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EPRT Essential Properties Realty Trust

Filed: 3 May 21, 4:52pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________________________________________________________
FORM 10-Q
_____________________________________________________________________________________________________________
(Mark One)
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
For the transition period from               to          
Commission File Number 001-38530
______________________________________________________________________________________________________
Essential Properties Realty Trust, Inc.

(Exact name of Registrant as specified in its Charter)
______________________________________________________________________________________________________
Maryland82-4005693
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
902 Carnegie Center Blvd., Suite 520

Princeton, New Jersey08540
(Address of Principal Executive Offices)(Zip Code)
Registrant’s telephone number, including area code: (609) 436-0619
______________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.01 par valueEPRTNew 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 x No o 
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 x No o 
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 filerxAccelerated filero
Non-accelerated fileroSmaller 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. o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No x 
As of May 3, 2021, the registrant had 117,496,747 shares of common stock, $0.01 par value per share, outstanding.


Table of Contents
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ESSENTIAL PROPERTIES REALTY TRUST, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
(In thousands, except share and per share data)
March 31,
2021
December 31,
2020
(Unaudited)
ASSETS
Investments:
Real estate investments, at cost:
Land and improvements$790,395 $741,254 
Building and improvements1,631,763 1,519,665 
Lease incentives14,192 14,297 
Construction in progress4,029 3,908 
Intangible lease assets83,030 80,271 
Total real estate investments, at cost2,523,409 2,359,395 
Less: accumulated depreciation and amortization(150,835)(136,097)
Total real estate investments, net2,372,574 2,223,298 
Loans and direct financing lease receivables, net176,025 152,220 
Real estate investments held for sale, net17,058 
Net investments2,548,599 2,392,576 
Cash and cash equivalents42,842 26,602 
Restricted cash1,974 6,388 
Straight-line rent receivable, net41,475 37,830 
Rent receivables, prepaid expenses and other assets, net27,827 25,406 
Total assets (1)
$2,662,717 $2,488,802 
LIABILITIES AND EQUITY
Secured borrowings, net of deferred financing costs$170,161 $171,007 
Unsecured term loans, net of deferred financing costs626,450 626,272 
Revolving credit facility138,000 18,000 
Intangible lease liabilities, net10,046 10,168 
Dividend payable26,398 25,703 
Derivative liabilities20,893 38,912 
Accrued liabilities and other payables16,486 16,792 
Total liabilities (1)
1,008,434 906,854 
Commitments and contingencies (see Note 11)
Stockholders' equity:
Preferred stock, $0.01 par value; 150,000,000 authorized; NaN issued and outstanding as of March 31, 2021 and December 31, 2020
Common stock, $0.01 par value; 500,000,000 authorized; 109,171,639 and 106,361,524 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively1,092 1,064 
Additional paid-in capital1,753,847 1,688,540 
Distributions in excess of cumulative earnings(88,635)(77,665)
Accumulated other comprehensive loss(19,248)(37,181)
Total stockholders' equity1,647,056 1,574,758 
Non-controlling interests7,227 7,190 
Total equity1,654,283 1,581,948 
Total liabilities and equity$2,662,717 $2,488,802 
__________________________________________________
(1)The Company’s consolidated balance sheets include assets and liabilities of consolidated variable interest entities (“VIEs”). See Note 2Summary of Significant Accounting Policies. As of March 31, 2021 and December 31, 2020, all of the assets and liabilities of the Company were held by its operating partnership, Essential Properties, L.P., a consolidated VIE, with the exception of $26.3 million and $25.6 million, respectively, of dividends payable.
The accompanying notes are an integral part of these consolidated financial statements.
2

ESSENTIAL PROPERTIES REALTY TRUST, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations
(Unaudited, in thousands, except share and per share data)
Three months ended March 31,
20212020
Revenues:
Rental revenue$45,432 $39,542 
Interest on loans and direct financing lease receivables3,105 1,938 
Other revenue, net15 
Total revenues48,552 41,487 
Expenses:
General and administrative6,431 7,536 
Property expenses1,414 373 
Depreciation and amortization15,646 13,012 
Provision for impairment of real estate5,722 373 
Provision for loan losses38 468 
Total expenses29,251 21,762 
Other operating income:
Gain on dispositions of real estate, net3,788 1,875 
Income from operations23,089 21,600 
Other (expense)/income:
Loss on repayment of secured borrowings(924)
Interest expense(7,678)(6,833)
Interest income20 231 
Income before income tax expense15,431 14,074 
Income tax expense56 31 
Net income15,375 14,043 
Net income attributable to non-controlling interests(80)(84)
Net income attributable to stockholders$15,295 $13,959 
Basic weighted average shares outstanding106,986,308 90,322,402 
Basic net income per share$0.14 $0.15 
Diluted weighted average shares outstanding108,055,741 91,332,297 
Diluted net income per share$0.14 $0.15 
The accompanying notes are an integral part of these consolidated financial statements.
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ESSENTIAL PROPERTIES REALTY TRUST, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Comprehensive Income/(Loss)
(Unaudited, in thousands)
Three months ended March 31,
20212020
Net income$15,375 $14,043 
Other comprehensive income (loss):
Unrealized income (loss) on cash flow hedges15,576 (38,432)
Cash flow hedge losses reclassified to interest expense2,447 332 
Total other comprehensive income (loss)18,023 (38,100)
Comprehensive income (loss)33,398 (24,057)
Net income attributable to non-controlling interests(80)(84)
Adjustment for cash flow hedge losses attributable to non-controlling interests90 229 
Comprehensive income (loss) attributable to stockholders$33,408 $(23,912)
The accompanying notes are an integral part of these consolidated financial statements.
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ESSENTIAL PROPERTIES REALTY TRUST, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands, except share data)
Common Stock
Number of SharesPar ValueAdditional Paid
In Capital
Distributions
in Excess of
Cumulative
Earnings
Accumulated Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
Non-
controlling
Interests
Total Equity
Balance at December 31, 2020106,361,524 $1,064 $1,688,540 $(77,665)$(37,181)$1,574,758 $7,190 $1,581,948 
Common stock issuance2,796,805 28 64,900 — — 64,928 — 64,928 
Costs related to issuance of common stock— — (1,188)— — (1,188)— (1,188)
Unrealized losses on cash flow hedges— — — — 15,498 15,498 78 15,576 
Cash flow hedge losses reclassified to interest expense— — — — 2,435 2,435 12 2,447 
Equity based compensation expense13,310 — 1,595 — — 1,595 — 1,595 
Dividends declared on common stock and OP Units— — — (26,265)— (26,265)(133)(26,398)
Net income— — — 15,295 — 15,295 80 15,375 
Balance at March 31, 2021109,171,639 $1,092 $1,753,847 $(88,635)$(19,248)$1,647,056 $7,227 $1,654,283 
The accompanying notes are an integral part of these consolidated financial statements.
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ESSENTIAL PROPERTIES REALTY TRUST, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Stockholders’ Equity (continued)
(Unaudited, in thousands, except share data)
Common Stock
Number of SharesPar ValueAdditional Paid-In CapitalDistributions
in Excess of
Cumulative
Earnings
Accumulated Other Comprehensive Income (Loss)Total
Stockholders'
Equity
Non-
controlling
Interests
Total Equity
Balance at December 31, 201983,761,151 $838 $1,223,043 $(27,482)$(1,949)$1,194,450 $7,663 $1,202,113 
Cumulative adjustment upon adoption of ASC 326— — — (187)— (187)(1)(188)
Common stock issuance8,188,698 81 206,157 — — 206,238 — 206,238 
Costs related to issuance of common stock— (8,539)— — (8,539)— (8,539)
Unrealized losses on cash flow hedges— — — — (38,201)(38,201)(231)(38,432)
Cash flow hedge losses reclassified to interest expense— — — — 330 330 332 
Share-based compensation expense— — 1,508 — — 1,508 — 1,508 
Dividends declared on common stock and OP Units— — — (21,168)— (21,168)(127)(21,295)
Net income— — — 13,959 — 13,959 84 14,043 
Balance at March 31, 202091,949,849 $919 $1,422,169 $(34,878)$(39,820)$1,348,390 $7,390 $1,355,780 
The accompanying notes are an integral part of these consolidated financial statements
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ESSENTIAL PROPERTIES REALTY TRUST, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Three months ended March 31,
20212020
Cash flows from operating activities:
Net income$15,375 $14,043 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization15,646 13,012 
Amortization of lease incentive1,177 475 
Amortization of above/below market leases and right of use assets, net18 80 
Amortization of deferred financing costs and other assets625 663 
Loss on repayment of secured borrowings924 
Provision for impairment of real estate5,722 373 
Provision for loan losses38 468 
Gain on dispositions of real estate, net(3,788)(1,875)
Straight-line rent receivable(3,645)(3,188)
Equity based compensation expense1,595 1,508 
Adjustment to rental revenue for tenant credit85 
Changes in other assets and liabilities:
Rent receivables, prepaid expenses and other assets(2,466)1,950 
Accrued liabilities and other payables(247)(2,084)
Net cash provided by operating activities30,135 26,349 
Cash flows from investing activities:
Proceeds from sales of real estate, net24,257 19,601 
Principal collections on loans and direct financing lease receivables942 66 
Investments in loans receivable(23,825)(8,024)
Deposits for prospective real estate investments(600)608 
Investment in real estate, including capital expenditures(174,685)(155,878)
Investment in construction in progress(121)(3,655)
Lease incentives paid(1,312)(900)
Net cash used in investing activities(175,344)(148,182)
Cash flows from financing activities:
Repayments of secured borrowings(1,002)(62,978)
Borrowings under term loan facilities180,000 
Borrowings under revolving credit facility120,000 69,000 
Repayments under revolving credit facility(50,000)
Proceeds from issuance of common stock, net64,928 198,162 
Offering costs(1,188)(203)
Dividends paid(25,703)(19,395)
Net cash provided by financing activities157,035 314,586 
Net increase in cash and cash equivalents and restricted cash11,826 192,753 
Cash and cash equivalents and restricted cash, beginning of period32,990 21,319 
Cash and cash equivalents and restricted cash, end of period$44,816 $214,072 
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents$42,842 $192,616 
Restricted cash1,974 21,456 
Cash and cash equivalents and restricted cash, end of period$44,816 $214,072 
The accompanying notes are an integral part of these consolidated financial statements.
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ESSENTIAL PROPERTIES REALTY TRUST, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Cash Flows (continued)
(Unaudited, in thousands)
Three months ended March 31,
20212020
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized$6,350 $5,245 
Cash paid for income taxes242 52 
Non-cash operating, investing and financing activities:
Adjustment upon adoption of ASC 326$$188 
Reclassification from construction in progress upon project completion4,225 
Non-cash investments in real estate and loan receivable activity960 
Unrealized losses on cash flow hedges(29,344)38,432 
Payable and accrued offering costs259 
Discounts and fees on capital raised through issuance of common stock1,188 8,077 
Dividends declared26,398 21,295 
The accompanying notes are an integral part of these consolidated financial statements.
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ESSENTIAL PROPERTIES REALTY TRUST, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements
March 31, 2021
1. Organization
Description of Business
Essential Properties Realty Trust, Inc. (the “Company”) is an internally managed real estate company that acquires, owns and manages primarily single-tenant properties that are net leased on a long-term basis to middle-market companies operating service-oriented or experience-based businesses. The Company generally invests in and leases freestanding, single-tenant commercial real estate facilities where a tenant services its customers and conducts activities that are essential to the generation of the tenant’s sales and profits.
The Company was organized on January 12, 2018 as a Maryland corporation. It elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes beginning with the year ended December 31, 2018, and it believes that its current organizational and operational status and intended distributions will allow it to continue to so qualify. Substantially all of the Company’s business is conducted directly and indirectly through its operating partnership, Essential Properties, L.P. (the “Operating Partnership”).
On June 25, 2018, the Company completed the initial public offering (“IPO”) of its common stock. The common stock of the Company is listed on the New York Stock Exchange under the ticker symbol “EPRT”.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic. The global spread of COVID-19 has created significant uncertainty and economic disruption, which is likely to persist, or increase, for a period of unknown duration. The pandemic has adversely affected the Company and its tenants, and the full extent to which it will adversely affect the Company’s financial condition, liquidity, and results of operations is impossible to predict and depends on evolving factors, including the duration and scope of the pandemic, and governmental and social responses thereto.
The Company continues to closely monitor the impact of COVID-19 on all aspects of its business, including its portfolio and the creditworthiness of its tenants. In 2020, the Company entered into deferral agreements with certain of its tenants and recognized contractual base rent related to these agreements as a component of rental revenue in its consolidated statements of operations for 2020. These rent deferrals were negotiated on a tenant-by-tenant basis, and, in general, allowed a tenant to defer all or a portion of its rent for a portion of 2020, with all of the deferred rent to be paid to the Company pursuant to a schedule that generally extends up to 24 months from the original due date of the deferred rent. It is possible that the existing deterioration, or further deterioration, in the Company's tenants’ ability to operate their businesses, or delays in the supply of products or services to the Company's tenants from vendors that they need to operate their businesses, caused by COVID-19 or otherwise, will cause the Company's tenants to be unable or unwilling to meet their contractual obligations to the Company, including the payment of rent (including deferred rent), or to request further rent deferrals or other concessions. The likelihood of this would increase if COVID-19 intensifies or persists for a prolonged period. To the extent COVID-19 causes a secular change in consumer behavior that reduces patronage of service-based and/or experience-based businesses, many of the Company's tenants would be adversely affected and their ability to meet their obligations to us could be further impaired. During the deferral period, these agreements reduced the Company's cash flow from operations, reduced its cash available for distribution and adversely affected its ability to make cash distributions to common stockholders. Furthermore, if tenants are unable to repay their deferred rent, the Company will not receive cash in the future in accordance with its expectations.
2. Summary of Significant Accounting Policies
Basis of Accounting
The accompanying unaudited consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of such financial statements have been
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included. The results of operations for the three months ended March 31, 2021 and 2020 are not necessarily indicative of the results for the full year. These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 that has been filed with the SEC.
Reclassification
Certain amounts previously reported in the consolidated statements of operations have been reclassified to conform with the current period by presenting interest expense as a component of other (expense)/income.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and subsidiaries in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation. As of March 31, 2021 and December 31, 2020, the Company, directly and indirectly, held a 99.5% ownership interest in the Operating Partnership and the consolidated financial statements include the financial statements of the Operating Partnership as of these dates. See Note 7—Equity for changes in the ownership interest in the Operating Partnership.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reportable Segments
ASC Topic 280, Segment Reporting, establishes standards for the manner in which enterprises report information about operating segments. Substantially all of the Company’s investments, at acquisition, are comprised of real estate owned that is leased to tenants on a long-term basis or real estate that secures the Company's investment in loans and direct financing receivables. Therefore, the Company aggregates these investments for reporting purposes and operates in 1 reportable segment.
Real Estate Investments
Investments in real estate are carried at cost less accumulated depreciation and impairment losses. The cost of investments in real estate reflects their purchase price or development cost. The Company evaluates each acquisition transaction to determine whether the acquired asset meets the definition of a business. Under Accounting Standards Update (“ASU”) 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business, an acquisition does not qualify as a business when there is no substantive process acquired or substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that are asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred.
The Company allocates the purchase price of acquired properties accounted for as asset acquisitions to tangible and identifiable intangible assets or liabilities based on their relative fair values. Tangible assets may include land, site improvements and buildings. Intangible assets may include the value of in-place leases and above- and below-market leases and other identifiable intangible assets or liabilities based on lease or property specific characteristics.
The Company incurs various costs in the leasing and development of its properties. Amounts paid to tenants that incentivize them to extend or otherwise amend an existing lease or to sign a new lease agreement are capitalized to lease incentives on the Company’s consolidated balance sheets. Tenant improvements are capitalized to building and improvements within the Company’s consolidated balance sheets. Costs incurred which are directly
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related to properties under development, which include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs and real estate taxes and insurance, are capitalized during the period of development as construction in progress. After the determination is made to capitalize a cost, it is allocated to the specific component of a project that benefited. Determination of when a development project commences, and capitalization begins, and when a development project has reached substantial completion, and is available for occupancy and capitalization must cease, involves a degree of judgment. The Company does not engage in speculative real estate development. The Company does, however, opportunistically agree to reimburse certain of its tenants for development costs at its properties in exchange for contractually specified rent that generally increases proportionally with its funding.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases based on the specific characteristics of each tenant’s lease. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. Factors the Company considers in this analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses, and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from six to 12 months. The fair value of above- or below-market leases is recorded based on the net present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to the in-place lease and the Company’s estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining non-cancelable term of the lease including any below-market fixed rate renewal options for below-market leases.
In making estimates of fair values for purposes of allocating purchase price, the Company uses a number of sources, including real estate valuations prepared by independent valuation firms. The Company also considers information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate (e.g., location, size, demographics, value and comparative rental rates), tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business. Additionally, the Company considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. The Company uses the information obtained as a result of its pre-acquisition due diligence as part of its consideration of the accounting standard governing asset retirement obligations and, when necessary, will record an asset retirement obligation as part of the purchase price allocation.
Real estate investments that are intended to be sold are designated as “held for sale” on the consolidated balance sheets at the lesser of carrying amount and fair value less estimated selling costs. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on the Company’s operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations for all applicable periods.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings and 15 years for site improvements. The Company recorded the following amounts of depreciation expense on its real estate investments during the periods presented:
Three months ended March 31,
(in thousands)20212020
Depreciation on real estate investments$13,739 $11,304 
Lease incentives are amortized on a straight-line basis as a reduction of rental income over the remaining non-cancellable terms of the respective leases. If a tenant terminates its lease, the unamortized portion of the lease incentive is charged to rental revenue. Construction in progress is not depreciated until the development has reached substantial completion. Tenant improvements are depreciated over the non-cancellable term of the related lease or their estimated useful life, whichever is shorter.
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Capitalized above-market lease intangibles are amortized on a straight-line basis as a reduction of rental revenue over the remaining non-cancellable terms of the respective leases. Capitalized below-market lease intangibles are accreted on a straight-line basis as an increase to rental revenue over the remaining non-cancellable terms of the respective leases including any below-market fixed rate renewal option periods.
Capitalized above-market ground lease values are accreted as a reduction of property expenses over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property expenses over the remaining terms of the respective leases and any expected below-market renewal option periods where renewal is considered probable.
The value of in-place leases, exclusive of the value of above-market and below-market lease intangibles, is amortized to depreciation and amortization expense on a straight-line basis over the remaining periods of the respective leases.
If a tenant terminates its lease, the unamortized portion of each intangible, including in-place lease values, is charged to depreciation and amortization expense, while above- and below-market lease adjustments are recorded within rental revenue in the consolidated statements of operations.
Loans Receivable
The Company holds its loans receivable for long-term investment. Loans receivable are carried at amortized cost, including related unamortized discounts or premiums, if any, less the Company's estimated allowance for loan losses. The Company recognizes interest income on loans receivable using the effective-interest method applied on a loan-by-loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective-interest method. As of March 31, 2021, the Company had 5 leases which were accounted for as loans receivable and 10 mortgage loans held for long-term investment. As of December 31, 2020, the Company had 5 leases which were accounted for as loans receivable and 8 mortgage loans receivable held for long-term investment.
Direct Financing Lease Receivables
Certain of the Company’s real estate investment transactions are accounted for as direct financing leases. The Company records the direct financing lease receivables at their net investment, determined as the aggregate minimum lease payments and the estimated non-guaranteed residual value of the leased property less unearned income. The unearned income is recognized over the term of the related lease so as to produce a constant rate of return on the net investment in the asset. The Company’s investment in direct financing lease receivables is reduced over the applicable lease term to its non-guaranteed residual value by the portion of rent allocated to the direct financing lease receivables. Subsequent to the adoption of ASC 842, Leases (“ASC 842”) in January 2019, the Company's existing direct financing lease receivables have been accounted for in the same manner, unless the underlying contracts have been modified.
If and when an investment in direct financing lease receivables is identified for impairment evaluation, the Company will apply the guidance in both ASC 310, Receivables (“ASC 310”) and ASC 842. Under ASC 310, the lease receivable portion of the net investment in a direct financing lease receivable is evaluated for impairment when it becomes probable the Company, as the lessor, will be unable to collect all rental payments associated with the Company’s investment in the direct financing lease receivable. Under ASC 842, the Company reviews the estimated non-guaranteed residual value of a leased property at least annually. If the review results in a lower estimate than had been previously established, the Company determines whether the decline in estimated non-guaranteed residual value is other than temporary. If a decline is judged to be other than temporary, the accounting for the transaction is revised using the changed estimate and the resulting reduction in the net investment in direct financing lease receivables is recognized by the Company as a loss in the period in which the estimate is changed. As of March 31, 2021 and December 31, 2020, the Company determined that none of its direct financing lease receivables were impaired.
Impairment of Long-Lived Assets
If circumstances indicate that the carrying value of a property may not be recoverable, the Company reviews the property for impairment. This review is based on an estimate of the future undiscounted cash flows,
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excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. Impairment assessments have a direct impact on the consolidated statements of operations because recording an impairment loss results in an immediate negative adjustment to the consolidated statement of operations.
The Company recorded the following provisions for impairment of long lived assets during the periods presented:
Three months ended March 31,
(in thousands)20212020
Provision for impairment of real estate$5,722 $373 
Cash and Cash Equivalents
Cash and cash equivalents includes cash in the Company’s bank accounts. The Company considers all cash balances and highly liquid investments with original maturities of three months or less to be cash and cash equivalents. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to an insurance limit.
As of March 31, 2021 and December 31, 2020, the Company had deposits of $42.8 million and $26.6 million, respectively, of which $42.6 million and $26.4 million, respectively, were in excess of the amount insured by the FDIC. Although the Company bears risk with respect to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result.
Restricted Cash
Restricted cash primarily consists of cash held with the trustee for the Company’s Master Trust Funding Program (as defined in Note 5—Long Term Debt). This restricted cash is used to make principal and interest payments on the Company’s secured borrowings, to pay trust expenses and to invest in future real estate investments which will be pledged as collateral under the Master Trust Funding Program. See Note 5—Long Term Debt for further discussion.
Deferred Financing Costs
Financing costs related to establishing the Company’s 2018 Credit Facility and Revolving Credit Facility (as defined below) were deferred and are being amortized as an increase to interest expense in the consolidated statements of operations over the term of the facility and are reported as a component of rent receivables, prepaid expenses and other assets, net on the consolidated balance sheets.
Financing costs related to the issuance of the Company’s secured borrowings under the Master Trust Funding Program, the April 2019 Term Loan and the November 2019 Term Loan (each as defined below) were deferred and are being amortized as an increase to interest expense in the consolidated statements of operations over the term of the related debt instrument and are reported as a reduction of the related debt balance on the consolidated balance sheets.
Derivative Instruments
In the normal course of business, the Company uses derivative financial instruments, which may include interest rate swaps, caps, options, floors and other interest rate derivative contracts, to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows on a portion of the Company’s floating-rate debt. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives
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designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may also enter into derivative contracts that are intended to economically hedge certain risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and qualifies for hedge accounting treatment. If a derivative is designated and qualifies for cash flow hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) in the consolidated statements of comprehensive income to the extent that it is effective. Any ineffective portion of a change in derivative fair value is immediately recorded in earnings. If the Company elects not to apply hedge accounting treatment (or for derivatives that do not qualify as hedges), any change in the fair value of such derivative instruments would be recognized immediately as a gain or loss on derivative instruments in the consolidated statements of operations.
Fair Value Measurement
The Company estimates fair value of financial and non-financial assets and liabilities based on the framework established in fair value accounting guidance. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy described below prioritizes inputs to the valuation techniques used in measuring the fair value of assets and liabilities. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs to be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1—Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date.
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3—Unobservable inputs that reflect the Company’s own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
Revenue Recognition
The Company’s rental revenue is primarily rent received from tenants. Rent from tenants is recorded in accordance with the terms of each lease on a straight-line basis over the non-cancellable initial term of the lease from the later of the date of the commencement of the lease and the date of acquisition of the property subject to the lease. Rental revenue recognition begins when the tenant controls the space and continues through the term of the related lease. Because substantially all of the leases provide for rental increases at specified intervals, the Company records a straight-line rent receivable and recognizes revenue on a straight-line basis through the expiration of the non-cancelable term of the lease. The Company considers whether the collectability of rents is reasonably assured in determining the amount of straight-line rent to record.
Generally, the Company’s leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions provided under the initial lease term, including rent increases. If economic incentives make it reasonably certain that an option period to extend the lease will be exercised, the Company will include these options in determining the non-cancelable term of the lease.
The Company defers rental revenue related to lease payments received from tenants in advance of their due dates. These amounts are presented within accrued liabilities and other payables on the Company’s consolidated balance sheets.
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Certain properties in the Company’s investment portfolio are subject to leases that provide for contingent rent based on a percentage of the tenant’s gross sales. For these leases, the Company recognizes contingent rental revenue when the threshold upon which the contingent lease payment is based is actually reached.
The Company recorded the following amounts as contingent rent, which are included as a component of rental revenue in the Company's consolidated statements of operations, during the periods presented:
Three months ended March 31,
(in thousands)20212020
Contingent rent$169 $201 
Adjustment to Rental Revenue
The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
If the assessment of the collectability of substantially all payments due under a lease changes from probable to not probable, any difference between the rental revenue recognized to date and the lease payments that have been collected is recognized as a current period reduction of rental revenue in the consolidated statements of operations.
The Company recorded the following amounts as adjustments to rental revenue during the periods presented:
Three months ended March 31,
(in thousands)20212020
Adjustment to rental revenue$85 $600 
Offering Costs
In connection with the completion of equity offerings, the Company incurs legal, accounting and other offering-related costs. Such costs are deducted from the gross proceeds of each equity offering when the offering is completed. As of March 31, 2021 and December 31, 2020, the Company capitalized a total of $68.4 million and $67.2 million, respectively, of such costs in the Company’s consolidated balance sheets. These costs are presented as a reduction of additional paid-in capital as of March 31, 2021 and December 31, 2020.
Income Taxes
The Company elected and qualified to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 2018. REITs are subject to a number of organizational and operational requirements, including a requirement that 90% of ordinary “REIT taxable income” (as determined without regard to the dividends paid deduction or net capital gains) be distributed. As a REIT, the Company will generally not be subject to U.S. federal income tax to the extent that it meets the organizational and operational requirements and its distributions equal or exceed REIT taxable income. For the period subsequent to the effective date of its REIT election, the Company continues to meet the organizational and operational requirements and expects distributions to exceed REIT taxable income. Accordingly, 0 provision has been made for U.S. federal income taxes. Even though the Company has elected and qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income and excise tax on its undistributed income. Franchise taxes and federal excise taxes on the Company’s undistributed income, if any, are included in general and administrative expenses on the accompanying consolidated statements of operations. Additionally, taxable income from non-REIT activities managed through the Company's taxable REIT subsidiary is subject to federal, state, and local taxes.
The Company analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in such jurisdictions. The Company follows a two-step process to evaluate uncertain tax positions. Step one, recognition, occurs when an entity concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon
15

examination. Step two, measurement, determines the amount of benefit that is more-likely-than-not to be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when the Company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. The use of a valuation allowance as a substitute for derecognition of tax positions is prohibited.
As of March 31, 2021 and December 31, 2020, the Company had 0 accruals recorded for uncertain tax positions. The Company’s policy is to classify interest expense and penalties relating to taxes in general and administrative expense in the consolidated statements of operations. During the three months ended March 31, 2021 and 2020, the Company recorded de minimis interest or penalties relating to taxes, and there were 0 interest or penalties with respect to taxes accrued as of March 31, 2021 or December 31, 2020. The 2020, 2019, 2018 and 2017 taxable years remain open to examination by federal and/or state taxing jurisdictions to which the Company is subject.
Equity-Based Compensation
The Company grants shares of restricted common stock and restricted share units (“RSUs”) to its directors, executive officers and other employees that vest over specified time periods, subject to the recipient’s continued service. The Company also grants performance-based RSUs to its executive officers, the final number of which is determined based on objective and subjective performance conditions and which vest over a multi-year period, subject to the recipient’s continued service. The Company accounts for the restricted common stock and RSUs in accordance with ASC 718, Compensation – Stock Compensation, which requires that such compensation be recognized in the financial statements based on its estimated grant-date fair value. The value of such awards is recognized as compensation expense in general and administrative expenses in the accompanying consolidated statements of operations over the applicable service periods.
The Company recognizes compensation expense for equity-based compensation using the straight-line method based on the terms of the individual grant. Forfeitures of equity-based compensation awards, if any, are recognized when they occur.
Variable Interest Entities
The Financial Accounting Standards Board (“FASB”) provides guidance for determining whether an entity is a variable interest entity (a “VIE”). VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses, or the right to receive benefits, of the VIE that could potentially be significant to the VIE.
The Company has concluded that the Operating Partnership is a VIE of which the Company is the primary beneficiary, as the Company has the power to direct the activities that most significantly impact the economic performance of the Operating Partnership. Substantially all of the Company’s assets and liabilities are held by the Operating Partnership. The assets and liabilities of the Operating Partnership are consolidated and reported as assets and liabilities on the Company’s consolidated balance sheets as of March 31, 2021 and December 31, 2020.
Additionally, the Company has concluded that certain entities to which it has provided mortgage loans are VIEs because the entities' equity was not sufficient to finance their activities without additional subordinated financial support. The following table presents information about the Company’s mortgage loan-related VIEs as of the dates presented:
(Dollars in thousands)March 31,
2021
December 31,
2020
Number of VIEs1111
Aggregate carrying value$117,572 $117,578 
The Company was not the primary beneficiary of any of these entities, because the Company did not have the power to direct the activities that most significantly impact the entities’ economic performance as of March 31, 2021 and December 31, 2020. The Company’s maximum exposure to loss in these entities is limited to
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the carrying amount of its investment. The Company had 0 liabilities associated with these VIEs as of March 31, 2021 and December 31, 2020.
Recent Accounting Developments
In February 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) establishing ASC 326, as amended by subsequent ASUs on the topic. ASU 2016-13 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020 and recorded estimates of expected loss on its loans and direct financing lease receivable portfolio beginning on that date, as discussed above.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The Company adopted ASU 2017-12 while accounting for its initial interest rate swaps in 2019 (see Note 6—Derivative and Hedging Activities). As the Company did not have other derivatives outstanding at time of adoption, no prior period adjustments were required. Pursuant to the provisions of ASU 2017-12, the Company is no longer required to separately measure and recognize hedge ineffectiveness. Instead, the Company recognizes the entire change in the fair value of cash flow hedges included in the assessment of hedge effectiveness in other comprehensive (loss) income. The amounts recorded in other comprehensive (loss) income will subsequently be reclassified to earnings when the hedged item affects earnings. The adoption of ASU 2017-12 did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance on January 1, 2020 and the adoption of ASU 2018-13 did not have a material impact on the Company’s related disclosures.
In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848) (“ASU 2020-4”). ASU 2020-4 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-4 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing lease guidance, the entity would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant, which would be accounted for under the lease modification framework, or if a lease concession was under the enforceable rights and obligations that existed in the original lease, which would be accounted for outside the lease modification framework. The Lease Modification Q&A provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease. This election is only available when total cash flows resulting from the modified lease are substantially similar to or less than the cash flows in the original lease. The Company made this election and accounts for rent deferrals by increasing its rent receivables as receivables accrue and continuing to recognize income during the deferral period. Lease concessions or amendments other than rent deferrals are evaluated to determine if a substantive change to the consideration in the original lease contract has occurred and should be accounted for as a lease modification. The Company continues to evaluate any amounts recognized for collectability, regardless of whether accounted for as a lease modification or not, and records an adjustment to rental revenue for amounts that are not probable of collection. For lease concessions granted in conjunction with the COVID-19 pandemic, the Company reviewed all amounts recognized on a tenant-by-tenant basis for collectability.
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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” (“ASU 2020-06”). 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 the 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 adopted this guidance on January 1, 2021 and the adoption of ASU 2020-06 did not have a material impact on the Company's consolidated financial statements.
3. Investments
The following table presents information about the Company’s real estate investment portfolio as of each date presented:
March 31,
2021
December 31,
2020
Owned properties (1)
1,1031,056
Properties securing investments in mortgage loans (2)
127115
Ground lease interests (3)
1010
Total number of investments1,2401,181
_____________________________________
(1)Includes 11 properties which are subject to leases accounted for as direct financing leases or loans as of March 31, 2021 and December 31, 2020.
(2)Properties secure 10 and 8 mortgage loans receivable as of March 31, 2021 and December 31, 2020, respectively.
(3)Includes 1 building which is subject to a lease accounted for as a direct financing lease as of March 31, 2021 and December 31, 2020.
The following table presents information about the Company’s gross investment portfolio as of each date presented:
(in thousands)March 31,
2021
December 31,
2020
Real estate investments, at cost$2,523,409 $2,359,395 
Loans and direct financing lease receivables, net176,025 152,220 
Real estate investments held for sale, net17,058 
Total gross investments$2,699,434 $2,528,673 
As of March 31, 2021 and December 31, 2020, 257 and 258 of these investments, comprising $364.4 million and $399.7 million, respectively, of net investments, were assets of consolidated special purpose entity subsidiaries and were pledged as collateral under the non-recourse obligations of the Company’s Master Trust Funding Program (see Note 5—Long Term Debt).
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Acquisitions in 2021 and 2020
The following table presents information about the Company’s acquisition activity during the three months ended March 31, 2021 and 2020:
Three months ended March 31,
(in thousands)20212020
Ownership typeFee InterestFee Interest
Number of properties6361
Purchase price allocation
Land and improvements$52,126 $48,626 
Building and improvements115,904 97,311 
Construction in progress (1)
121 3,656 
Intangible lease assets3,510 3,094 
Total purchase price171,661 152,687 
Intangible lease liabilities(41)
Purchase price (including acquisition costs)$171,620 $152,687 
_____________________________________
(1)Represents amounts incurred at and subsequent to acquisition and includes approximately $20,000 and $0.1 million of capitalized interest expense for the three months ended March 31, 2021 and 2020, respectively.

During the three months ended March 31, 2021 and 2020, the Company did 0t have any investments that individually represented more than 5% of the Company’s total investment activity.
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Gross Investment Activity
During the three months ended March 31, 2021 and 2020, the Company had the following gross investment activity:
(Dollar amounts in thousands)Number of
Investment
Locations
Dollar
Amount of
Investments
Gross investments, January 1, 20201,000$2,002,314 
Acquisitions of and additions to real estate investments61160,433 
Sales of investments in real estate(10)(19,207)
Relinquishment of properties at end of ground lease term(3)(1,931)
Provisions for impairment of real estate (1)
(373)
Investments in loans receivable28,024 
Principal collections on and settlements of loans and direct financing lease receivables(66)
Other(637)
Gross investments, March 31, 20202,148,557 
Less: Accumulated depreciation and amortization (2)
(100,473)
Net investments, March 31, 20201,050$2,048,084 
Gross investments, January 1, 20211,181$2,528,673 
Acquisitions of and additions to real estate investments63177,023 
Sales of investments in real estate(16)(23,297)
Provisions for impairment of real estate (3)
(5,722)
Investments in loans receivable1323,825 
Principal collections on and settlements of loans and direct financing lease receivables(1)(942)
Other(126)
Gross investments, March 31, 20212,699,434 
Less: Accumulated depreciation and amortization (2)
(150,835)
Net investments, March 31, 20211,240$2,548,599 
_____________________________________
(1)During the three months ended March 31, 2020, the Company identified and recorded provisions for impairment at 2 vacant properties.
(2)Includes $126.5 million and $81.3 million of accumulated depreciation as of March 31, 2021 and 2020, respectively.
(3)During the three months ended March 31, 2021, the Company identified and recorded provisions for impairment at 2 vacant properties and 7 tenanted properties.
Real Estate Investments
The Company’s investment properties are leased to tenants under long-term operating leases that typically include one or more renewal options. See Note 4—Leases for more information about the Company’s leases.
Loans and Direct Financing Lease Receivables
As of March 31, 2021 and December 31, 2020, the Company had 15 and 13 loans receivable outstanding with an aggregate carrying amount of $174.7 million and $150.8 million, respectively. The maximum amount of loss due to credit risk is our current principal balance of $174.7 million.
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The Company’s loans receivable portfolio as of March 31, 2021 and December 31, 2020 are summarized below (dollars in thousands): 
Principal Balance Outstanding
Loan Type
Monthly
Payment (1)
Number of Secured PropertiesEffective Interest RateStated Interest RateMaturity DateMarch 31,
2021
December 31,
2020
Mortgage (2)(3)
I/O28.80%8.10%2039$12,000 $12,000 
Mortgage (3)
P+I28.10%8.10%20596,108 6,114 
Mortgage (2)
I/O28.53%7.80%20397,300 7,300 
Mortgage (2)
I/O698.16%7.70%203428,000 28,000 
Mortgage (2)
I/O188.05%7.50%203437,105 37,105 
Mortgage (2)
I/O18.42%7.70%20405,300 5,300 
Mortgage (2)
I/O17.00%7.00 %2021860 
Mortgage (2)
I/O38.30%8.25 %20222,324 2,324 
Mortgage (2)
I/O197.30%6.80 %203546,000 46,000 
Mortgage (2)
I/O17.00%7.00%2023600 
Mortgage (2)
I/O17.00%7.00%2023360 
Mortgage (2)
I/O116.89%6.75%202623,824 
Leasehold interestP+I210.69%(4)20391,435 1,435 
Leasehold interestP+I12.25%(5)20341,095 1,109 
Leasehold interestP+I12.41%(5)20341,625 1,645 
Leasehold interestP+I14.97%(5)20381,595 1,605 
Net investment$174,671 $150,797 
_____________________________________
(1)I/O: Interest Only; P+I: Principal and Interest
(2)Loan requires monthly payments of interest only with a balloon payment due at maturity.
(3)Loan allows for prepayments in whole or in part without penalty.
(4)This leasehold interest is accounted for as a loan receivable, as the lease for 2 land parcels contains an option for the lessee to repurchase the leased parcels in 2024 or 2025.
(5)These leasehold interests are accounted for as loans receivable, as the leases for each property contain an option for the relevant lessee to repurchase the leased property in the future.
Scheduled principal payments due to be received under the Company’s loans receivable as of March 31, 2021 were as follows:
(in thousands)Loans Receivable
April 1 - December 31, 2021$156 
20222,545 
20231,196 
2024252 
2025268 
Thereafter170,254 
Total$174,671 
As of March 31, 2021 and December 31, 2020, the Company had $2.4 million of net investments accounted for as direct financing lease receivables. The components of the investments accounted for as direct financing lease receivables were as follows:
(in thousands)March 31,
2021
December 31,
2020
Minimum lease payments receivable$3,445 $3,529 
Estimated unguaranteed residual value of leased assets270 270 
Unearned income from leased assets(1,304)(1,357)
Net investment$2,411 $2,442 
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Scheduled future minimum non-cancelable base rental payments due to be received under the Company's direct financing lease receivables as of March 31, 2021 were as follows:
(in thousands)Future Minimum
Base Rental
Payments
April 1 - December 31, 2021$256 
2022345 
2023347 
2024289 
2025254 
Thereafter1,954 
Total$3,445 
Allowance for Loan Losses
The Company utilizes a RELEM model which estimates losses on loans and direct financing lease receivables for purposes of calculating an allowance for loan losses. As of March 31, 2021, the Company recorded an allowance for loan losses of $1.1 million. Changes in the Company’s allowance for loan losses are presented within provision for loan losses in the Company’s consolidated statements of operations.
For the three months ended March 31, 2021 and 2020, the changes to the Company's allowance for loan losses were as follows:
(in thousands)Loans and Direct Financing Lease Receivables
Balance at January 1, 2020$
Cumulative-effect adjustment upon adoption of ASC 326188 
Current period provision for expected credit losses (1)
468 
Write-offs charged
Recoveries
Balance at March 31, 2020$656 
Balance at January 1, 2021$1,018 
Current period provision for expected credit losses (1)
38 
Write-offs charged
Recoveries
Balance at March 31, 2021$1,056 
_____________________________________
(1)The increase in expected credit losses is due to the changes in assumptions regarding current macroeconomic factors related to COVID-19 and our investment in new loans receivable during the period.
The Company considers the ratio of loan to value ("LTV") to be a significant credit quality indicator for its loans and direct financing lease portfolio. The following table presents information about the LTV of the Company's loans and direct financing lease receivables measured at amortized cost as of March 31, 2021:
Amortized Cost Basis by Origination YearTotal Amortized Costs Basis
(in thousands)20212020201920182017Prior
LTV <60%$$$28,000 $$$738 $28,738 
LTV 60%-70%23,825 980 24,805 
LTV >70%960 56,844 65,043 692 123,539 
$24,785 $56,844 $93,043 $$$2,410 $177,082 
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Real Estate Investments Held for Sale
The Company continually evaluates its portfolio of real estate investments and may elect to dispose of investments considering criteria including, but not limited to, tenant concentration, tenant credit quality, tenant operation type (e.g., industry, sector or concept), unit-level financial performance, local market conditions and lease rates, associated indebtedness and asset location. Real estate investments held for sale are expected to be sold within twelve months.
The following table shows the activity in real estate investments held for sale and intangible lease liabilities held for sale during the three months ended March 31, 2021 and 2020.
(Dollar amounts in thousands)Number of PropertiesReal Estate InvestmentsIntangible Lease LiabilitiesNet Carrying Value
Held for sale balance, January 1, 20201$1,211 $$1,211 
Transfers to held for sale classification31,528 1,528 
Sales(1)(1,211)(1,211)
Transfers to held and used classification0
Held for sale balance, March 31, 20203$1,528 $$1,528 
Held for sale balance, January 1, 20218$17,058 $$17,058 
Transfers to held for sale classification0
Sales(4)(3,168)(3,168)
Transfers to held and used classification(4)(13,890)(13,890)
Held for sale balance, March 31, 20210$$$
Significant Concentrations
The Company did not have any tenants (including for this purpose, all affiliates of such tenants) whose rental revenue for the three months ended March 31, 2021 or 2020 represented 10% or more of total rental revenue in the Company’s consolidated statements of operations.
The following table lists the states where the rental revenue from the properties in that state during the periods presented represented 10% or more of total rental revenue in the Company’s consolidated statements of operations:
Three months ended March 31,
State20212020
Texas13.3%11.6%
Georgia*10.2%
_____________________________________
*     State's rental revenue was not greater than 10% of total rental revenue during the period specified.
Intangible Assets and Liabilities
Intangible assets and liabilities consisted of the following as of the dates presented:
March 31, 2021December 31, 2020
(in thousands)Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Intangible assets:
In-place leases$71,048 $20,164 $50,884 $67,986 $18,767 $49,219 
Intangible market lease assets11,982 4,122 7,860 12,285 4,059 8,226 
Total intangible assets$83,030 $24,286 $58,744 $80,271 $22,826 $57,445 
Intangible market lease liabilities$12,793 $2,747 $10,046 $12,772 $2,604 $10,168 
23

The remaining weighted average amortization period for the Company’s intangible assets and liabilities as of March 31, 2021, by category and in total, were as follows:
Years Remaining
In-place leases10.7
Intangible market lease assets13.7
Total intangible assets11.1
Intangible market lease liabilities17.2
The following table discloses amounts recognized within the consolidated statements of operations related to amortization of in-place leases, amortization and accretion of above- and below-market lease assets and liabilities, net and the amortization and accretion of above- and below-market ground leases for the periods presented:
Three months ended March 31,
(in thousands)20212020
Amortization of in-place leases (1)
$1,638 $1,679
Amortization (accretion) of market lease intangibles, net (2)
18 80 
Amortization (accretion) of above- and below-market ground lease intangibles, net (3)
(90)122 
_____________________________________
(1)Reflected within depreciation and amortization expense.
(2)Reflected within rental revenue.
(3)Reflected within property expenses.
The following table provides the estimated amortization of in-place lease assets to be recognized as a component of depreciation and amortization expense for the next five years and thereafter:
(in thousands)In-Place Lease Assets
April 1 - December 31, 2021$5,955 
20225,816 
20235,395 
20244,716 
20253,662 
Thereafter25,340 
Total$50,884 
The following table provides the estimated net amortization of above- and below-market lease intangibles to be recognized as a component of rental revenue for the next five years and thereafter:
(in thousands)Above Market Lease AssetBelow Market Lease LiabilitiesNet Adjustment to Rental Revenue
April 1 - December 31, 2021$(539)$403 $(136)
2022(717)542 (175)
2023(686)511 (175)
2024(653)508 (145)
2025(647)513 (134)
Thereafter(4,618)7,569 2,951 
Total$(7,860)$10,046 $2,186 
24

4. Leases
As Lessor
The Company’s investment properties are leased to tenants under long-term operating leases that typically include one or more tenant renewal options. The Company’s leases provide for annual base rental payments (generally payable in monthly installments), and generally provide for increases in rent based on fixed contractual terms or as a result of increases in the Consumer Price Index.
Substantially all of the leases are triple-net, which means that the lessees are responsible for paying all property operating expenses, including maintenance, insurance, utilities, property taxes and, if applicable, ground rent expense; therefore, the Company is generally not responsible for repairs or other capital expenditures related to the properties while the triple-net leases are in effect and, at the end of the lease term, the lessees are responsible for returning the property to the Company in a substantially similar condition as when they took possession. Some of the Company’s leases provide that in the event the Company wishes to sell the property subject to that lease, it first must offer the lessee the right to purchase the property on the same terms and conditions as any offer which it intends to accept for the sale of the property.
Scheduled future minimum base rental payments due to be received under the remaining non-cancelable term of the operating leases in place as of March 31, 2021 were as follows:
(in thousands)Future Minimum Base Rental Receipts
April 1 - December 31, 2021$146,932 
2022198,767 
2023201,707 
2024202,815 
2025201,569 
Thereafter2,222,825 
Total$3,174,615 
Since lease renewal periods are exercisable at the option of the lessee, the preceding table presents future minimum base rental payments to be received during the initial non-cancelable lease term only. In addition, the future minimum lease payments exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to performance thresholds and exclude increases in annual rent based on future changes in the Consumer Price Index, among other items.
The fixed and variable components of lease revenues for the three months ended March 31, 2021 and 2020 were as follows:
Three months ended March 31,
(in thousands)20212020
Fixed lease revenues$46,089 $40,403 
Variable lease revenues (1)
623 366 
Total lease revenues (2)
$46,712 $40,769 
_____________________________________
(1)Includes contingent rent based on a percentage of the tenant’s gross sales and costs paid by the Company for which it is reimbursed by its tenants.
(2)Excludes the amortization and accretion of above- and below-market lease intangible assets and liabilities and lease incentives and the adjustment to rental revenue for tenant credit.
As Lessee
The Company has a number of ground leases, an office lease and other equipment leases which are classified as operating leases. As of March 31, 2021, the Company’s right of use ("ROU") assets and lease liabilities were $6.3 million and $8.6 million, respectively. As of December 31, 2020, the Company’s ROU assets and lease liabilities were $6.4 million and $8.8 million, respectively.
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The discount rate applied to measure each ROU asset and lease liability is based on the Company’s incremental borrowing rate ("IBR"). The Company considers the general economic environment and its historical borrowing activity and factors in various financing and asset specific adjustments to ensure the IBR is appropriate to the intended use of the underlying lease. As the Company did not elect to apply hindsight, lease term assumptions determined under ASC 840 were carried forward and applied in calculating the lease liabilities recorded under ASC 842. Certain of the Company’s ground leases offer renewal options which it assesses against relevant economic factors to determine whether it is reasonably certain of exercising or not exercising the option. Lease payments associated with renewal periods that the Company is reasonably certain will be exercised, if any, are included in the measurement of the corresponding lease liability and ROU asset.
The following table sets forth information related to the measurement of the Company’s lease liabilities as of the dates presented:
March 31,
2021
December 31, 2020
Weighted average remaining lease term (in years)22.722.4
Weighted average discount rate6.40%6.41%
Upon adoption of ASC 842 (see Note 2—Summary of Significant Accounting Policies), ground lease rents are no longer presented on a net basis and instead are reflected on a gross basis in the Company’s consolidated statements of operations for the three months ended March 31, 2021 and 2020.
The following table sets forth the details of rent expense for the three months ended March 31, 2021 and 2020:
Three months ended March 31,
(in thousands)20212020
Fixed rent expense - Ground Rent$239 $254 
Fixed rent expense - Office Rent128 128 
Variable rent expense
Total rent expense$367 $382 
As of March 31, 2021, future lease payments due from the Company under the ground, office and equipment operating leases where the Company is directly responsible for payment and the future lease payments due under the ground operating leases where the Company’s tenants are directly responsible for payment over the next five years and thereafter were as follows:
(in thousands)Office and Equipment Leases
Ground Leases
to be Paid by
the Company
Ground Leases
to be Paid
Directly by the
Company’s
Tenants
Total Future
Minimum
Base Rental
Payments
April 1 - December 31, 2021$384 $116 $607 $1,107 
2022522 151 811 1,484 
2023525 131 485 1,141 
2024531 24 436 991 
2025538 356 894 
Thereafter14,562 14,562 
Total$2,500 $422 $17,257 20,179 
Present value discount(11,560)
Lease liabilities$8,619 
The Company has adopted the short-term lease policy election and accordingly, the table above excludes future minimum base cash rental payments by the Company or its tenants on leases that have a term of less than 12 months at lease inception. The total of such future obligations is not material.
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5. Long Term Debt
The following table summarizes the Company's outstanding indebtedness as of March 31, 2021 and December 31, 2020:
Principal OutstandingWeighted Average Interest Rate
(in thousands)Maturity DateMarch 31,
2021
December 31,
2020
March 31,
2021
December 31,
2020
Unsecured term loans:
April 2019 Term LoanApril 2024$200,000 $200,000 1.3%1.4%
November 2019 Term LoanNovember 2026430,000 430,000 1.6%1.7%
Revolving Credit FacilityApril 2023138,000 18,000 1.4%1.4%
Secured borrowings:
Series 2017-1 NotesJune 2047172,191 173,193 4.2%4.2%
Total principal outstanding$940,191 $821,193 2.0%2.1 %
The following table summarizes the scheduled principal payments on the Company’s outstanding indebtedness as of March 31, 2021:
(in thousands)April 2019 Term LoanNovember 2019 Term LoanRevolving Credit FacilitySecured BorrowingsTotal
April 1 - December 31, 2021$$$$3,082 $3,082 
20224,292 4,292 
2023138,000 4,512 142,512 
2024200,000 160,305 360,305 
2025
Thereafter430,000 430,000 
Total$200,000 $430,000 $138,000 $172,191 $940,191 
The Company was not in default of any provisions under any of its outstanding indebtedness as of March 31, 2021 or December 31, 2020.
Revolving Credit Facility and April 2019 Term Loan
On April 12, 2019, the Company, through the Operating Partnership, entered into an amended and restated credit agreement (the “Amended Credit Agreement”) with its group of lenders, amending and restating the terms of the Company’s previous $300.0 million revolving credit facility (the “2018 Credit Facility”) to increase the maximum aggregate initial original principal amount of the revolving loans available thereunder up to $400.0 million (the “Revolving Credit Facility”) and to permit the incurrence of an additional $200.0 million in term loans thereunder (the “April 2019 Term Loan”).
The Revolving Credit Facility has a term of four years from April 12, 2019, with an extension option of up to one year exercisable by the Operating Partnership, subject to certain conditions, and the April 2019 Term Loan has a term of five years from the effective date of the amended agreement. The loans under each of the Revolving Credit Facility and the April 2019 Term Loan initially bear interest at an annual rate of applicable LIBOR plus the applicable margin (which applicable margin varies between the Revolving Credit Facility and the April 2019 Term Loan).
The applicable LIBOR is the rate with a term equivalent to the interest period applicable to the relevant borrowing. The applicable margin initially is a spread set according to a leverage-based pricing grid. At the Operating Partnership’s election, on and after receipt of an investment grade corporate credit rating from Standard & Poor’s (“S&P”) or Moody’s Investors Services, Inc. (“Moody’s”), the applicable margin will be a spread set according to the Company’s corporate credit ratings provided by S&P and/or Moody’s. The Revolving Credit Facility and the April 2019 Term Loan are freely pre-payable at any time and the Revolving Credit Facility is mandatorily payable if borrowings exceed the borrowing base or the facility limit. The Operating Partnership may re-borrow amounts paid down on the Revolving Credit Facility but not on the April 2019 Term Loan.
27

The Operating Partnership is required to pay revolving credit fees throughout the term of the Revolving Credit Agreement based upon its usage of the Revolving Credit Facility, at a rate which depends on its usage of such facility during the period before the Company receives an investment grade corporate credit rating from S&P or Moody’s, and which rate shall be based on the corporate credit rating from S&P and/or Moody’s after the time, if applicable, the Company receives such a rating. The Operating Partnership was required to pay a ticking fee on the April 2019 Term Loan for the period from April 12, 2019 through May 14, 2019, the date the term loan was fully drawn. The Amended Credit Agreement has an accordion feature to increase, subject to certain conditions, the maximum availability of credit (either through increased revolving commitments or additional term loans) by up to $200 million.
Additionally, on November 22, 2019, the Company further amended the Amended Credit Agreement to update certain terms to be consistent with those as described under, and to acknowledge, where applicable, the November 2019 Term Loan (as defined below) and to make certain other changes to the Amended Credit Agreement consistent with market practice on future replacement of the LIBOR rate and qualified financial contracts.
The Operating Partnership is the borrower under the Amended Credit Agreement, and the Company and each of its subsidiaries that owns a direct or indirect interest in an eligible real property asset are guarantors under the Amended Credit Agreement.
Under the terms of the Amended Credit Agreement, the Company is subject to various restrictive financial and nonfinancial covenants which, among other things, require the Company to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth.
The Amended Credit Agreement restricts the Company’s ability to pay distributions to its stockholders under certain circumstances. However, the Company may make distributions to the extent necessary to maintain its qualification as a REIT under the Code. The Amended Credit Agreement contains certain additional covenants that, subject to exceptions, limit or restrict the Company’s incurrence of indebtedness and liens, disposition of assets, transactions with affiliates, mergers and fundamental changes, modification of organizational documents, changes to fiscal periods, making of investments, negative pledge clauses and lines of business and REIT qualification.
In May 2019, the Company borrowed the entire $200.0 million available under the April 2019 Term Loan and used the proceeds to repurchase, in part, notes previously issued under its Master Trust Funding Program. The Company borrowed the entire $430.0 million available under the November 2019 Term Loan in separate draws in December 2019 and March 2020 and used the proceeds to voluntarily prepay notes previously issued under its Master Trust Funding Program at par, to repay amounts outstanding under the Revolving Credit Facility and for general working capital purposes.
The Company was in compliance with all financial covenants and was not in default of any other provisions under the Amended Credit Facility as of March 31, 2021 and December 31, 2020.
The following table presents information about the Revolving Credit Facility for the periods presented:
Three months ended March 31,
(in thousands)20212020
Balance on January 1,$18,000 $46,000 
Borrowings120,000 69,000 
Repayments(50,000)
Balance on March 31,$138,000 $65,000 
The following table presents information about interest expense related to the Revolving Credit Facility for the periods presented:
Three months ended March 31,
(in thousands)20212020
Interest expense$395 $398 
Amortization of deferred financing costs291 291 
Total$686 $689 
28

Total deferred financing costs, net, of $2.2 million and $2.5 million related to the Revolving Credit Facility were included within rent receivables, prepaid expenses and other assets, net on the Company’s consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively.
As of March 31, 2021 and December 31, 2020, the Company had $262.0 million and $382.0 million, respectively, of unused borrowing capacity related to the Revolving Credit Facility.
November 2019 Term Loan
On November 26, 2019, the Company, through the Operating Partnership, entered into a new $430 million term loan credit facility (the “November 2019 Term Loan”) with a group of lenders. The November 2019 Term Loan provides for term loans to be drawn up to an aggregate amount of $430 million with a maturity of November 26, 2026.
Borrowings under the November 2019 Term Loan bear interest at an annual rate of applicable LIBOR plus the applicable margin. The applicable LIBOR will be the rate with a term equivalent to the interest period applicable to the relevant borrowing. The applicable margin will initially be a spread set according to a leverage-based pricing grid. At the Operating Partnership’s irrevocable election, on and after receipt of an investment grade corporate credit rating from S&P or Moody’s, the applicable margin will be a spread set according to the Company’s corporate credit ratings provided by S&P and/or Moody’s.
The November 2019 Term Loan is pre-payable at any time by the Operating Partnership (as borrower), provided, that if the loans under the November 2019 Term Loan are repaid on or before November 26, 2020,they are subject to a 2 percent prepayment premium, and if repaid thereafter but on or before November 26, 2021, they are subject to a 1 percent prepayment premium. After November 26, 2021 the loans may be repaid without penalty. The Operating Partnership may not re-borrow amounts paid down on the November 2019 Term Loan. The Operating Partnership was required to pay a ticking fee on any undrawn portion of the November 2019 Term Loan for the period from November 26, 2019 through March 26, 2020, the date that the November 2019 Term Loan was fully drawn. The November 2019 Term Loan has an accordion feature to increase, subject to certain conditions, the maximum availability of the facility up to an aggregate of $500 million.
The Operating Partnership is the borrower under the November 2019 Term Loan, and the Company and each of its subsidiaries that owns a direct or indirect interest in an eligible real property asset are guarantors under the facility. Under the terms of the November 2019 Term Loan, the Company is subject to various restrictive financial and nonfinancial covenants which, among other things, require the Company to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth.
Additionally, the November 2019 Term Loan restricts the Company’s ability to pay distributions to its stockholders under certain circumstances. However, the Company may make distributions to the extent necessary to maintain its qualification as a REIT under the Code. The facility contains certain covenants that, subject to exceptions, limit or restrict the Company’s incurrence of indebtedness and liens, disposition of assets, transactions with affiliates, mergers and fundamental changes, modification of organizational documents, changes to fiscal periods, making of investments, negative pledge clauses and lines of business and REIT qualification.
The Company was in compliance with all financial covenants and was not in default of any other provisions under the November 2019 Term Loan as of March 31, 2021 and December 31, 2020.
The following table presents information about aggregate interest expense related to the April 2019 and November 2019 Term Loan Facilities:
Three months ended March 31,
(in thousands)20212020
Interest expense$2,421 $3,415 
Amortization of deferred financing costs178 177 
Total$2,599 $3,592 
Total deferred financing costs, net, of $3.6 million and $3.7 million as of March 31, 2021 and December 31, 2020, respectively, related to the Term Loan Facilities are included as a component of unsecured term loans, net of deferred financing costs on the Company’s consolidated balance sheet as of March 31, 2021.
29

The Company fixed the interest rates on its term loan facilities’ variable-rate debt through the use of interest rate swap agreements. See Note 6—Derivative and Hedging Activities for additional information.
Secured Borrowings
In the normal course of business, the Company transfers financial assets in various transactions with Special Purpose Entities (“SPE”) determined to be VIEs, which primarily consist of securitization trusts established for a limited purpose (the “Master Trust Funding Program”). These SPEs are formed for the purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets. In these securitization transactions, the Company typically receives cash from the SPE as proceeds for the transferred assets and retains the rights and obligations to service the transferred assets in accordance with servicing guidelines. All debt obligations issued from the SPEs are non-recourse to the Company.
In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheets. For transactions that do not meet the requirements for derecognition and remain on the consolidated balance sheets, the transferred assets may not be pledged or exchanged by the Company.
The Company evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Company is the primary beneficiary and, therefore, should consolidate the entity based on the variable interests it held both at inception and when there was a change in circumstances that required a reconsideration. The Company has determined that the SPEs created in connection with its Master Trust Funding Program should be consolidated as the Company is the primary beneficiary of each of these entities. Tenant rentals received on assets transferred to SPEs under the Master Trust Funding Program are sent to the trustee and used to pay monthly principal and interest payments.
Series 2016-1 Notes
In December 2016, the Company issued its first series of notes under the Master Trust Funding Program, consisting of $263.5 million of Class A Notes and $17.3 million of Class B Notes (together, the “Series 2016-1 Notes”). These notes were issued to an affiliate of Eldridge Industries, LLC (“Eldridge”) through underwriting agents. The Series 2016-1 Notes were issued by 2 SPEs formed to hold assets and issue the secured borrowings associated with the securitization.
The Series 2016-1 Notes were scheduled to mature in November 2046, but the terms of the Class A Notes required principal to be paid monthly through November 2021, with a balloon repayment at that time, and the terms of the Class B Notes required no monthly principal payments but required the full principal balance to be paid in November 2021.
In May 2019, the Company repurchased a portion of its Class A Series 2016-1 Notes with a face value of $200 million for $201.4 million from an affiliate of Eldridge. On November 12, 2019, the Company cancelled all $200 million of these repurchased Class A Series 2016-1 Notes.
In November 2019, the Company prepaid all $70.4 million of the then outstanding Series 2016-1 Notes (consisting of the remaining $53.2 million Class A Series 2016-1 Notes and $17.2 million Class B Series 2016-1 Notes) at par plus accrued interest pursuant to the terms of the agreements related to such securities.
Series 2017-1 Notes
In July 2017, the Company issued its second series of notes under the Master Trust Funding Program, consisting of $232.4 million of Class A Notes and $15.7 million of Class B Notes (together, the “Series 2017-1 Notes”). The Series 2017-1 Notes were issued by 3 SPEs formed to hold assets and issue the secured borrowings associated with the securitization.
The Series 2017-1 Notes mature in June 2047 and have a weighted average interest rate of 4.19% as of March 31, 2021. If the notes are not repaid in full on or before such anticipated repayment date, additional interest will begin to accrue on the notes. The anticipated repayment date for the Series 2017-1 Notes is June 2024.
30

The Series 2017-1 Notes may be voluntarily prepaid, in whole or in part, beginning in November 2021 without the payment of a make whole amount. Voluntary prepayments may be made before 31 months prior to the anticipated repayment date.
In February 2020, the Company voluntarily prepaid $62.3 million of the Class A Series 2017-1 Notes at par plus accrued interest pursuant to the terms of the agreements related to such securities. The Company was not subject to the payment of a make whole amount in connection with this prepayment. The Company accounted for this prepayment as a debt extinguishment. In addition, the Company recorded a $0.9 million loss on repurchase and repayment of secured borrowings related to the amortization of deferred financing costs on the $62.3 million voluntary prepayment of the Class A Series 2017-1 Notes during the three months ended March 31, 2020.
The following table presents information about interest expense related to the Master Trust Funding Program:
Three months ended March 31,
(in thousands)20212020
Interest expense$1,811 $2,126 
Amortization of deferred financing costs156 188 
Total$1,967 $2,314 
Total deferred financing costs, net, of $2.0 million and $2.2 million related to the Master Trust Funding Program were included within secured borrowings, net of deferred financing costs on the Company’s consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively.
6. Derivative and Hedging Activities
The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Subsequent to the adoption of ASU 2017-12, assessments of hedge effectiveness are performed quarterly using either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in accumulated other comprehensive income (loss) and the change is reflected as derivative changes in fair value in the supplemental disclosures of non-cash financing activities in the consolidated statements of cash flows. The amounts recorded in accumulated other comprehensive income (loss) will subsequently be reclassified to interest expense as interest payments are made on the Company’s borrowings under its variable-rate term loan facilities. During the next twelve months, the Company estimates that $9.8 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense. The Company does not have netting arrangements related to its derivatives.
The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations. As of March 31, 2021, there were no events of default related to the interest rate swaps.
31

The following table summarizes the notional amount at inception and fair value of these instruments on the Company's balance sheet as of March 31, 2021 and December 31, 2020 (dollar amounts in thousands):
Fair value of Asset/(Liability)
Derivatives Designated as Hedging Instruments (1)
Fixed Rate Paid by CompanyEffective DateMaturity Date
Notional Value (2)
March 31,
2021
December 31, 2020
Interest Rate Swap2.06%05/14/201904/12/2024$100,000 $(5,031)$(6,176)
Interest Rate Swap2.06%05/14/201904/12/202450,000 (2,517)(3,089)
Interest Rate Swap2.07%05/14/201904/12/202450,000 (2,522)(3,094)
Interest Rate Swap1.61%12/09/201911/26/2026175,000 (5,401)(11,838)
Interest Rate Swap1.61%12/09/201911/26/202650,000 (1,545)(3,396)
Interest Rate Swap1.60%12/09/201911/26/202625,000 (755)(1,675)
Interest Rate Swap1.36%07/09/202011/26/2026100,000 (1,729)(5,353)
Interest Rate Swap1.36%07/09/202011/26/202680,000 (1,394)(4,291)
$630,000 $(20,894)$(38,912)
_____________________________________
(1)All interest rate swaps have a 1 month LIBOR variable rate paid by the bank.
(2)Notional value indicates the extent of the Company’s involvement in these instruments, but does not represent exposure to credit, interest rate or market risks.
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The following table presents amounts recorded to accumulated other comprehensive gain/loss related to derivative and hedging activities for the periods presented:
Three months ended March 31,
(in thousands)20212020
Accumulated other comprehensive gain (loss)$18,023 $(38,100)
As of March 31, 2021, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $20.7 million. As of December 31, 2020, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $38.9 million. As of March 31, 2021 and December 31, 2020, there were 0 derivatives in a net asset position.
During the three months ended March 31, 2021 and 2020, the Company recorded a loss on the change in fair value of its interest rate swaps of $2.4 million and $0.3 million, respectively, which was included in interest expense in the Company's consolidated statements of operations.
As of March 31, 2021 and December 31, 2020, the Company had not posted any collateral related to these agreements and was not in breach of any provisions of such agreements. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $21.3 million and $40.2 million as of March 31, 2021 and December 31, 2020, respectively.
7. Equity
Stockholders’ Equity
On January 14, 2020, the Company completed a follow-on offering of 7,935,000 shares its common stock, including 1,035,000 shares of common stock purchased by the underwriters pursuant to an option to purchase additional shares, at an offering price of $25.20 per share. Net proceeds from this follow-on offering, after deducting underwriting discounts and commissions and other expenses, were $191.5 million.
On September 22, 2020, the Company completed a follow-on offering of 10,120,000 shares its common stock, including 1,320,000 shares of common stock purchased by the underwriters pursuant to an option to purchase additional shares, at an offering price of $19.00 per share. Net proceeds from this follow-on offering, after deducting underwriting discounts and commissions and other expenses, were $184.1 million.
32

At the Market Program
In June 2020, the Company established a new at the market common equity offering program, pursuant to which it can publicly offer and sell, from time to time, shares of its common stock with an aggregate gross sales price of up to $250 million (the “2020 ATM Program”). In connection with establishing the 2020 ATM Program, the Company terminated its prior at the market program, which it established in August 2019 (the “2019 ATM Program”) and no additional stock can be issued thereunder. Pursuant to the 2019 ATM Program, the Company could publicly offer and sell shares of its common stock with an aggregate gross sales price of up to $200 million and, prior to its termination, the Company issued common stock with an aggregate gross sales price of $184.4 million thereunder.
As of March 31, 2021, the Company issued common stock with an aggregate gross sales price of $144.2 million under the 2020 ATM Program and could issue additional common stock with an aggregate gross sales price of up to $105.8 million under the 2020 ATM Program. As the context requires, the 2020 ATM Program and the 2019 ATM Program are referred to herein as the “ATM Program."
The following table details information related to activity under the ATM Program for each period presented:
Three months ended March 31,
(in thousands, except share and per share data)20212020
Shares of common stock sold2,796,805 253,698 
Weighted average sale price per share$23.22 $24.74 
Gross proceeds$64,928 $6,277 
Net proceeds$63,891 $6,197 
Dividends on Common Stock
During the three months ended March 31, 2021 and 2020, the Company’s board of directors declared the following quarterly cash dividends on common stock:
Date DeclaredRecord DateDate PaidDividend per Share of Common StockTotal Dividend
(in thousands)
March 5, 2021March 31, 2021April 15, 2021$0.24 $26,265 
March 18, 2020March 31, 2020April 15, 2020$0.23 $21,168 
8. Non-controlling Interests
Essential Properties OP G.P., LLC, a wholly owned subsidiary of the Company, is the sole general partner of the Operating Partnership, and holds a 1.0% general partner interest in the Operating Partnership. The Company contributes the net proceeds from issuing shares of common stock to the Operating Partnership in exchange for a number of limited partnership in the Operating Partnership ('OP Units") equal to the number of shares of common stock issued.
As of March 31, 2021, the Company held 109,171,639 OP Units, representing a 99.5% interest in the Operating Partnership. As of the same date, former members of EPRT Holdings, LLC (the "Non-controlling OP Unit Holders") held 553,847 OP Units in the aggregate, representing a 0.5% limited partner interest in the Operating Partnership. The OP Units held by the Non-controlling OP Unit Holders are presented as non-controlling interests in the Company’s consolidated financial statements.
A holder of OP Units has the right to distributions per unit equal to dividends per share paid on the Company’s common stock and has the right to redeem OP Units for cash or, at the Company’s election, shares of the Company's common stock on a 1-for-one basis, provided, however, that such OP Units must have been outstanding for at least one year. Distributions to OP Unit holders are declared and paid concurrently with the Company’s cash dividends to common stockholders. See Note 7—Equity for details.
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9. Equity Based Compensation
Equity Incentive Plan
In 2018, the Company adopted an equity incentive plan (the “Equity Incentive Plan”), which provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock awards, performance awards and LTIP units. Officers, employees, non-employee directors, consultants, independent contractors and agents who provide services to the Company or to any subsidiary of the Company are eligible to receive such awards. A maximum of 3,550,000 shares may be issued under the Equity Incentive Plan, subject to certain conditions.
The following table presents information about the Company’s restricted stock awards ("RSAs"), and restricted stock units ("RSUs") during the three months ended March 31, 2021 and 2020:
Restricted Stock AwardsRestricted Stock Units
SharesWtd. Avg. Grant Date Fair ValueUnitsWtd. Avg. Grant Date Fair Value
Unvested, January 1, 2020492,701 $13.72 100,814 $22.80 
Granted135,120 32.13 
Vested(10,747)14.12 
Forfeited
Unvested, March 31, 2020481,954 $13.71 235,934 $28.14 
Unvested, January 1, 2021240,598 $13.73 321,602 $25.27 
Granted196,921 32.37 
Vested(9,865)14.12 (19,614)23.17 
Forfeited
Unvested, March 31, 2021230,733 $13.71 498,909 $28.15 
Restricted Stock Awards
On June 25, 2018, restricted stock awards ("RSAs") relating to an aggregate of 691,290 shares of unvested restricted common stock were granted to the Company's directors, executive officers and other employees under the Equity Incentive Plan. These RSAs vest over periods ranging from one year to three years from the date of grant, subject to the individual recipient's continued provision of service to the Company through the applicable vesting dates.
In January 2019, RSAs relating to an aggregate of 46,368 shares of unvested restricted common stock were granted to the Company’s executive officers, other employees and an external consultant under the Equity Incentive Plan. These RSAs vest over periods ranging from one year to four years from the date of grant, subject to the individual recipient’s continued provision of service to the Company through the applicable vesting dates. In June 2020, additional RSAs relating to an aggregate of 3,658 shares of unvested restricted common stock were granted to certain members of the Company's board of directors which vested immediately upon grant. The Company estimates the grant date fair value of RSAs granted under the Equity Incentive Plan using the average market price of the Company’s common stock on the date of grant.
The following table presents information about the Company’s RSAs for the periods presented:
Three months ended March 31,
(in thousands)20212020
Compensation cost recognized in general and administrative expense$759 $894 
Dividends declared on unvested RSAs and charged directly to distributions in excess of cumulative earnings55 111 
Fair value of shares vested during the period139 152 
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The following table presents information about the Company’s RSAs as of the dates presented:
(Dollars in thousands)March 31,
2021
December 31,
2020
Total unrecognized compensation cost$919 $1,678 
Weighted average period over which compensation cost will be recognized (in years)0.60.7
Restricted Stock Units
In January 2019 and 2020 and February 2021 the Company issued target grants of 119,085, 84,684, and 126,353 performance-based RSUs, respectively, to the Company’s executive officers under the Equity Incentive Plan. Of these awards, 75% are non-vested RSUs for which vesting percentages and the ultimate number of units vesting will be calculated based on the total shareholder return (“TSR”) of the Company's common stock as compared to the TSR of peer companies identified in the grant agreements. The payout schedule can produce vesting percentages ranging from 0% to 250% of target. TSR will be calculated based upon the average closing price for the 20-trading day period ending December 31, 2021 (for the 2019 grants), December 31, 2022 (for the 2020 grants) and December 31, 2023 (for the 2021 grants) divided by the average closing price for the 20-trading day period ended January 1, 2019 (for the 2019 grants), January 1, 2020 (for the 2020 grants), or January 1, 2021 (for the 2021 grants).The target number of units is based on achieving a TSR equal to the 50th percentile of the peer group. The Company recorded expense on these TSR RSUs based on achieving the target.
The grant date fair value of the TSR RSUs was measured using a Monte Carlo simulation model based on the following assumptions:
Grant Year
202120202019
Volatility55%20%18%
Risk free rate0.20%1.61%2.57%
The remaining 25% of these performance-based RSUs vest based on the Compensation Committee's subjective evaluation of the individual recipient’s achievement of certain strategic objectives. In May 2020, the Compensation Committee evaluated and subjectively awarded 7,596 of these RSUs to a former executive officer of the Company, which vested immediately. As of March 31, 2021, the Compensation Committee had not identified specific performance targets relating to the individual recipients’ achievement of strategic objectives for the remainder of the subjective awards. As such, these awards do not have either a service inception or a grant date for GAAP accounting purposes and the Company recorded 0 compensation cost with respect to this portion of the performance-based RSUs during the three months ended March 31, 2021 and 2020.
In June 2019 and 2020, the Company issued 11,500 and 26,817 RSUs, respectively, to the Company’s independent directors. These awards vest in full on the earlier of one year from the grant date or the first annual meeting of stockholders that occurs after the grant date, subject to the individual recipient’s continued provision of service to the Company through the applicable vesting date. The Company estimated the grant date fair value of these RSUs using the average market price of the Company’s common stock on the date of grant.
During the year ended December 31, 2020, the Company issued an aggregate of 157,943 RSUs to the Company’s executive officers, other employees and directors under the Equity Incentive Plan. These awards vest over a period of up to four years from the date of grant, subject to the individual recipient’s continued provision of service to the Company through the applicable vesting dates.
During the three months ended March 31, 2021, the Company issued 102,156 RSUs to the Company’s executive officers, other employees and directors under the Equity Incentive Plan. These awards vest over a period of up to four years from the date of grant, subject to the individual recipient’s continued provision of service to the Company through the applicable vesting dates.
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The following table presents information about the Company’s RSUs for the periods presented:
Three months ended March 31,
(in thousands)20212020
Compensation cost recognized in general and administrative expense$836 $614 
Dividend equivalents declared and charged directly to distributions in excess of cumulative earnings64 19 
Fair value of units vested during the period454 
The following table presents information about the Company’s RSUs as of the dates presented:
(Dollars in thousands)March 31,
2021
December 31,
2020
Total unrecognized compensation cost$10,795 $5,261 
Weighted average period over which compensation cost will be recognized (in years)2.92.4
10. Net Income Per Share
The Company computes net income per share pursuant to the guidance in the FASB ASC Topic 260, Earnings Per Share. The guidance requires the classification of the Company’s unvested restricted common stock and units, which contain rights to receive non-forfeitable dividends or dividend equivalents, as participating securities requiring the two-class method of computing net income per share. Diluted net income per share of common stock further considers the effect of potentially dilutive shares of common stock outstanding during the period, including the assumed vesting of restricted share units with a market-based or service-based vesting condition, where dilutive. The OP Units held by non-controlling interests represent potentially dilutive securities as the OP Units may be redeemed for cash or, at the Company’s election, exchanged for shares of the Company’s common stock on a 1-for-one basis.
The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share (dollars in thousands):
Three months ended March 31,
(dollar amounts in thousands)20212020
Numerator for basic and diluted earnings per share:
Net income$15,375 $14,043 
Less: net income attributable to non-controlling interests(80)(84)
Less: net income allocated to unvested restricted common stock and RSUs(119)(130)
Net income available for common stockholders: basic15,176 13,829 
Net income attributable to non-controlling interests80 84 
Net income available for common stockholders: diluted$15,256 $13,913 
Denominator for basic and diluted earnings per share:
Weighted average common shares outstanding107,217,918 90,805,301 
Less: weighted average number of shares of unvested restricted common stock(231,610)(482,899)
Weighted average shares outstanding used in basic net income per share106,986,308 90,322,402 
Effects of dilutive securities: (1)
OP Units553,847 553,847 
Unvested restricted common stock and RSUs515,586 456,048 
Weighted average shares outstanding used in diluted net income per share108,055,741 91,332,297 
_____________________________________
(1)For the three months ended March 31, 2021 and 2020, excludes the impact of 100,663 and 65,312 unvested restricted stock units, respectively, as the effect would have been antidilutive.
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11. Commitments and Contingencies
As of March 31, 2021, the Company had remaining future commitments under mortgage notes, reimbursement obligations or similar arrangements to fund $14.8 million to its tenants for development, construction and renovation costs related to properties leased from the Company.
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company or its properties.
Environmental Matters
In connection with the ownership of real estate, the Company may be liable for costs and damages related to environmental matters. As of March 31, 2021, the Company had not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity.
Defined Contribution Retirement Plan
The Company has a defined contribution retirement savings plan qualified under Section 401(a) of the Code (the “401(k) Plan”). The 401(k) Plan is available to all of the Company’s full-time employees. The Company provides a matching contribution in cash equal to 100% of the first 5% of eligible compensation contributed by participants which vests immediately.
The following table presents the matching contributions made by the Company for the three months ended March 31, 2021 and 2020:
Three months ended March 31,
(in thousands)20212020
401(k) matching contributions$91 $86 
Employment Agreements
The Company has employment agreements with its executive officers. These employment agreements have an initial term of four years, with automatic one year extensions unless notice of non-renewal is provided by either party. These agreements provide for initial annual base salaries and an annual performance bonus. If an executive officer’s employment terminates under certain circumstances, the Company would be liable for any annual performance bonus awarded for the year prior to termination, to the extent unpaid, continued payments equal to 12 months of base salary, monthly reimbursement for 12 months of COBRA premiums, and under certain situations, a pro rata bonus for the year of termination.
12. Fair Value Measurements
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs used in measuring financial instruments at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures regularly and, depending on various factors, it is possible that an asset or liability may be classified differently from period to period. However, the Company expects that changes in classifications between levels will be rare.
In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are
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not presented at their fair value on the consolidated balance sheet. The fair values of financial instruments are estimates based upon market conditions and perceived risks as of March 31, 2021 and December 31, 2020. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.
Financial assets and liabilities for which the carrying values approximate their fair values include cash and cash equivalents, restricted cash, accounts receivable included within prepaid expenses and other assets, dividends payable and accrued liabilities and other payables. Generally, these assets and liabilities are short term in duration and their carrying value approximates fair value on the consolidated balance sheets.
The estimated fair values of the Company’s fixed-rate loans receivable have been derived based on primarily unobservable market inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 3 within the fair value hierarchy. The Company believes the carrying value of its fixed-rate loans receivable approximates fair value.
The estimated fair values of the Company’s borrowings under the Revolving Credit Facility, the April 2019 Term Loan and the November 2019 Term Loan have been derived based on primarily unobservable market inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 3 within the fair value hierarchy. The Company believes the carrying value of its borrowings under the Revolving Credit Facility, the April 2019 Term Loan and the November 2019 Term Loan as of March 31, 2021 and December 31, 2020 approximate fair value.
The estimated fair values of the Company’s secured borrowings have been derived based on primarily unobservable market inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 3 within the fair value hierarchy.
As of March 31, 2021, the Company’s secured borrowings had an aggregate carrying value of $172.2 million (excluding net deferred financing costs of $2.0 million) and an estimated fair value of $176.1 million. As of December 31, 2020, the Company’s secured borrowings had an aggregate carrying value of $173.2 million (excluding net deferred financing costs of $2.2 million) and an estimated fair value of $176.4 million.
The Company measures its derivative financial instruments at fair value on a recurring basis. The fair values of the Company’s derivative financial instruments were determined using widely accepted valuation techniques, including discounted cash flow analyses on the expected cash flows of the derivative financial instruments. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While it was determined that the majority of the inputs used to value the derivatives fall within Level 2 of the fair value hierarchy under authoritative accounting guidance, the credit valuation adjustments associated with the derivatives also utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of March 31, 2021 and December 31, 2020, the significance of the impact of the credit valuation adjustments on the overall valuation of the derivative financial instruments was assessed and it was determined that these adjustments were not significant to the overall valuation of the derivative financial instruments. As a result, it was determined that the derivative financial instruments in their entirety should be classified in Level 2 of the fair value hierarchy. As of March 31, 2021 and December 31, 2020, the Company estimated the fair value of its interest rate swap contracts to be a $20.9 million liability and a $38.9 million liability, respectively.
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The Company measures its real estate investments at fair value on a nonrecurring basis. The fair values of these real estate investments were determined using the following input levels as of the dates presented:
Net Carrying ValueFair Value Measurements Using Fair Value Hierarchy
(in thousands)Fair ValueLevel 1Level 2Level 3
March 31, 2021
Non-financial assets:
Long-lived assets$9,506 $9,506 $$$9,506 
December 31, 2020
Non-financial assets:
Long-lived assets$4,754 $4,754 $$$4,754 
Long Lived Assets
The Company reviews its investments in real estate when events or circumstances change indicating that the carrying amount of an asset may not be recoverable. In the evaluation of an investment in real estate for impairment, many factors are considered, including estimated current and expected operating cash flows from the asset during the projected holding period, costs necessary to extend the life or improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of the asset in the ordinary course of business.
Quantitative information about Level 3 fair value measurements as of March 31, 2021 is as follows:
(dollar amounts in thousands)Fair ValueValuation TechniquesSignificant Unobservable Inputs
Non-financial assets:
Long-lived assets:
Medical/Dental - Daingerfield, TX$1,600 Sales comparison approachNon-binding sales contract$1,600 
Vacant - San Antonio, TX25 Sales comparison approachBinding sales contract25 
Vacant - Stevensville, MI1,025 Sales comparison approachNon-binding sales contract1,025 
Restaurant - Family Dining - Soperton, GA543 Sales comparison approachComparable sales prices543 
Restaurant - Family Dining - Gray, GA493 Sales comparison approachComparable sales prices493 
Restaurant - Family Dining - Sandersville, GA587 Sales comparison approachComparable sales prices587 
Restaurant - Family Dining - Barnesville, GA238 Sales comparison approachComparable sales prices238 
Vacant - Deming, NM548 Discounted cash flow approach
Terminal
Value: 8.0%
Discount Rate: 8.5%
548 
Home Furnishings - Battle Creek, MI4,446 Discounted cash flow approach
Terminal
Value: 8.0%
Discount Rate: 8.5%
4,446 
The fair values of impaired real estate were determined by using the following information, depending on availability, in order of preference: i) signed purchase and sale agreements or letters of intent; ii) recently quoted bid or ask prices; iii) estimates of future cash flows, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, terminal capitalization rates, discount rates and expenses based upon market conditions; or iv) expectations for the use of the real estate. Based on these inputs, the Company determined that its valuation of the impaired real estate falls within Level 3 of the fair value hierarchy.
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13. Subsequent Events
The Company has evaluated all events and transactions that occurred after March 31, 2021 through the filing of this Quarterly Report on Form 10-Q and determined that there have been no events that have occurred that would require adjustment to disclosures in the consolidated financial statements except as disclosed below.
April 2021 Equity Offering
In April 2021, the Company completed a follow-on offering of 8,222,500 shares of its common stock, including 1,072,500 shares of common stock purchased by the underwriters pursuant to an option to purchase additional shares, at a public offering price of $23.50 per share. The Company used a portion of the proceeds from this offering to repay the $138.0 million principal that was outstanding on the Revolving Credit Facility as of March 31, 2021.
Acquisition and Disposition Activity
Subsequent to March 31, 2021, the Company invested in 19 real estate properties for an aggregate investment amount (including acquisition-related costs) of $45.6 million.
Subsequent to March 31, 2021, the Company sold or transferred its investment in 4 real estate properties for an aggregate gross sales price of $4.8 million and incurred $0.3 million of disposition costs related to these transactions.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In this Quarterly Report on Form 10-Q, we refer to Essential Properties Realty Trust, Inc., a Maryland corporation, together with its consolidated subsidiaries, including its operating partnership, Essential Properties, L.P., as “we,” “us,” “our” or the “Company,” unless we specifically state otherwise or the context indicates otherwise.
Special Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning 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”). In particular, many statements pertaining to our business and growth strategies, investment, financing and leasing activities, and trends in our business, including trends in the market for long-term, net leases of freestanding, single-tenant properties, contain forward-looking statements. When used in this quarterly report, the words “estimate,” “anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximately,” and “plan,” and variations of such words, and similar words or phrases, that are predictions of future events or trends and that do not relate solely to historical matters, are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans, beliefs or intentions of management.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements; accordingly, you should not rely on forward-looking statements as predictions of future events. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise, and may not be realized. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
the ongoing adverse impact of the COVID-19 pandemic on the Company and its tenants;
general business and economic conditions;
risks inherent in the real estate business, including tenant defaults or bankruptcies, illiquidity of real estate investments, fluctuations in real estate values and the general economic climate in local markets, competition for tenants in such markets, potential liability relating to environmental matters and potential damages from natural disasters;
the performance, and financial condition of our tenants;
the availability of suitable properties to invest in and our ability to acquire and lease those properties on favorable terms;
our ability to renew leases, lease vacant space or re-lease space as existing leases expire or are terminated;
volatility and uncertainty in the credit markets and broader financial markets, including potential fluctuations in the Consumer Price Index ("CPI");
the degree and nature of our competition;
our failure to generate sufficient cash flows to service our outstanding indebtedness;
our ability to access debt and equity capital on attractive terms;
fluctuating interest rates;
availability of qualified personnel and our ability to retain our key management personnel;
changes in, or the failure or inability to comply with, applicable law or regulation;
our failure to continue to qualify for taxation as a real estate investment trust (“REIT”);
changes in the U.S. tax law and other U.S. laws, whether or not specific to REITs; and
additional factors discussed in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2020.
You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report. While forward-looking statements reflect our good faith beliefs, they are not guarantees
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of future events or of our performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.
Because we operate in a highly competitive and rapidly changing environment, new risks emerge from time to time, and it is not possible for management to predict all such risks, nor can management assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual events or results.
Overview
We are an internally managed real estate company that acquires, owns and manages primarily single-tenant properties that are net leased on a long-term basis to middle-market companies operating service-oriented or experience-based businesses. We generally invest in and lease freestanding, single-tenant commercial real estate facilities where a tenant services its customers and conducts activities that are essential to the generation of the tenant’s sales and profits. As of March 31, 2021, 95.3% of our $193.5 million of annualized base rent was attributable to properties operated by tenants in service-oriented and experience-based businesses. "Annualized base rent" means annualized contractually specified cash base rent in effect on March 31, 2021 for all of our leases (including those accounted for as loans or direct financing leases) commenced as of that date and annualized cash interest on our mortgage loans receivable as of that date.
We were organized on January 12, 2018 as a Maryland corporation. We have elected to be taxed as a REIT for federal income tax purposes beginning with the year ended December 31, 2018, and we believe that our current organization, operations and intended distributions will allow us to continue to so qualify. We completed our initial public offering in June 2018. Our common stock is listed on the New York Stock Exchange under the symbol “EPRT”.
Our primary business objective is to maximize stockholder value by generating attractive risk-adjusted returns through owning, managing and growing a diversified portfolio of commercially desirable properties. We have grown significantly since commencing our operations and investment activities in June 2016. As of March 31, 2021, we had a portfolio of 1,240 properties (inclusive of two undeveloped land parcels and 127 properties which secure our investments in mortgage loans receivable) that was diversified by tenant, industry, concept and geography, had annualized base rent of $193.5 million and was 99.1% occupied. Our portfolio is built based on the following core investment attributes:
Diversification. As of March 31, 2021, our portfolio was 99.1% occupied by 259 tenants operating 367 different brands, or concepts, in 17 industries across 43 states, with none of our tenants contributing more than 2.6% of our annualized base rent. Our goal is that, over time, no more than 5% of our annualized base rent will be derived from any single tenant or more than 1% from any single property.
Long Lease Term. As of March 31, 2021, our leases had a weighted average remaining lease term of 14.3 years (based on annualized base rent), with 4.2% of our annualized base rent attributable to leases expiring prior to January 1, 2026. Our properties generally are subject to long-term net leases that we believe provide us a stable base of revenue from which to grow our portfolio.
Significant Use of Master Leases. As of March 31, 2021, 59.9% of our annualized base rent was attributable to master leases.
Rent Coverage Ratio and Tenant Financial Reporting. As of March 31, 2021, our portfolio’s weighted average rent coverage ratio was 3.0x, and 98.2% of our leases (based on annualized base rent) obligate the tenant to periodically provide us with specified unit-level financial reporting.
Contractual Base Rent Escalation. As of March 31, 2021, 99.4% of our leases (based on annualized base rent) provided for increases in future base rent at a weighted average rate of 1.5% per year.

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Significant Use of Sale-Leaseback Investments. We seek to acquire properties owned and operated by middle-market businesses and lease the properties back to the operators pursuant to our standard lease form. During the three months ended March 31, 2021, approximately 85.0% of our investments were sale-leaseback transactions.
Smaller, Low Basis Single-Tenant Properties. We generally invest in freestanding “small-box” single- tenant properties. As of March 31, 2021, our average investment per property was $2.2 million (which equals our aggregate investment in our properties (including transaction costs, lease incentives and amounts funded for construction in progress) divided by the number of properties owned at such date), and we believe investments of similar size allow us to grow our portfolio without concentrating a large amount of capital in individual properties and limit our exposure to events that may adversely affect a particular property. Additionally, we believe that many of our properties are generally fungible and appropriate for multiple commercial uses, which reduces the risk that a particular property may become obsolete and increases their liquidity.
Our Competitive Strengths
We believe the following competitive strengths distinguish us from our competitors and allow us to compete effectively in the single-tenant, net-lease market:
Carefully Constructed Portfolio of Recently Acquired Properties Leased to Service-Oriented or Experience-Based Tenants. We have strategically constructed a portfolio that is diversified by tenant, industry and geography and generally avoids exposure to businesses that we believe are subject to pressure from e-commerce businesses. Our properties are generally subject to long-term net leases that we believe provide us with a stable base of revenue from which to grow our portfolio. As of March 31, 2021, we had a portfolio of 1,240 properties, with annualized base rent of $193.5 million, which was carefully selected by our management team in accordance with our focused and disciplined investment strategy. Our portfolio is diversified with 259 tenants operating 367 different concepts across 43 states and 17 industries. None of our tenants contributed more than 2.6% of our annualized base rent as of March 31, 2021, and our strategy targets a scaled portfolio that, over time, derives no more than 5% of its annualized base rent from any single tenant or more than 1% from any single property.
We focus on investing in properties leased to tenants operating in service-oriented or experience- based businesses such as car washes, restaurants (primarily quick service restaurants), early childhood education, medical and dental services, convenience stores, automotive services, equipment rental, entertainment and health and fitness, which we believe are generally more insulated from e-commerce pressure than many others. As of March 31, 2021, 95.3% of our annualized base rent was attributable to tenants operating service-oriented and experience-based businesses.
We believe that our portfolio’s diversity and rigorous underwriting decrease the impact on us of an adverse event affecting a specific tenant, industry or region, and our focus on leasing to tenants in industries that we believe are well-positioned to withstand competition from e-commerce businesses increases the stability and predictability of our rental revenue.
Experienced and Proven Management Team. Our senior management has significant experience in the net-lease industry and a track record of growing net-lease businesses to significant scale.
Our senior management team has been responsible for our focused and disciplined investment strategy and for developing and implementing our investment sourcing, underwriting, closing and asset management infrastructure, which we believe can support significant investment growth without a proportionate increase in our operating expenses. As of March 31, 2021, exclusive of our initial investment in a portfolio of 262 net leased properties, consisting primarily of restaurants, that we acquired on June 16, 2016 as part of the liquidation of General Electric Capital Corporation for an aggregate purchase price of $279.8 million (including transaction costs) (the "Initial Portfolio"), 84.4% of our portfolio’s annualized base rent was attributable to internally originated sale-leaseback transactions and 85.3% was acquired from parties who had previously engaged in one or more transactions that involved a member of our senior management team (including operators and tenants and other participants in the net lease industry, such as brokers, intermediaries and financing sources). The substantial experience, knowledge and relationships of our senior leadership team provide us with an extensive network of contacts that we believe allows us to originate attractive investment opportunities and effectively grow our business.
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Differentiated Investment Strategy. We seek to acquire and lease freestanding, single-tenant commercial real estate facilities where a tenant services its customers and conducts activities at the property that are essential to the generation of its sales and profits. We primarily seek to invest in properties leased to unrated middle- market companies that we determine have attractive credit characteristics and stable operating histories. We believe middle-market companies are underserved from a capital perspective and that we can offer them attractive real estate financing solutions while allowing us to enter into lease agreements that provide us with attractive risk-adjusted returns. Furthermore, many net-lease transactions with middle- market companies involve properties that are individually relatively small, which allows us to avoid concentrating a large amount of capital in individual properties. We maintain close relationships with our tenants, which we believe allows us to source additional investments and become the capital provider of choice as our tenants’ businesses grow and their real estate needs increase.
Asset Base Allows for Significant Growth. Building on our senior leadership team’s experience of more than 20 years in net-lease real estate investing, we have developed leading origination, underwriting, financing and property management capabilities. Our platform is scalable, and we seek to leverage our capabilities to improve our efficiency and processes to continue to seek attractive risk- adjusted growth. While we expect that our general and administrative expenses could increase as our portfolio grows, we expect that such expenses as a percentage of our portfolio and our revenues will decrease over time due to efficiencies and economies of scale. With our smaller asset base relative to other peers that focus on acquiring net leased real estate, we believe that we can achieve superior growth through manageable acquisition volume.
Disciplined Underwriting Leading to Strong Portfolio Characteristics. We generally seek to execute transactions with an aggregate purchase price of $3 million to $50 million. Our size allows us to focus on investing in a segment of the market that we believe is underserved from a capital perspective and where we can originate or acquire relatively smaller assets on attractive terms that provide meaningful growth to our portfolio. In addition, we seek to invest in commercially desirable properties that are suitable for use by different tenants, offer attractive risk-adjusted returns and possess characteristics that reduce our real estate investment risks.
Extensive Tenant Financial Reporting Supports Active Asset Management. We seek to enter into lease agreements that obligate our tenants to periodically provide us with corporate and/or unit-level financial reporting, which we believe enhances our ability to actively monitor our investments, negotiate lease renewals and proactively manage our portfolio to protect stockholder value. As of March 31, 2021, leases contributing 98.2% of our annualized base rent required tenants to provide us with specified unit-level financial information, and leases contributing 98.3% of our annualized base rent required tenants to provide us with corporate-level financial reporting.
Our Business and Growth Strategies
Our primary business objective is to maximize stockholder value by generating attractive risk-adjusted returns through owning, managing and growing a diversified portfolio of commercially desirable properties. We intend to pursue our objective through the following business and growth strategies.
Structure and Manage Our Diverse Portfolio with Focused and Disciplined Underwriting and Risk Management. We seek to maintain the stability of our rental revenue and maximize the long-term return on our investments while continuing our growth by using our focused and disciplined underwriting and risk management expertise. When underwriting assets, we emphasize commercially desirable properties, with strong operating performance, healthy rent coverage ratios and tenants with attractive credit characteristics.
Leasing. In general, we seek to enter into leases with (i) relatively long terms (typically with initial terms of 15 years or more and tenant renewal options); (ii) attractive rent escalation provisions; (iii) healthy rent coverage ratios; and (iv) tenant obligations to periodically provide us with financial information, which provides us with information about the operating performance of the leased property and/or tenant and allows us to actively monitor the security of payments under the lease on an ongoing basis. We strongly prefer to use master lease structures, pursuant to which we lease multiple properties to a single tenant on a unitary (i.e., “all or none”) basis. In addition, in the context of our sale-leaseback investments, we generally seek to establish contract rents that are at or below prevailing market rents, which we believe enhances tenant retention and reduces our releasing risk if a lease is rejected in a bankruptcy proceeding or expires.
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Diversification. We monitor and manage the diversification of our portfolio in order to reduce the risks associated with adverse developments affecting a particular tenant, property, industry or region. Our strategy targets a scaled portfolio that, over time, will (1) derive no more than 5% of its annualized base rent from any single tenant or more than 1% of its annualized base rent from any single property, (2) be primarily leased to tenants operating in service-oriented or experience- based businesses and (3) avoid significant geographic concentration. While we consider these criteria when making investments, we may be opportunistic in managing our business and make investments that do not meet one or more of these criteria if we believe the opportunity presents an attractive risk-adjusted return.
Asset Management. We are an active asset manager and regularly review each of our properties to evaluate various factors, including, but not limited to, changes in the business performance at the property, credit of the tenant and local real estate market conditions. Among other things, we use Moody’s Analytics RiskCalc, which is a model for predicting private company defaults based on Moody’s Analytics Credit Research Database, to proactively detect credit deterioration. Additionally, we monitor market rents relative to in-place rents and the amount of tenant capital expenditures in order to refine our tenant retention and alternative use assumptions. Our management team utilizes our internal credit diligence to monitor the credit profile of each of our tenants on an ongoing basis. We believe that this proactive approach enables us to identify and address issues in a timely manner and to determine whether there are properties in our portfolio that are appropriate for disposition.
In addition, as part of our active portfolio management, we may selectively dispose of assets that we conclude do not offer a return commensurate with the investment risk, contribute to unwanted geographic, industry or tenant concentrations, or may be sold at a price we determine is attractive. We believe that our underwriting processes and active asset management enhance the stability of our rental revenue by reducing default losses and increasing the likelihood of lease renewals.
Focus on Relationship-Based Sourcing to Grow Our Portfolio by Originating Sale-Leaseback Transactions. We plan to continue our disciplined growth by originating sale-leaseback transactions and opportunistically making acquisitions of properties subject to net leases that contribute to our portfolio’s tenant, industry and geographic diversification. As of March 31, 2021, exclusive of the Initial Portfolio, 84.4% of our portfolio’s annualized base rent was attributable to internally originated sale- leaseback transactions and 85.3% was acquired from parties who had previously engaged in transactions that involved a member of our senior management team (including operators and tenants and other participants in the net lease industry, such as brokers, intermediaries and financing sources). In addition, we seek to leverage our relationships with our tenants to facilitate investment opportunities, including selectively agreeing to reimburse certain of our tenants for development costs at our properties in exchange for contractually specified rent that generally increases proportionally with our funding. As of March 31, 2021, exclusive of the Initial Portfolio, approximately 42.4% of our investments were sourced from operators and tenants who had previously consummated a transaction involving a member of our management team. We believe our senior management team’s reputation, in-depth market knowledge and extensive network of longstanding relationships in the net lease industry provide us access to an ongoing pipeline of attractive investment opportunities.
Focus on Middle-Market Companies in Service-Oriented or Experience-Based Businesses. We primarily focus on investing in properties that we lease on a long-term, triple-net basis to middle- market companies that we determine have attractive credit characteristics and stable operating histories. Properties leased to middle-market companies may offer us the opportunity to achieve superior risk-adjusted returns as a result of our extensive and disciplined credit and real estate analysis, lease structuring and portfolio composition. We believe our capital solutions are attractive to middle- market companies, as such companies often have limited financing options as compared to larger, credit rated organizations. We also believe that, in many cases, smaller transactions with middle- market companies will allow us to maintain and grow our portfolio’s diversification. Middle-market companies are often willing to enter into leases with structures and terms that we consider attractive (such as master leases and leases that require ongoing tenant financial reporting) and believe contribute to the stability of our rental revenue.
In addition, we emphasize investments in properties leased to tenants engaged in service-oriented or experience-based businesses, such as car washes, restaurants (primarily quick service restaurants), early childhood education, medical and dental services, convenience stores, automotive services, equipment rental, entertainment and health and fitness, as we believe these businesses are generally more insulated from e-commerce pressure than many others.
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Internal Growth Through Long-Term Triple-Net Leases That Provide for Periodic Rent Escalations. We seek to enter into long-term (typically with initial terms of 15 years or more and tenant renewal options), triple-net leases that provide for periodic contractual rent escalations. As of March 31, 2021, our leases had a weighted average remaining lease term of 14.3 years (based on annualized base rent), with only 4.2% of our annualized base rent attributable to leases expiring prior to January 1, 2026, and 99.4% of our leases (based on annualized base rent) provided for increases in future base rent at a weighted average of 1.5% per year.
Actively Manage Our Balance Sheet to Maximize Capital Efficiency. We seek to maintain a prudent balance between debt and equity financing and to maintain funding sources that lock in long-term investment spreads and limit interest rate sensitivity. We target a level of net debt that, over time, is generally less than six times our annualized adjusted EBITDAre (as defined in "Non-GAAP Financial Measures" below). We have access to multiple sources of debt capital, including the investment grade-rated, asset-backed bond market, through our Master Trust Funding Program, and bank debt, through our revolving credit facility, our five-year senior unsecured term loan facility and our seven-year senior unsecured term loan facility.
Historical Investment and Disposition Activity
The following table sets forth select information about our quarterly investment activity for the quarters ended June 30, 2019 through March 31, 2021 (dollars in thousands):
Three Months Ended
June 30, 2019September 30, 2019December 31, 2019March 31, 2020
Investment Volume$190,280 $173,590 $204,709 $167,490 
Number of Transactions32 284132
Property Count91 1399463
Avg. Investment per Unit$2,015 $1,174 $2,049 $2,551 
Cash Cap Rates 1
7.3%7.5%7.3%7.1%
GAAP Cap Rates 2
8.1%8.3%8.0%8.0%
Master Lease Percentage 3,4
67%73%41%54%
Sale-Leaseback Percentage 3,5
65%93%81%88%
Percentage of Financial Reporting 3,6
100%100%99%100%
Rent Coverage Ratio3.2x3.2x3.1x2.7x
Lease Term (in years)15.316.616.316.1
Three Months Ended
June 30, 2020September 30, 2020December 31, 2020March 31, 2021
Investment Volume$42,369 $148,877 $244,078 $197,816 
Number of Transactions11193322
Property Count135010874
Avg. Investment per Unit$2,870 $2,866 $2,218 $2,650 
Cash Cap Rates 1
7.4%7.1%7.1%7.0%
GAAP Cap Rates 2
8.1%7.9%7.7%7.9%
Master Lease Percentage 3,4
68%79%89%79%
Sale-Leaseback Percentage 3,5
100%92%88%85%
Percentage of Financial Reporting 3,6
100%100%100%100%
Rent Coverage Ratio4.3x2.8x3.6x3.0x
Lease Term (in years)16.717.616.316.1
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(1)     Annualized contractually specified cash base rent for the first full month after the investment divided by the purchase price for the property.
(2)    GAAP rent for the first twelve months after the investment divided by the purchase price for the property.
(3)    As a percentage of annualized base rent.
(4)    Includes investments in mortgage loans receivable collateralized by more than one property.
(5)    Includes investments in mortgage loans receivable made in support of sale-leaseback transactions.
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(6)    Tenants party to leases that obligate them to periodically provide us with corporate and/or unit-level financial reporting, as a percentage of our annualized base rent.
The following table sets forth select information about our quarterly disposition activity for the quarters ended June 30, 2019 through March 31, 2021 (dollars in thousands):
Three Months Ended
June 30, 2019September 30, 2019December 31, 2019March 31, 2020
Disposition volume1
$26,804 $19,495 $15,229 $19,571 
Cash cap rate on leased assets 2
7.0%6.7%6.9%7.1%
Leased properties sold 3
10 10 
Vacant properties sold 3
— 
Three Months Ended
June 30, 2020September 30, 2020December 31, 2020March 31, 2021
Disposition volume1
$3,420 $19,595 $39,042 $25,197 
Cash cap rate on leased assets 2
6.8%7.0%7.4%7.1%
Leased properties sold 3
11 21 15 
Vacant properties sold 3
— 
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(1)     Net of transaction costs.
(2)     Annualized contractually specified cash base rent at time of sale divided by the gross sale price (excluding transaction costs) for the property.
(3)     Property count excludes dispositions where only a portion of the owned parcel was sold.
COVID-19 Pandemic Update
COVID-19 has created significant uncertainty and economic disruption, which is likely to persist, or increase, for a period of unknown duration. The pandemic has adversely affected us and our tenants, and the full extent to which it will adversely affect our financial condition, liquidity, and results of operations is difficult to predict and depends on evolving factors, including the duration and scope of the pandemic, and governmental and social responses thereto. We continue to closely monitor the impact of COVID-19 on all aspects of our business, including our portfolio and the creditworthiness of our tenants. In March 2020, we initiated steps to safeguard the health and safety of our employees, and transitioned all of our employees to a remote work environment. We successfully executed our business continuity plan, with all of our core financial, operational and telecommunication systems operating from a cloud-based environment with no disruption. More recently, our employees have been able to work in our headquarters, located in Princeton, New Jersey, on a schedule designed to promote appropriate social distancing and health and safety.
The impact of the pandemic is rapidly evolving. It continues to adversely impact commercial activity and cause uncertainty and volatility in financial markets. The pandemic has adversely affected our tenants’ ability to meet their financial obligations to us (including the payment of rent and deferred rent), exposed us to increased risk of tenant default or bankruptcy, and impaired the value of certain of our properties. The pandemic has caused a large number of our tenants to suspend or reduce their operations, which has adversely affected their ability to pay rent to us.
One of our main operating functions is our proactive asset management approach. Accordingly, we continue to actively engage in discussions with our tenants regarding the impact of COVID-19 on their business operations, liquidity, and financial position, and, where appropriate, negotiate rent deferrals or other concessions. During 2020, we entered into deferral agreements with certain of our tenants and recognized contractual base rent related to these agreements as a component of rental revenue in our consolidated statements of operations for 2020. These rent deferrals were negotiated on a tenant-by-tenant basis, and, in general, allowed a tenant to defer all or a portion of its rent for a portion of 2020, with all of the deferred rent to be paid to us pursuant to a schedule that generally extends up to 24 months from the original due date of the deferred rent.
The adverse impacts of the pandemic and the responses designed to mitigate its effects (such as local, state, regional or national lockdowns or other limitations on business activities) have varied, and likely will continue
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to vary, by geography. It is possible that our properties and tenants located in certain areas will be more adversely affected than our properties and tenants located in other areas. While our properties are diversified by geography, our business includes substantial holdings in the following states as of as of March 31, 2021: Texas (13.8%), Georgia (9.1%), Florida (6.4%), Ohio (5.7%), Arkansas (4.3%) (percentages indicate annualized base rent attributable to properties in each state as of such date). If the pandemic surges in these states or other areas from which we derive significant revenue, the adverse impact of the pandemic on us and our tenants would likely increase.
Similarly, as of March 31, 2021, leases representing approximately 32.6% of our annualized base rent as of March 31, 2021 were with tenants in industries that have been particularly adversely affected by the COVID-19 pandemic, including: early childhood education (13.4% of annualized base rent), restaurants (casual dining and family dining) (7.2% of annualized base rent), health and fitness (5.0% of annualized base rent), entertainment (3.6% of annualized base rent), movie theaters (2.2% of annualized base rent) and home furnishings (1.2% of annualized base rent). See “Our Real Estate Investment Portfolio—Diversification by Industry” and “Our Real Estate Investment Portfolio—Diversification by Geography,” below for additional information about our exposure to various states and industries.
The pandemic could cause our occupancy to decrease, which would lead to increased property-level expenses, as we would be obligated to pay costs (e.g., real estate taxes, maintenance costs and insurance) that would otherwise be paid by a tenant at a property subject to a triple-net lease. Additionally, while we recently have begun to accelerate our investment program, the pandemic has caused us to adopt a more cautious investment strategy, as we emphasize liquidity and financial flexibility, that has slowed our pace of external growth. Conditions in the bank lending and capital markets have been volatile and may deteriorate as a result of the pandemic, and our ability, and that of our tenants, to access capital may become constrained or eliminated, or the terms on which capital may be accessed may deteriorate significantly.
It is possible that the existing deterioration, or further deterioration, in our tenants’ ability to operate their businesses caused by COVID-19 or otherwise, will cause our tenants to be unable or unwilling to meet their contractual obligations to us, including the payment of rent (including deferred rent) or to request further rent deferrals or other forms of rent relief, such as rent reductions. Given the significant uncertainty around the duration and severity of the impact of COVID-19, we are unable to predict the impact it will have on our tenants’ continued ability to pay rent (including deferred rent). Therefore, information provided regarding October rent collections should not serve as an indication of expected future rent collections.
The extent to which COVID-19 impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, geographic and industry variations in COVID-19’s impact and actions taken to contain COVID-19. The impact of COVID-19 on our tenants and properties will likely have a continuing adverse impact on us, particularly if tenants are unable to meet their rental payment obligations to us (including the payment of deferred rent), our vacancy rate increases or if we choose to grant further rent deferrals or other concessions.
Liquidity and Capital Resources
As of March 31, 2021, we had $2.5 billion of net investments in our investment portfolio, consisting of investments in 1,240 properties (inclusive of two undeveloped land parcels and 127 properties which secure our investments in mortgage loans receivable), with annualized base rent of $193.5 million. Substantially all of our cash from operations is generated by our investment portfolio.
Our liquidity requirements for operating our Company consist primarily of the funds necessary to pay principal and interest payments on our outstanding indebtedness, and the general and administrative expenses of operating our business and managing our portfolio. The occupancy level of our portfolio is high (99.1% as of March 31, 2021) and, because substantially all of our leases are triple-net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with our properties. When a property becomes vacant because the tenant has vacated the property due to default or at the expiration of the lease term without a renewal or new lease being executed, we incur the property costs not paid by the tenant, as well as those property costs accruing during the time it takes to locate a new tenant or to sell the property. As of March 31, 2021, 11 of our properties were vacant, representing less than 1% of our portfolio, and all remaining properties were subject to a lease (excluding two undeveloped land parcels). We expect to incur some property costs from time to time in periods during which properties that become vacant are being marketed for lease or sale. In addition, we may recognize an expense for certain property costs, such as real estate taxes billed in arrears, if we believe the tenant
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is likely to vacate the property before making payment on those obligations. The amount of such property costs can vary quarter-to-quarter based on the timing of property vacancies and the level of underperforming properties; however, we do not expect that such costs will be significant to our operations.
We intend to continue to grow through additional investments in stand-alone single tenant properties. To accomplish this objective, we seek to acquire real estate with a combination of debt and equity capital and with cash from operations that we do not distribute to our stockholders. When we sell properties, we generally reinvest the cash proceeds from our sales in new property acquisitions. Our short-term liquidity requirements also include the funding needs associated with 20 properties where we have agreed to provide construction financing or reimburse the tenant for certain development, construction and renovation costs in exchange for contractually payments of interest or increased rent that generally increases in proportion with our level of funding. As of March 31, 2021, we agreed to provide construction financing or reimburse the tenant for certain development, construction and renovation costs in an aggregate amount of $36.5 million, and, as of such date, we funded $21.7 million of this commitment. We expect to fund the balance of such commitment by December 31, 2021.
Additionally, as of April 30, 2021, we were under contract to acquire 49 properties with an aggregate purchase price of $115.0 million, subject to completion of our due diligence procedures and satisfaction of customary closing conditions. We expect to meet our short-term liquidity requirements, including our investment in potential future single tenant properties, primarily with our cash and cash equivalents, net cash from operating activities and borrowings under the Revolving Credit Facility and potentially through proceeds generated from our ATM Program, which has $105.8 million remaining.
Our long-term liquidity requirements consist primarily of funds necessary to invest in additional properties and repay indebtedness. We expect to meet our long-term liquidity requirements through various sources of capital, including net cash from operating activities, borrowings under our revolving credit and term loan facilities, future financings, sale of common stock under our ATM Program, proceeds from the sale of the properties in our portfolio and other secured and unsecured borrowings (including potential issuances under the Master Trust Funding Program). However, at any point in time, there may be a number of factors that could have a material and adverse effect on our ability to access these capital sources, including unfavorable conditions in the overall equity and credit markets, our level of leverage, the portion of our unencumbered, borrowing restrictions imposed by our existing debt agreements, general market conditions for real estate and potentially REITs specifically, our operating performance, our liquidity and general market perceptions about us. The success of our business strategy will depend, to a significant degree, on our ability to access these various capital sources to fund our investment in single tenant properties and thereby grow our cash flows.
An additional liquidity need is funding the required level of distributions that are among the requirements for us to continue to qualify for taxation as a REIT. During the three months ended March 31, 2021, our board of directors declared total cash distributions of $0.24 per share of common stock. Holders of OP Units are entitled to distributions per unit equivalent to those paid by us per share of common stock. During the three months ended March 31, 2021, we paid $25.7 million of distributions to common stockholders and OP Unit holders, and, as of March 31, 2021, we recorded $26.4 million of distributions payable to common stockholders and OP Unit holders. To continue to qualify for taxation as a REIT, we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. As a result of this requirement, we cannot rely on retained earnings to fund our business needs to the same extent as other entities that are not REITs. If we do not have sufficient funds available to us from our operations to fund our business needs, we will need to find alternative ways to fund those needs. Such alternatives may include, among other things, selling properties (whether or not the sales price is optimal or otherwise meets our strategic long-term objectives), incurring additional indebtedness or issuing equity securities in public or private transactions. The availability and attractiveness of the terms of these potential sources of financing cannot be assured.
Generally, our short-term debt capital is provided through use of our Revolving Credit Facility. We manage our long-term leverage position through the issuance of long-term fixed-rate debt on a secured or unsecured basis. Generally, we will seek to issue long-term debt on an unsecured basis as we believe this facilitates greater flexibility in our management of our existing portfolio and our ability to retain optionality in our overall financing and growth strategy. By seeking to match the expected cash inflows from our long-term leases with the expected cash outflows for our long-term debt, we seek to “lock in,” for as long as is economically feasible, the expected positive difference between our scheduled cash inflows on our leases and the cash outflows on our debt obligations. In this way, we seek to reduce the risk that increases in interest rates would adversely impact our results of operations. Our ability
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to execute leases that contain annual rent escalations also contributes to our ability to manage the risk of a rising interest rate environment. We use various financial instruments designed to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies such as interest rate swaps and caps, depending on our analysis of the interest rate environment and the costs and risks of such strategies. Although we are not required to maintain a particular leverage ratio and may not be able to do so, we generally consider that, over time, a level of net debt (which includes recourse and non-recourse borrowings and any outstanding preferred stock less unrestricted cash and cash held for the benefit of lenders) that is less than six times our annualized adjusted EBITDAre is prudent for a real estate company like ours.
As of March 31, 2021, all of our long-term debt was fixed-rate debt or was effectively converted to a fixed-rate for the term of the debt through hedging strategies and our weighted average debt maturity was 4.1 years. As we continue to invest in real estate properties and grow our real estate portfolio, we intend to manage our long-term debt maturities to reduce the risk that a significant amount of our debt will mature in any single year in the future.
Over time, we may access additional long-term debt capital with future debt issuances through our Master Trust Funding Program, although we have no plans to do so. Future sources of debt capital may also include term borrowings from insurance companies, banks and other sources, mortgage financing of a single-asset or portfolio of assets and CMBS borrowings. These sources of debt capital may offer us the opportunity to lower our cost of funding and further diversify our sources of debt capital. Over time, we may choose to issue preferred equity as a part of our overall strategy for funding our investment objectives and growth goals. As our outstanding debt matures, we may refinance it as it comes due or choose to repay it using cash and cash equivalents or borrowings under the Revolving Credit Facility. Management believes that the cash generated by our operations, together with our cash and cash equivalents at March 31, 2021, our borrowing availability under the Revolving Credit Facility and our potential access to additional sources of capital, will be sufficient to fund our operations for the foreseeable future and allow us to acquire the real estate for which we currently have made commitments.
Description of Certain Debt
The following table summarizes our outstanding indebtedness as of March 31, 2021 and December 31, 2020:
Principal Outstanding
Weighted Average Interest Rate (1)
(in thousands)Maturity DateMarch 31,
2021
December 31,
2020
March 31,
2021
December 31,
2020
Unsecured term loans:
April 2019 Term LoanApril 2024$200,000 $200,000 3.3%3.3%
November 2019 Term LoanNovember 2026430,000 430,000 3.0%3.0%
Revolving Credit FacilityApril 2023138,000 18,000 1.4%1.4%
Secured borrowings:
Series 2017-1 NotesJune 2047172,191 173,193 4.2%4.2%
Total principal outstanding$940,191 $821,193 3.0%3.3%
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(1)Interest rates are presented after giving effect to our interest rate swap agreements, where applicable.
Unsecured Revolving Credit Facility and April 2019 Term Loan
Through our Operating Partnership, we are party to an Amended Credit Agreement with a group of lenders, which provides for revolving loans of up to $400.0 million (the “Revolving Credit Facility”) and up to an additional $200.0 million in term loans (the “April 2019 Term Loan”).
The Revolving Credit Facility matures in April 2023, with an extension option of up to one year exercisable by the Operating Partnership, subject to certain conditions, and the April 2019 Term Loan matures on April 12, 2024. The loans under each of the Revolving Credit Facility and the April 2019 Term Loan initially bear interest at an annual rate of applicable LIBOR plus the applicable margin (which applicable margin varies between the Revolving Credit Facility and the April 2019 Term Loan). The applicable LIBOR is the rate with a term equivalent to the interest period applicable to the relevant borrowing. The applicable margin initially is a spread set according to a leverage-based pricing grid. At the Operating Partnership’s election, on and after receipt of an investment grade corporate credit rating from S&P or Moody’s, the applicable margin will be a spread set according to the credit ratings provided
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by S&P and/or Moody’s. Each of the Revolving Credit Facility and the April 2019 Term Loan is freely pre-payable at any time and is mandatorily payable if borrowings exceed the borrowing base or the revolving facility limit. The Operating Partnership may re-borrow amounts paid down on the Revolving Credit Facility but not on the April 2019 Term Loan. The Operating Partnership is required to pay revolving credit fees throughout the term of the Revolving Credit Agreement based upon its usage of the Revolving Credit Facility, at a rate which depends on its usage of such facility during the period before we receive an investment grade corporate credit rating from S&P or Moody’s, and which rate shall be based on the corporate credit rating from S&P and/or Moody’s after the time, if applicable, we receive such a rating. The Amended Credit Agreement has an accordion feature to increase, subject to certain conditions, the maximum availability of credit (either through increased revolving commitments or additional term loans) by up to $200.0 million.
The Operating Partnership is the borrower under the Amended Credit Agreement, and we and each of the subsidiaries of the Operating Partnership that owns a direct or indirect interest in an eligible real property asset are guarantors under the Amended Credit Agreement.
Under the terms of the Amended Credit Agreement, we are subject to various restrictive financial and nonfinancial covenants which, among other things, require us to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth.
The Amended Credit Agreement restricts our ability to pay distributions to our stockholders under certain circumstances. However, we may make distributions to the extent necessary to maintain our qualification as a REIT under the Code. The Amended Credit Agreement contains certain additional covenants that, subject to exceptions, limit or restrict our incurrence of indebtedness and liens, disposition of assets, transactions with affiliates, mergers and fundamental changes, modification of organizational documents, changes to fiscal periods, making of investments, negative pledge clauses and lines of business and REIT qualification.
November 2019 Term Loan
On November 26, 2019, we, through our Operating Partnership, entered into a $430.0 million term loan credit facility (the “November 2019 Term Loan”) with a group of lenders. The November 2019 Term Loan provides for term loans to be drawn up to an aggregate amount of $430.0 million with a maturity of November 26, 2026. The loans under the November 2019 Term Loan are available to be drawn in up to three draws during the six-month period beginning on November 26, 2019. In December 2019, we made an initial borrowing of $250.0 million available under the November 2019 Term Loan and, on March 26, 2020, we borrowed the remaining $180.0 million available under the November 2019 Term Loan.
Borrowings under the November 2019 Term Loan bear interest at an annual rate of applicable LIBOR plus the applicable margin. The applicable LIBOR will be the rate with a term equivalent to the interest period applicable to the relevant borrowing. The applicable margin will initially be a spread set according to a leverage-based pricing grid. At the Operating Partnership’s irrevocable election, on and after receipt of an investment grade corporate credit rating from S&P or Moody’s, the applicable margin will be a spread set according to our corporate credit ratings provided by S&P and/or Moody’s. The November 2019 Term Loan is pre-payable at any time by the Operating Partnership, provided, that if the loans under the November 2019 Term Loan are repaid on or before November 26, 2020, 2021, they are subject to a one percent prepayment premium. After November 26, 2021 the loans may be repaid without penalty. The November 2019 Term Loan has an accordion feature to increase, subject to certain conditions, the maximum availability of the facility up to an aggregate of $500 million.
The Operating Partnership is the borrower under the November 2019 Term Loan, and our Company and each of its subsidiaries that owns a direct or indirect interest in an eligible real property asset are guarantors under the facility. Under the terms of the November 2019 Term Loan, we are subject to various restrictive financial and nonfinancial covenants which, among other things, require us to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth.
The November 2019 Term Loan restricts our ability to pay distributions to our stockholders under certain circumstances. However, we may make distributions to the extent necessary to maintain our qualification as a REIT under the Code. The November 2019 Term Loan contains certain additional covenants that, subject to exceptions, limit or restrict our incurrence of indebtedness and liens, disposition of assets, transactions with affiliates, mergers
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and fundamental changes, modification of organizational documents, changes to fiscal periods, making of investments, negative pledge clauses and lines of business and REIT qualification.
Master Trust Funding Program
SCF RC Funding I LLC, SCF RC Funding II LLC and SCF RC Funding III LLC (collectively, the “Master Trust Issuers”), all of which are indirect wholly-owned subsidiaries of the Operating Partnership, have issued net-lease mortgage notes payable (the “Notes”) with an aggregate outstanding gross principal balance of $172.2 million as of March 31, 2021. The Notes are secured by all assets owned by the Master Trust Issuers. We provide property management services with respect to the mortgaged properties owned by the Master Trust Issuers and service the related leases pursuant to an amended and restated property management and servicing agreement, dated as of July 11, 2017, among the Master Trust Issuers, the Operating Partnership (as property manager and as special servicer), Midland Loan Services, a division of PNC Bank, National Association, (as back-up manager) and Citibank, N.A. (as indenture trustee).
Beginning in 2016, two series of Notes, each comprised of two classes, were issued under the program: (i) Notes originally issued by SCF RC Funding I LLC and SCF RC Funding II LLC (the “Series 2016-1 Notes”), which were repaid in full in November 2019, and (ii) Notes originally issued by SCF RC Funding I LLC, SCF RC Funding II LLC and SCF RC Funding III LLC (the “Series 2017-1 Notes”), with an aggregate outstanding principal balance of $172.2 million as of March 31, 2021. The Notes are the joint obligations of all Master Trust Issuers.
Notes issued under our Master Trust Funding Program are secured by a lien on all of the property owned by the Master Trust Issuers and the related leases. A substantial portion of our real estate investment portfolio serves as collateral for borrowings outstanding under our Master Trust Funding Program. As of March 31, 2021, we pledged 257 properties, with a net investment amount of $364.4 million, under the Master Trust Funding Program. The agreement governing our Master Trust Funding Program permits substitution of real estate collateral from time to time, subject to certain conditions.
Absent a plan to issue additional long-term debt through the Master Trust Funding Program, we are not required to add assets to, or substitute collateral in, the existing collateral pool. We can voluntarily elect to substitute assets in the collateral pool, subject to meeting prescribed conditions that are designed to protect the collateral pool by requiring the substitute assets to be of equal or greater measure in attributes such as: the asset’s fair value, monthly rent payments, remaining lease term and weighted average coverage ratios. In addition, we can sell underperforming assets and reinvest the proceeds in new properties. Any substitutions and sales are subject to an overall limitation of 35% of the collateral pool which is typically reset at each new issuance unless the substitution or sale is credit- or risk-based, in which case there are no limitations.
A significant portion of our cash flows are generated by the special purpose entities comprising our Master Trust Funding Program. For the three months ended March 31, 2021, excess cash flow from the Master Trust Funding Program, after payment of debt service and servicing and trustee expenses, totaled $5.1 million on cash collections of $8.5 million, which represents a debt service coverage ratio (as defined in the program documents) of 2.1 to 1. If at any time the monthly debt service coverage ratio (as defined in the program documents) generated by the collateral pool is less than or equal to 1.25 to 1, excess cash flow from the Master Trust Funding Program entities will be deposited into a reserve account to be used for payments to be made on the Notes, to the extent there is a shortfall; if at any time the three month average debt service coverage ratio generated by the collateral pool is less than or equal to 1.15 to 1, excess cash flow from the Master Trust Funding Program entities will be applied to an early amortization of the Notes. If cash generated by our properties held in the Master Trust Funding Program is required to be held in a reserve account or applied to an early amortization of the Notes, it would reduce the amount of cash available to us and could limit or eliminate our ability to make distributions to our common stockholders.
The Notes require monthly payments of principal and interest. The payment of principal and interest on any Class B Notes is subordinate to the payment of principal and interest on any Class A Notes. The Series 2017-1 Notes mature in June 2047 and have a weighted average interest rate of 4.2% as of March 31, 2021. However, the anticipated repayment date for the Series 2017-1 Notes is June 2024, and if the notes are not repaid in full on or before such anticipated repayment date, additional interest will begin to accrue on the notes.
The Series 2017-1 Notes may be voluntarily prepaid, in whole or in part, at any time on or after the date that is 31 months prior to the anticipated repayment date in June 2024 without the payment of a make whole amount.
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Voluntary prepayments may be made before 31 months prior to the anticipated repayment date but will be subject to the payment of a make whole amount.
An event of default will occur under the Master Trust Funding Program, if, among other things, the Master Trust Issuers fail to pay interest or principal on the Notes when due, materially default in complying with the material covenants contained in the documents evidencing the Notes or the mortgages on the mortgaged property collateral or if a bankruptcy or other insolvency event occurs. Under the master trust indenture, we have a number of Master Trust Issuer covenants including requirements to pay any taxes and other charges levied or imposed upon the Master Trust Issuers and to comply with specified insurance requirements. We are also required to ensure that all uses and operations on or of our properties comply in all material respects with all applicable environmental laws. As of March 31, 2021, we were in material compliance with all such covenants.
As of March 31, 2021, scheduled principal repayments on the Notes issued under the Master Trust Funding Program for the remainder of 2021 are $3.1 million. We expect to meet these repayment requirements primarily through our net cash from operating activities.
Cash Flows
Comparison of the three months ended March 31, 2021 and 2020
As of March 31, 2021, we had $42.8 million of cash and cash equivalents and $2.0 million of restricted cash as compared to $192.6 million and $21.5 million, respectively, as of March 31, 2020.
Cash Flows for the three months ended March 31, 2021
During the three months ended March 31, 2021, net cash provided by operating activities was $30.1 million. Our cash flows from operating activities are primarily dependent upon the occupancy level of our portfolio, the rental rates specified in our leases, the interest on our loans and direct financing lease receivables, the collectability of rent and interest income and the level of our operating expenses and other general and administrative costs. Cash inflows related to net income adjusted for non-cash items of $32.8 million (net income of $15.4 million adjusted for non-cash items, including depreciation and amortization of tangible, intangible and right-of-use real estate assets, amortization of deferred financing costs and other assets, loss on repurchase of secured borrowings, provision for impairment of real estate, gain on dispositions of real estate, net, straight-line rent receivable, and equity-based compensation expense, which in the aggregate net to an addition of $17.5 million). These net cash inflows were partially offset by the change in rent receivables, prepaid expenses and other assets of $2.5 million and the change in accrued liabilities and other payables of $0.2 million.
Net cash used in investing activities during the three months ended March 31, 2021 was $175.3 million. Our net cash used in investing activities is generally used to fund our investments in real estate, including capital expenditures, the development of our construction in progress and investments in loans receivables and direct financing leases, offset by cash provided from the disposition of real estate and principal collections on our loans and direct financing lease receivables. The cash used in investing activities included $174.7 million to fund investments in real estate, including capital expenditures, $0.1 million to fund construction in progress, $23.8 million of investments in loans receivable, $0.6 million in deposits on prospective real estate investments and $1.3 million paid to tenants as lease incentives. These cash outflows were partially offset by $24.3 million of proceeds from sales of investments, net of disposition costs and $0.9 million of principal collections on our loans and direct financing lease receivables.
Net cash provided by financing activities of $157.0 million during the three months ended March 31, 2021 related to net cash inflows of $64.9 million from the issuance of common stock through our ATM Program and $120.0 million of borrowings under the Revolving Credit Facility. These cash inflows were partially offset by $1.0 million of repayments of secured borrowing principal, the payment of $25.7 million in dividends and the payment of $1.2 million of offering costs related to the ATM Program.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of March 31, 2021.
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Contractual Obligations
The following table provides information with respect to our commitments as of March 31, 2021:
Payment due by period
(in thousands)TotalApril 1 - December 31, 20212022 - 20232024 - 2025Thereafter
Secured Borrowings—Principal$172,191 $3,082 $8,804 $160,305 $— 
Secured Borrowings—Fixed Interest (1)
22,561 5,372 13,844 3,345 — 
Unsecured Term Loans630,000 — — 200,000 430,000 
Revolving Credit Facility138,000 — 138,000 — — 
Tenant Construction Financing and
   Reimbursement Obligations (2)
14,826 14,826 — — — 
Operating Lease Obligations (3)
20,179 1,107 2,625 1,885 14,562 
Total$997,757 $24,387 $163,273 $365,535 $444,562 
_____________________________________
(1)Includes interest payments on outstanding indebtedness issued under our Master Trust Funding Program through the anticipated repayment dates.
(2)Includes obligations to reimburse certain of our tenants for construction costs that they incur in connection with construction at our properties in exchange for contractually specified rent that generally increases proportionally with our funding.
(3)Includes $17.3 million of rental payments due under ground lease arrangements where our tenants are directly responsible for payment.
Additionally, we may enter into commitments to purchase goods and services in connection with the operation of our business. These commitments generally have terms of one-year or less and reflect expenditure levels comparable to our historical expenditures as adjusted for growth.
We have made an election to be taxed as a REIT for federal income tax purposes beginning with our taxable year ended December 31, 2018; accordingly, we generally will not be subject to federal income tax, for the year ended December 31, 2020, if we distribute all of our REIT taxable income, determined without regard to the dividends paid deduction, to our stockholders.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. Estimates and assumptions include, among other things, subjective judgments regarding the fair values and useful lives of our properties for depreciation and lease classification purposes, the collectability of receivables and asset impairment analysis. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we reevaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have not made any material changes to these policies during the periods covered by this quarterly report.
Recent Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) establishing ASC 326, as amended by subsequent ASUs on the topic. ASU 2016-13 is
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effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. We adopted this guidance on January 1, 2020 and recorded estimates of expected loss on its loans receivable portfolio beginning on that date.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. We adopted ASU 2017-12 while accounting for our interest rate swaps. As we did not have other derivatives outstanding at time of adoption, no prior period adjustments were required. Pursuant to the provisions of ASU 2017-12, we are no longer required to separately measure and recognize hedge ineffectiveness. Instead, we recognize the entire change in the fair value of cash flow hedges included in the assessment of hedge effectiveness in other comprehensive (loss) income. The amounts recorded in other comprehensive (loss) income will subsequently be reclassified to earnings when the hedged item affects earnings. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019, with early adoption permitted. We adopted this guidance on January 1, 2020 and the adoption of ASU 2018-13 did not have a material impact on our related disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In April 2020, the Financial Accounting Standards Board ("FASB”) staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing lease guidance, the entity would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant, which would be accounted for under the lease modification framework, or if a lease concession was under the enforceable rights and obligations that existed in the original lease, which would be accounted for outside the lease modification framework. The Lease Modification Q&A provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease. This election is only available when total cash flows resulting from the modified lease are substantially similar to the cash flows in the original lease. We made this election and account for rent deferrals by increasing our rent receivables as receivables accrue and continuing to recognize income during the deferral period. Lease concessions or amendments other than rent deferrals are evaluated to determine if a substantive change to the consideration in the original lease contract has occurred and should be accounted for as a lease modification. We continue to evaluate any amounts recognized for collectability, regardless of whether accounted for as a lease modification or not, and record an adjustment to rental income for tenant credit for amounts that are not probable of collection. For lease concessions granted in conjunction with the COVID-19 pandemic, we reviewed all amounts recognized on a tenant-by-tenant basis for collectability.
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” (“ASU 2020-06”). 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 the 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
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for instruments that may be settled in cash or other assets. The amendments in ASU 2020-06 are effective for us for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. We adopted this guidance on January 1, 2021 and the adoption of ASU 2020-06 did not have a material impact on our consolidated financial statements.
Our Real Estate Investment Portfolio
As of March 31, 2021, we had a portfolio of 1,240 properties, including two undeveloped land parcels, 11 vacant properties and 127 properties that secure our investments in mortgage loans receivable, that was diversified by tenant, concept, industry and geography and had annualized base rent of $193.5 million. Our 259 tenants operate 367 different concepts in 17 industries across 43 states. None of our tenants represented more than 2.6% of our portfolio at March 31, 2021, and our top ten largest tenants represented 20.2% of our annualized base rent as of that date.
Diversification by Tenant
As of March 31, 2021, our top ten tenants included the following concepts: Captain D's, Cadence Academy, EquipmentShare, Mister Car Wash, Circle K, AMC, Mavis Discount Tire, The Malvern School, Zaxby's, and Driver's Edge. Our 1,227 leased properties are operated by our 259 tenants. The following table details information about our tenants and the related concepts as of March 31, 2021 (dollars in thousands):
Tenant(1)
Concept
Number of
Properties (2)
Annualized
Base Rent
% of
Annualized
Base Rent
Captain D's, LLCCaptain D's74 $5,094 2.6 %
Cadence Education, LLCCadence Academy23 4,788 2.5 %
EQUIPMENTSHARE.COM INCEquipmentShare16 4,731 2.4 %
CAR WASH PARTNERS, INC.Mister Car Wash13 4,358 2.3 %
Mac's Convenience Stores, LLC (3)
Circle K34 3,797 2.0 %
American Multi-Cinema, Inc (4)
AMC3,535 1.8 %
Mavis Tire Express Services Corp.Mavis Discount Tire19 3,395 1.8 %
Malvern School Properties, LPThe Malvern School13 3,208 1.7 %
1788 Chicken, LLCZaxby's20 3,141 1.6 %
GB Auto Service, Inc.Driver's Edge13 3,004 1.5 %
Top 10 Subtotal230 39,051 20.2 %
Other997 154,418 79.8 %
Total1,227 $193,469 100.0 %
_____________________________________
(1)Represents tenant or guarantor.
(2)Excludes two undeveloped land parcels and 11 vacant properties.
(3)Includes properties leased to a subsidiary of Alimentation Couche Tard Inc.
(4)Includes four properties leased to a subsidiary of AMC Entertainment Holdings, Inc.
As of March 31, 2021, our five largest tenants, who contributed 11.8% of our annualized base rent, had a rent coverage ratio of 3.9x and our ten largest tenants, who contributed 20.2% of our annualized base rent, had a rent coverage ratio of 3.1x.
As of March 31, 2021, 94.2% of our leases (based on annualized base rent) were triple-net, and the tenant is typically responsible for all improvements and is contractually obligated to pay all operating expenses, such as maintenance, insurance, utility and tax expense, related to the leased property. Due to the triple-net structure of our leases, we do not expect to incur significant capital expenditures relating to our triple-net leased properties, and the potential impact of inflation on our operating expenses is reduced.
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Diversification by Concept
Our tenants operate their businesses across 367 concepts. The following table details those concepts as of March 31, 2021 (dollars in thousands):
ConceptType of BusinessAnnualized
Base
Rent
% of
Annualized
Base Rent
Number of
Properties (1)
Building
(Sq. Ft.)
Captain D'sService$6,033 3.1 %84 218,259 
EquipmentShareService4,730 2.4 %16 330,911 
Mister Car WashService4,358 2.3 %13 54,621 
Circle KService3,875 2.0 %35 130,975 
AMCExperience3,535 1.8 %240,672 
Mavis Discount TireService3,395 1.8 %19 165,713 
Zaxby'sService3,355 1.7 %21 72,986 
The Malvern SchoolService3,208 1.7 %13 149,781 
Vasa FitnessExperience2,948 1.5 %258,085 
R-StoreService2,854 1.5 %25 105,703 
Top 10 Subtotal38,291 19.8 %236 1,727,706 
Other155,178 80.2 %991 8,943,814 
Total$193,469 100.0 %1,227 10,671,520 
_____________________________________
(1)Excludes two undeveloped land parcels and 11 vacant properties.
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Diversification by Industry
Our tenants’ business concepts are diversified across various industries. The following table summarizes those industries as of March 31, 2021 (dollars in thousands):
Tenant IndustryType of
Business
Annualized
Base
Rent
% of
Annualized
Base Rent
Number of
Properties (1)
Building
(Sq. Ft.)
Rent Per
Sq. Ft. (2)
Car WashesService$28,827 14.9 %119 558,339 $50.75 
Quick ServiceService26,356 13.6 %333 896,960 29.34 
Early Childhood EducationService25,937 13.4 %113 1,176,431 21.69 
Medical / DentalService23,977 12.4 %141 1,036,054 23.06 
Automotive ServiceService16,599 8.6 %115 799,574 20.76 
Convenience StoresService15,296 7.9 %138 551,526 27.73 
Casual DiningService8,227 4.3 %56 345,028 24.24 
Equipment Rental and SalesService6,147 3.2 %26 500,710 12.27 
Family DiningService5,516 2.9 %38 222,737 25.33 
Pet Care ServicesService3,528 1.8 %35 258,280 17.24 
Other ServicesService3,114 1.5 %19 207,883 15.72 
Service Subtotal163,524 84.5 %1,133 6,553,522 25.07 
Health and FitnessExperience9,648 5.0 %25 1,004,189 9.61 
EntertainmentExperience6,966 3.6 %18 647,483 10.76 
Movie TheatresExperience4,167 2.2 %293,206 14.21 
Experience Subtotal20,781 10.8 %49 1,944,878 10.68 
Home FurnishingsRetail3,017 1.6 %17 648,374 4.65 
GroceryRetail2,399 1.2 %267,729 8.96 
Retail Subtotal5,416 2.8 %22 916,103 5.91 
Building MaterialsIndustrial3,748 1.9 %23 1,257,017 2.98 
Total/Weighted Average$193,469 100.0 %1,227 10,671,520 $18.15 
_____________________________________
(1)Excludes two undeveloped land parcels and 11 vacant properties.
(2)Excludes properties with no annualized base rent and properties under construction.
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Diversification by Geography
Our 1,240 property locations are spread across 43 states. The following table details the geographical locations of our properties as of March 31, 2021 (dollars in thousands):
StateAnnualized
Base Rent
% of
Annualized
Base Rent
Number of
Properties
Building
(Sq. Ft.)
Texas$26,668 13.8 %157 1,261,644 
Georgia17,550 9.1 %117 651,982 
Florida12,406 6.4 %56 587,955 
Ohio11,010 5.7 %73 723,861 
Arkansas8,227 4.3 %66 362,290 
Alabama7,435 3.8 %51 461,183 
Michigan6,988 3.6 %48 810,571 
Arizona6,613 3.4 %38 314,948 
Wisconsin6,272 3.2 %38 258,723 
Tennessee6,160 3.2 %49 243,396 
Minnesota5,590 2.9 %33 447,526 
North Carolina4,876 2.5 %24 308,950 
Oklahoma4,812 2.5 %28 340,446 
Illinois4,660 2.4 %29 204,783 
South Carolina4,645 2.4 %31 328,827 
Pennsylvania4,587 2.4 %29 241,291 
Colorado4,317 2.2 %22 222,179 
New York4,306 2.2 %37 185,923 
Missouri4,144 2.1 %30 544,649 
California3,473 1.8 %22 196,425 
Massachusetts3,355 1.7 %19 334,931 
Mississippi3,341 1.7 %30 121,250 
Kentucky3,102 1.6 %27 157,447 
New Jersey2,993 1.6 %17 118,613 
New Mexico2,932 1.5 %19 113,697 
Indiana2,851 1.5 %24 192,529 
Iowa2,719 1.4 %19 113,101 
Maryland1,922 1.0 %68,324 
Louisiana1,877 1.0 %11 80,537 
South Dakota1,702 0.9 %41,472 
Washington1,646 0.9 %11 88,735 
Connecticut1,610 0.8 %104,684 
Virginia1,528 0.8 %71,774 
Kansas1,485 0.8 %90,952 
Oregon1,097 0.6 %124,931 
Utah922 0.5 %67,659 
West Virginia915 0.5 %18 44,915 
Nevada657 0.3 %56,420 
Nebraska633 0.3 %17,776 
Wyoming433 0.2 %14,001 
Idaho393 0.2 %35,433 
New Hampshire380 0.2 %37,786 
Alaska237 0.1 %6,630 
Total$193,469 100.0 %1,240 10,801,149 
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Lease Expirations
As of March 31, 2021, the weighted average remaining term of our leases was 14.3 years (based on annualized base rent), with only 4.2% of our annualized base rent attributable to leases expiring prior to January 1, 2026. The following table sets forth our lease expirations for leases in place as of March 31, 2021 (dollars in thousands):
Lease Expiration Year (1)
Annualized
Base Rent
% of Annualized
Base Rent
Number of
Properties (2)
Weighted
Average Rent
Coverage Ratio (3)
2021$76 — %-0.9x
2022490 0.3 %3.0x
2023867 0.5 %10 3.1x
20244,874 2.5 %47 4.7x
20251,724 0.9 %18 2.5x
20264,293 2.2 %29 3.6x
20274,459 2.3 %28 2.7x
20283,991 2.1 %14 1.6x
20295,089 2.6 %71 3.9x
20305,230 2.7 %49 3.7x
20319,487 4.9 %63 2.5x
203210,089 5.2 %48 4.0x
20337,936 4.1 %27 2.6x
203433,053 17.1 %236 3.4x
203520,525 10.6 %129 3.0x
20363,639 1.9 %29 2.2x
20375,205 2.7 %27 6.7x
203812,289 6.4 %78 2.5x
203921,998 11.4 %117 2.6x
204028,189 14.6 %147 2.3x
Thereafter9,966 5.0 %54 2.1x
Total/Weighted Average$193,469 100.0 %1,227 3.0x
_____________________________________
(1)Expiration year of contracts in place as of March 31, 2021, excluding any tenant option renewal periods that have not been exercised.
(2)Excludes two undeveloped land parcels and 11 vacant properties.
(3)Weighted by annualized base rent.
Unit Level Rent Coverage
Generally, we seek to acquire investments with healthy rent coverage ratios, and as of March 31, 2021, the weighted average rent coverage ratio of our portfolio was 3.0x. Our portfolio’s unit-level rent coverage ratios (by annualized base rent and excluding leases that do not report unit-level financial information) as of March 31, 2021 are displayed below:
Unit Level Coverage Ratio% of Total
≥ 2.00x56.6 %
1.50x to 1.99x16.7 %
1.00x to 1.49x10.7 %
< 1.00x14.2 %
Not Reported1.8 %
100.0 %
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Credit Ratings
Tenant financial distress is typically caused by consistently poor or deteriorating operating performance, near-term liquidity issues or unexpected liabilities. To assess the probability of tenant insolvency, we utilize Moody’s Analytics RiskCalc, which is a model for predicting private company defaults based on Moody’s Analytics Credit Research Database, which incorporates both market and company-specific risk factors. The following table illustrates the portions of our annualized base rent as of March 31, 2021 attributable to leases with tenants having specified implied credit ratings based on their Moody’s RiskCalc scores:
Credit RatingNR< 1.00x1.00 to 1.49x1.50 to 1.99x≥ 2.00x
CCC+0.1 %3.6 %2.9 %1.1 %0.3 %
B-0.2 %— %1.5 %0.8 %5.1 %
B0.1 %0.7 %0.6 %0.4 %3.6 %
B+— %2.5 %3.1 %2.9 %2.9 %
BB-— %1.9 %0.8 %3.1 %7.1 %
BB0.1 %0.7 %1.0 %1.9 %7.6 %
BB+— %1.3 %0.6 %1.9 %10.2 %
BBB-0.1 %0.2 %— %0.7 %5.0 %
BBB— %0.7 %0.2 %2.3 %2.8 %
BBB+— %0.1 %0.1 %1.1 %6.5 %
A-— %— %— %— %2.0 %
A— %— %— %— %1.8 %
A+— %— %— %— %0.1 %
AA-— %— %— %— %— %
_____________________________________
NR    Not reported.
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Results of Operations
The following discussion includes the results of our operations for the periods presented.
Comparison of the three months ended March 31, 2021 and 2020
Three months ended March 31,
(dollar amounts in thousands)20212020Change%
Revenues:
Rental revenue$45,432 $39,542 $5,890 14.9 %
Interest income on loans and direct financing lease receivables3,105 1,938 1,167 60.2 %
Other revenue, net15 114.3 %
Total revenues48,552 41,487 7,065 
Expenses:
General and administrative6,431 7,536 (1,105)(14.7)%
Property expenses1,414 373 1,041 279.1 %
Depreciation and amortization15,646 13,012 2,634 20.2 %
Provision for impairment of real estate5,722 373 5,349 1,434.0 %
Provision for loan losses38 468 (430)(91.9)%
Total expenses29,251 21,762 7,489 
Other operating income:
Gain on dispositions of real estate, net3,788 1,875 1,913 102.0 %
Income from operations23,089 21,600 1,489 
Other (expense)/income:
Loss on repayment of secured borrowings— (924)924 100.0 %
Interest expense(7,678)(6,833)(845)12.4 %
Interest income20 231 (211)(91.3)%
Income (loss) before income tax expense (benefit)15,431 14,074 1,357 
Income tax expense (benefit)56 31 25 80.6 %
Net income15,375 14,043 1,332 
Net income attributable to non-controlling interests(80)(84)(4)(4.8)%
Net income attributable to stockholders$15,295 $13,959 $1,336 
Rental revenue. Rental revenue increased by $5.9 million for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020. The increase in revenues was driven primarily by the growth in the size of our real estate investment portfolio, which generated additional rental revenues. Our real estate investment portfolio grew from 1,050 properties, representing $2.0 billion in net investments in real estate, as of March 31, 2020 to 1,240 properties, representing $2.5 billion in net investments in real estate, as of March 31, 2021. Our real estate investments were acquired throughout the periods presented and were not all owned by us for the entirety of periods; accordingly, a significant portion of the increase in rental revenue between periods is related to recognizing revenue in 2021 from acquisitions that were made during 2020 and 2021.
Interest on loans and direct financing lease receivables. Interest on loans and direct financing lease receivables increased by $1.2 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily due to additional investments in loans receivable during 2021, which led to a higher average daily balance of loans receivable outstanding during the three months ended March 31, 2021.
Other revenue. Other revenue increased approximately $8,000 during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily due to the receipt of interest earned during three months ended March 31, 2021.
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General and administrative expenses. General and administrative expenses decreased $1.1 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The decrease was primarily related to a decrease in legal, professional and directors’ fees, as well as one time severance costs and charges incurred during the three months ended March 31, 2020.
Property expenses. Property expenses increased by approximately $1.0 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The increase in property expenses was primarily due to increased reimbursable costs, insurance expenses and property-related operational costs three months ended March 31, 2021.
Depreciation and amortization expense. Depreciation and amortization expense increased by $2.6 million during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. Depreciation and amortization expense increased in proportion to the increase in the size of our real estate portfolio during the three months ended March 31, 2021.
Provision for impairment of real estate. Impairment charges on real estate investments were $5.7 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021 and 2020, we recorded a provision for impairment of real estate at nine and two of our real estate investments, respectively. We strategically seek to identify non-performing properties that we may re-lease or dispose of in an effort to improve our returns and manage risk exposure. An increase in vacancy associated with our disposition or re-leasing strategies may trigger impairment charges when the expected future cash flows from the properties from sale or re-lease are less than their net book value.
Provision for loan losses. Provision for loan losses decreased by $0.4 million for the three months ended March 31, 2021. This provision is related to the changes in our loan loss reserve subsequent to the adoption of ASC 326. Under ASC 326, we are required to re-evaluate the expected loss on our portfolio of loans and direct financing lease receivables at each balance sheet date.
Gain on dispositions of real estate, net. Gain on dispositions of real estate, net, increased by $1.9 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. We disposed of 16 and 10 real estate properties during the three months ended March 31, 2021 and 2020, respectively.
Loss on repayment of secured borrowings. During the three months ended March 31, 2020, we recorded a $0.9 million loss on repayment of secured borrowings due to the write-off deferred financing costs related to the partial repayment of the Series 2017-1 Notes in February 2020.
Interest expense. Interest expense increased by $0.8 million during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The increase is primarily related to higher average outstanding balances on our November 2019 Term Loan and our Revolving Credit Facility during the three months ended March 31, 2021.
Interest income. Interest income decreased by $0.2 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The decrease in interest income was primarily due to higher average daily cash balances in our interest-bearing bank accounts and higher interest rates during the three months ended March 31, 2020
Income tax expense. Income tax expense increased by approximately $25,000 for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. We are organized and operate as a REIT and are not subject to U.S. federal corporate income taxes on our REIT taxable income that is currently distributed to our stockholders. However, the Operating Partnership is subject to taxation in certain state and local jurisdictions that impose income taxes on a partnership. The changes in income tax expense are primarily due to changes in the proportion of our real estate portfolio located in jurisdictions where we are subject to taxation.
Non-GAAP Financial Measures
Our reported results are presented in accordance with GAAP. We also disclose the following non-GAAP financial measures: funds from operations (“FFO”), core funds from operations (“Core FFO”), adjusted funds from operations (“AFFO”), earnings before interest, taxes, depreciation and amortization (“EBITDA”), EBITDA further adjusted to exclude gains (or losses) on sales of depreciable property and real estate impairment losses
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(“EBITDAre”), adjusted EBITDAre, annualized adjusted EBITDAre, net debt, net operating income (“NOI”) and cash NOI (“Cash NOI”). We believe these non-GAAP financial measures are industry measures used by analysts and investors to compare the operating performance of REITs.
We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude extraordinary items (as defined by GAAP), net gain or loss from sales of depreciable real estate assets, impairment write-downs associated with depreciable real estate assets and real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO is used by management, and may be useful to 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 and losses on sales (which are dependent 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 compute Core FFO by adjusting FFO, as defined by NAREIT, to exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and/or not related to our core real estate operations. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of our peers, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis. Core FFO is used by management in evaluating the performance of our core business operations. Items included in calculating FFO that may be excluded in calculating Core FFO include certain transaction related gains, losses, income or expense or other non-core amounts as they occur.
To derive AFFO, we modify our computation of Core FFO to include other adjustments to GAAP net income related to certain items that we believe are not indicative of our operating performance, including straight-line rental revenue, non-cash interest expense, non-cash compensation expense, other amortization and non-cash charges, capitalized interest expense and transaction costs. Such items may cause short-term fluctuations in net income but have no impact on operating cash flows or long-term operating performance. We believe that AFFO is an additional useful supplemental measure for investors to consider when assessing our operating performance without the distortions created by non-cash items and certain other revenues and expenses.
FFO, Core FFO and AFFO do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of FFO, Core FFO and AFFO may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs.
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The following table reconciles net income (which is the most comparable GAAP measure) to FFO, Core FFO and AFFO attributable to stockholders and non-controlling interests:
Three months ended March 31,
(in thousands)20212020
Net income$15,375 $14,043 
Depreciation and amortization of real estate15,621 12,988 
Provision for impairment of real estate5,722 373 
Gain on dispositions of real estate, net(3,788)(1,875)
FFO attributable to stockholders and non-controlling interests32,930 25,529 
Other non-recurring expenses (1)
— 1,576 
Core FFO attributable to stockholders and non-controlling interests32,930 27,105 
Adjustments:
Straight-line rental revenue, net(3,644)(3,191)
Non-cash interest479 534 
Non-cash compensation expense1,595 1,291 
Other amortization expense1,105 434 
Other non-cash charges36 468 
Capitalized interest expense(20)(95)
Transaction costs— 67 
AFFO attributable to stockholders and non-controlling interests$32,481 $26,613 
_____________________________________
(1)Includes non-recurring expenses of $0.7 million for accruals of severance payments and acceleration of non-cash compensation expense in connection with the termination of one of our executive officers and our $0.9 million loss on repayment of secured borrowings during the three months ended March 31, 2020.
We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. In 2017, NAREIT issued a white paper recommending that companies that report EBITDA also report EBITDAre. We compute EBITDAre in accordance with the definition adopted by NAREIT. NAREIT defines EBITDAre as EBITDA (as defined above) excluding gains (or losses) from the sales of depreciable property and real estate impairment losses. We present EBITDA and EBITDAre as they are measures commonly used in our industry. We believe that these measures are useful to investors and analysts because they provide supplemental information concerning our operating performance, exclusive of certain non-cash items and other costs. We use EBITDA and EBITDAre as measures of our operating performance and not as measures of liquidity.
EBITDA and EBITDAre do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of EBITDA and EBITDAre may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs.
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The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA and EBITDAre attributable to stockholders and non-controlling interests:
Three months ended March 31,
(in thousands)20212020
Net income$15,375 $14,043 
Depreciation and amortization15,646 13,012 
Interest expense7,678 6,833 
Interest income(20)(231)
Income tax expense56 31 
EBITDA attributable to stockholders and non-controlling interests38,735 33,688 
Provision for impairment of real estate5,722 373 
Gain on dispositions of real estate, net(3,788)(1,875)
EBITDAre attributable to stockholders and non-controlling interests
$40,669 $32,186 
We further adjust EBITDAre for the most recently completed quarter i) based on an estimate calculated as if all re-leasing, investment and disposition activity that took place during the quarter had been made on the first day of the quarter, ii) to exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and iii) to eliminate the impact of lease termination fees and contingent rental revenue from certain of our tenants, which is subject to sales thresholds specified in the applicable leases (“Adjusted EBITDAre”). We then annualize quarterly Adjusted EBITDAre by multiplying it by four (“Annualized Adjusted EBITDAre”), which we believe provides a meaningful estimate of our current run rate for all of our investments as of the end of the most recently completed quarter. 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 less than our current Annualized Adjusted EBITDAre.
The following table reconciles net income (which is the most comparable GAAP measure) to Annualized Adjusted EBITDAre attributable to stockholders and non-controlling interests for the three months ended March 31, 2021:
(in thousands)Three months ended March 31, 2021
Net income$15,375 
Depreciation and amortization15,646 
Interest expense7,678 
Interest income(20)
Income tax expense56 
EBITDA attributable to stockholders and non-controlling interests38,735 
Provision for impairment of real estate5,722 
Gain on dispositions of real estate, net(3,788)
EBITDAre attributable to stockholders and non-controlling interests
40,669 
Adjustment for current quarter re-leasing, acquisition and disposition activity (1)
2,987 
Adjustment to exclude other non-recurring expenses (2)
123 
Adjusted EBITDAre attributable to stockholders and non-controlling interests
$43,779 
Annualized Adjusted EBITDAre attributable to stockholders and non-controlling interests
$175,116 
_____________________________________
(1)Adjustment assumes all re-leasing activity, investments and dispositions of real estate investments made during the three months ended March 31, 2021 had occurred on January 1, 2021.
(2)Adjustment is made to exclude non-core expenses added back to compute Core FFO, our provision for loan losses and the write-off of receivables.
We calculate our net debt as our gross debt (defined as total debt plus net deferred financing costs on our secured borrowings) less cash and cash equivalents and restricted cash available for future investment. We believe
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excluding cash and cash equivalents and restricted cash available for future investment from gross debt, all of which could be used to repay debt, provides an estimate of the net contractual amount of borrowed capital to be repaid, which we believe is a beneficial disclosure to investors and analysts.
The following table reconciles total debt (which is the most comparable GAAP measure) to net debt:
(in thousands)March 31,
2021
December 31,
2020
Secured borrowings, net of deferred financing costs$170,161 $171,007 
Unsecured term loan, net of deferred financing costs626,450 626,272 
Revolving credit facility138,000 18,000 
Total debt934,611 815,279 
Deferred financing costs, net5,580 5,914 
Gross debt940,191 821,193 
Cash and cash equivalents(42,842)(26,602)
Restricted cash available for future investment(1,974)(6,388)
Net debt$895,375 $788,203 
We compute NOI as total revenues less property expenses. NOI excludes all other items of expense and income included in the financial statements in calculating net income or loss, in accordance with GAAP. Cash NOI further excludes non-cash items included in total revenues and property expenses, such as straight-line rental revenue and other amortization and non-cash charges. We believe NOI and Cash NOI provide useful and relevant information because they reflect only those revenue and expense items that are incurred at the property level and present such items on an unlevered basis.
NOI and Cash NOI are not measures of financial performance under GAAP. You should not consider our NOI and Cash NOI as alternatives to net income or cash flows from operating activities determined in accordance with GAAP. Additionally, our computation of NOI and Cash NOI may differ from the methodology for calculating these metrics used by other equity REITs, and, therefore, may not be comparable to similarly titled measures reported by other equity REITs.
The following table reconciles net income (which is the most comparable GAAP measure) to NOI and Cash NOI attributable to stockholders and non-controlling interests:
Three months ended March 31,
(in thousands)20212020
Net income$15,375 $14,043 
General and administrative expense6,431 7,536 
Depreciation and amortization15,646 13,012 
Provision for impairment of real estate5,722 373 
Provision for loan losses38 468 
Gain on dispositions of real estate, net(3,788)(1,875)
Loss on repayment secured borrowings— 924 
Interest expense7,678 6,833 
Interest income(20)(231)
Income tax expense56 31 
NOI attributable to stockholders and non-controlling interests47,138 41,114 
Straight-line rental revenue, net(3,644)(3,191)
Other amortization and non-cash charges1,105 434 
Cash NOI attributable to stockholders and non-controlling interests$44,599 $38,357 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Over time, we generally seek to match the expected cash inflows from our long-term leases with the expected cash outflows for our long-term debt. To achieve this objective, we borrow on a fixed-rate basis through longer-term debt issuances under our Master Trust Funding Program. Additionally, we incur debt that bears interest
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at floating rates under the Revolving Credit Facility, which we use in connection with our operations, including for funding investments, the April 2019 Term Loan and the November 2019 Term Loan. We have fixed the floating rates on borrowings under our term loan facilities by entering into interest rate swap agreements where we pay a fixed interest rate and receive a floating interest rate equal to the rate we pay on the respective term loan.
Principal Outstanding
Weighted Average Interest Rate (1)
(in thousands)Maturity DateMarch 31,
2021
December 31,
2020
March 31,
2021
December 31,
2020
Unsecured term loans:
April 2019 Term LoanApril 2024$200,000 $200,000 3.3%3.3%
November 2019 Term LoanNovember 2026430,000 430,000 3.0%3.0%
Revolving Credit FacilityApril 2023138,000 18,000 1.4%1.4%
Secured borrowings:
Series 2017-1 NotesJune 2047172,191 173,193 4.2%4.2%
Total principal outstanding$940,191 $821,193 3.0%3.3%
_____________________________________
(1)Interest rates are presented after giving effect to our interest rate swap agreements, where applicable.
At March 31, 2021, our aggregate liability in the event of the early termination of our swaps was $21.3 million. At March 31, 2021, a 100-basis point increase of the interest rate on this facility would increase our related interest costs by $0.5 million per year and a 100-basis point decrease of the interest rate would decrease our related interest costs by $0.5 million per year.
Additionally, our borrowings under the Revolving Credit Facility bear interest at an annual rate equal to LIBOR plus a leverage-based credit spread. Therefore, an increase or decrease in interest rates would result in an increase or decrease to our interest expense related to the Revolving Credit Facility. We monitor our market interest rate risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical adverse change in interest rates. Based on the results of a sensitivity analysis, which assumes a 100-basis point adverse change in interest rates, the estimated market risk exposure for our variable‑rate borrowings under the Revolving Credit Facility was $1.4 million as of March 31, 2021.
We are exposed to interest rate risk between the time we enter into a sale-leaseback transaction or acquire a leased property and the time we finance the related real estate with long-term fixed-rate debt. In addition, when our long-term debt matures, we may have to refinance the debt at a higher interest rate. Market interest rates are sensitive to many factors that are beyond our control. Our interest rate risk management objective is to limit the impact of future interest rate changes on our earnings and cash flows. Additionally, our long-term debt under our Master Trust Funding Program generally provides for some amortization of the principal balance over the term of the debt, which serves to reduce the amount of refinancing risk at debt maturity.
In addition to amounts that we borrow under the Revolving Credit Facility, we may incur variable-rate debt in the future that we do not choose to hedge. Additionally, decreases in interest rates may lead to increased competition for the acquisition of real estate due to a reduction in desirable alternative income-producing investments. Increased competition for the acquisition of real estate may lead to a decrease in the yields on real estate we have targeted for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our results of operations will be adversely affected. Significant increases in interest rates may also have an adverse impact on our earnings if we are unable to acquire real estate with rental rates high enough to offset the increase in interest rates on our borrowings.
Fair Value of Fixed-Rate Indebtedness
The estimated fair value of our fixed-rate indebtedness under the Master Trust Funding Program is calculated based primarily on unobservable market inputs such as interest rates and discounted cash flow analyses
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using estimates of the amount and timing of future cash flows, market rates and credit spreads. The following table discloses fair value information related to our fixed-rate indebtedness as of March 31, 2021:
(in thousands)
Carrying Value (1)
Estimated Fair Value
Secured borrowings under Master Trust Funding Program$172,191 $176,056 
_____________________________________
(1)Excludes net deferred financing costs of $2.0 million.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective in providing reasonable assurance of compliance.
Changes in Internal Control
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to various lawsuits, claims and other legal proceedings. Management does not believe that the resolution of any of these matters either individually or in the aggregate will have a material adverse effect on our business, financial condition, results of operations or liquidity. Further, from time to time, we are party to various lawsuits, claims and other legal proceedings for which third parties, such as our tenants, are contractually obligated to indemnify, defend and hold us harmless. In some of these matters, the indemnitors have insurance for the potential damages. In other matters, we are being defended by tenants who may not have sufficient insurance, assets, income or resources to satisfy their defense and indemnification obligations to us. The unfavorable resolution of such legal proceedings could, individually or in the aggregate, materially adversely affect the indemnitors’ ability to satisfy their respective obligations to us, which, in turn, could have a material adverse effect on our business, financial condition, results of operations or liquidity. It is management’s opinion that there are currently no such legal proceedings pending that will, individually or in the aggregate, have such a material adverse effect. Despite management’s view of the ultimate resolution of these legal proceedings, we may have significant legal expenses and costs associated with the defense of such matters. Further, management cannot predict the outcome of these legal proceedings and if management’s expectation regarding such matters is not correct, such proceedings could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Item 1A. Risk Factors.
There have been no material changes to the risk factors as disclosed in the section entitled “Risk Factors” beginning on page 14 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and filed with the SEC on February 24, 2021. These risk factors may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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.
Exhibit
Number
Description
101.INSInline XBRL Instance Document - the instance does not appear in the Interactive Data File because
its XBRL tags are embedded within the Inline XBRL document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (embedded within the Inline XBRL document)
_____________________________________
*    Filed herewith.
**    Furnished herewith.

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

ESSENTIAL PROPERTIES REALTY TRUST, INC.
Date:May 3, 2021By:/s/ Peter M. Mavoides
Peter M. Mavoides
Director, President and Chief Executive Officer
(Principal Executive Officer)
Date:May 3, 2021By:/s/ Mark E. Patten
Mark E. Patten
Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer)
72