UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2021, or
☐Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 001-39529
BROADSTONE NET LEASE, INC.
(Exact name of registrant as specified in its charter)
Maryland
26-1516177
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
800 Clinton Square
Rochester, New York
14604
(Address of principal executive offices)
(Zip Code)
(585) 287-6500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, $0.00025 par value
BNL
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
Non-accelerated filer
☒
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 161,266,662 shares of the Registrant’s Common Stock, $0.00025 par value per share, outstanding as of October 29, 2021.
TABLE OF CONTENTS
Page
Part I - FINANCIAL INFORMATION
1
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)
2
Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity (Unaudited)
3
Condensed Consolidated Statements of Cash Flows (Unaudited)
5
Notes to the Condensed Consolidated Financial Statements (Unaudited)
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Cautionary Note Regarding Forward-Looking Statements
Explanatory Note and Certain Defined Terms
Overview
29
Real Estate Portfolio Information
30
Results of Operations
36
Liquidity and Capital Resources
40
Derivative Instruments and Hedging Activities
43
Cash Flows
Contractual Obligations
Non-GAAP Measures
44
Critical Accounting Policies
47
Impact of Recent Accounting Pronouncements
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
48
Part II - OTHER INFORMATION
49
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
50
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)
September 30,2021
December 31,2020
Assets
Accounted for using the operating method, net of accumulated depreciation
$
3,674,206
3,354,511
Accounted for using the direct financing method
28,830
29,066
Accounted for using the sales-type method
568
567
Investment in rental property, net
3,703,604
3,384,144
Cash and cash equivalents
16,182
100,486
Accrued rental income
112,163
102,117
Tenant and other receivables, net
940
1,604
Prepaid expenses and other assets
13,819
22,277
Goodwill
339,769
Intangible lease assets, net
301,046
290,913
Debt issuance costs – unsecured revolving credit facility, net
4,658
6,435
Leasing fees, net
9,791
10,738
Total assets
4,501,972
4,258,483
Liabilities and equity
Unsecured revolving credit facility
—
Mortgages, net
97,530
107,382
Unsecured term loans, net
646,458
961,330
Senior unsecured notes, net
843,665
472,466
Interest rate swap, liabilities
36,196
72,103
Earnout liability
7,509
Accounts payable and other liabilities
79,606
74,936
Accrued interest payable
9,895
4,023
Intangible lease liabilities, net
72,497
79,653
Total liabilities
1,785,847
1,779,402
Commitments and contingencies (See Note 18)
Equity
Broadstone Net Lease, Inc. stockholders' equity:
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding
Common stock, $0.00025 par value; 500,000 shares authorized, 161,255 shares issued and outstanding at September 30, 2021; 440,000 shares authorized, 108,609 shares issued and outstanding at December 31, 2020
27
Class A common stock, $0.00025 par value; no shares authorized, issued or outstanding at September 30, 2021; 60,000 shares authorized, 37,000 shares issued and outstanding at December 31, 2020
9
Additional paid-in capital
2,895,219
2,624,997
Cumulative distributions in excess of retained earnings
(305,665
)
(259,673
Accumulated other comprehensive loss
(37,590
(66,255
Total Broadstone Net Lease, Inc. stockholders’ equity
2,552,004
2,299,105
Non-controlling interests
164,121
179,976
Total equity
2,716,125
2,479,081
Total liabilities and equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Income and Comprehensive Income (Loss)
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2021
2020
Revenues
Lease revenues, net
122,777
80,744
290,234
239,346
Operating expenses
Depreciation and amortization
36,682
31,363
98,620
102,503
Asset management fees
2,461
Property management fees
1,275
Property and operating expense
4,842
4,187
14,019
12,492
General and administrative
8,552
7,214
27,840
18,756
Provision for impairment of investment in rental properties
25,989
14,732
28,001
17,399
Total operating expenses
76,065
57,496
168,480
154,886
Other income (expenses)
Interest income
11
20
Interest expense
(15,611
(18,511
(47,149
(59,015
Cost of debt extinguishment
(242
(392
(368
(414
Gain on sale of real estate
1,220
1,060
9,725
Income taxes
(473
(129
(1,187
(1,080
Internalization expenses
(1,929
(3,523
Change in fair value of earnout liability
(1,059
6,362
(5,539
8,506
Other (expenses) income
(25
(11
(22
Net income
30,522
9,711
77,302
38,657
Net income attributable to non-controlling interests
(1,824
(961
(5,167
(3,738
Net income attributable to Broadstone Net Lease, Inc.
28,698
8,750
72,135
34,919
Weighted average number of common shares outstanding
Basic
159,226
111,155
150,227
108,228
Diluted
169,587
123,381
161,273
119,747
Net earnings per share attributable to common stockholders
Basic and diluted
0.18
0.08
0.48
0.32
Comprehensive income (loss)
Other comprehensive income (loss)
Change in fair value of interest rate swaps
4,559
4,352
30,328
(59,766
Realized loss (gain) on interest rate swaps
85
(42
(125
35,166
14,021
107,632
(21,234
Comprehensive (income) loss attributable to non-controlling interests
(2,101
(1,387
(7,313
1,510
Comprehensive income (loss) attributable to Broadstone Net Lease, Inc.
33,065
12,634
100,319
(19,724
Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity
CommonStock
Class ACommonStock
AdditionalPaid-inCapital
CumulativeDistributionsin Excess ofRetainedEarnings
AccumulatedOtherComprehensiveLoss
Non-controllingInterests
TotalStockholders'Equity
Balance, January 1, 2021
22,223
1,737
23,960
Issuance of 211 shares of common stock
233
Offering costs, discounts and commissions
(500
Stock-based compensation
1,769
Retirement of 45 shares of common stock
(832
Conversion of 37,000 Class A common stock to 37,000 shares of common stock
(9
Conversion of 38 OP Units to 38 shares of common stock
606
(606
Distributions declared ($0.250 per share and OP Unit)
(36,690
(2,963
(39,653
Change in fair value of interest rate swap agreements
26,602
2,078
28,680
Realized gain on interest rate swap agreements
(39
(2
(41
Adjustment to non-controlling interests
(953
1,008
(55
Balance, March 31, 2021
2,625,320
(274,140
(38,684
180,165
2,492,697
21,214
1,606
22,820
Issuance of 11,659 shares of common stock
4
264,795
264,799
Issuance of 248 OP Units
(11,013
951
Retirement of 16 shares of common stock
(309
Conversion of 1,127 OP Units to 1,127 shares of common stock
17,859
(17,859
Distributions declared ($0.255 per share and OP Unit)
(40,696
(2,788
(43,484
(2,708
(203
(2,911
(38
(4
(7,472
(466
7,938
Balance, June 30, 2021
2,890,131
(293,622
(41,896
168,855
2,723,508
1,824
Issuance of 957 shares of common stock
281
Issuance of 1,611 OP Units
(256
949
Retirement of three shares of common stock
(75
Forfeiture of five shares of common stock
Conversion of 1,723 OP Units to 1,723 shares of common stock
27,755
(27,755
(40,741
(2,682
(43,423
4,287
272
Realized loss on interest rate swap agreements
80
(23,541
(61
23,602
Balance, September 30, 2021
Class A Common Stock
MezzanineEquityCommonStock
MezzanineEquityNon-controllingInterests
TotalMezzanineEquity
Balance, January 1, 2020
26
1,895,935
(208,261
(20,086
111,406
1,779,020
Cumulative effect of accounting change
(323
10,816
710
11,526
322
Issuance of 293 shares of common stock and 3,124 shares of mezzanine equity common stock
6,097
66,376
Issuance of 5,278 mezzanine non-controlling interests
112,159
Adjustment to carrying value of mezzanine equity non-controlling interests
(2,416
2,416
Distributions declared ($0.330 per share and OP Unit)
(35,299
(2,100
(37,399
(1,161
(53,014
(3,472
(56,486
(1,576
(40
Balance, March 31, 2020
1,899,616
(233,067
(73,138
106,542
1,699,979
112,158
178,534
15,353
992
16,345
753
Issuance of 11 shares of common stock
232
(97
97
Distributions declared ($0.110 per share and OP Unit)
(11,817
(701
(12,518
(581
(5,438
(351
(5,789
(267
(37
(3
(1
Balance, June 30, 2020
1,899,751
(229,531
(78,613
106,479
1,698,112
178,535
587
9,337
374
Issuance of 341 shares of common stock
796
Issuance of 33,500 shares of Class A common stock
8
569,492
569,500
Offering costs, discounts, and commissions
(37,180
Reclassification of portion of contingent earnout liability
6,809
11,627
18,436
Reclassification of 3,124 shares of mezzanine equity common stock to 3,124 shares of common stock
66,375
(66,376
Reclassification of 5,278 mezzanine equity non-controlling interests to 5,278 non- controlling interests
112,698
(112,698
Repurchase of two fractional shares of common stock
(35
Repurchase of fractional OP Units
Distributions declared ($0.135 per share and OP Unit)
(18,739
(1,738
(20,477
3,921
264
4,185
167
Balance, September 30, 2020
2,506,008
(239,520
(74,729
229,913
2,421,707
Condensed Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Adjustments to reconcile net income including non-controlling interests to net cash provided by operating activities:
Depreciation and amortization including intangibles associated with investment in rental property
96,312
102,536
Amortization of debt issuance costs and original issuance discount charged to interest expense
2,725
2,421
Stock-based compensation expense
3,644
Straight-line rent, direct financing and sales-type lease adjustments
(13,042
(14,696
368
414
(9,791
(9,725
5,539
(8,506
Cash paid for earnout liability
(6,440
Settlement of interest rate swaps
(5,580
Leasing fees paid
(319
Adjustment to provision for credit losses
(142
Other non-cash items
830
420
Changes in assets and liabilities, net of acquisition:
Tenant and other receivables
664
(3,023
1,690
(4,751
(456
5,305
5,872
5,859
Net cash provided by operating activities
187,318
132,964
Investing activities
Acquisition of rental property accounted for using the operating method
(516,111
(76
Cash paid for Internalization
(30,861
Capital expenditures and improvements
(1,451
(7,629
Proceeds from disposition of rental property, net
68,608
54,810
Change in deposits on investments in rental property
575
Net cash (used in) provided by investing activities
(448,379
16,207
Financing activities
Proceeds from issuance of common stock and Class A common stock, net of $11,194 and $35,514 offering costs, discounts, and commissions in 2021 and 2020, respectively
253,170
534,117
Repurchase of fractional shares of common stock
(36
Borrowings on mortgages, senior unsecured notes and unsecured term loans
381,810
60,000
Principal payments on mortgages and unsecured term loans
(332,193
(393,294
Borrowings on unsecured revolving credit facility
216,600
192,000
Repayments on unsecured revolving credit facility
(216,600
(389,300
Cash distributions paid to stockholders
(113,304
(52,447
Cash distributions paid to non-controlling interests
(8,638
(5,395
(6,608
Debt issuance and extinguishment costs paid
(3,827
(6,140
Net cash provided by (used in) financing activities
170,410
(60,495
Net (decrease) increase in cash and cash equivalents and restricted cash
(90,651
88,676
Cash and cash equivalents and restricted cash at beginning of period
110,728
20,311
Cash and cash equivalents and restricted cash at end of period
20,077
108,987
Reconciliation of cash and cash equivalents and restricted cash
Cash and cash equivalents at beginning of period
12,455
Restricted cash at beginning of period
10,242
7,856
Cash and cash equivalents at end of period
101,787
Restricted cash at end of period
3,895
7,200
1. Business Description
Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008. The Corporation focuses on investing in income-producing, net leased commercial properties, primarily in the United States. The Corporation leases industrial, healthcare, restaurant, retail, and office commercial properties under long-term lease agreements. At September 30, 2021, the Corporation owned a diversified portfolio of 696 individual commercial properties with 695 properties located in 42 U.S. states and one property located in British Columbia, Canada.
Broadstone Net Lease, LLC (the Corporation’s operating company, or the “OP”), is the entity through which the Corporation conducts its business and owns (either directly or through subsidiaries) all of the Corporation’s properties. The Corporation is the sole managing member of the OP. The remaining membership units in the OP (“OP Units”), which are referred to as non-controlling interests, are held by members who were issued OP Units pursuant to the Internalization (defined below) or in exchange for their interests in properties acquired by the OP. As the Corporation conducts substantially all of its operations through the OP, it is structured as what is referred to as an umbrella partnership real estate investment trust (“UPREIT”). The Corporation, the OP, and its consolidated subsidiaries are collectively referred to as the “Company.”
Prior to February 7, 2020, the Corporation was externally managed by Broadstone Real Estate, LLC (“BRE”) and Broadstone Asset Management, LLC (the “Asset Manager”) subject to the direction, oversight, and approval of the Company’s board of directors (the “Board of Directors”). The Asset Manager was a wholly owned subsidiary of BRE and all of the Corporation’s officers were employees of BRE. Accordingly, both BRE and the Asset Manager were related parties of the Company. Refer to Note 3 for further discussion concerning related parties and related party transactions.
On February 7, 2020, the Corporation, the OP, BRE, and certain of their respective subsidiaries and affiliates, completed through a series of mergers (the “Mergers”) the internalization of the external management functions previously performed for the Corporation and the OP by BRE and the Asset Manager (such transactions, collectively, the “Internalization”). Upon consummation of the Internalization, the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP and the Company became internally managed. Upon Internalization, the prior Property Management Agreement and Asset Management Agreement were terminated. The Internalization was not considered a “Termination Event” under the terms of the agreements and therefore no fees were paid under them as a result of the Internalization.
On September 18, 2020, the Corporation effected a four-for-one stock split on its then outstanding 26,944 shares of common stock (“Common Stock”) that previously had a $0.001 par value. Concurrent with the stock split, the OP effected a four-for-one stock split of its outstanding OP Units. No fractional shares or OP Units were issued as a result of the stock split. All historic share and per share amounts in these Condensed Consolidated Financial Statements have been adjusted to give retroactive effect to the stock split.
On September 21, 2020, the Corporation completed its initial public offering (“IPO”) and issued an aggregate of 37,000 shares of a new class of common stock, $0.00025 par value per share (“Class A Common Stock”) at $17.00 per share, which includes shares issued pursuant to the underwriters’ partial exercise of their over-allotment option on October 20, 2020, pursuant to a registration statement on Form S-11 (File No. 333-240381), as amended, under the Securities Act of 1933, as amended. Shares of Class A Common Stock were listed on the New York Stock Exchange (“NYSE”) under the symbol “BNL.” On March 20, 2021, each share of Class A Common Stock automatically converted into one share of Common Stock, and effective March 22, 2021, all shares of Common Stock were listed and freely tradeable on the NYSE under the symbol “BNL.” See Note 14.
The following table summarizes the outstanding equity and economic ownership interest of the Corporation and the OP:
September 30, 2021
December 31, 2020
Shares of Common Stock
OP Units
Total DilutedShares
Ownership interest
161,255
10,370
171,625
145,609
11,399
157,008
Percent ownership of OP
94.0
%
6.0
100.0
92.7
7.3
Refer to Note 16 for further discussion regarding the calculation of weighted average shares outstanding.
2. Summary of Significant Accounting Policies
Interim Information
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and Article 10 of the Securities and Exchange Commission’s (“SEC”) Regulation S-X. Accordingly, the Corporation has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2020, included in the Company’s 2020 Annual Report on Form 10-K, filed with the SEC on February 25, 2021. Therefore, the readers of this quarterly report should refer to those audited consolidated financial statements, specifically Note 2, Summary of Significant Accounting Policies, for further discussion of significant accounting policies and estimates. The Corporation believes all adjustments necessary for a fair presentation have been included in these interim Condensed Consolidated Financial Statements (which include only normal recurring adjustments).
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts and operations of the Company. All intercompany balances and transactions have been eliminated in consolidation.
To the extent the Corporation has a variable interest in entities that are not evaluated under the variable interest entity (“VIE”) model, the Corporation evaluates its interests using the voting interest entity model. The Corporation has complete responsibility for the day-to-day management of, authority to make decisions for, and control of the OP. Based on consolidation guidance, the Corporation has concluded that the OP is a VIE as the members in the OP do not possess kick-out rights or substantive participating rights. Accordingly, the Corporation consolidates its interest in the OP. However, because the Corporation holds the majority voting interest in the OP and certain other conditions are met, it qualifies for the exemption from providing certain disclosure requirements associated with investments in VIEs.
The portion of the OP not owned by the Corporation is presented as non-controlling interests as of and during the periods presented.
Basis of Accounting
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP.
Use of Estimates
The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include, but are not limited to, the allocation of purchase price between tangible and intangible assets acquired and liabilities assumed, the value of long-lived assets and goodwill, the provision for impairment, the depreciable lives of rental property, the amortizable lives of intangible assets and liabilities, the provisions for uncollectible rent and credit losses, the fair value of the earnout liability, the fair value of assumed debt, the fair value of the Company’s interest rate swap agreements, and the determination of any uncertain tax positions. Accordingly, actual results may differ from those estimates.
Long-lived Asset Impairment
The Company reviews long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. An impairment loss is measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value. Significant judgment is made in determining if and when impairment should be taken. The Company’s assessment of impairment as of September 30, 2021 was based on the most current information available to the Company. Certain of the Company’s properties may have fair values less than their carrying amounts. However, based on the Company’s plans with respect to each of those properties, the Company believes that their carrying amounts are recoverable and therefore, no impairment charges were recognized other than those described below. If the operating conditions mentioned above deteriorate or if the Company’s expected holding period for assets changes, subsequent tests for impairments could result in additional impairment charges in the future.
7
Inputs used in establishing fair value for real estate assets generally fall within Level 3 of the fair value hierarchy, which are characterized as requiring significant judgment as little or no current market activity may be available for validation. The main indicator used to establish the classification of the inputs is current market conditions, as derived through the use of published commercial real estate market information. The Company determines the valuation of impaired assets using generally accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations, and bona fide purchase offers received from third parties. Management may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.
The following table summarizes the Company's impairment charges, resulting primarily from changes in the Company's long-term hold strategy with respect to the individual properties:
(in thousands, except number of properties)
Number of properties
Impairment charge
During the three months ended September 30, 2021, the Company executed an early lease termination with an office tenant on two properties in exchange for a fee of $35,000, and simultaneously sold the underlying properties to an unrelated third party for aggregate gross proceeds of $16,000. As the sale of the underlying properties was to an unrelated third party, the Company accounted for the lease termination income and sale of properties as separate transactions in accordance with GAAP.
The Company recognized the termination fee income, net of $1,496 write-off of accrued rental income associated with the lease as other income from real estate transactions, a component of Lease revenues, net, in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss). Refer to the Lease Termination Fee Income accounting policy below for additional information on the Company's accounting for lease terminations. As a result of the early lease termination, the Company accelerated the amortization of the remaining lease intangibles, recognizing $289 in Lease revenues, net and $4,047 in Depreciation and amortization in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
The Company sold the underlying vacant properties for an aggregate sales price of $16,000, and incurred sales expenses of $661. The properties’ carrying value, net of the fully amortized lease intangibles, was $41,085, resulting in a $25,746 loss on sale of the properties. As the lease termination income was recognized separate from the sale of the underlying properties, the $35,000 cash receipt was not able to be factored into the properties' future undiscounted cash flows, and the properties were immediately deemed impaired. As such, the Company recognized the loss as an impairment charge in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
The following summarizes the impact of the above transactions, together with the corresponding financial statement line item:
Lease termination fee
35,000
Write-off of accrued rental income
(1,496
Accelerated amortization of above-market and below-market lease intangibles
289
33,793
Accelerated amortization of in-place lease intangible
(4,046
Loss on sale
(25,746
Total impact to net income
4,001
The remaining impairments recognized during the three and nine months ended September 30, 2021 were immaterial.
Lease Termination Fee Income
The Company recognizes lease termination fee income when all conditions of the termination agreement have been met, and collection of the lease termination fee is probable. If the tenant immediately vacates the property upon satisfying the conditions of the termination agreement, the Company recognizes the lease termination fee income net of accrued rental income associated with the lease immediately,
as other income from real estate transactions, a component of Lease revenues, net, in the Condensed Consolidated Statement of Income and Comprehensive Income (Loss).
Restricted Cash
Restricted cash includes escrow funds the Company maintains pursuant to the terms of certain mortgages, and lease agreements, and undistributed proceeds from the sale of properties under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), and is reported within Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets.
Restricted cash consisted of the following:
September 30,
December 31,
Escrow funds and other
7,852
Undistributed 1031 proceeds
2,390
Rent Received in Advance
Rent received in advance represents tenant payments received prior to the contractual due date, and is included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets. Rent received in advance consisted of the following:
Rent received in advance
14,516
13,651
Provision for Uncollectible Rent
In accordance with ASC 842, Leases, provisions for uncollectible rent are recorded as an offset to Lease revenues, net on the accompanying Consolidated Statements of Income and Comprehensive Income (Loss).
The following table summarizes the changes in the provision for uncollectible rent:
Beginning balance
400
2,222
201
Provision for uncollectible rent, net
(150
(262
1,961
Write-offs
(1,750
(1,751
Ending balance
250
210
Derivative Instruments
The Company uses interest rate swap agreements to manage risks related to interest rate movements. The interest rate swap agreements, designated and qualifying as cash flow hedges, are reported at fair value. The Company early adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting and Hedging Activities, effective January 1, 2018 on a modified retrospective basis. ASU 2017-12 amended the designation and measurement guidance for qualifying hedging transactions and the presentation of hedge results in an entity’s financial statements.
ASU 2017-12 removed the concept of separately measuring and reporting hedge ineffectiveness and requires a company to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. In accordance with ASU 2017-12, the gain or loss on the qualifying hedges is initially included as a component of other comprehensive income or loss and is subsequently reclassified into earnings when interest payments (the forecasted transactions) on the related debt are incurred and as the swap net settlements occur.
When an existing cash flow hedge is terminated, the Company determines the accounting treatment for the accumulated gain or loss recognized in Accumulated other comprehensive loss based on the probability of the hedged forecasted transaction occurring within the period the cash flow hedge was anticipated to affect earnings. If the Company determines that the hedged forecasted transaction is probable of occurring during the original period, the accumulated gain or loss is reclassified into earnings over the remaining life of the cash flow hedge using a straight-line method. If the Company determines that the hedged forecasted transaction is not probable of occurring during the original period, the entire amount of accumulated gain or loss is reclassified into earnings at such time.
The Company documents its risk management strategy and hedge effectiveness at the inception of, and during the term of, each hedge. The Company’s interest rate risk management strategy is intended to stabilize cash flow requirements by maintaining interest rate swap agreements to convert certain variable-rate debt to a fixed rate.
Fair Value Measurements
Recurring Fair Value Measurements
Earnout Liability – In connection with the Internalization, the Company recognized an earnout liability that was due and payable to the former owners of BRE once certain milestones were achieved during specified periods of time following the closing of the Internalization (the “Earnout Periods”). Under the terms of the agreement, the milestones related to either (a) the 40-day dollar volume-weighted average price of a share of the Company’s common stock (“VWAP per REIT Share”), following the completion of an IPO of the Company’s common stock, or (b) the Company’s AFFO per share, prior to the completion of an IPO.
The Company utilized third-party valuation experts to assist in estimating the fair value of the earnout liability, and developed estimates by considering weighted-average probabilities of likely outcomes, and using a Monte Carlo simulation and discounted cash flow analysis. These estimates required the Company to make various assumptions about share price volatility and, prior to the IPO, about the timing of an IPO and net asset prices, each of which are unobservable and considered Level 3 inputs in the fair value hierarchy. A change in these inputs to a different amount could have resulted in a significantly higher or lower fair value measurement at the reporting date. Specifically, advancements in the estimated IPO date assumption increased the earnout liability’s fair value given the earnout’s fixed time horizon. Peer share price volatilities were used to estimate the Company’s expected share price volatility, and the Company’s corresponding ability to achieve the earnout targets. Increases in the volatility assumption would increase the earnout liability’s fair value. Increases in net asset values would also increase the earnout liability’s fair value.
The Company achieved all four VWAP milestones applicable to the earnout as of September 30, 2021, and therefore no remaining earnout liability was recorded at September 30, 2021.
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of September 30, 2020:
Significant Unobservable Inputs
Weighted AverageAssumption Used
Range
Peer stock price volatility
40.0%
26.11% - 56.85%
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of February 7, 2020, which was the date of the Internalization:
Expected IPO date
April 15, 2020
March 2020 through May 2020
20.0%
16.22% to 23.09%
Company's net asset value per diluted share
$21.30
(a)
10
The following table presents a reconciliation of the change in the earnout liability:
10,063
37,975
Allocation of Internalization purchase price at February 7, 2020
40,119
Change in fair value subsequent to Internalization
1,059
(b)
(6,362
Reclassification as a component of additional paid-in capital and non-controlling interests
(18,436
Payout of tranches earned
(11,122
(13,048
13,177
The balances of financial instruments measured at fair value on a recurring basis are as follows:
Total
Level 1
Level 2
Level 3
(36,196
(72,103
(7,509
Long-term Debt – The fair value of the Company’s debt was estimated using Level 1, Level 2, and Level 3 inputs based on recent secondary market trades of the Company's 2031 Senior Unsecured Public Notes (defined below), recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate (“LIBOR”), U.S. Treasury obligation interest rates, and discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect the Company’s judgment as to the approximate current lending rates for loans or groups of loans with similar maturities and assumes that the debt is outstanding through maturity. Market information, as available, or present value techniques were utilized to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist on specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.
The following table summarizes the carrying amount reported on the Condensed Consolidated Balance Sheets and the Company’s estimate of the fair value of the Unsecured revolving credit facility, Mortgages, net, Unsecured term loans, net and Senior unsecured notes, net, which reflects the fair value of interest rate swaps:
Carrying amount
1,597,868
1,547,667
Fair value
1,710,238
1,679,188
Non-recurring Fair Value Measurements
The Company’s non-recurring fair value measurements at September 30, 2021 and December 31, 2020 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.
Right-of-Use Assets and Lease Liabilities
The Company is a lessee under non-cancelable operating leases associated with its corporate headquarters and other office spaces as well as with leases of land (“ground leases”). The Company records right-of-use assets and lease liabilities associated with these leases. The lease liability is equal to the net present value of the future payments to be made under the lease, discounted using estimates based on observable market factors. The right-of-use asset is generally equal to the lease liability plus initial direct costs associated with the leases. The Company includes in the recognition of the right-of-use asset and lease liability those renewal periods that are reasonably certain to be exercised, based on the facts and circumstances that exist at lease inception. Amounts associated with percentage rent provisions are considered variable lease costs and are not included in the initial measurement of the right-of-use asset or lease liability. The Company has made an accounting policy election, applicable to all asset types, not to separate lease from nonlease components when allocating contract consideration related to operating leases.
Right-of-use assets and lease liabilities associated with operating leases were included in the accompanying Condensed Consolidated Balance Sheets as follows:
Financial Statement Presentation
Right-of-use assets
3,250
3,075
Lease liabilities
2,714
2,659
Stock-Based Compensation
The Company has issued restricted stock awards (“RSAs”) and performance-based restricted stock units (“PRSUs”) under its 2020 Omnibus Equity and Incentive Plan (the “Equity Incentive Plan”). The Company accounts for stock-based incentives in accordance with ASC 718, Compensation – Stock Compensation, which requires that such compensation be recognized in the financial statements based on the award’s estimated grant date fair value. The value of such awards is recognized as compensation expense in General and administrative expenses in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) over the appropriate vesting period on a straight-line basis or at the cumulative amount vested at each balance sheet date, if greater. The Company records forfeitures during the period in which they occur by reversing all previously recorded stock compensation expense associated with the forfeited shares. Dividends declared on RSAs issued under the Equity Incentive Plan are recorded as Cumulative distributions in excess of retained earnings on the Condensed Consolidated Balance Sheets. Accumulated dividends related to forfeited RSAs will be reversed through compensation expense in the period the forfeiture occurs. Dividends accrued on the PRSUs are recorded as Cumulative distributions in excess of retained earnings on the Condensed Consolidated Balance Sheets. Accumulated dividends accrued related to forfeited PRSUs are reversed in the period the forfeiture occurs.
Recently Adopted Accounting Standards
In January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-01, Reference Rate Reform (Topic 848): Scope, which refines the scope of ASC 848, to include all derivative contracts subject to a transition for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest (PAI) as a result of reference rate reform (the “discounting transition”). ASU 2021-01 gives market participants the ability to apply certain aspects of the contract modification and hedge accounting expedients to derivative contracts affected by a discounting transition. ASU 2021-01 permits an entity to elect certain hedging relief if it has designated a derivative as a hedging instrument in a hedging relationship and the terms of the derivative have changed as a result of the discounting transition. The Company will apply the amendments in ASU 2021-01 related to contract modifications and hedging relationships prospectively.
Other Recently Issued Accounting Standards
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in ASU 2020-06 also simplify the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The amendments in ASU 2020-06 are effective for the Company for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The guidance must be adopted as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new guidance.
Reclassifications
The Company reclassified $961,330 of Unsecured term notes, net at December 31, 2020 to Unsecured term loans, net at September 30, 2021 and $472,466 of Unsecured term notes, net at December 31, 2020 to Senior unsecured notes, net at September 30, 2021 on the Condensed Consolidated Balance Sheets, to conform with the current period presentation. The reclassifications are changes from one acceptable presentation to another acceptable presentation.
12
3. Related-Party Transactions
Prior to the Internalization on February 7, 2020, BRE, a related party in which certain directors of the Corporation had either a direct or indirect ownership interest, and the Asset Manager were considered to be related parties.
Earnout Consideration
In connection with the Internalization, the Company incurred a contingent obligation that would be payable to certain members of the Company’s Board of Directors and employees who had previously been owners and/or employees of BRE, upon the occurrence of certain events (see Note 4). As of September 30, 2021, the Company achieved all four VWAP milestones applicable to the earnout. As a result, the Company issued 1,089 shares of common stock, 1,859 OP Units and made cash payments of $13,048 to these related parties (see Note 4).
Conversion of OP Units to Common Stock
During the three and nine months ended September 30, 2021, in a non-cash transaction (see Note 17), the Company converted 1,029 and 2,049 OP Units held by an affiliated third party to 1,029 and 2,049 shares of common stock at a total conversion value of $16,586 and $32,761, respectively. There were no related party OP Unit conversions for the three and nine months ended September 30, 2020.
4. Internalization
On February 7, 2020, the Company completed the Internalization and the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP. The effect of the Internalization has been reflected in the Company’s operating results beginning on February 7, 2020.
In accordance with the Internalization, the Company was required to pay additional earnout consideration of up to $75,000 payable in four tranches of $10,000, $15,000, $25,000, and $25,000 when certain milestones related to the 40-day VWAP per REIT Share were achieved. The consideration consisted of a combination of cash, shares of the Company’s common stock, and OP Units, based on the same proportions paid in the base consideration.
As of September 30, 2021, the Company achieved all four VWAP milestones, thereby triggering the payout of all earnout tranches. Below is a summary of the shares of common stock and OP Units issued, and cash paid for each earnout tranche:
Shares of
40-Day
Common Stock
VWAP of a
Tranche
Issued
Cash Paid
REIT Share
Achievement Date
145
248
1,926
22.50
June 16, 2021
218
371
2,888
23.75
July 14, 2021
363
620
4,117
24.375
September 21, 2021
25.00
Condensed Pro Forma Financial Information (Unaudited)
The following pro forma information summarizes selected financial information from the Company’s combined results of operations, as if the Internalization had occurred on January 1, 2019. These results contain certain adjustments totaling $1,929 and $8,068 of income, respectively, for the three and nine months ended September 30, 2020. These pro forma adjustments reflect the elimination of Internalization expenses and asset management, property management, and disposition fees between the Company and BRE and the Asset Manager in historic financial results, and adjustments to reflect compensation and related costs, incremental general and administrative expenses related to the Internalization, and incremental interest expense associated with the borrowing related to the Internalization. This pro forma information is presented for informational purposes only, and may not be indicative of what actual results of operations would have been had the Internalization occurred at the beginning of the period, nor does it purport to represent the results of future operations.
The condensed pro forma financial information is as follows:
For the Three Months Ended
For the Nine Months Ended
September 30, 2020
11,640
42,982
13
5. Acquisitions of Rental Property
The Company closed on the following acquisitions during the nine months ended September 30, 2021:
Number of
Real Estate
Date
Property Type
Properties
Acquisition Price
February 5, 2021
Healthcare
4,843
February 26, 2021
Restaurant
181
March 11, 2021
Retail
26,834
March 30, 2021
41,324
March 31, 2021
14,140
June 4, 2021
19,420
June 9, 2021
Industrial
8,500
106,578
June 25, 2021
12,131
June 28, 2021
15,300
June 30, 2021
1,279
30,750
July 2, 2021
4,500
July 21, 2021
5,565
July 29, 2021
4,586
13,041
July 30, 2021
11,011
August 23, 2021
September 8, 2021
8,901
September 17, 2021
1,722
September 24, 2021
2,456
48,699
September 29, 2021
10,600
59,343
511,704
(c)
The Company did not complete any acquisitions of rental property during the nine months ended September 30, 2020.
The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation for completed real estate acquisitions:
Land
72,829
Land improvements
22,103
Buildings and improvements
379,946
Acquired in-place leases(d)
40,865
Acquired above-market lease (e)
211
Right-of-use asset
663
Lease liability
(481
516,136
The above acquisitions were funded using a combination of available cash on hand, revolving credit facility borrowings, and proceeds from the 2031 Senior Unsecured Public Notes (see Note 9). All real estate acquisitions closed during the nine months ended September 30, 2021, qualified as asset acquisitions and, as such, acquisition costs have been capitalized.
14
Subsequent to September 30, 2021, the Company closed on the following acquisitions (see Note 19):
October 1, 2021
3,306
October 22, 2021
5,386
October 27, 2021
4,278
12,970
6. Sale of Real Estate
The Company closed on the following sales of real estate, none of which qualified as discontinued operations:
Number of properties disposed
25
18
Aggregate sale price
26,567
9,816
71,905
57,539
Aggregate carrying value
(24,244
(8,327
(58,817
(45,085
Additional sales expenses
(1,103
(429
(3,297
(2,729
7. Investment in Rental Property and Lease Arrangements
The Company generally leases its investment rental property to established tenants in the industrial, healthcare, restaurant, retail, and office property types. At September 30, 2021, the Company had 681 real estate properties which were leased under leases that have been classified as operating leases, 10 that have been classified as direct financing leases, and one that has been classified as a sales-type lease. Of the 10 leases classified as direct financing leases, three include land portions which are accounted for as operating leases. The sales-type lease includes a land portion which is accounted for as an operating lease. Substantially all leases have initial terms of 10 to 20 years. The Company’s leases generally provide for limited increases in rent as a result of fixed increases, increases in the CPI, or increases in the tenant’s sales volume. Generally, tenants are also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and maintain property and liability insurance coverage. The leases also typically provide for one or more multiple year renewal options, at the election of the tenant, and are subject to generally the same terms and conditions as the initial lease.
Investment in Rental Property – Accounted for Using the Operating Method
Rental property subject to non-cancelable operating leases with tenants was as follows:
616,917
555,748
291,045
279,360
3,161,728
2,857,510
Equipment
11,870
4,081,560
3,704,488
Less accumulated depreciation
(407,354
(349,977
Depreciation expense on investment in rental property was as follows:
Depreciation
25,232
23,317
73,119
70,392
15
Estimated lease payments to be received under non-cancelable operating leases with tenants at September 30, 2021 are as follows:
Remainder of 2021
80,375
2022
323,733
2023
327,663
2024
324,289
2025
317,470
Thereafter
2,467,607
3,841,137
Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future lease payments due during the initial lease terms. Such amounts exclude any potential variable rent increases that are based on changes in the CPI or future variable rents which may be received under the leases based on a percentage of the tenant’s gross sales. Additionally, certain of our leases provide tenants with the option to terminate their leases in exchange for termination penalties, or that are contingent upon the occurrence of a future event. Future lease payments within the table above have not been adjusted for these termination rights.
Investment in Rental Property – Direct Financing Leases
The Company’s net investment in direct financing leases was comprised of the following:
Undiscounted estimated lease payments to be received
43,397
45,782
Estimated unguaranteed residual values
15,203
Unearned revenue
(29,605
(31,753
Reserve for credit losses
(165
(166
Net investment in direct financing leases
Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at September 30, 2021 are as follows:
795
3,241
3,304
3,361
3,475
29,221
The above rental receipts do not include future lease payments for renewal periods, potential variable CPI rent increases, or variable percentage rent payments that may become due in future periods.
16
The following table summarizes amounts reported as Lease revenues, net on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss):
Contractual rental amounts billed for operating leases
78,886
69,270
227,142
209,440
Adjustment to recognize contractual operating lease billings on a straight-line basis
4,942
6,768
14,033
16,709
Variable rental amounts earned
130
234
335
308
Earned income from direct financing leases
726
757
2,184
2,599
Interest income from sales-type leases
Operating expenses billed to tenants
4,414
3,389
12,998
11,456
Other income from real estate transactions (a)
33,515
64
33,548
Adjustment to revenue recognized for uncollectible rental amounts billed, net
150
262
(49
(1,961
Total Lease revenues, net
8. Intangible Assets and Liabilities
The following is a summary of intangible assets and liabilities and related accumulated amortization:
Lease intangibles:
Acquired above-market leases
49,195
54,616
Less accumulated amortization
(17,862
(18,928
Acquired above-market leases, net
31,333
35,688
Acquired in-place leases
370,685
340,958
(100,972
(85,733
Acquired in-place leases, net
269,713
255,225
Total intangible lease assets, net
Acquired below-market leases
105,334
107,788
(32,837
(28,135
Leasing fees
14,776
15,462
(4,985
(4,724
Amortization of intangible lease assets and liabilities was as follows:
Intangible
Acquired in-place leases and leasing fees
11,424
8,026
25,429
32,060
Above-market and below-market leases
944
(149
2,362
17
For the three and nine months ended September 30, 2021, amortization expense includes $3,757 of accelerated amortization resulting from early lease terminations. For the three and nine months ended September 30, 2020, amortization expense includes $2,459 and $14,517, of accelerated amortization resulting from early lease termination, respectively.
Estimated future amortization of intangible assets and liabilities at September 30, 2021 is as follows:
6,482
24,480
24,168
23,410
22,113
137,687
238,340
9. Unsecured Credit Agreements
The following table summarizes the Company’s unsecured credit agreements:
Outstanding Balance
(in thousands, except interest rates)
InterestRate(b) (c)
MaturityDate
Unsecured revolving credit facility(a)
(d) (e)
Sep. 2023
Unsecured term loans(a):
2022 Unsecured Term Loan
one-month LIBOR + 1.00% (f)
Feb. 2022
2023 Unsecured Term Loan
265,000
one-month LIBOR + 1.10% (g)
Jan. 2023
2024 Unsecured Term Loan
190,000
Jun. 2024
2026 Unsecured Term Loan
400,000
450,000
one-month LIBOR + 1.00% (h)
Feb. 2026
Total unsecured term loans
650,000
965,000
Unamortized debt issuance costs, net
(3,542
(3,670
Total unsecured term loans, net
Senior unsecured notes(a):
2027 Senior Unsecured Notes - Series A
150,000
4.84%
Apr. 2027
2028 Senior Unsecured Notes - Series B
225,000
5.09%
Jul. 2028
2030 Senior Unsecured Notes - Series C
100,000
5.19%
Jul. 2030
2031 Senior Unsecured Public Notes
375,000
2.60%
Sep. 2031
Total senior unsecured notes
850,000
475,000
Unamortized debt issuance costs and original issuance discount, net
(6,335
(2,534
Total senior unsecured notes, net
Total unsecured debt, net
1,490,123
1,433,796
At September 30, 2021, the weighted average interest rate on all outstanding borrowings was 2.71%, exclusive of interest rate swap agreements.
On September 15, 2021, the Company completed a public offering of $375,000 in aggregate principal amount of 2.60% senior unsecured notes due 2031 (“2031 Senior Unsecured Public Notes”), issued at 99.816% of the principal amount. The 2031 Senior Unsecured Public Notes require semi-annual interest payments through the maturity date of September 15, 2031, unless earlier redeemed. The 2031 Senior Unsecured Public Notes can be redeemed by the Company at par within three months of their respective maturities, or the Company can call the notes at any time for the principal, accrued interest, and a make-whole amount based upon the applicable government bond yield plus 20 basis points. The proceeds were used to repay in full borrowings on the Unsecured revolving credit facility and the 2023 Unsecured Term Loan, and to fund acquisitions.
On March 12, 2021, the Company amended the 2026 Unsecured Term Loan and made a $50,000 paydown on the loan. Prior to the amendment, the borrowings under the 2026 Unsecured Term Loan were subject to interest at variable rates based on LIBOR plus a margin based on the OP’s current credit rating ranging between 1.45% and 2.40% per annum with the applicable margin being 1.60% immediately prior to the amendment. The amendment reduced the margin to a range between 0.85% and 1.65% per annum and based on the OP’s credit rating of BBB, the applicable margin was 1.0% beginning March 12, 2021. All other terms and conditions of the 2026 Unsecured Term Loan remained materially the same as those in effect prior to this amendment.
For the three and nine months ended September 30, 2021, the Company incurred $4,069 and $5,020, respectively, in debt issuance costs and original issuance discount associated with the 2031 Senior Unsecured Public Notes and the amended 2026 Unsecured Term Loan. For the three and nine months ended September 30, 2020, the Company incurred $5,918 in debt issuance costs associated with the Revolving Credit Facility. For each separate debt instrument, on a lender by lender basis, in accordance with ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction was deemed to be new debt, a modification of existing debt, or an extinguishment of existing debt. Debt issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred.
Based on the assessment, $3,379 and $4,325 of debt issuance costs incurred during the three and nine months ended September 30, 2021, respectively, were deemed to be related to new debt, and the modification of existing debt, and therefore have been deferred and are being amortized over the term of the associated debt. For the three and nine months ended September 30, 2020, $5,918 of debt issuance costs incurred were related to the issuance of new debt, or the modification of existing debt, and therefore were deferred and are being amortized over the term of the associated debt.
Additionally, during the three and nine months ended September 30, 2021, $214 and $340, respectively, of unamortized debt issuance costs were expensed, and included in Cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss). Such amounts totaled $392 during the three and nine months ended September 30, 2020.
Debt issuance costs and original issuance discounts are amortized as a component of Interest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss). The following table summarizes debt issuance cost and original issuance discount amortization:
Debt issuance costs and original issuance discount amortization
962
819
2,832
2,528
The Company is subject to various financial and operational covenants and financial reporting requirements pursuant to its unsecured credit agreements. These covenants require the Company to maintain certain financial ratios, including leverage, fixed charge coverage, debt service coverage, aggregate debt ratio, consolidated income available for debt to annual debt service charge, total unencumbered assets to total unsecured debt, and secured debt ratio, among others. As of September 30, 2021, the Company believes it was in compliance with all of its loan covenants. Failure to comply with the covenants would result in a default which, if the Company were unable to cure or obtain a waiver from the lenders, could accelerate the repayment of the obligations. Further, in the event of default, the Company may be restricted from paying dividends to its stockholders in excess of dividends required to maintain its REIT qualification. Accordingly, an event of default could have a material and adverse impact on the Company.
19
10. Mortgages
The Company’s mortgages consist of the following:
Origination
Maturity
Interest
Lender
(Month/Year)
Rate
Wilmington Trust National Association
Apr-19
Feb-28
4.92%
47,064
47,945
(a) (b) (c) (j)
Jun-18
Aug-25
4.36%
19,657
19,947
(a) (b) (c) (i)
PNC Bank
Oct-16
Nov-26
3.62%
17,196
17,498
(b) (c)
T2 Durham I, LLC
Jul-21
Jul-24
Greater of Prime + 1.25% or 5.00%
7,500
(b) (k)
Aegon
Apr-12
Oct-23
6.38%
6,451
7,039
(b) (f)
Sun Life
Mar-12
Oct-21
5.13%
10,469
(b) (e)
M&T Bank
Oct-17
Aug-21
one - monthLIBOR+3%
4,769
(b) (d) (g) (h)
Total mortgages
97,868
107,667
Debt issuance costs, net
(338
(285
At September 30, 2021, investment in rental property of $162,642 was pledged as collateral against the Company’s mortgages.
Estimated future principal payments to be made under the above mortgages and the Company’s unsecured credit agreements (see Note 9) at September 30, 2021 are as follows:
707
62,907
7,582
199,760
20,195
1,306,717
Certain of the Company’s mortgage and note payable agreements provide for prepayment fees and can be terminated under certain events of default as defined under the related agreements. These prepayment fees are not reflected as part of the table above.
11. Interest Rate Swaps
Interest rate swaps were entered into with certain financial institutions in order to mitigate the impact of interest rate variability over the term of the related debt agreements. The interest rate swaps are considered cash flow hedges. In order to reduce counterparty concentration risk, the Company has a diversification policy for institutions that serve as swap counterparties. Under these agreements, the Company receives monthly payments from the counterparties on these interest rate swaps equal to the related variable interest rates multiplied by the outstanding notional amounts. All of the Company's interest swaps at September 30, 2021 and December 31, 2020 are tied to the one-month LIBOR rate. Certain interest rate swaps amortize on a monthly basis. In turn, the Company pays the counterparties each month an amount equal to a fixed rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that the Company pays a fixed interest rate on its variable-rate borrowings.
In connection with the issuance of the 2031 Senior Unsecured Public Notes in September 2021 and repayment of outstanding borrowings of variable rate debt indexed to the one-month LIBOR rate (see Note 9), the Company terminated interest rate swap agreements with an aggregate termination value of $5,580. The Company determined that it is not probable the hedge forecasted transactions will not occur during the original periods, and therefore, the $5,580 of accumulated losses held in Other comprehensive income (loss) will be reclassified to interest expense on a straight-line basis over the original lives of the terminated swaps. For the three and nine months ended September 30, 2021, amounts reclassified out of Other comprehensive income (loss) to Interest expense were $126.
The following is a summary of the Company’s outstanding interest rate swap agreements:
Counterparty
Maturity Date
FixedRate
NotionalAmount
Fair Value
Wells Fargo Bank, N.A.
February 2021
2.39
(70
August 2021
1.02
4,768
Capital One, National Association
December 2021
1.05
15,000
(141
September 2022
2.83
25,000
(1,139
Bank of America, N.A.
November 2023
2.80
(1,848
2.65
(1,785
Regions Bank
December 2023
1.18
(763
Truist Financial Corporation
April 2024
1.99
(1,487
Bank of Montreal
July 2024
1.16
40,000
(1,380
October 2024
2.72
(964
(1,422
December 2024
1.58
(463
(799
January 2025
1.91
(1,044
(1,725
April 2025
2.20
(1,324
(2,084
July 2025
2.32
(1,478
(2,351
(1,174
(1,941
December 2025
2.30
(1,546
(2,481
January 2026
1.92
(1,156
(2,039
2.05
(2,062
2.08
(1,842
(3,078
1.93
(1,164
(2,019
April 2026
2.68
(1,204
(1,843
July 2026
1.32
(682
(1,806
December 2026
2.33
10,000
(692
(1,300
(2,372
April 2027
(2,287
(3,555
December 2027
2.37
(1,904
(3,234
(1,909
(3,199
January 2028
75,000
(5,743
(9,650
May 2029
2.09
(1,557
(2,994
2.11
(1,599
(3,004
June 2029
2.03
(1,459
(2,843
U.S. Bank National Association
(1,456
(2,902
August 2029
1.35
(187
(1,445
640,000
859,768
21
At September 30, 2021, the weighted average fixed rate on all outstanding interest rate swaps was 2.11%.
The total amounts recognized, and the location in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss), from converting from variable rates to fixed rates under these agreements were as follows:
Reclassification from
Total Interest Expense
Amount of Gain
Accumulated Other
Presented in the Condensed
Recognized in
Comprehensive Loss
Consolidated Statements of
Amount of
Income and Comprehensive
Location
Loss
Income (Loss)
4,085
15,611
4,166
18,511
(Loss)
12,140
47,149
8,467
59,015
Amounts related to the interest rate swaps expected to be reclassified out of Accumulated other comprehensive loss to Interest expense during the next twelve months are estimated to be a loss of $15,477. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes the risk exposure by limiting counterparties to major banks who meet established credit and capital guidelines.
12. Non-Controlling Interests
The following table summarizes OP Units exchanged for shares of common stock:
OP Units exchanged for shares of common stock
1,723
Value of units exchanged
46,220
As of September 30, 2021, the Company achieved all four VWAP milestones applicable to the earnout. As a result, the Company issued 1,611 and 1,859 OP Units for the three and nine months ended September 30, 2021, respectively (see Note 4).
13. Credit Risk Concentrations
The Company maintained bank balances that, at times, exceeded the federally insured limit during the nine months ended September 30, 2021. The Company has not experienced losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts.
The Company has mortgages with two institutions that comprised 68% and 18% of total mortgages at September 30, 2021. The Company had mortgages with three institutions that comprised 63%, 16%, and 10% of total mortgages at December 31, 2020. For the three and nine months ended September 30, 2021 and 2020, the Company had no individual tenants or common franchises that accounted for more than 10% of total revenues, excluding lease termination fees.
14. Equity
General
On June 28, 2021, the Corporation completed its first public follow-on equity offering and issued 11,500 shares of Common Stock, including shares issued pursuant to the underwriters' full exercise of their over-allotment option, at $23.00 per share. The net proceeds, after deducting underwriting discounts and commissions of $10,580 and $433 of other expenses, were $253,487. The Company used the net proceeds to repay the remaining $160,600 principal due under the Company's revolving credit facility. The remaining net proceeds were used for general business purposes, including acquisitions. As of September 30, 2021, the Company had $242 of accrued offering costs related to the public follow-on equity offering.
22
On September 21, 2020, the Corporation completed its IPO and issued 37,000 shares of Class A Common Stock inclusive of the underwriters’ partial exercise of their over-allotment option on October 20, 2020.
Aside from the conversion discussed below, the terms of the Class A Common Stock were identical to the terms of the Common Stock. Each share of Class A Common Stock automatically converted into one share of Common Stock on March 20, 2021, and effective March 22, 2021, all shares of Common Stock were listed and freely tradeable on the NYSE under the ticker “BNL.” The Common Stock and Class A Common Stock are collectively referred to as the Corporation’s “common stock.”
As of September 30, 2021, the Company achieved all four VWAP milestones applicable to the earnout. As a result, the Company issued 944 and 1,089 shares of common stock during the three and nine months ended September 30, 2021, respectively (see Note 4).
On August 23, 2021, the Company established an at-the-market common equity offering program ("ATM Program"), through which it may, from time to time, publicly offer and sell shares of common stock having an aggregate gross sales price of up to $400,000. The ATM Program provides for forward sale agreements, enabling the Company to set the price of shares upon pricing the offering, while delaying the issuance of shares and the receipt of the net proceeds. There was no activity relating to the ATM Program during the three and nine months ended September 30, 2021.
15. Stock-Based Compensation
Restricted Stock Awards
On March 1, 2021 and August 4, 2020, the Company awarded 199 and 341 shares of RSAs, respectively, to certain officers and employees under the Equity Incentive Plan. The holder of RSAs is generally entitled at all times on and after the date of issuance of the restricted common shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The RSAs vest over a one, three, or four year period from the date of grant and are subject to the employee’s continued service through the applicable vesting dates and in accordance with the terms of the individual award agreements. The March 1, 2021 grant date fair value per share of $18.66 was based on the market price of the Company’s common stock on the grant date. The August 4, 2020 grant date fair value per share of $20.50 was based on the determined share value established by the Board of Directors ("Determined Share Value"). Prior to the IPO, the Company sold shares of common stock in a private offering at a price equal to the Determined Share Value, which was established at least quarterly by the Board of Directors based on the net asset value ("NAV") of the Company's portfolio, input from management and third-party consultants, and such other factors as the Board of Directors determined. The Company's NAV was calculated using its established valuation process, starting with an estimate of the fair value of the properties in the portfolio as of the date based upon, among other factors, the implied market price for each asset based upon a review of market capitalization rates.
The following table presents information about the Company’s RSAs:
Compensation cost
701
3,124
Dividends declared on unvested RSAs
95
46
296
Grant date fair value of shares vested during the period
3,296
(in thousands, except recognition period)
Unamortized value of RSAs
5,508
5,001
Weighted average amortization period (in years)
2.6
2.8
23
The following table presents information about the Company’s RSA activity:
For the Three Months Ended September 30, 2021
For the Nine Months Ended September 30, 2021
Number of Shares
Weighted Average Grant Date Fair Value per Share
Unvested at beginning of period
378
19.60
341
20.50
Granted
26.02
202
18.68
Vested
(164
20.15
Forfeited
(5
19.72
Unvested at end of period
19.61
For the Three Months Ended September 30, 2020
For the Nine Months Ended September 30, 2020
Performance-based Restricted Stock Units
On March 1, 2021, the Company issued target grants of 132 PRSUs under the Equity Incentive Plan to the officers of the Company. The awards are non-vested restricted stock units where the vesting percentages and the ultimate number of units vesting will be measured 50% based on the relative total shareholder return (“rTSR”) of the Company’s common stock as compared to the rTSR of peer companies over a three-year period, as identified in the grant agreements, and 50% based on the rTSR of the Company’s common stock as compared to the rTSR of the MSCI US REIT Index over a three year measurement period. The payout schedules can produce vesting percentages ranging from 0% to 200% with a target of 100%. rTSR means the percentage appreciation in the fair market value of one share over the three year measurement period beginning on the date of grant, assuming the reinvestment of dividends on the ex-dividend date. The target number of units is based on achieving a rTSR equal to the 55th percentile of the peer companies and MSCI US REIT Index. Dividends accrue during the measurement period and will be paid on the PRSUs ultimately earned at the end of the measurement period in either cash or common stock, at the direction of the Board’s Compensation Committee. The grant date fair value of the PRSUs was measured using a Monte Carlo simulation model based on assumptions including share price volatility.
The following table presents information about the Company’s PRSUs:
223
520
Unamortized value of PRSUs
2,154
2.4
There were no PRSUs at September 30, 2020.
The following table presents information about the Company’s PRSU activity:
110
24.40
132
24
16. Earnings per Share
The following table summarizes the components used in the calculation of basic and diluted earnings per share (“EPS”):
Basic earnings:
Net earnings attributable to Broadstone Net Lease, Inc. common shareholders
Less earnings allocated to unvested restricted shares
(95
(46
(296
Net earnings used to compute basic earnings per common share
28,603
8,704
71,839
34,873
Diluted earnings:
Net earnings used to compute basic earnings per share
Net earnings attributable to non-controlling interests
961
5,167
3,738
Net earnings used to compute diluted earnings per common share
30,427
9,665
77,006
38,611
159,604
111,371
150,593
108,300
Less weighted average unvested restricted shares (a)
(378
(216
(366
(72
Weighted average number of common shares outstanding used in basic earnings per common share
Effects of restricted stock units (b)
219
172
Effects of convertible membership units (c)
10,142
12,226
10,874
11,519
Weighted average number of common shares outstanding used in diluted earnings per common share
Basic earnings per share
Diluted earnings per share
17. Supplemental Cash Flow Disclosures
Cash paid for interest was $38,551 and $50,853 for the nine months ended September 30, 2021 and 2020, respectively. Cash paid for income taxes was $1,144 and $1,385 for the nine months ended September 30, 2021 and 2020, respectively.
The following are non-cash transactions and have been excluded from the accompanying Condensed Consolidated Statements of Cash Flows:
18. Commitments and Contingencies
Litigation
From time to time, the Company is a party to various litigation matters incidental to the conduct of the Company’s business. While the resolution of such matters cannot be predicted with certainty, based on currently available information, the Company does not believe that the final outcome of any of these matters will have a material effect on its consolidated financial position, results of operations, or liquidity.
Property and Acquisition Related
In connection with ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company is not aware of any non-compliance, liability, claim, or other environmental condition that would have a material effect on its consolidated financial position, results of operations, or liquidity.
The Company has a commitment to fund a building expansion expected to be completed in 2022, totaling $17,388 as of September 30, 2021, in exchange for an increase in rent contractually scheduled to commence in August 2022.
The Company is a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and to the Founding Owners’ Tax Protection Agreement in connection with the Internalization. The tax protection agreements require the Company to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. The Company is required to allocate an amount of nonrecourse liabilities to each beneficiary that is at least equal to the minimum liability amount, as contained in the agreements. The minimum liability amount and the associated allocation of nonrecourse liabilities are calculated in accordance with applicable tax regulations, are completed at the OP level, and do not represent GAAP accounting. Therefore, there is no impact to the Condensed Consolidated Financial Statements. Based on values as of September 30, 2021, taxable sales of the applicable properties would trigger liability under the agreements of approximately $22,300. Based on information available, the Company does not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future.
In the normal course of business, the Company enters into various types of commitments to purchase real estate properties. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated to purchase the properties.
Obligations Under Operating Leases
Subsequent to the Internalization, the Company leases office space for its corporate headquarters and other locations under non-cancellable operating leases with expiration dates ranging from 2021 to 2023. These leases contain provisions for fixed monthly payments, subject to rent escalations. None of the leases are subject to any sublease agreement.
The Company also leases land at certain properties under non-cancellable operating leases (“ground leases”) with initial lease terms ranging from 2034 to 2069. These leases contain provisions for fixed monthly payments, subject to rent escalations. One lease requires the Company to make annual rent payments calculated based upon sales generated at the property (“percentage rent”). None of the leases are subject to any sublease agreement.
The following table summarizes the total lease costs associated with operating leases:
Operating lease costs
Office leases
158
155
473
362
Ground leases
39
33
106
100
Variable lease costs
42
Total lease costs
621
505
The following table summarizes payments associated with obligations under operating leases, reported as Net cash provided by operating activities on the accompanying Condensed Consolidated Statements of Cash Flows:
Operating lease payments
191
179
618
490
Estimated future lease payments required under non-cancelable operating leases at September 30, 2021, and a reconciliation to the lease liabilities, is as follows:
186
723
539
153
3,777
Total undiscounted cash flows
5,533
Less imputed interest
(2,819
The above rental payments include future minimum lease payments due during the initial lease terms. Such amounts exclude any contingent amounts associated with percentage rent that may become due in future periods.
19. Subsequent Events
On October 15, 2021, the Company paid distributions totaling $43,764.
On October 28, 2021, the Board of Directors declared a quarterly distribution of $0.265 per share on the Company’s common stock and OP Units for the fourth quarter of 2021, which will be payable on or before January 15, 2022 to stockholders and unit holders of record as of December 31, 2021.
Subsequent to September 30, 2021, the Company continued to expand its operations through the acquisition of additional rental property and associated intangible assets and liabilities. The Company acquired approximately $12,970 of rental property and associated intangible assets and liabilities (see Note 5).
Subsequent to September 30, 2021, the Company borrowed $38,000 on the Unsecured revolving credit facility, the proceeds of which were used to fund acquisitions and for other general corporate purposes.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except where the context suggests otherwise, as used in this Quarterly Report on Form 10-Q, the terms “BNL,” “we,” “us,” “our,” and “our company” refer to Broadstone Net Lease, Inc., a Maryland corporation incorporated on October 18, 2007, and, as required by context, Broadstone Net Lease, LLC, a New York limited liability company (the “OP”), which we refer to as the or our “OP,” and to their respective subsidiaries.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends, that are intended to be made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other comparable words. All of the forward-looking statements included in this Quarterly Report on Form 10-Q are subject to various risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results, performance, and achievements could differ materially from those expressed in or by the forward-looking statements and may be affected by a variety of risks and other factors. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from such forward-looking statements.
Important factors that could cause results to differ materially from the forward-looking statements are described in Item 1. “Business,” Item 1A. “Risk Factors,” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K, as filed with the SEC on February 25, 2021. The “Risk Factors” of our 2020 Annual Report should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this Quarterly Report on Form 10-Q.
You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report on Form 10-Q. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this Quarterly Report on Form 10-Q will increase with the passage of time. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
Unless the context otherwise requires, the following terms and phrases are used throughout this MD&A as described below:
We acquire, own, and manage primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, retail, and office property types. During the nine months ended September 30, 2021, we invested $507.2 million, excluding capitalized acquisition costs, in 80 properties at a weighted average initial cash capitalization rate of 6.4%. The acquisitions included properties in industrial (48%, based on ABR), healthcare (27%), and retail (25%) asset classes located across 27 states with a weighted average initial lease term and minimum annual rent increases of 16.4 years and 1.5%, respectively. As of September 30, 2021, our portfolio has grown to 696 properties, with 695 properties located in 42 U.S. states and one property located in British Columbia, Canada.
We focus on investing in real estate that is operated by creditworthy single tenants in industries characterized by positive business drivers and trends. We target properties that are an integral part of the tenants’ businesses and for which there are therefore opportunities to secure long-term net leases. Through long-term net leases, our tenants are able to retain operational control of their strategically important locations, while allocating their debt and equity capital to fund their core business operations rather than real estate ownership.
Regulation FD Disclosures
We use any of the following to comply with our disclosure obligations under Regulation FD: SEC filings, press releases, public conference calls, or our website. We routinely post important information on our website at www.Broadstone.com, including information that may be deemed material. We encourage our shareholders and others interested in our company to monitor these distribution channels for material disclosures. Our website address is included in this Quarterly Report as a textual reference only and the information on the website is not incorporated by reference in this Quarterly Report.
The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as of September 30, 2021. The percentages below are calculated based on our ABR of $324.6 million as of September 30, 2021.
Diversification by Property Type
# Properties
ABR($'000s)
ABR as a % ofTotal Portfolio
Square Feet('000s)
SF as a % ofTotal Portfolio
Manufacturing
61
47,962
14.8
8,715
27.8
Distribution & Warehouse
47,563
14.6
9,052
28.8
Food Processing
21,357
6.6
2,405
7.7
Flex and R&D
17,025
5.2
1,457
4.6
Cold Storage
12,620
3.9
933
3.0
Services
7,787
446
1.4
Industrial Total
151
154,314
47.5
23,008
73.3
Clinical
25,009
1,055
3.4
Healthcare Services
12,413
3.8
463
1.5
Animal Health Services
10,196
3.1
405
1.3
Surgical
9,611
316
1.0
Life Science
7,655
549
1.7
Untenanted
0.0
0.1
Healthcare Total
127
64,884
20.0
2,811
9.0
Quick Service Restaurants
148
24,522
7.5
1.6
Casual Dining
82
19,362
527
Restaurant Total
231
43,884
13.5
1,037
3.3
General Merchandise
90
15,958
4.9
1,178
Automotive
68
12,914
4.0
844
2.7
Home Furnishings
6,999
2.2
797
2.5
34
Retail Total
35,871
11.1
2,853
9.1
Office
Corporate Headquarters
10,221
671
2.1
Strategic Operations
9,587
615
2.0
Call Center
5,853
1.8
391
1.2
Office Total
25,661
7.9
1,677
5.3
696
324,614
31,386
31
Diversification by Tenant
Tenant
ABR as a % of Total Portfolio
SF as a % of Total Portfolio
Jack's Family Restaurants LP*
7,026
147
0.5
Red Lobster Hospitality & Red Lobster Restaurants LLC*
6,994
0.6
Joseph T. Ryerson & Son, Inc
6,395
1,537
Axcelis Technologies, Inc.
417
Hensley & Company*
5,756
577
BluePearl Holdings, LLC*
5,309
160
Outback Steakhouse of Florida LLC*1
5,192
140
0.4
Krispy Kreme Doughnut Corporation
Quick Service Restaurants/Food Processing
5,034
156
Siemens Medical Solutions USA, Inc. & Siemens Corporation
Manufacturing/Flex and R&D
4,862
545
Big Tex Trailer Manufacturing, Inc.*
Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters
4,860
1,302
4.1
Total Top 10 Tenants
161
57,287
17.6
5,162
16.4
Santa Cruz Valley Hospital
Healthcare Facilities
Nestle' Dreyer's Ice Cream Company
4,409
310
Tractor Supply Company
4,406
1.1
Arkansas Surgical Hospital
4,260
129
American Signature, Inc.
4,224
474
Cascade Aerospace Inc.
4,084
0.7
Dollar General Corporation
4,077
Fresh Express Incorporated
3,869
Aventiv Technologies, LLC
3,819
154
Kith Kitchens*
3,561
843
Total Top 20 Tenants
98,496
30.3
8,498
27.1
1Tenant’s properties include 20 Outback Steakhouse restaurants and two Carrabba’s Italian Grill restaurants.
*Subject to a master lease.
Diversification by Brand
Brand
Jack's Family Restaurants*
Red Lobster*
Ryerson
Axcelis
Hensley*
BluePearl Veterinary Partners*
Bob Evans Farms*1
Casual Dining/Food Processing
5,247
282
0.9
Krispy Kreme
Siemens
Big Tex Trailers*
Automotive/Distribution & Warehouse/Manufacturing/Corporate Headquarters
Total Top 10 Brands
57,342
5,304
16.9
Wendy's**
4,549
88
0.3
Outback Steakhouse*
4,492
126
Nestle'
Tractor Supply Co.
Value City Furniture
Taco Bell**
4,122
0.2
Cascade Aerospace
Dollar General
Total Top 20 Brands
309
100,465
30.9
7,602
24.2
1 Brand includes one BEF Foods, Inc property and 19 Bob Evans Restaurants, LLC properties.
**Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.
32
Diversification by Industry
Industry
Square Feet ('000s)
51,781
16.0
2,022
6.4
Restaurants
44,549
13.7
1,067
Packaged Foods & Meats
14,212
4.4
1,404
4.5
Distributors
13,906
4.3
2,519
8.0
Food Distributors
12,978
1,556
5.0
Auto Parts & Equipment
12,427
2,387
7.6
Specialized Consumer Services
12,078
3.7
720
2.3
Metal & Glass Containers
9,796
2,206
7.0
9,088
515
Home Furnishing
8,898
1,785
5.7
Specialty Stores
8,813
1,064
Home Furnishing Retail
8,794
1,149
Aerospace & Defense
8,675
952
Electronic Components
6,658
466
General Merchandise Stores
65
6,657
584
1.9
Other (41 industries)
93
95,304
29.3
10,928
34.8
Untenanted properties
62
Diversification by Geographic Location
State
TX
32,960
10.2
3,468
11.0
NJ
4,900
366
IL
19,980
6.2
1,986
6.3
MO
4,822
959
WI
18,548
1,884
WA
4,203
FL
16,350
859
LA
3,394
194
CA
16,035
1,563
NE
3,027
509
OH
14,879
1,400
MD
2,903
293
MI
14,854
1,411
NM
2,782
96
AZ
13,092
909
2.9
MS
2,759
334
NC
35
12,893
1,308
4.2
IA
2,704
0.8
622
IN
12,746
1,759
5.6
WV
2,466
109
MN
12,662
2,021
SC
AL
10,784
836
CO
2,408
125
NY
10,660
680
UT
2,345
280
TN
10,509
3.2
CT
55
MA
10,286
1,026
MT
1,544
AR
7,391
NV
1,332
GA
7,375
1,056
DE
1,130
133
OK
7,126
ND
PA
6,689
1,010
VT
413
KY
5,813
672
WY
307
VA
5,367
204
Total US
695
320,530
98.8
31,155
99.3
KS
5,008
639
Total Canada
Grand Total
Lease Expirations
As of September 30, 2021, the ABR weighted average remaining term of our leases was approximately 10.6 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Approximately 47.9% of our ABR was derived from leases that will expire after 2030, and no more than 7.2% of our ABR was derived from leases that expire in any single year prior to 2030. The following chart sets forth our lease expirations based upon the terms of the leases in place as of September 30, 2021.
Expiration Year
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040+
71
98
45
84
75
Number of leases
54
The following table presents certain information based on lease expirations by year. Amounts are in thousands, except for number of properties.
294
37
4,867
13,858
1,689
5.4
7,889
682
18,679
5.8
23,128
7.1
2,010
23,283
7.2
2,352
21,713
6.7
2,711
8.6
52,598
16.2
5,080
7,636
737
26,218
8.1
3,023
9.6
16,866
1,717
5.5
5,850
376
11,602
3.6
1,552
24,085
7.4
2,608
8.3
17,256
1,367
6,839
306
9,131
2040
5,906
317
24,450
1,823
The following discussion includes the results of our operations for the periods presented.
Three Months Ended September 30, 2021 Compared to Three Months Ended June 30, 2021
Lease Revenues, net
June 30,
Increase/(Decrease)
75,011
3,875
4,724
114
14.0
728
(0.3
)%
(6.7
4,196
Other income from real estate transactions
33,487
>100
(57
207
>(100
84,759
38,018
44.9
The increase in Lease revenues, net was primarily attributable to lease termination fee income of $35.0 million during the three months ended September 30, 2021, with no comparable activity during the three months ended June 30, 2021. In September 2021, we executed the early termination of a long-term, master lease with an investment-grade office tenant in exchange for a termination fee of $35.0 million. Simultaneously, we sold the underlying vacant properties to an unrelated third party. Through the simultaneous transactions, we recorded $33.8 million of revenue, $4.1 million of amortization, and $25.7 million of impairment, for a net $4.0 million increase to net income. The classifications resulted in a $33.8 million increase to FFO, but no impact to AFFO or net debt to annualized adjusted EBITDAre. Refer to our non-GAAP reconciliations in the Non-GAAP Measures section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Lease revenues, net also increased due to growth in our real estate portfolio through accretive property acquisitions during the second quarter of 2021. During the second quarter of 2021, we invested $194.0 million, excluding capitalized acquisition costs, in 34 properties at a weighted average initial cash cap rate of 6.2%. Most of these acquisitions closed during the month of June 2021, and therefore did not materially contribute to Lease revenues, net for the three months ended June 30, 2021.
Operating Expenses
31,225
5,457
17.5
4,572
270
5.9
8,655
(103
(1.2
44,452
31,613
71.1
The increase in depreciation and amortization for the three months ended September 30, 2021 was primarily due to $4.1 million of accelerated amortization resulting from an early lease termination, as discussed in Lease Revenues, net above, together with growth in our real estate portfolio.
During the three months ended September 30, 2021, we recognized $26.0 million of impairment on our investments in rental properties. Although we recognized $25.7 million of impairment associated with the early lease termination transaction, we also recognized $33.8 million of revenue and $4.1 million of amortization, resulting in a net $4.0 million increase to net income. No properties were impaired during the three months ended June 30, 2021. The following table presents the impairment charges for the three months ended September 30, 2021:
Carrying value prior to impairment charge
44,290
18,301
The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.
(6
(100.0
(15,430
242
3,838
(2,618
(68.2
(301
57.1
(5,604
(4,545
(81.1
(29
>(100.0
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months ended September 30, 2021, we recognized gains of $1.2 million on the sale of six properties, compared to gains of $3.8 million on the sale of 11 properties during the three months ended June 30, 2021. Our proactive asset management strategy includes determining to sell any of our properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives.
As part of the Internalization, we were required to pay additional earnout consideration if certain milestones were achieved during the Earnout Periods. During the three months ended September 30, 2021, we achieved the remaining share price milestones and paid the earnout consideration as follows: $13.0 million in cash, 1,089 common shares, and 1,859 OP units. At September 30, 2021, the earnout consideration had been paid in full. The change in fair value of the earnout liability during the corresponding period represents the difference between the June 30, 2021 valuation, and the actual cash paid during the three months ended September 30, 2021.
Net income and Net earnings per diluted share
(in thousands, except per share data)
7,702
33.8
Net earnings per diluted share
0.14
0.04
28.6
The increase in net income is primarily attributable to the $4.0 million increase associated with the simultaneous early lease termination transaction and sale of underlying properties as discussed in Lease Revenue, net above, an additional $4.2 million of revenue associated with growth in our real estate portfolio, and a $4.5 million change in the fair value of our earnout liability, partially offset by a $2.6 million decrease in gain on sale of real estate and incremental depreciation and amortization associated with growth in our real estate portfolio.
GAAP net income includes items such as gain or loss on sale of real estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
17,702
8.5
(2,676
(16.0
8.8
(415
1,542
32,753
>100.0
1,912
(97.5
50,888
21.3
The increase in Lease revenues, net was primarily attributable to lease termination fee income of $35.0 million during the nine months ended September 30, 2021, with no comparable activity during the nine months ended September 30, 2020. In September 2021, we executed the early termination of a long-term, master lease with an investment-grade office tenant in exchange for a termination fee of $35.0 million. Simultaneously, we sold the underlying vacant properties to an unrelated third party. Through the simultaneous transactions, we recorded $33.8 million of revenue, $4.1 million of amortization, and $25.7 million of impairment, for a net $4.0 million increase to net income. The classifications resulted in a $33.8 million increase to FFO, but no impact to AFFO or net debt to annualized adjusted EBITDAre. Refer to our non-GAAP reconciliations in the Non-GAAP Measures section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Lease revenues, net also increased due to growth in our real estate portfolio through accretive property acquisitions during the fourth quarter of 2020 and first half of 2021. During this period, we invested $381.6 million, excluding capitalized acquisition costs, in 81 properties at a weighted average initial cash cap rate of 6.4%. We did not acquire any properties during the first three quarters of 2020 as a result of the COVID-19 pandemic.
(3,883
(3.8
(2,461
(1,275
1,527
12.2
9,084
48.4
10,602
60.9
13,594
38
The decrease in depreciation and amortization was due to $4.1 million of accelerated amortization resulting from an early lease termination during the nine months ended September 30, 2021, as discussed in Lease Revenues, net above, together with growth in our real estate portfolio, compared to $11.1 million of accelerated amortization during the nine months ended September 30, 2020 (as a result of the COVID-19 pandemic and certain lease terminations).
Asset management fees and Property management fees
The decrease in asset management fees and property management fees was due to the completion of the Internalization in February 2020, which terminated the associated agreements with our third-party manager.
The increase in property and operating expense was mainly attributable to the number of properties we own for which we pay insurance and real estate taxes and are reimbursed by the tenants under the terms of the respective leases. There was a corresponding increase in operating expenses billed to tenants included within Lease revenues, net.
The increase in general and administrative expenses mainly reflects the impact of the Internalization associated with our newly acquired employee base. Following the Internalization, our asset and property management fees were replaced with compensation and related expenses, along with associated general and administrative expenses in February 2020.
During the nine months ended September 30, 2021, we recognized $28.0 million of impairment on our investments in rental properties, primarily attributable to our simultaneous early lease termination transactions and sale of underlying properties as discussed in Lease revenues, net above, compared to $17.4 million during the nine months ended September 30, 2021. Although we recognized $25.7 million of impairment associated with the lease termination transaction, we also recognized $33.8 million of revenue and $4.1 million of amortization, resulting in a net $4.0 million increase to net income. The following table presents the impairment charges for their respective periods:
47,108
51,445
19,107
34,046
(45.0
(11,866
(20.1
(11.1
66
107
9.9
(14,045
(50.0
The decrease in interest expense primarily reflects a decrease in our average outstanding borrowings, combined with a decrease in our weighted average cost of borrowings. In September 2020, we used the proceeds of our IPO to repay $456.7 million of outstanding borrowings, including accrued interest, significantly reducing our leverage profile. In January 2021, we received an initial credit rating
of 'BBB' with a stable outlook from S&P Global Ratings ("S&P"), which had the effect of lowering the applicable margin on our then existing $965 million of bank loans by 25 basis points beginning in February 2021. In September 2021, Moody's upgraded our credit rating to 'Baa2' with a stable outlook, which aligned with S&P's credit rating and therefore had no impact to our actual interest expense. We also repriced and partially repaid our 2026 Unsecured Term Loan in March 2021, reducing the applicable margin and principal balance by an additional 60 basis points and $50 million, respectively. Our Net Debt to Annualized Adjusted EBITDAre ratio, used as a relative leverage measure, decreased from 7.04x as of January 1, 2020, to 5.06x as of September 30, 2021.
During the nine months ended September 30, 2020, we incurred $3.5 million of third-party fees and consulting expenses associated with the Internalization. We did not incur these expenses during the nine months ended September 30, 2021.
The change in the fair value of the earnout liability during the nine months ended September 30, 2021, reflects our achievement of all earnout milestones during 2021.
38,645
0.16
50.0
The increase in net income is primarily due to revenue growth of $50.9 million, a $11.9 million decrease in interest expense, a $3.9 million decrease in depreciation and amortization expenses, a $3.7 million decrease in asset and property management fees, and a $3.5 million decrease in Internalization expenses. These factors were partially offset by $14.0 million increase in the fair value of our earnout liability, $10.6 million increase in impairment of investment in rental properties, and $9.1 million increase in general and administrative expenses.
We acquire real estate using a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on maximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our leverage profile and overall liquidity position. We believe our leverage strategy has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our current investment grade credit ratings of 'BBB' from S&P and 'Baa2' from Moody’s Investors Service (“Moody’s”). We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with lenders and with rating agencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As of September 30, 2021, we had total debt outstanding and Net Debt of $1.6 billion and a Net Debt to Annualized Adjusted EBITDAre ratio of 5.06x.
Net Debt and Annualized Adjusted EBITDAre are non-GAAP financial measures, and Annualized Adjusted EBITDAre is calculated based upon EBITDA, EBITDAre, and Adjusted EBITDAre, each of which is also a non-GAAP financial measure. Refer to Non-GAAP Measures below for further details concerning our calculation of non-GAAP measures and reconciliations to the comparable GAAP measure.
Liquidity/REIT Requirements
Liquidity is a measure of our ability to meet potential cash requirements, including our ongoing commitments to repay debt, fund our operations, acquire properties, make distributions to our stockholders, and other general business needs. As a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gain, on an annual basis. As a result, it is unlikely that we will be able to retain substantial cash balances to meet our long-term liquidity needs, including repayment of debt and the acquisition of additional properties, from our annual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital.
Short-term Liquidity Requirements
Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including our general and administrative expenses as well as interest payments on our outstanding debt, and to pay distributions. We do not currently anticipate making significant capital expenditures or incurring other significant property costs because of the strong occupancy levels across our portfolio and the net lease nature of our leases. We expect to meet our short-term liquidity requirements primarily from cash and cash equivalents balances and net cash provided by operating activities, supplemented by borrowings under our Revolving Credit Facility.
As detailed in the contractual obligations table below, we have approximately $16.1 million of expected obligations due to be paid throughout the remainder of 2021, primarily consisting of $0.7 million of mortgage maturities, and $15.1 million of interest expense due, including the impact of our interest rate swaps. We expect our cash provided by operating activities, as discussed below, will be sufficient to pay for our current obligations including interest expense on our borrowings. We expect to either repay the maturing mortgages with available cash on hand generated from our results of operations or borrowings under our Revolving Credit Facility, or refinance with property-level borrowings.
Long-term Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds necessary to repay debt and invest in additional revenue generating properties. Debt capital has historically been provided through unsecured term loans from commercial banks, revolving credit facilities, and private placement senior unsecured notes. In September 2021, we completed our inaugural public bond offering of $375 million aggregate principal amount of 2.600% senior unsecured notes due 2031 (the “2031 Senior Unsecured Public Notes”), and expect to use additional public bond offerings in the future as a form of growth capital.
The source and mix of our debt capital in the future will be impacted by market conditions as well as our continued focus on lengthening our debt maturity profile to better align with our portfolio’s long-term leases, staggering debt maturities to reduce the risk that a significant amount of debt will mature in any single year in the future, and managing our exposure to interest rate risk. Our $60 million 2022 Unsecured Term Loan has a short-term maturity date of February 2022, which we expect to either repay with available cash on hand, or with borrowings under our Revolving Credit Facility. As of September 30, 2021, we had full capacity available under our $900 million Revolving Credit Facility.
We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our capital structure.
Equity Capital Resources
On September 21, 2020, we completed our IPO and issued 37 million shares of stock for net proceeds of $588.3 million, including shares issued subsequently pursuant to the underwriters’ partial exercise of their over-allotment option.
On June 28, 2021, we completed our first public follow-on equity offering and issued 11.5 million shares of stock for net proceeds of $253.5 million, including shares issued pursuant to the underwriters' full exercise of their over-allotment option. Our public offerings have been used to repay debt, fund acquisitions, and for other general corporate purposes.
On August 23, 2021, we established an at-the-market common equity offering program ("ATM Program"), through which we may, from time to time, publicly offer and sell shares of our common stock having an aggregate gross sales price of up to $400 million. The ATM Program provides for forward sale agreements, enabling us to set the price of shares upon pricing the offering while delaying the issuance of shares and the receipt of the net proceeds.
As we continue to invest in accretive real estate properties, we expect to balance our debt and equity capitalization, while maintaining a Net Debt to Annualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of follow-on equity offerings and the ATM Program.
41
Unsecured Indebtedness and Capital Markets Activities as of and for the Nine Months Ended September 30, 2021
The following table sets forth our outstanding Revolving Credit Facility, Unsecured Term Loans and Senior Unsecured Notes at September 30, 2021.
InterestRate
one-month LIBOR + 1.00%or daily LIBOR + 1.00%
Unsecured term loans:
one-month LIBOR + 1.00%
Senior unsecured notes:
Total unsecured debt
1,500,000
The addition of S&P's investment grade credit rating of 'BBB' with stable outlook in January 2021, together with Moody's then existing investment grade credit rating, facilitated the successful completion of our inaugural public bond offering discussed above. Additionally S&P's credit rating reduced the applicable margin on our existing bank loans by 25 basis points beginning in February 2021, and reduced the applicable margin on borrowings under our Revolving Credit Facility by 20 basis points. During the three months ended September 30, 2021, Moody’s upgraded our credit rating to ‘Baa2’ with stable outlook. The Moody’s upgrade aligned with our ‘BBB’ rating from S&P, and therefore did not impact the applicable margin on the debt set forth in the table above.
On March 12, 2021, we amended our $450 million 2026 Unsecured Term Loan, reducing the applicable margin an additional 60 basis points based on our current credit rating. In connection with the amendment, we repaid in full the outstanding commitments for two lenders and elected to repay an additional $10 million in outstanding principal, bringing the outstanding balance to $400 million as of March 31, 2021.
As discussed above, on September 15, 2021, we completed our inaugural public bond offering of our 2031 Senior Unsecured Public Notes. We used the proceeds to repay the Unsecured revolving credit facility and the 2023 Unsecured Term Loan in full, to fund acquisitions, and for other general corporate purposes. Borrowings under the 2031 Senior Unsecured Public Notes are subject to interest only, semi-annual payments at a fixed rate of 2.60% per annum and mature on September 15, 2031.
We have full capacity available under our $900 million Revolving Credit Facility as of September 30, 2021.
Debt Covenants
We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of September 30, 2021, we believe we were in compliance with all of our covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification.
Covenants
Requirements
Leverage Ratio
≤ 0.60 to 1.00
Secured Indebtedness Ratio
≤ 0.40 to 1.00
Unencumbered Coverage Ratio
≥ 1.75 to 1.00
Fixed Charge Coverage Ratio
≥ 1.50 to 1.00
Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value
Dividends and Other Restricted Payments
Only applicable in case of default
Aggregate Debt Ratio
Consolidated Income Available for Debt to Annual Debt Service Charge
Total Unencumbered Assets to Total Unsecured Debt
Secured Debt Ratio
We are exposed to interest rate risk arising from changes in interest rates on the floating-rate borrowings under our unsecured credit facilities and a certain mortgage. Borrowings pursuant to our unsecured credit facilities and the mortgage bear interest at floating rates based on LIBOR plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense, which will in turn, increase or decrease our net income and cash flow.
We attempt to manage our interest rate risk by entering into interest rate swaps. As of September 30, 2021, we had 24 interest rate swaps outstanding in an aggregate notional amount of $640.0 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable-rate borrowings. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes.
Cash and cash equivalents and restricted cash totaled $20.1 million and $109.0 million at September 30, 2021 and September 30, 2020, respectively. The table below shows information concerning cash flows for the nine months ended September 30, 2021 and 2020:
(In thousands)
Decrease in cash and cash equivalents and restricted cash
The increase in net cash provided by operating activities during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization.
The increase in cash used in investing activities during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, was mainly due to increased acquisition volume in 2021 offset by decrease in cash paid in connection with the Internalization.
The change in net cash provided by (used in) by financing activities during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 mainly reflects an increase in net proceeds from equity and debt offerings in 2021 to fund growth in our real estate portfolio.
The following table provides information with respect to our contractual commitments and obligations as of September 30, 2021 (in thousands). Refer to the discussion in the Liquidity and Capital Resources section above for further discussion over our short and long-term obligations.
Year ofMaturity
Term Loans
Revolving Credit Facility(a)
SeniorNotes
Mortgagesand NotesPayable
InterestExpense(b)
TenantImprovementAllowances(c)
Operating Leases
15,127
57
16,077
2,907
59,427
123,057
58,630
66,751
9,760
55,609
255,522
52,156
72,506
56,717
137,943
1,448,437
378,892
1,982,350
At September 30, 2021 and December 31, 2020, investment in rental property of $162.6 million and $173.5 million, respectively, was pledged as collateral against our mortgages.
Additionally, we are a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and we entered into the Founding Owners’ Tax Protection Agreement in connection with the Internalization. The tax protection agreements require us to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. Based on values as of September 30, 2021, taxable sales of the applicable properties would trigger liability under the four agreements of approximately $22.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above.
In the normal course of business, we enter into various types of commitments to purchase real estate properties. These commitments are generally subject to our customary due diligence process and, accordingly, a number of specific conditions must be met before we’re obligated to purchase the properties.
FFO and AFFO
We compute FFO in accordance with the standards established by the Board of Governors of Nareit, the worldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. To derive Adjusted Funds From Operations (“AFFO”), we modify the Nareit computation of FFO to include other adjustments to GAAP net income related to certain non-cash and non-recurring revenues and expenses, including straight-line rents, the change in fair value of our earnout liability, cost of debt extinguishments, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, realized gains or losses on foreign currency transactions, internalization expenses, stock-based compensation, severance, extraordinary items, and other specified non-cash items. We believe that excluding such items assists management and investors in distinguishing whether changes in our operations are due to growth or decline of operations at our properties or from other factors.
Our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market rental rates over time. Our leases do not include significant front-loading or back-loading of payments, or significant rent-free periods. Therefore, we find it useful to evaluate rent on a contractual basis as it allows for comparison of existing rental rates to market rental rates. In situations where we granted short-term rent deferrals as a result of the COVID-19 pandemic, and such deferrals were probable of collection and expected to be repaid within a short term, we continued to recognize the same amount of GAAP lease revenues each period. Consistent with GAAP lease revenues, the short-term deferrals associated with COVID-19, and the corresponding payments, did not impact our AFFO.
We further exclude the change in fair value of our earnout liability, lease termination fees, costs or gains recorded on the extinguishment of debt, non-cash interest expense and gains, the amortization of debt issuance costs, net mortgage premiums, and lease intangibles, realized gains and losses on foreign currency transactions, internalization expenses, stock-based compensation and severance, as these items are not indicative of ongoing operational results. We use AFFO as a measure of our performance when we formulate corporate goals.
FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers, primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is a useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.
Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate AFFO. In the future, the SEC, Nareit, or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of AFFO accordingly.
The following table reconciles net income (which is the most comparable GAAP measure) to FFO and AFFO:
June 30,2021
September 30,2020
Real property depreciation and amortization
36,656
31,202
98,548
102,452
(1,220
(3,838
Provision for impairment on investment in rental properties
FFO
91,947
50,184
194,060
148,783
Capital improvements/reserves
1,662
Straight-line rent adjustment
(3,434
(4,979
(13,045
(14,706
(35,000
Amortization of debt issuance costs
956
Amortization of net mortgage premiums
(34
(106
Loss (gain) on interest rate swaps and other non-cash interest expense
Amortization of lease intangibles
(940
(641
(2,309
3,523
924
Severance
5,604
Other expenses (income)
AFFO
55,836
52,024
157,270
134,201
EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre
We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. EBITDA is a measure commonly used in our industry. We believe that this ratio provides investors and analysts with a measure of our performance that includes our operating results unaffected by the differences in capital structures, capital investment cycles and useful life of related assets compared to other companies in our industry. We compute EBITDAre in accordance with the definition adopted by Nareit, as EBITDA excluding gains (loss) from the sales of depreciable property and provisions for impairment on investment in real estate. We believe EBITDA and EBITDAre are useful to investors and analysts because they provide important supplemental information about our operating performance exclusive of certain non-cash and other costs. EBITDA and EBITDAre are not measures of financial performance under GAAP, and our EBITDA and EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA and EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.
We are focused on a disciplined and targeted acquisition strategy, together with active asset management that includes selective sales of properties. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, each discussed further below, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with our lenders and rating agencies regarding our credit rating. As we fund new acquisitions using our unsecured Revolving Credit Facility, our leverage profile and Net Debt will be immediately impacted by current quarter acquisitions. However, the full benefit of EBITDAre from newly acquired properties will not be received in the same quarter in which the properties are acquired. Additionally, EBITDAre for the quarter includes amounts generated by properties that have been sold during the quarter. Accordingly, the variability in EBITDAre caused by the timing of our acquisitions and dispositions can temporarily distort our leverage ratios. We adjust EBITDAre (“Adjusted EBITDAre”) for the most recently completed quarter (i) to recalculate as if all acquisitions and dispositions had occurred at the beginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either non-cash, such as cost of debt extinguishments or the change in fair value of our earnout liability, or that we believe are one time, or unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future, and (iii) to eliminate the impact of lease termination fees and other items that are not a result of normal operations. We then annualize quarterly Adjusted EBITDAre by multiplying it by four (“Annualized Adjusted EBITDAre”). You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to be inaccurate. Our actual reported EBITDAre for future periods may be significantly different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.
The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA, EBITDAre, and Adjusted EBITDAre. Information is also presented with respect to Annualized EBITDAre and Annualized Adjusted EBITDAre:
15,430
301
EBITDA
83,288
69,776
EBITDAre
108,057
65,938
Adjustment for current quarter acquisition activity (a)
3,534
2,761
Adjustment for current quarter disposition activity (b)
(353
Adjustment to exclude change in fair value of earnout liability
Adjustment exclude write-off of accrued rental income
1,496
Adjustment to exclude cost of debt extinguishments
Adjustment to exclude lease termination fee
Adjusted EBITDAre
78,001
73,950
Annualized EBITDAre
432,221
263,761
Annualized Adjusted EBITDAre
311,998
295,808
We define Net Debt as gross debt (total reported debt plus deferred financing costs) less cash and cash equivalents and restricted cash. We believe that the presentation of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre is useful to investors and analysts because these ratios provide information about gross debt less cash and cash equivalents, which could be used to repay debt, compared to our performance as measured using EBITDAre, and is used in communications with lenders and rating agencies regarding our credit rating. The following table reconciles total debt (which is the most comparable GAAP measure) to Net Debt, and presents the ratio of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre, respectively:
Debt
Revolving Credit Facility
910,994
472,637
105,748
Debt issuance costs
10,215
6,625
Gross Debt
1,496,004
(16,182
(78,987
Restricted cash
(3,895
(8,021
Net Debt
1,577,791
1,408,996
Net Debt to Annualized EBITDAre
3.65x
5.34x
Net Debt to Annualized Adjusted EBITDAre
5.06x
4.76x
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as other disclosures in the financial statements. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, “Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We believe there have been no significant changes during the nine months ended September 30, 2021, to the items that we disclosed as our critical accounting policies in our 2020 Annual Report on Form 10-K.
For information on the impact of recent accounting pronouncements on our business, see Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks, one of the most predominant of which is a change in interest rates. Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variable-rate debt. Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced. We attempt to manage interest rate risk by entering into long-term fixed rate debt or by entering into interest rate swaps to convert certain variable-rate debt to a fixed rate. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. Further information concerning our interest rate swaps can be found in Note 11 in our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q.
Our fixed-rate debt includes our Senior Unsecured Notes, mortgages, and variable-rate debt converted to a fixed rate with the use of interest rate swaps. Our fixed-rate debt and outstanding interest rate swaps had carrying values and fair values of approximately $1.6 billion and $1.7 billion, respectively, as of September 30, 2021. Changes in market interest rates impact the fair value of our fixed-rate debt and interest rate swaps, but they have no impact on interest incurred or on cash flows. For instance, if interest rates were to increase 1%, and the fixed-rate debt balance were to remain constant, we would expect the fair value of our debt to decrease, similar to how the price of a bond decreases as interest rates rise. A 1% increase in market interest rates would have resulted in a decrease in the fair value of our fixed-rate debt and interest rate swaps of approximately $99.6 million as of September 30, 2021.
Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on LIBOR plus an applicable margin, and totaled $657.5 million as of September 30, 2021, of which $640.0 million was swapped to a fixed rate by our use of interest rate swaps. Taking into account the effect of our interest rate swaps, a 1% increase in interest would have a corresponding $0.2 million increase in interest expense annually, while a 1% decrease in interest would have a corresponding $0.1 million decrease in interest expense annually, due to certain interest rate floors on our variable-rate debt.
With the exception of our interest rate swap transactions, we have not engaged in transactions in derivative financial instruments or derivative commodity instruments.
As of September 30, 2021, our financial instruments were not exposed to significant market risk due to foreign currency exchange risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of and for the quarter ended September 30, 2021, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are subject to various lawsuits, claims, and other legal proceedings that arise in the ordinary course of our business. We are not currently a party to legal proceedings that we believe would reasonably be expected to have material adverse effect on our business, financial condition, or results of operations. We are not aware of any material legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject, nor are we aware of any such legal proceedings contemplated by government agencies.
Item 1A. Risk Factors.
There have been no material changes from the risk factors set forth in our 2020 Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits
No.
Description
Articles of Incorporation of Broadstone Net Lease, Inc. (filed as Exhibit 3.1 to the Corporation’s Registration Statement on Form 10 filed April 24, 2017 and incorporated herein by reference)
Articles of Amendment of Broadstone Net Lease, Inc. (filed as Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)
Articles Supplementary of Broadstone Net Lease, Inc. (filed as Exhibit 3.2 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)
Articles of Amendment of Broadstone Net Lease, Inc. (filed as Exhibit 3.3 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)
3.5
Second Amended and Restated Bylaws of Broadstone Net Lease, Inc., adopted March 23, 2020 (filed as Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed March 25, 2020 and incorporated herein by reference)
Indenture, dated as of September 15, 2021, among the Issuer, the Company and the Trustee, including the form of the Guarantee (filed as Exhibit 4.1 to the Corporation’s Current Report on Form 8-K filed September 10, 2021 and incorporated herein by reference)
First Supplemental Indenture, dated as of September 15, 2021, among the Issuer, the Company and the Trustee, including the form of the Notes (filed as Exhibit 4.2 to the Corporation’s Current Report on Form 8-K filed September 10, 2021 and incorporated herein by reference)
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*†
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*†
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document – the instance document does not appear in Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
†In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 2, 2021
/s/ Christopher J. Czarnecki
Christopher J. Czarnecki
Chief Executive Officer and President
/s/ Ryan M. Albano
Ryan M. Albano
Executive Vice President and Chief Financial Officer
51