 

2,206

 

 

 

7.8

%

Healthcare Services

 

 

19

 

 

 

9,152

 

 

 

3.0

%

 

 

522

 

 

 

1.8

%

Home Furnishing Retail

 

 

16

 

 

 

8,711

 

 

 

2.9

%

 

 

1,149

 

 

 

4.1

%

Aerospace & Defense

 

 

6

 

 

 

7,760

 

 

 

2.6

%

 

 

921

 

 

 

3.3

%

Distributors

 

 

12

 

 

 

6,909

 

 

 

2.3

%

 

 

966

 

 

 

3.4

%

Specialty Stores

 

 

17

 

 

 

6,913

 

 

 

2.3

%

 

 

888

 

 

 

3.1

%

Electronic Components

 

 

2

 

 

 

6,658

 

 

 

2.2

%

 

 

466

 

 

 

1.7

%

Air Freight & Logistics

 

 

3

 

 

 

6,494

 

 

 

2.1

%

 

 

436

 

 

 

1.5

%

Industrial Machinery

 

 

16

 

 

 

6,021

 

 

 

2.0

%

 

 

1,174

 

 

 

4.1

%

Other (40 industries)

 

 

125

 

 

 

95,152

 

 

 

31.5

%

 

 

10,894

 

 

 

38.4

%

Untenanted properties

 

 

6

 

 

 

 

 

 

 

 

 

96

 

 

 

0.3

%

Total

 

 

661

 

 

$

302,256

 

 

 

100.0

%

 

 

28,367

 

 

 

100.0

%

 


27


 

 

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

 

 

54

 

 

$

30,771

 

 

 

10.2

%

 

 

3,207

 

 

 

11.3

%

 

 

VA

 

 

13

 

 

 

 

$

4,368

 

 

 

 

 

1.4

%

 

 

 

 

110

 

 

 

 

 

0.4

%

IL

 

 

25

 

 

 

19,339

 

 

 

6.4

%

 

 

1,976

 

 

 

7.0

%

 

 

WA

 

 

15

 

 

 

 

 

4,155

 

 

 

 

 

1.4

%

 

 

 

 

150

 

 

 

 

 

0.5

%

CA

 

 

11

 

 

 

15,735

 

 

 

5.2

%

 

 

1,554

 

 

 

5.5

%

 

 

MO

 

 

9

 

 

 

 

 

3,882

 

 

 

 

 

1.3

%

 

 

 

 

733

 

 

 

 

 

2.6

%

FL

 

 

46

 

 

 

15,663

 

 

 

5.2

%

 

 

801

 

 

 

2.8

%

 

 

KY

 

 

17

 

 

 

 

 

3,473

 

 

 

 

 

1.2

%

 

 

 

 

167

 

 

 

 

 

0.6

%

WI

 

 

32

 

 

 

15,655

 

 

 

5.2

%

 

 

1,611

 

 

 

5.7

%

 

 

LA

 

 

3

 

 

 

 

 

3,128

 

 

 

 

 

1.0

%

 

 

 

 

175

 

 

 

 

 

0.6

%

MI

 

 

35

 

 

 

14,760

 

 

 

4.9

%

 

 

1,439

 

 

 

5.1

%

 

 

NE

 

 

6

 

 

 

 

 

2,959

 

 

 

 

 

1.0

%

 

 

 

 

509

 

 

 

 

 

1.8

%

OH

 

 

35

 

 

 

14,125

 

 

 

4.7

%

 

 

1,369

 

 

 

4.8

%

 

 

MD

 

 

4

 

 

 

 

 

2,882

 

 

 

 

 

1.0

%

 

 

 

 

293

 

 

 

 

 

1.0

%

IN

 

 

30

 

 

 

12,830

 

 

 

4.2

%

 

 

1,765

 

 

 

6.2

%

 

 

MS

 

 

8

 

 

 

 

 

2,736

 

 

 

 

 

0.9

%

 

 

 

 

334

 

 

 

 

 

1.2

%

NC

 

 

34

 

 

 

12,134

 

 

 

4.0

%

 

 

1,245

 

 

 

4.4

%

 

 

NM

 

 

8

 

 

 

 

 

2,731

 

 

 

 

 

0.9

%

 

 

 

 

97

 

 

 

 

 

0.3

%

MN

 

 

20

 

 

 

11,501

 

 

 

3.8

%

 

 

1,757

 

 

 

6.2

%

 

 

IA

 

 

4

 

 

 

 

 

2,704

 

 

 

 

 

0.9

%

 

 

 

 

622

 

 

 

 

 

2.2

%

NY

 

 

26

 

 

 

10,323

 

 

 

3.4

%

 

 

680

 

 

 

2.4

%

 

 

SC

 

 

13

 

 

 

 

 

2,466

 

 

 

 

 

0.8

%

 

 

 

 

308

 

 

 

 

 

1.1

%

TN

 

 

42

 

 

 

10,225

 

 

 

3.4

%

 

 

390

 

 

 

1.4

%

 

 

UT

 

 

3

 

 

 

 

 

2,328

 

 

 

 

 

0.8

%

 

 

 

 

280

 

 

 

 

 

1.0

%

MA

 

 

4

 

 

 

9,994

 

 

 

3.3

%

 

 

1,009

 

 

 

3.5

%

 

 

CT

 

 

2

 

 

 

 

 

1,653

 

 

 

 

 

0.6

%

 

 

 

 

55

 

 

 

 

 

0.2

%

PA

 

 

16

 

 

 

9,785

 

 

 

3.2

%

 

 

1,146

 

 

 

4.0

%

 

 

WV

 

 

8

 

 

 

 

 

1,642

 

 

 

 

 

0.5

%

 

 

 

 

36

 

 

 

 

 

0.1

%

AL

 

 

50

 

 

 

8,761

 

 

 

2.9

%

 

 

206

 

 

 

0.7

%

 

 

MT

 

 

7

 

 

 

 

 

1,544

 

 

 

 

 

0.5

%

 

 

 

 

43

 

 

 

 

 

0.2

%

AZ

 

 

8

 

 

 

8,553

 

 

 

2.8

%

 

 

761

 

 

 

2.7

%

 

 

CO

 

 

3

 

 

 

 

 

1,434

 

 

 

 

 

0.5

%

 

 

 

 

94

 

 

 

 

 

0.3

%

AR

 

 

11

 

 

 

7,380

 

 

 

2.4

%

 

 

282

 

 

 

1.0

%

 

 

NV

 

 

2

 

 

 

 

 

1,311

 

 

 

 

 

0.4

%

 

 

 

 

81

 

 

 

 

 

0.3

%

GA

 

 

19

 

 

 

6,554

 

 

 

2.2

%

 

 

976

 

 

 

3.4

%

 

 

ND

 

 

2

 

 

 

 

 

933

 

 

 

 

 

0.3

%

 

 

 

 

28

 

 

 

 

 

0.1

%

OK

 

 

18

 

 

 

6,440

 

 

 

2.1

%

 

 

786

 

 

 

2.8

%

 

 

DE

 

 

3

 

 

 

 

 

663

 

 

 

 

 

0.2

%

 

 

 

 

35

 

 

 

 

 

0.1

%

KS

 

 

10

 

 

 

5,407

 

 

 

1.8

%

 

 

639

 

 

 

2.3

%

 

 

WY

 

 

1

 

 

 

 

 

307

 

 

 

 

 

0.1

%

 

 

 

 

21

 

 

 

 

 

0.1

%

NJ

 

 

3

 

 

 

4,900

 

 

 

1.6

%

 

 

366

 

 

 

1.3

%

 

 

Total US

 

 

660

 

 

 

 

$

298,134

 

 

 

 

 

98.6

%

 

 

 

 

28,136

 

 

 

 

 

99.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Canada

 

 

1

 

 

 

 

 

4,122

 

 

 

 

 

1.4

%

 

 

 

 

231

 

 

 

 

 

0.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total

 

 

661

 

 

 

 

$

302,256

 

 

 

 

 

100.0

%

 

 

 

 

28,367

 

 

 

 

 

100.0

%

 


28


 

 

Lease Expirations

As of March 31, 2021, the ABR weighted average remaining term of our leases was approximately 10.6 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Approximately 44.9% of our rental revenue was derived from leases that will expire after 2030, and no more than 9.0% of our rental revenue was derived from leases that expire in any single year prior to 2030. The following chart sets forth our lease expirations based upon the terms of the leases in place as of March 31, 2021.

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

 

4

 

3

 

6

 

11

 

19

 

34

 

27

 

35

 

61

 

86

 

21

 

44

 

41

 

31

 

14

 

71

 

24

 

33

 

12

 

41

 

37

Number of

   leases

 

5

 

4

 

7

 

11

 

22

 

26

 

23

 

29

 

29

 

42

 

16

 

26

 

15

 

16

 

10

 

8

 

9

 

29

 

7

 

7

 

5

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

Expiration Year

 

# Properties

 

 

ABR

($'000s)

 

 

ABR as a % of

Total Portfolio

 

 

Square Feet

('000s)

 

 

SF as a % of

Total Portfolio

 

2021

 

 

4

 

 

$

964

 

 

 

0.3

%

 

 

46

 

 

 

0.2

%

2022

 

 

3

 

 

 

2,409

 

 

 

0.8

%

 

 

86

 

 

 

0.3

%

2023

 

 

6

 

 

 

4,841

 

 

 

1.6

%

 

 

515

 

 

 

1.8

%

2024

 

 

11

 

 

 

13,662

 

 

 

4.5

%

 

 

1,689

 

 

 

6.0

%

2025

 

 

19

 

 

 

7,833

 

 

 

2.6

%

 

 

682

 

 

 

2.4

%

2026

 

 

34

 

 

 

18,586

 

 

 

6.1

%

 

 

1,404

 

 

 

4.9

%

2027

 

 

27

 

 

 

22,917

 

 

 

7.6

%

 

 

2,010

 

 

 

7.1

%

2028

 

 

35

 

 

 

27,171

 

 

 

9.0

%

 

 

2,736

 

 

 

9.6

%

2029

 

 

61

 

 

 

19,357

 

 

 

6.4

%

 

 

2,538

 

 

 

8.9

%

2030

 

 

86

 

 

 

49,088

 

 

 

16.2

%

 

 

4,927

 

 

 

17.4

%

2031

 

 

21

 

 

 

7,145

 

 

 

2.4

%

 

 

725

 

 

 

2.6

%

2032

 

 

44

 

 

 

26,225

 

 

 

8.7

%

 

 

3,014

 

 

 

10.6

%

2033

 

 

41

 

 

 

16,385

 

 

 

5.4

%

 

 

1,693

 

 

 

6.0

%

2034

 

 

31

 

 

 

5,479

 

 

 

1.8

%

 

 

361

 

 

 

1.3

%

2035

 

 

14

 

 

 

10,498

 

 

 

3.5

%

 

 

1,471

 

 

 

5.2

%

2036

 

 

71

 

 

 

16,914

 

 

 

5.6

%

 

 

969

 

 

 

3.4

%

2037

 

 

24

 

 

 

17,256

 

 

 

5.7

%

 

 

1,367

 

 

 

4.8

%

2038

 

 

33

 

 

 

6,805

 

 

 

2.3

%

 

 

306

 

 

 

1.1

%

2039

 

 

12

 

 

 

8,988

 

 

 

3.0

%

 

 

933

 

 

 

3.3

%

2040

 

 

41

 

 

 

6,887

 

 

 

2.3

%

 

 

347

 

 

 

1.2

%

Thereafter

 

 

37

 

 

 

12,846

 

 

 

4.2

%

 

 

452

 

 

 

1.6

%

Untenanted properties

 

 

6

 

 

 

 

 

 

 

 

 

96

 

 

 

0.3

%

Total

 

 

661

 

 

$

302,256

 

 

 

100.0

%

 

 

28,367

 

 

 

100.0

%

 

29


 

 

Results of Operations

The following discussion includes the results of our operations for the periods presented. We have included an analysis of the three months ended March 31, 2021, as compared to the three months ended December 31, 2020 and March 31, 2020. We have included the comparison of the immediately preceding quarter given our Internalization and initial public offering’s (“IPO”) significant impact to our results of operations and financial condition, and therefore comparability, of the prior year periods. We believe the quarter-over-quarter analysis is beneficial to investors as it compares the results of operations on a more comparable basis, and aligns with our strategic growth priorities under a different leverage and liquidity profile going forward.

Three Months Ended March 31, 2021 Compared to Three Months Ended December 31, 2020

Lease Revenues, net

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

December 31,

 

 

Increase/(Decrease)

 

(in thousands)

 

2021

 

 

2020

 

 

$

 

 

%

 

Contractual rental amounts billed for operating leases

 

$

73,245

 

 

$

72,558

 

 

$

687

 

 

 

0.9

%

Adjustment to recognize contractual operating lease

   billings on a straight-line basis

 

 

4,367

 

 

 

4,256

 

 

 

111

 

 

 

2.6

%

Variable rental amounts earned

 

 

91

 

 

 

455

 

 

 

(364

)

 

 

(80.0

)%

Earned income from direct financing leases

 

 

730

 

 

 

756

 

 

 

(26

)

 

 

(3.4

)%

Earned income from sales-type leases

 

 

14

 

 

 

5

 

 

 

9

 

 

>100%

 

Operating expenses billed to tenants

 

 

4,388

 

 

 

4,389

 

 

 

(1

)

 

 

(0.0

)%

Other income from real estate transactions

 

 

5

 

 

 

(16

)

 

 

21

 

 

>(100)%

 

Adjustment to revenue recognized for uncollectible

   rental amounts billed

 

 

(142

)

 

 

(112

)

 

 

(30

)

 

 

26.8

%

Total Lease revenues, net

 

$

82,698

 

 

$

82,291

 

 

$

407

 

 

 

0.5

%

The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through accretive property acquisitions during the fourth quarter of 2020. 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 materially contribute to Lease revenues, net for the three months ended December 31, 2020.

Operating Expenses

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

December 31,

 

 

Increase/(Decrease)

 

(in thousands)

 

2021

 

 

2020

 

 

$

 

 

%

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

30,713

 

 

$

30,182

 

 

$

531

 

 

 

1.8

%

Property and operating expense

 

 

4,605

 

 

 

4,986

 

 

 

(381

)

 

 

(7.6

)%

General and administrative

 

 

10,633

 

 

 

9,232

 

 

 

1,401

 

 

 

15.2

%

Provision for impairment of investment in rental properties

 

 

2,012

 

 

 

1,678

 

 

 

334

 

 

 

19.9

%

Total operating expenses

 

$

47,963

 

 

$

46,078

 

 

$

1,885

 

 

 

4.1

%

General and administrative

The increase in general and administrative expenses mainly reflects increased severance associated with the departure of an executive officer during the three months ended March 31, 2021.


30


 

 

Provision for impairment of investment in rental properties

During the three months ended March 31, 2021, we recognized $2.0 million of impairment on our investments in rental properties, compared to $1.7 million during the three months ended December 31, 2020. The following table presents the impairment charges for their respective period:

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

December 31,

 

(in thousands, except number of properties)

 

2021

 

 

2020

 

Number of properties

 

 

1

 

 

 

1

 

Carrying value prior to impairment charge

 

 

2,818

 

 

$

4,228

 

Fair value

 

 

806

 

 

 

2,550

 

Impairment charge

 

$

2,012

 

 

$

1,678

 

The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.

Other income (expenses)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

December 31,

 

 

Increase/(Decrease)

 

(in thousands)

 

2021

 

 

2020

 

 

$

 

 

%

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

5

 

 

$

4

 

 

$

1

 

 

 

25.0

%

Interest expense

 

 

(16,108

)

 

 

(17,123

)

 

 

(1,015

)

 

 

(5.9

)%

Cost of debt extinguishment

 

 

(126

)

 

 

(3

)

 

 

123

 

 

>100%

 

Gain on sale of real estate

 

 

4,733

 

 

 

5,260

 

 

 

(527

)

 

 

(10.0

)%

Income taxes

 

 

(413

)

 

 

141

 

 

 

(554

)

 

>(100)%

 

Internalization expenses

 

 

 

 

 

(182

)

 

 

(182

)

 

 

(100.0

)%

Change in fair value of earnout liability

 

 

1,124

 

 

 

(6,706

)

 

 

7,830

 

 

>100%

 

Other income (expenses)

 

 

10

 

 

 

15

 

 

 

(5

)

 

 

(33.3

)%

Interest expense

The decrease in interest expense reflects a decrease in our weighted average cost of borrowings combined with decreased average outstanding borrowings in the comparable period. In January 2021, we received an initial credit rating of BBB with a stable outlook from S&P Global Ratings (“S&P”), which had the effect of lowering the applicable margin on our then 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 Revolving Credit Facility borrowings. We also repriced our 2026 Unsecured Term Loan in March 2021, reducing the applicable margin by an additional 60 basis points, and simultaneously repaid $50 million.

Change in fair value of earnout liability

As part of the Internalization, we may be required to pay additional earnout consideration if certain milestones are achieved during the Earnout Periods. We record the fair value of this contingent consideration in the Condensed Consolidated Balance Sheets, and update the fair value at the end of each reporting period. To the extent the change in fair value relates to a portion of the earnout consideration that is classified as a liability, we record the change through earnings. We estimate the fair value of the earnout liability by 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 us to make various assumptions about future share prices, and other items that are unobservable and are considered Level 3 inputs in the fair value hierarchy. The change in the fair value of the earnout liability during the three months ended March 31, 2021, reflects a decrease in our share price as compared to December 31, 2020.

Net income and Net earnings per diluted share

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

December 31,

 

 

Increase/(Decrease)

 

(in thousands, except per share data)

 

2021

 

 

2020

 

 

$

 

 

%

 

Net income

 

$

23,960

 

 

$

17,619

 

 

$

6,341

 

 

 

36.0

%

Net earnings per diluted share

 

 

0.15

 

 

 

0.11

 

 

 

0.04

 

 

 

36.4

%

31


 

 

The increase in net income is primarily due to a $7.8 million increase in income from the change in fair value of our earnout liability and a $1.0 million decrease in interest expense. These factors were partially offset by a $1.4 million increase in general and administrative expenses.

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.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Lease Revenues, net

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

Increase/(Decrease)

 

(in thousands)

 

2021

 

 

2020

 

 

$

 

 

%

 

Contractual rental amounts billed for operating leases

 

$

73,245

 

 

$

72,828

 

 

$

417

 

 

 

0.6

%

Adjustment to recognize contractual operating lease

   billings on a straight-line basis

 

 

4,367

 

 

 

1,665

 

 

 

2,702

 

 

>100%

 

Variable rental amounts earned

 

 

91

 

 

 

3

 

 

 

88

 

 

>100%

 

Earned income from direct financing leases

 

 

730

 

 

 

987

 

 

 

(257

)

 

 

(26.0

)%

Earned income from sales-type leases

 

 

14

 

 

 

 

 

 

14

 

 

 

100.0

%

Operating expenses billed to tenants

 

 

4,388

 

 

 

3,732

 

 

 

656

 

 

 

17.6

%

Other income from real estate transactions

 

 

5

 

 

 

49

 

 

 

(44

)

 

 

(89.8

)%

Adjustment to revenue recognized for uncollectible

   rental amounts billed

 

 

(142

)

 

 

(1,033

)

 

 

891

 

 

 

(86.3

)%

Total Lease revenues, net

 

$

82,698

 

 

$

78,231

 

 

$

4,467

 

 

 

5.7

%

 

The increase in Lease revenues, net, was primarily attributable to growth in our real estate portfolio through accretive property acquisitions during 2020. 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 to Lease revenues, net for the three months ended March 31, 2020.

Operating Expenses

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

Increase/(Decrease)

 

(in thousands)

 

2021

 

 

2020

 

 

$

 

 

%

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

30,713

 

 

$

31,219

 

 

$

(506

)

 

 

(1.6

)%

Asset management fees

 

 

 

 

 

2,461

 

 

 

(2,461

)

 

 

(100.0

)%

Property management fees

 

 

 

 

 

1,275

 

 

 

(1,275

)

 

 

(100.0

)%

Property and operating expense

 

 

4,605

 

 

 

4,115

 

 

 

490

 

 

 

11.9

%

General and administrative

 

 

10,633

 

 

 

5,842

 

 

 

4,791

 

 

 

82.0

%

Provision for impairment of investment in rental properties

 

 

2,012

 

 

 

2,133

 

 

 

(121

)

 

 

(5.7

)%

Total operating expenses

 

$

47,963

 

 

$

47,045

 

 

$

918

 

 

 

2.0

%

Asset management fees and Property management fees

The decrease in asset management fees and property management fees was due to the completion of the Internalization in February 2020, which terminated the associated agreements with our third-party manager.

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, along with associated general and administrative expenses for the three months ended March 31, 2020.


32


 

 

Provision for impairment of investment in rental properties

During the three months ended March 31, 2021, we recognized $2.0 million of impairment on our investments in rental properties, compared to $2.1 million during the three months ended March 31, 2020. The following table presents the impairment charges for their respective periods:

 

 

For the Three Months Ended

 

 

 

March 31,

 

(in thousands, except number of properties)

 

2021

 

 

2020

 

Number of properties

 

 

1

 

 

 

1

 

Carrying value prior to impairment charge

 

$

2,818

 

 

$

22,133

 

Fair value

 

 

806

 

 

 

20,000

 

Impairment charge

 

$

2,012

 

 

$

2,133

 

The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.

Other income (expenses)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

Increase/(Decrease)

 

(in thousands)

 

2021

 

 

2020

 

 

$

 

 

%

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

5

 

 

$

9

 

 

$

(4

)

 

 

(44.4

)%

Interest expense

 

 

(16,108

)

 

 

(20,991

)

 

 

(4,883

)

 

 

(23.3

)%

Cost of debt extinguishment

 

 

(126

)

 

 

(22

)

 

 

104

 

 

>100%

 

Gain on sale of real estate

 

 

4,733

 

 

 

7,619

 

 

 

(2,886

)

 

 

(37.9

)%

Income taxes

 

 

(413

)

 

 

(549

)

 

 

(136

)

 

 

(24.8

)%

Internalization expenses

 

 

 

 

 

(1,205

)

 

 

(1,205

)

 

 

(100.0

)%

Change in fair value of earnout liability

 

 

1,124

 

 

 

(4,177

)

 

 

5,301

 

 

>100%

 

Other income (expenses)

 

 

10

 

 

 

(22

)

 

 

32

 

 

>100%

 

Interest expense

The decrease in interest expense primarily reflects a decrease in our average outstanding borrowings, combined with a decrease in our weighted average cost of borrowings. In September 2020, we used the proceeds of our IPO to repay $456.7 million of outstanding borrowings, including accrued interest, significantly reducing our leverage profile. In January 2021, we received an initial credit rating of BBB with a stable outlook from S&P, which had the effect of lowering the applicable margin on our then existing $965 million of bank loans by 25 basis points beginning in February 2021. We also repriced and partially repaid our 2026 Unsecured Term Loan in March 2021, reducing the applicable margin and principal balance by an additional 60 basis points and $50 million, respectively.

Gain on sale of real estate

Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months ended March 31, 2021, we recognized gains of $4.7 million on the sale of eight properties, compared to gains of $7.6 million on the sale of 10 properties during the three months ended March 31, 2020.

Internalization expenses

During the three months ended March 31, 2020, we incurred $1.2 million of third-party fees and consulting expenses associated with the Internalization that closed on February 7, 2020. We did not incur these expenses during the three months ended March 31, 2021.

Change in fair value of earnout liability

The change in the fair value of the earnout liability during the three months ended March 31, 2021, reflects a decrease in our period end share price.

33


 

Net income and Net earnings per diluted share

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

Increase/(Decrease)

 

(in thousands, except per share data)

 

2021

 

 

2020

 

 

$

 

 

%

 

Net income

 

$

23,960

 

 

$

11,848

 

 

$

12,112

 

 

>100%

 

Net earnings per diluted share

 

 

0.15

 

 

 

0.10

 

 

 

0.05

 

 

 

50.0

%

 

The increase in net income, is primarily due to a $5.3 million increase in income from the change in fair value of our earnout liability, a $4.9 million decrease in interest expense, revenue growth of $4.5 million, and a $1.2 million decrease in internalization expenses. These factors were partially offset by a $2.9 million decrease in the gain on sale of real estate.

GAAP net income includes items such as gain or loss on sale of real estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons.

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 ratings of BBB from S&P and Baa3 from Moody’s Investors Service (“Moody’s”). 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 March 31, 2021, we had total debt outstanding of $1.5 billion, Net Debt of $1.5 billion, and a Net Debt to Annualized Adjusted EBITDAre ratio of approximately 5.25x.

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.

As detailed in the contractual obligations table below, we have approximately $61.7 million of expected obligations due to be paid throughout the remainder of 2021, primarily consisting of $17.2 million of mortgage maturities, and $43.1 million of interest expense due, including the impact of our interest rate swaps. We expect our cash provided by operating activities, as discussed below, will be sufficient to pay for our current obligations including interest expense on our borrowings. We expect to either repay the maturing mortgages with available cash on hand generated from our results of operations or borrowings under our Revolving Credit Facility, or refinance with property-level borrowings.  

34


 

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 prior to our IPO.

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. Our $60 million 2022 Unsecured Term Loan has a short-term maturity date of February 2022. We expect to either repay the 2022 Unsecured Term Loan with available cash on hand, or with borrowings under our Revolving Credit Facility. With outstanding borrowings of $15 million at March 31, 2021, we have $885 million of available capacity under our Revolving Credit Facility.

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 continue to invest in accretive real estate properties, we expect 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. As of March 31, 2021, we have successfully deployed the remaining proceeds from our IPO.

Unsecured Indebtedness and Capital Markets Activities as of and for the Three Months Ended March 31, 2021

The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and Senior Notes at March 31, 2021.

 

(in thousands, except interest rates)

 

Outstanding

Balance

 

 

Interest

Rate

 

 

Maturity

Date

Revolving Credit Facility

 

$

15,000

 

 

daily LIBOR + 1.00%

 

 

Sept. 2023

2022 Unsecured Term Loan

 

 

60,000

 

 

one-month LIBOR + 1.00%

 

 

Feb. 2022

2023 Unsecured Term Loan

 

 

265,000

 

 

one-month LIBOR + 1.10%

 

 

Jan. 2023

2024 Unsecured Term Loan

 

 

190,000

 

 

one-month LIBOR + 1.00%

 

 

Jun. 2024

2026 Unsecured Term Loan

 

 

400,000

 

 

one-month LIBOR + 1.00%

 

 

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

 

 

1,405,000

 

 

 

 

 

 

 

As announced on January 21, 2021, S&P assigned the Company an initial credit rating of 'BBB' with a stable outlook. As a result of this credit rating, the margin of our existing bank loans was reduced by 25 basis points beginning in February 2021, the applicable margin on borrowings under our Revolving Credit Facility was reduced by 20 basis points, and our access to a diverse set of advantageous funding sources should expand. During the quarter, Moody’s reaffirmed our ‘Baa3’ credit rating and updated their outlook from ‘stable’ to ‘positive.

35


 

On March 12, 2021, we amended our $450 million 2026 Unsecured Term Loan, reducing the applicable margin an additional 60 basis points based on our current credit rating. In connection with the amendment, we repaid in full the outstanding commitments for two lenders and elected to repay an additional $10 million in outstanding principal, bringing the outstanding balance to $400 million as of March 31, 2021.    

On March 31, 2021, we drew $15 million on our Revolving Credit Facility to fund an acquisition. We have $885 million of remaining capacity on our Revolving Credit Facility as of March 31, 2021.

Debt Covenants

We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of March 31, 2021, 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 March 31, 2021, we had 32 interest rate swaps outstanding in an aggregate notional amount of $824.7 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.

Cash Flows

Cash and cash equivalents and restricted cash totaled $18.4 million, $110.7 million, and $96.7 million at March 31, 2021, December 31, 2020 and March 31, 2020, respectively. The table below shows information concerning cash flows for the three months ended March 31, 2021, December 31, 2020, and March 31, 2020:

 

 

 

For the Three Months Ended

 

(In thousands)

 

March 31,

2021

 

 

December 31,

2020

 

 

March 31,

2020

 

Net cash provided by operating activities

 

$

51,780

 

 

$

46,064

 

 

$

40,319

 

Net cash (used in) provided by investing activities

 

 

(67,661

)

 

 

(76,443

)

 

 

4,474

 

Net cash (used in) provided by financing activities

 

 

(76,497

)

 

 

32,120

 

 

 

31,608

 

Increase in cash and cash equivalents and restricted cash

 

$

(92,378

)

 

$

1,741

 

 

$

76,401

 

 

The increase in net cash provided by operating activities during the three months ended March 31, 2021 as compared to the three months ended December 31, 2020 and March 31, 2020, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization.

The change in net cash (used in) provided by investing activities during the three months ended March 31, 2021 as compared to the three months ended December 31, 2020, was mainly due to decreased acquisition volume quarter-over-quarter. The change in net cash (used in) provided by investing activities during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, was mainly due to increased acquisition volume and decreased proceeds from disposal of properties in 2021 offset by decrease in cash paid in connection with the Internalization.

36


 

 

The change in net cash (used in) provided by financing activities during the three months ended March 31, 2021 as compared to the three months ended December 31, 2020 mainly reflects a net repayment of debt in 2021 as compared to net proceeds from our IPO in 2020. During the three months ended March 31, 2021, we made a $50 million paydown on our 2026 Unsecured Term Loan using cash on hand and remaining proceeds from our IPO in 2020. During the three months ended December 31, 2020 our underwriters partially exercised their overallotment option, resulting in the issuance of an additional 3.5 million shares for net proceeds of approximately $55.9 million.  The change in net cash (used in) provided by financing activities during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, mainly reflects a net repayment of debt in 2021, compared to net borrowings during the three months ended March 31, 2020.

Contractual Obligations

The following table provides information with respect to our contractual commitments and obligations as of March 31, 2021 (in thousands). Refer to the discussion in the Liquidity and Capital Resources section above for further discussion over our short and long-term obligations.

 

Year of

Maturity

 

Term Loans

 

 

Revolving Credit Facility(a)

 

 

Senior

Notes

 

 

Mortgages

and Notes

Payable

 

 

Interest

Expense(b)

 

 

Tenant

Improvement

Allowances(c)

 

 

Operating

Leases

 

 

Total

 

Remainder of 2021

 

$

 

 

$

 

 

$

 

 

$

17,169

 

 

$

43,052

 

 

$

903

 

 

$

548

 

 

$

61,672

 

2022

 

 

60,000

 

 

 

 

 

 

 

 

 

2,907

 

 

 

55,574

 

 

 

 

 

 

690

 

 

 

119,171

 

2023

 

 

265,000

 

 

 

15,000

 

 

 

 

 

 

7,582

 

 

 

51,007

 

 

 

 

 

 

505

 

 

 

339,094

 

2024

 

 

190,000

 

 

 

 

 

 

 

 

 

2,260

 

 

 

45,921

 

 

 

 

 

 

120

 

 

 

238,301

 

2025

 

 

 

 

 

 

 

 

 

 

 

20,195

 

 

 

42,362

 

 

 

 

 

 

121

 

 

 

62,678

 

Thereafter

 

 

400,000

 

 

 

 

 

 

475,000

 

 

 

56,717

 

 

 

82,083

 

 

 

 

 

 

2,290

 

 

 

1,016,090

 

Total

 

$

915,000

 

 

$

15,000

 

 

$

475,000

 

 

$

106,830

 

 

$

319,999

 

 

$

903

 

 

$

4,274

 

 

$

1,837,006

 

(a)

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.

(b)

Interest expense is projected based on the outstanding borrowings and interest rates in effect as of March 31, 2021. This amount includes the impact of interest rate swap agreements.

(c)

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

At March 31, 2021 and December 31, 2020, investment in rental property of $172.4 million and $173.5 million, respectively, was pledged as collateral against our mortgages.

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 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, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. Based on values as of March 31, 2021, taxable sales of the applicable properties would trigger liability under the four agreements of approximately $22.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above.

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 Adjusted Funds From Operations (“AFFO”), we modify the Nareit computation of FFO to include other adjustments to GAAP net income related to certain non-cash and non-recurring revenues and expenses, including straight-line rents, 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 excluding such items assists

37


 

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.

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

 

 

 

For the Three Months Ended

 

(in thousands, except per share data)

 

March 31,

2021

 

 

December 31,

2020

 

 

March 31,

2020

 

Net income

 

$

23,960

 

 

$

17,619

 

 

$

11,848

 

Real property depreciation and amortization

 

 

30,690

 

 

 

30,161

 

 

 

31,210

 

Gain on sale of real estate

 

 

(4,733

)

 

 

(5,260

)

 

 

(7,619

)

Provision for impairment on investment in rental properties

 

 

2,012

 

 

 

1,678

 

 

 

2,133

 

FFO

 

$

51,929

 

 

$

44,198

 

 

$

37,572

 

Straight-line rent adjustment

 

 

(4,632

)

 

 

(5,125

)

 

 

(1,612

)

Adjustment to provision for credit losses

 

 

(1

)

 

 

(6

)

 

 

(17

)

Cost of debt extinguishment

 

 

126

 

 

 

3

 

 

 

22

 

Amortization of debt issuance costs

 

 

914

 

 

 

917

 

 

 

888

 

Amortization of net mortgage premiums

 

 

(35

)

 

 

(36

)

 

 

(35

)

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

 

 

(41

)

 

 

(41

)

 

 

(42

)

Amortization of lease intangibles

 

 

(728

)

 

 

(1,150

)

 

 

(1,138

)

Internalization expenses

 

 

 

 

 

182

 

 

 

1,205

 

Stock-based compensation

 

 

1,769

 

 

 

1,193

 

 

 

 

Severance

 

 

1,243

 

 

 

68

 

 

 

26

 

Change in fair value of earnout liability

 

 

(1,124

)

 

 

6,706

 

 

 

4,177

 

Other expenses

 

 

(10

)

 

 

(15

)

 

 

22

 

AFFO

 

$

49,410

 

 

$

46,894

 

 

$

41,068

 

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

38


 

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.

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

 

 

 

For the Three Months Ended

 

(in thousands)

 

March 31,

2021

 

 

December 31,

2020

 

 

March 31,

2020

 

Net income

 

$

23,960

 

 

$

17,619

 

 

$

11,848

 

Depreciation and amortization

 

 

30,713

 

 

 

30,182

 

 

 

31,219

 

Interest expense

 

 

16,108

 

 

 

17,123

 

 

 

20,991

 

Income taxes

 

 

413

 

 

 

(141

)

 

 

549

 

EBITDA

 

$

71,194

 

 

$

64,783

 

 

$

64,607

 

Provision for impairment of investment in

   rental properties

 

 

2,012

 

 

 

1,678

 

 

 

2,133

 

Gain on sale of real estate

 

 

(4,733

)

 

 

(5,260

)

 

 

(7,619

)

EBITDAre

 

$

68,473

 

 

$

61,201

 

 

$

59,121

 

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

 

(in thousands)

 

March 31,

2021

 

 

December 31,

2020

 

 

March 31,

2020

 

EBITDAre

 

$

68,473

 

 

$

61,201

 

 

$

59,121

 

Adjustment for current quarter acquisition activity (a)

 

 

1,365

 

 

 

1,703

 

 

 

 

Adjustment for current quarter disposition activity (b)

 

 

(278

)

 

 

(318

)

 

 

(285

)

Adjustment to exclude non-recurring and other expenses (c)

 

 

2,100

 

 

 

182

 

 

 

1,205

 

Adjustment to exclude change in fair value of earnout liability

 

 

(1,124

)

 

 

6,706

 

 

 

4,177

 

Adjustment exclude write-off of accrued rental income

 

 

442

 

 

 

242

 

 

 

3,993

 

Adjustment to exclude cost of debt extinguishments

 

 

126

 

 

 

 

 

 

22

 

Adjusted EBITDAre

 

$

71,104

 

 

$

69,716

 

 

$

68,233

 

Annualized EBITDAre

 

$

273,888

 

 

$

244,805

 

 

$

236,484

 

Annualized Adjusted EBITDAre

 

$

284,414

 

 

$

278,867

 

 

$

272,932

 

(a)

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

(b)

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

(c)

Amounts include $1.2 million of severance and $0.9 million of accelerated stock-based compensation associated with the departure of executive officers in 2021, and expense directly associated with the Internalization in 2020.

39


 

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:

 

(in thousands)

 

March 31,

2021

 

 

December 31,

2020

 

 

March 31,

2020

 

Debt

 

 

 

 

 

 

 

 

 

 

 

 

Revolving Credit Facility

 

$

15,000

 

 

$

 

 

$

353,300

 

Unsecured term notes, net

 

 

1,383,283

 

 

 

1,433,796

 

 

 

1,672,587

 

Mortgages and notes payable, net

 

 

106,559

 

 

 

107,382

 

 

 

110,464

 

Debt issuance costs

 

 

6,988

 

 

 

6,489

 

 

 

7,767

 

Gross Debt

 

 

1,511,830

 

 

 

1,547,667

 

 

 

2,144,118

 

Cash and cash equivalents

 

 

(10,205

)

 

 

(100,486

)

 

 

(93,151

)

Restricted cash

 

 

(8,145

)

 

 

(10,242

)

 

 

(3,561

)

Net Debt

 

$

1,493,480

 

 

$

1,436,939

 

 

$

2,047,406

 

Net Debt to Annualized  EBITDAre

 

5.45x

 

 

5.87x

 

 

8.66x

 

Net Debt to Annualized Adjusted EBITDAre

 

5.25x

 

 

5.15x

 

 

7.50x

 

Critical Accounting Policies

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Condensed Consolidated Financial Statements 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,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We believe there have been no significant changes during the three months ended March 31, 2021, to the items that we disclosed as our critical accounting policies in our 2020 Annual Report on Form 10-K.

Impact of Recent Accounting Pronouncements

For information on the impact of recent accounting pronouncements on our business, see Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks, one of the most predominant of which is a change in interest rates. Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variable-rate debt. Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced. We attempt to manage interest rate risk by entering into long-term fixed rate debt or by entering into interest rate swaps to convert certain variable-rate debt to a fixed rate. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. Further information concerning our interest rate swaps can be found in Note 11 in our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q.

Our fixed-rate debt includes our Senior Notes, mortgages, and variable-rate debt converted to a fixed rate with the use of interest rate swaps. Our fixed-rate debt and outstanding interest rate swaps had carrying values and fair values of approximately $1.4 billion and $1.5 billion, respectively, as of March 31, 2021. Changes in market interest rates impact the fair value of our fixed-rate debt and interest rate swaps, but they have no impact on interest incurred or on cash flows. For instance, if interest rates were to increase 1%, and the fixed-rate debt balance were to remain constant, we would expect the fair value of our debt to decrease, similar to how the price of a bond decreases as interest rates rise. A 1% increase in market interest rates would have resulted in a decrease in the fair value of our fixed-rate debt and interest rate swaps of approximately $74.5 million as of March 31, 2021.

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Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on LIBOR plus an applicable margin, and totaled $934.7 million as of March 31, 2021, of which $824.7 million was swapped to a fixed rate by our use of interest rate swaps. Taking into account the effect of our interest rate swaps, a 1% increase or decrease in interest would have a corresponding $1.1 million increase or decrease in interest expense annually.

With the exception of our interest rate swap transactions, we have not engaged in transactions in derivative financial instruments or derivative commodity instruments.

As of March 31, 2021, our financial instruments were not exposed to significant market risk due to foreign currency exchange risk.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of and for the quarter ended March 31, 2021, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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    Part II – OTHER INFORMATION

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 1A.  Risk Factors.

There have been no material changes from the risk factors set forth in our Form 10-K.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities.

None.

Item 3.Defaults Upon Senior Securities.

None.

Item 4.Mine Safety Disclosures.

Not applicable.

Item 5.Other Information.

None.

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Item 6.Exhibits

 

No.

 

Description

 

 

 

3.1

 

Articles of Incorporation of Broadstone Net Lease, Inc. (filed as Exhibit 3.1 to the Corporation’s Registration Statement on Form 10 filed April 24, 2017 and incorporated herein by reference)

 

 

 

3.2

 

Articles of Amendment of Broadstone Net Lease, Inc. (filed as Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)

 

 

 

3.3

 

Articles Supplementary of Broadstone Net Lease, Inc. (filed as Exhibit 3.2 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)

 

 

 

3.4

 

Articles of Amendment of Broadstone Net Lease, Inc. (filed as Exhibit 3.3 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)

 

 

 

3.5

 

Second Amended and Restated Bylaws of Broadstone Net Lease, Inc., adopted March 23, 2020 (filed as Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed March 25, 2020 and incorporated herein by reference)

 

 

 

10.1*

 

Form of Broadstone Net Lease, Inc. 2020 Omnibus Equity and Incentive Plan Restricted Stock Unit Award Agreement

 

 

 

10.2

 

Third Amendment to Capital One Term Loan Agreement, dated as of March 12, 2021, by and among Broadstone Net Lease, Inc., Broadstone Net Lease, Capital One, National Association, as administrative agent, and the lenders party thereto (filed as Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed March 18, 2021 and incorporated herein by reference)

 

 

 

31.1*

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1*†

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2*†

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

*

Filed herewith.

In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

 

43


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

BROADSTONE NET LEASE, INC.

 

 

 

Date: May 5, 2021

 

/s/ Christopher J. Czarnecki

 

 

Christopher J. Czarnecki

 

 

Chief Executive Officer and President

 

 

 

Date: May 5, 2021

 

/s/ Ryan M. Albano

 

 

Ryan M. Albano

 

 

Executive Vice President and Chief Financial Officer

 

44