UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2022, 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 169,306,032 shares of the Registrant's Common Stock, $0.00025 par value per share, outstanding as of May 2, 2022.
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 (Unaudited)
2
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
3
Condensed Consolidated Statements of Cash Flows (Unaudited)
4
Notes to the Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
20
Cautionary Note Regarding Forward-Looking Statements
Explanatory Note and Certain Defined Terms
Overview
21
Real Estate Portfolio Information
22
Results of Operations
28
Liquidity and Capital Resources
31
Derivative Instruments and Hedging Activities
34
Contractual Obligations
Cash Flows
35
Non-GAAP Measures
Critical Accounting Policies
38
Impact of Recent Accounting Pronouncements
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
39
Part II - OTHER INFORMATION
40
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
41
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)
March 31,2022
December 31,2021
Assets
Accounted for using the operating method:
Land
$
709,962
655,374
Land improvements
300,300
295,329
Buildings and improvements
3,381,990
3,242,618
Equipment
10,422
11,870
Total accounted for using the operating method
4,402,674
4,205,191
Less accumulated depreciation
(454,122
)
(430,141
Accounted for using the operating method, net
3,948,552
3,775,050
Accounted for using the direct financing method
28,684
28,782
Accounted for using the sales-type method
571
Investment in rental property, net
3,977,807
3,804,403
Cash and cash equivalents
54,103
21,669
Accrued rental income
120,117
116,874
Tenant and other receivables, net
1,160
1,310
Prepaid expenses and other assets
22,525
17,275
Interest rate swap, assets
8,944
—
Goodwill
339,769
Intangible lease assets, net
311,277
303,642
Debt issuance costs – unsecured revolving credit facility, net
7,427
4,065
Leasing fees, net
9,391
9,641
Total assets
4,852,520
4,618,648
Liabilities and equity
Unsecured revolving credit facility
266,118
102,000
Mortgages, net
96,141
96,846
Unsecured term loans, net
586,884
646,671
Senior unsecured notes, net
843,990
843,801
Interest rate swap, liabilities
1,154
27,171
Accounts payable and other liabilities
40,611
38,038
Dividends payable
47,682
45,914
Accrued interest payable
9,845
6,473
Intangible lease liabilities, net
68,775
70,596
Total liabilities
1,961,200
1,877,510
Commitments and contingencies (See Note 15)
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, 168,750 and 162,383 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
42
Additional paid-in capital
3,056,560
2,924,168
Cumulative distributions in excess of retained earnings
(336,988
(318,476
Accumulated other comprehensive income (loss)
5,027
(28,441
Total Broadstone Net Lease, Inc. stockholders’ equity
2,724,641
2,577,292
Non-controlling interests
166,679
163,846
Total equity
2,891,320
2,741,138
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
For the Three Months Ended March 31,
2022
2021
Revenues
Lease revenues, net
93,841
82,698
Operating expenses
Depreciation and amortization
34,290
30,713
Property and operating expense
5,044
4,605
General and administrative
8,828
10,633
Provision for impairment of investment in rental properties
2,012
Total operating expenses
48,162
47,963
Other income (expenses)
Interest income
Interest expense
(16,896
(16,108
Cost of debt extinguishment
(126
Gain on sale of real estate
1,196
4,733
Income taxes
(412
(413
Change in fair value of earnout liability
1,124
Other (expenses) income
(1,126
10
Net income
28,441
23,960
Net income attributable to non-controlling interests
(1,683
(1,737
Net income attributable to Broadstone Net Lease, Inc.
26,758
22,223
Weighted average number of common shares outstanding
Basic
163,809
145,338
Diluted
174,288
156,724
Net earnings per share attributable to common stockholders
Basic and diluted
0.16
0.15
Comprehensive income
Other comprehensive income
Change in fair value of interest rate swaps
34,961
28,680
Realized loss (gain) on interest rate swaps
659
(41
64,061
52,599
Comprehensive income attributable to non-controlling interests
(3,790
(3,813
Comprehensive income attributable to Broadstone Net Lease, Inc.
60,271
48,786
Condensed Consolidated Statements of Stockholders' Equity
CommonStock
AdditionalPaid-inCapital
CumulativeDistributionsin Excess ofRetainedEarnings
AccumulatedOtherComprehensiveIncome (Loss)
Non-controllingInterests
TotalStockholders'Equity
Balance, January 1, 2022
1,683
Issuance of 6,427 shares of common stock
136,825
136,826
Offering costs, discounts, and commissions
(2,218
Stock-based compensation, net
929
Retirement of 59 shares of common stock
(1,301
Distributions declared ($0.265 per share and OP Unit)
(45,270
(2,845
(48,115
Change in fair value of interest rate swap agreements
32,893
2,068
Realized loss on interest rate swap agreements
620
Adjustment to non-controlling interests
(1,843
(45
1,888
Balance, March 31, 2022
Class A Common Stock
AccumulatedOtherComprehensiveLoss
Balance, January 1, 2021
27
9
2,624,997
(259,673
(66,255
179,976
2,479,081
1,737
Issuance of 211 shares of common stock
233
(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
26,602
2,078
Realized gain on interest rate swap agreements
(39
(2
(953
1,008
(55
Balance, March 31, 2021
36
2,625,320
(274,140
(38,684
180,165
2,492,697
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
33,132
29,985
Amortization of debt issuance costs and original issuance discount charged to interest expense
830
879
Stock-based compensation expense
Straight-line rent, direct financing and sales-type lease adjustments
(3,584
(4,632
126
(1,196
(4,733
(1,124
Other non-cash items
2,275
(95
Changes in assets and liabilities, net of acquisition:
Tenant and other receivables
150
582
804
1,072
(6,049
(3,894
3,372
5,873
Net cash provided by operating activities
59,104
51,780
Investing activities
Acquisition of rental property accounted for using the operating method
(211,902
(88,532
Capital expenditures and improvements
(778
(1,334
Proceeds from disposition of rental property, net
5,020
22,105
Change in deposits on investments in rental property
(18
100
Net cash used in investing activities
(207,678
(67,661
Financing activities
Proceeds from issuance of common stock, net of $2,132 and $173 offering costs, discounts, and commissions in 2022 and 2021, respectively
134,412
(173
Principal payments on mortgages and unsecured term loans
(60,700
(50,802
Borrowings on unsecured revolving credit facility
250,783
15,000
Repayments on unsecured revolving credit facility
(88,000
Cash distributions paid to stockholders
(43,503
(36,402
Cash distributions paid to non-controlling interests
(3,174
Debt issuance and extinguishment costs paid
(3,795
(946
Net cash provided by (used in) financing activities
186,352
(76,497
Net increase (decrease) in cash and cash equivalents and restricted cash
37,778
(92,378
Cash and cash equivalents and restricted cash at beginning of period
27,769
110,728
Cash and cash equivalents and restricted cash at end of period
65,547
18,350
Reconciliation of cash and cash equivalents and restricted cash
Cash and cash equivalents at beginning of period
100,486
Restricted cash at beginning of period
6,100
10,242
Cash and cash equivalents at end of period
10,205
Restricted cash at end of period
11,444
8,145
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 March 31, 2022, the Corporation owned a diversified portfolio of 752 individual commercial properties with 745 properties located in 43 U.S. states and seven properties located in four Canadian provinces.
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 membership units not owned by the Corporation are referred to as OP Units or non-controlling interests. 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."
Pursuant to the Corporation's initial public offering ("IPO"), a new class of common stock ("Class A Common Stock") was issued. 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."
The following table summarizes the outstanding equity and economic ownership interest of the Corporation and the OP:
March 31, 2022
December 31, 2021
Shares of Common Stock
OP Units
Total DilutedShares
Ownership interest
168,750
10,323
179,073
162,383
172,706
Percent ownership of OP
94.2
%
5.8
100.0
94.0
6.0
Refer to Note 13 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, 2021, included in the Company's 2021 Annual Report on Form 10-K, filed with the SEC on February 23, 2022. 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 long-lived asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the long-lived 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 long-lived asset or asset group exceeds its fair value. Significant judgment is made to determine if and when impairment should be taken. The Company's assessment of impairment as of March 31, 2022 and 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.
6
Inputs used in establishing fair value for real estate assets generally fall within Level 3 of the fair value hierarchy, which are characterized as requiring significant judgment as little or no current market activity may be available for validation. The main indicator used to establish the classification of the inputs is current market conditions, as derived through the use of published commercial real estate market information. The Company determines the valuation of impaired assets using generally accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations, and bona fide purchase offers received from third parties. Management may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.
The following table summarizes the Company's impairment charge, resulting primarily from changes in the Company's long-term hold strategy, with respect to the individual property:
(in thousands, except number of properties)
Number of properties
Impairment charge
Restricted Cash
Restricted cash includes escrow funds the Company maintains pursuant to the terms of certain mortgages, lease agreements, and undistributed proceeds from the sale of properties under Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"), and is reported within Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets. Restricted cash consisted of the following:
March 31,
December 31,
Escrow funds and other
6,410
Undistributed 1031 proceeds
5,034
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
15,181
15,162
Fair Value Measurements
Recurring Fair Value Measurements
The balances of financial instruments measured at fair value on a recurring basis are as follows (see Note 9):
Total
Level 1
Level 2
Level 3
(1,154
(27,171
7
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 (see Note 7), 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, unsecured term loans, and senior unsecured notes which reflects the fair value of interest rate swaps:
Carrying amount
1,802,552
1,699,160
Fair value
1,785,597
1,785,701
Non-recurring Fair Value Measurements
The Company's non-recurring fair value measurements at March 31, 2022 and December 31, 2021 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.
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"). Subject to any adjustment as provided in the Equity Incentive Plan, up to 9,000,000 shares may be issued to awards granted under 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 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 are 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 August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. The amendments in ASU 2020-06 were effective for the Company beginning January 1, 2022. The Company uses the two-class method of computing basic and diluted earnings per share. Based on the nature of the Company's potentially dilutive instruments, the treasury stock method is not used in computing dilutive earnings per share. Accordingly, the adoption of ASU 2020-06 did not have a material impact on the Company.
8
3. Acquisitions of Rental Property
The Company closed on the following acquisitions during the three months ended March 31, 2022:
Number of
Real Estate
Date
Property Type
Properties
Acquisition Price
January 7, 2022
Retail
2,573
February 10, 2022
Industrial
21,733
February 15, 2022
1,341
February 28, 2022
5,678
March 4, 2022
79,061
Restaurant
16
99,587
209,973
(a)
The Company closed on the following acquisitions during the three months ended March 31, 2021:
February 5, 2021
Healthcare
4,843
February 26, 2021
(b)
181
March 11, 2021
13
26,834
March 30, 2021
11
41,324
March 31, 2021
14,140
87,322
(c)
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:
54,784
19,584
5,410
4,355
142,269
57,893
Acquired in-place leases(d)
16,037
6,725
Acquired below-market lease (e)
(76
Non-real estate liabilities assumed
(6,440
211,984
88,557
The above acquisitions were funded using a combination of available cash on hand, and proceeds from equity issuances and revolving credit facility borrowings. All real estate acquisitions closed during the three months ended March 31, 2022 and 2021, qualified as asset acquisitions and, as such, acquisition costs have been capitalized.
Subsequent to March 31, 2022, the Company closed on the following acquisitions (see Note 16):
April 12, 2022
1,680
7,522
April 13, 2022
16,250
April 19, 2022
1,780
27,232
4. 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
Aggregate sale price
5,212
23,062
Aggregate carrying value
(3,824
(17,372
Additional sales expenses
(192
(957
5. 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 March 31, 2022, the Company had 752 real estate properties, 739 of which were leased under leases that have been classified as operating leases, 10 that have been classified as direct financing leases, one that has been classified as a sales-type lease, and two that were vacant. 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. Most 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 Consumer Price Index ("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
Depreciation expense on investment in rental property was as follows:
Depreciation
26,658
23,743
Estimated lease payments to be received under non-cancelable operating leases with tenants at March 31, 2022 are as follows:
Remainder of 2022
260,936
2023
349,824
2024
346,753
2025
340,232
2026
330,637
Thereafter
2,469,426
4,097,808
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
41,793
42,602
Estimated unguaranteed residual values
15,203
Unearned revenue
(28,182
(28,893
Reserve for credit losses
(130
Net investment in direct financing leases
Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at March 31, 2022 are as follows:
2,433
3,304
3,361
3,474
3,547
25,674
The above rental receipts do not include future lease payments for renewal periods, potential variable CPI rent increases, or variable percentage rent payments that may become due in future periods.
The following table summarizes amounts reported as Lease revenues, net on the Condensed Consolidated Statements of Income and Comprehensive Income:
Contractual rental amounts billed for operating leases
84,396
73,245
Adjustment to recognize contractual operating lease billings on a straight-line basis
5,021
4,809
Net write-offs of accrued rental income
(1,326
(442
Variable rental amounts earned
186
91
Earned income from direct financing leases
723
730
Interest income from sales-type leases
14
Operating expenses billed to tenants
4,735
4,388
Other income from real estate transactions
Adjustment to revenue recognized for uncollectible rental amounts billed, net
50
(142
Total Lease revenues, net
6. Intangible Assets and Liabilities
The following is a summary of intangible assets and liabilities and related accumulated amortization:
Lease intangibles:
Acquired above-market leases
46,990
47,147
Less accumulated amortization
(17,396
(16,807
Acquired above-market leases, net
29,594
30,340
Acquired in-place leases
395,326
380,766
(113,643
(107,464
Acquired in-place leases, net
281,683
273,302
Total intangible lease assets, net
Acquired below-market leases
105,386
105,310
(36,611
(34,714
Leasing fees
14,728
14,786
(5,337
(5,145
Amortization of intangible lease assets and liabilities was as follows:
Intangible
Financial Statement Presentation
Acquired in-place leases and leasing fees
7,601
6,947
Above-market and below-market leases
1,161
753
Estimated future amortization of intangible assets and liabilities at March 31, 2022 is as follows:
19,508
25,800
25,040
22,393
135,409
251,893
12
7. Unsecured Credit Agreements
The following table summarizes the Company's unsecured credit agreements:
Outstanding Balance
(in thousands, except interest rates)
InterestRate
MaturityDate
Applicable reference rate + 0.85% (a) (b) (c)
Mar. 2026
Unsecured term loans:
2022 Unsecured Term Loan
60,000
one-month LIBOR + 1.00% (c)
Feb. 2022 (d)
2024 Unsecured Term Loan
190,000
Jun. 2024
2026 Unsecured Term Loan
400,000
Feb. 2026
Total unsecured term loans
590,000
650,000
Unamortized debt issuance costs, net
(3,116
(3,329
Total unsecured term loans, net
Senior unsecured notes:
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
Unamortized debt issuance costs and original issuance discount, net
(6,010
(6,199
Total senior unsecured notes, net
Total unsecured debt, net
1,696,992
1,592,472
At March 31, 2022, the weighted average interest rate on all outstanding borrowings was 2.69%, exclusive of interest rate swap agreements.
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 March 31, 2022, and for all periods presented 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.
On January 28, 2022, the Company amended and restated the unsecured revolving credit facility to increase the available borrowings to $1.0 billion and extend the maturity date to March 31, 2026. In addition to United States Dollars ("USD"), borrowings under the unsecured revolving credit facility can be made in Pound Sterling, Euros or Canadian Dollars ("CAD") up to an aggregate amount of $500.0 million. Prior to the amendment, borrowings under the credit facility were subject to interest at variable rates based on LIBOR plus a margin based on the Company's current credit rating ranging between 0.825% to 1.55% per annum. Borrowings under the amended credit facility are subject to interest only payments at variable rates equal to the applicable reference rate plus a margin based on the Company's credit rating, ranging between 0.725% and 1.400%. In addition, the amended credit facility is subject to a facility fee on the amount of the revolving commitments, based on the Company's credit rating. The applicable facility fee is 0.200% per annum.
For the three months ended March 31, 2022, the Company incurred $3.8 million in debt issuance costs associated with the unsecured revolving credit facility. For the three months ended March 31, 2021, the Company incurred $1.0 million in debt issuance costs associated with the amended 2026 Unsecured Term Loan.
For each separate debt instrument, on a lender by lender basis, in accordance with ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction was deemed to be new debt, a modification of existing debt, or an
extinguishment of existing debt. Debt issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred.
With respect to the unsecured revolving credit facility amendment, the transaction was deemed to be new debt and therefore, the debt issuance costs incurred during the three months ended March 31, 2022, have been deferred and are being amortized over the term of the associated debt. With respect to the amended 2026 Unsecured Term Loan, the transaction was deemed to be a modification of existing debt and therefore the $0.9 million of debt issuance costs paid to lenders were deferred and are being amortized over the term of the associated debt. The remaining debt issuance costs of $0.1 million were expensed as incurred during the three months ended March 31, 2021.
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. The following table summarizes debt issuance cost and original issuance discount amortization:
Debt issuance costs and original issuance discount amortization
856
914
8. 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%
46,447
46,760
(a) (b) (c) (d)
Jun-18
Aug-25
4.36%
19,454
19,557
(a) (b) (c) (e)
PNC Bank
Oct-16
Nov-26
3.62%
16,989
17,094
(b) (c)
T2 Durham I, LLC
Jul-21
Jul-24
Greater of Prime + 1.25% or 5.00%
7,500
(b) (f)
Aegon
Apr-12
Oct-23
6.38%
6,044
6,249
(b) (g)
Total mortgages
96,434
97,160
Debt issuance costs, net
(293
(314
At March 31, 2022, investment in rental property of $160.6 million 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 7) at March 31, 2022 are as follows:
2,180
7,582
199,760
20,195
682,961
889,874
Certain of the Company's mortgages 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.
9. Interest Rate Swaps
Interest rate swaps were entered into with certain financial institutions in order to mitigate the impact of interest rate variability over the term of the related debt agreements. The interest rate swaps are considered cash flow hedges. In order to reduce counterparty concentration risk, the Company has a diversification policy for institutions that serve as swap counterparties. Under these agreements, the Company receives monthly payments from the counterparties on these interest rate swaps equal to the related variable interest rates multiplied by the outstanding notional amounts. Certain interest rate swaps amortize on a monthly basis. In turn, the Company pays the counterparties each month an amount equal to a fixed rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that the Company pays a fixed interest rate on its variable-rate borrowings.
The following is a summary of the Company's outstanding interest rate swap agreements:
Counterparty
Maturity Date
FixedRate
NotionalAmount
Fair Value
Wells Fargo Bank, N.A.
October 2024
2.72
(102
(702
Capital One, National Association
December 2024
1.58
341
(241
Bank of Montreal
January 2025
1.91
25,000
366
(649
Truist Financial Corporation
April 2025
2.20
187
(905
July 2025
2.32
105
(1,049
1.99
364
(767
December 2025
2.30
117
(1,125
January 2026
1.92
456
(760
2.05
40,000
545
(1,415
2.08
35,000
442
(1,274
1.93
449
(768
April 2026
2.68
(155
(941
July 2026
1.32
1,520
(205
December 2026
2.33
10,000
(538
410
(936
Toronto-Dominion Bank
March 2027
2.46
16,024
224
April 2027
(452
(1,887
December 2027
2.37
(80
(1,570
(91
(1,575
January 2028
75,000
(274
(4,741
May 2029
2.09
289
(1,316
Regions Bank
2.11
243
(1,356
June 2029
2.03
370
(1,222
U.S. Bank National Association
386
(1,220
August 2029
1.35
1,541
March 2032
2.69
172
2.70
March 2034
2.81
32,046
219
720,118
7,790
640,000
At March 31, 2022, the weighted average fixed rate on all outstanding interest rate swaps was 2.17%.
The total amounts recognized, and the location in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income, from converting from variable rates to fixed rates under these agreements were as follows:
Reclassification from
Amount of Gain
Accumulated Other
Total Interest Expense
Recognized in
Comprehensive Income (Loss)
Presented in the Condensed
Consolidated Statements of
Comprehensive
Amount of
Income and Comprehensive
Income (Loss)
Location
Loss
Income
3,865
16,896
4,016
16,108
Amounts related to the interest rate swaps expected to be reclassified out of Accumulated other comprehensive income (loss) to Interest expense during the next twelve months are estimated to be a loss of $4.9 million. 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.
15
10. Credit Risk Concentrations
The Company maintained bank balances that, at times, exceeded the federally insured limit during the three months ended March 31, 2022. 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.
For the three months ended March 31, 2022 and 2021, the Company had no individual tenants or common franchises that accounted for more than 10% of Lease revenues, net.
11. Equity
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 $400.0 million. 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. As of March 31, 2022, the Company has issued common stock with an aggregate gross sales price of $164.7 million under the ATM Program and could issue additional common stock with an aggregate sales price of up to $235.3 million under the ATM Program.
The following table presents information about the Company's ATM Program activity:
For the Three Months Ended
Number of common shares issued
6,273
Weighted average sale price per share
21.82
Net proceeds
134,326
Gross proceeds
136,544
There was no ATM Program activity during the three months ended March 31, 2021.
12. Stock-Based Compensation
Restricted Stock Awards
The Company awarded 142,045 and 199,430 shares of RSAs, during the three months ended March 31, 2022 and 2021, 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 the 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 weighted average value of awards granted during the three months ended March 31, 2022 and 2021, were $21.66 and $18.66, respectively, which were based on the market price per share of the Company's common stock on the grant date.
The following table presents information about the Company's RSAs:
Compensation cost
610
1,695
Dividends declared on unvested RSAs
97
104
Fair value of shares vested during the period
3,209
2,522
(in thousands, except recognition period)
Unamortized value of RSAs
7,177
4,715
Weighted average amortization period (in years)
2.8
2.4
The following table presents information about the Company's RSA activity:
Number of Shares
Weighted Average Grant Date Fair Value per Share
Unvested at beginning of period
372
19.62
20.50
Granted
142
21.66
199
18.66
Vested
(146
19.80
(124
20.26
Forfeited
(1
26.41
Unvested at end of period
367
20.33
416
Performance-based Restricted Stock Units
The Company issued target grants of 121,883 and 132,189 PRSUs, during the three months ended March 31, 2022 and 2021, respectively, 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, as identified in the grant agreements, over a three-year period, 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. Vesting percentages range 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:
319
74
Unamortized value of PRSUs
5,011
1,931
2.6
2.2
The following table presents information about the Company's PRSU activity:
110
24.40
122
27.93
132
(22
232
26.25
17
13. 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
(97
(104
Net earnings used to compute basic earnings per common share
26,661
22,119
Diluted earnings:
Net earnings used to compute basic earnings per share
Net earnings attributable to non-controlling interests
Net earnings used to compute diluted earnings per common share
28,344
23,856
164,179
145,672
Less: weighted average unvested restricted shares (a)
(370
(334
Weighted average number of common shares outstanding used in basic earnings per common share
Effects of restricted stock units (b)
156
Effects of convertible membership units (c)
11,386
Weighted average number of common shares outstanding used in diluted earnings per common share
Basic earnings per share
Diluted earnings per share
14. Supplemental Cash Flow Disclosures
Cash paid for interest was $12.0 million and $9.4 million for the three months ended March 31, 2022 and 2021, respectively. Cash paid for income taxes was $0.5 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively.
The following are non-cash transactions and have been excluded from the accompanying Condensed Consolidated Statements of Cash Flows:
18
15. 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 cost 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 $17.4 million as of March 31, 2022, 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 March 31, 2022, taxable sales of the applicable properties would trigger liability under the agreements of approximately $22.3 million. 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.
16. Subsequent Events
On April 15, 2022, the Company paid distributions totaling $47.5 million.
On April 29, 2022, the Board of Directors declared a quarterly distribution of $0.270 per share on the Company's common stock and OP Units for the second quarter of 2022, which will be payable on or before July 15, 2022 to stockholders and unit holders of record as of June 30, 2022.
Subsequent to March 31, 2022, the Company continued to expand its operations through the acquisition of additional rental property and associated intangible assets and liabilities. The Company acquired approximately $27.2 million of rental property and associated intangible assets and liabilities (see Note 3).
Through May 2, 2022, the Company issued 542,929 shares of common stock at a weighted average sale price of $21.88 per share under the ATM Program. The net proceeds, after deducting $0.2 million of commissions and other offering costs, were $11.7 million.
19
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, 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 2021 Annual Report on Form 10-K, as filed with the SEC on February 23, 2022. The "Risk Factors" of our 2021 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.
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.
Unless the context otherwise requires, the following terms and phrases are used throughout this MD&A as described below:
We are an internally-managed real estate investment trust ("REIT") that acquires, owns, and manages primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, retail, and office property types. During the three months ended March 31, 2022, we invested $210.0 million, excluding capitalized acquisition costs, in 27 properties at a weighted average initial cash capitalization rate of 5.7%. The acquisitions included properties in restaurants (50%, based on ABR), retail (37%), and industrial (13%) asset classes located across 14 U.S. states and four Canadian provinces with a weighted average initial lease term and minimum annual rent increases of 19.3 years and 1.5%, respectively. As of March 31, 2022, our portfolio has grown to 752 properties, with 745 properties located in 43 U.S. states and seven properties located in four Canadian provinces.
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 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 core business operations rather than real estate ownership.
The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as of March 31, 2022. The percentages below are calculated based on our ABR of $347.7 million as of March 31, 2022.
Diversification by Property Type
# Properties
ABR($'000s)
ABR as a % ofTotal Portfolio
Square Feet('000s)
SF as a % ofTotal Portfolio
Manufacturing
64
50,797
14.6
9,147
27.9
Distribution & Warehouse
45
49,015
14.1
9,221
28.1
Food Processing
22,881
6.6
2,636
8.0
Flex and R&D
17,296
5.0
1,457
4.4
Cold Storage
12,702
3.6
933
2.9
Services
8,548
2.5
487
1.5
Industrial Total
158
161,239
46.4
23,881
72.8
Clinical
51
25,735
7.4
1,049
3.2
Healthcare Services
12,511
463
1.4
Animal Health Services
10,352
3.0
405
1.2
Surgical
10,226
329
1.0
Life Science
7,688
549
1.7
Untenanted
0.1
Healthcare Total
128
66,512
19.1
2,813
8.6
Casual Dining
102
27,008
7.8
683
2.1
Quick Service Restaurants
148
25,022
7.2
505
Restaurant Total
250
52,030
15.0
1,188
General Merchandise
120
22,784
6.5
1,633
Automotive
66
12,084
3.5
771
Home Furnishings
7,030
2.0
797
Retail Total
200
41,898
12.0
3,235
9.9
Office
Corporate Headquarters
10,429
679
Strategic Operations
9,691
615
1.9
Call Center
5,887
391
Office Total
26,007
7.5
1,685
5.1
752
347,686
32,802
23
Diversification by Tenant
Tenant
ABR as a % of Total Portfolio
SF as a % of Total Portfolio
Jack's Family Restaurants LP*
43
7,166
147
0.4
Red Lobster Hospitality & Red Lobster Restaurants LLC*
6,699
174
0.5
Joseph T. Ryerson & Son, Inc
6,395
1.8
1,537
4.7
J. Alexander's, LLC*
6,025
131
Axcelis Technologies, Inc.
5,991
417
1.3
Hensley & Company*
5,871
577
BluePearl Holdings, LLC**
5,444
1.6
165
Dollar General Corporation
55
5,391
510
Outback Steakhouse of Florida LLC*1
5,278
140
Tractor Supply Company
5,269
Total Top 10 Tenants
206
59,529
17.1
4,215
12.9
Krispy Kreme Doughnut Corporation
Quick Service Restaurants/Food Processing
Big Tex Trailer Manufacturing, Inc.*
Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters
4,957
1,302
4.0
Siemens Medical Solutions USA, Inc. & Siemens Corporation
Manufacturing/Flex and R&D
4,936
Santa Cruz Valley Hospital
Healthcare Facilities
4,500
Nestle' Dreyer's Ice Cream Company
4,476
310
0.9
Arkansas Surgical Hospital
4,366
129
American Signature, Inc.
4,224
474
Cascade Aerospace Inc.
4,150
231
0.7
MEC Mountain Equipment Company Ltd.*
4,147
0.6
Aventiv Technologies, LLC
3,896
154
Total Top 20 Tenants
269
104,215
30.0
7,863
24.0
1Tenant's properties include 20 Outback Steakhouse restaurants and two Carrabba's Italian Grill restaurants.
*Subject to a master lease.
** Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.
Diversification by Brand
Brand
Jack's Family Restaurants*
Red Lobster*
Ryerson
Axcelis
Hensley*
BluePearl Veterinary Partners*
Dollar General
Bob Evans Farms*1
Casual Dining/Food Processing
5,285
281
0.8
Tractor Supply Co.
Krispy Kreme
Total Top 10 Brands
216
58,545
16.8
4,381
13.4
Big Tex Trailers*
Automotive/Distribution & Warehouse/Manufacturing/Corporate Headquarters
Siemens
Outback Steakhouse*
4,566
Wendy's**
4,554
89
0.3
Nestle'
Value City Furniture
Taco Bell**
4,172
80
0.2
Cascade Aerospace
Total Top 20 Brands
327
103,446
29.8
7,815
23.8
1 Brand includes one BEF Foods, Inc property and 20 Bob Evans Restaurants, LLC properties.
**Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.
24
Diversification by Industry
Industry
Square Feet ('000s)
53,325
15.3
2,029
6.2
Restaurants
253
52,801
15.2
1,230
3.7
Packaged Foods & Meats
16,654
4.8
1,820
5.5
Distributors
26
14,690
4.2
2,561
Food Distributors
14,403
4.1
1,786
5.4
Specialty Stores
13,855
1,338
Auto Parts & Equipment
12,634
2,387
7.3
Specialized Consumer Services
47
12,116
722
Metal & Glass Containers
9,898
2,206
6.7
9,172
515
Home Furnishing
8,955
1,785
Home Furnishing Retail
8,845
1,149
Aerospace & Defense
8,818
952
General Merchandise Stores
85
8,442
765
2.3
Electronic Components
6,806
466
Other (41 industries)
92
96,272
11,039
33.8
Untenanted properties
52
25
Diversification by Geographic Location
State /Province
TX
69
36,443
10.5
3,502
10.7
LA
3,400
194
IL
21,099
6.1
2,002
NE
3,029
509
WI
19,744
5.7
2,069
6.3
MD
2,966
293
MI
48
16,700
1,545
CO
2,796
134
FL
44
16,313
849
NM
2,783
96
OH
15,655
4.5
1,416
4.3
MS
2,772
334
CA
15,612
1,493
4.6
IA
2,754
622
MN
13,733
3.9
2,244
6.8
SC
2,494
308
AZ
13,213
3.8
909
WV
2,480
109
NC
13,023
1,308
UT
2,379
280
IN
29
12,812
1,759
CT
1,699
TN
12,111
565
MT
1,563
AL
11,843
3.4
863
NV
1,336
GA
11,124
1,555
DE
133
NY
10,660
680
ND
943
MA
10,456
1,026
3.1
VT
414
OK
7,583
977
WY
307
AR
7,548
283
SD
81
0.0
PA
6,960
Total US
745
339,389
97.6
32,372
98.7
KY
6,573
703
BC
4,776
KS
5,488
647
ON
2,150
101
VA
5,388
204
AB
1,010
NJ
4,904
1.1
MB
361
MO
4,822
959
Total Canada
8,297
430
WA
4,232
Grand Total
Lease Expirations
As of March 31, 2022, the ABR weighted average remaining term of our leases was approximately 10.5 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Approximately 66.4% of our ABR was derived from leases that will expire in 2030 and after, and no more than 6.8% 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 March 31, 2022.
Expiration Year
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041+
71
54
33
86
Number of leases
32
56
The following table presents certain information based on lease expirations by year. Amounts are in thousands, except for number of properties.
1,566
46
5,387
538
14,031
1,689
5.2
8,468
698
19,207
1,414
23,482
2,019
22,982
2,291
7.0
21,988
2,711
8.3
53,209
5,099
15.5
7,991
707
28,764
3,248
18,795
1,950
5.9
6,200
409
11,728
1,552
25,720
2,854
8.7
17,763
1,369
6,840
306
9,145
5,945
317
2041
18,815
1,637
19,660
963
The following discussion includes the results of our operations for the periods presented.
Three Months Ended March 31, 2022 Compared to Three Months Ended December 31, 2021
Lease Revenues, net
Increase/(Decrease)
81,482
2,914
5,372
(351
(6.5
)%
(100.0
433
(247
(57.0
725
(0.3
(6.7
4,464
271
>100.0
(100
(66.7
92,642
1,199
The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through accretive property acquisitions closed in the fourth quarter of 2021. During the fourth quarter of 2021, we invested $147.5 million, excluding capitalized acquisition costs, in 36 properties at a weighted average initial cash capitalization rate of 6.0%. Most of these acquisitions closed during the month of December 2021, and therefore did not materially contribute to Lease revenues, net for the three months ended December 31, 2021.
Operating Expenses
33,476
814
4,440
604
13.6
8,526
302
207
(207
46,649
1,513
The increase in depreciation and amortization for the three months ended March 31, 2022 was primarily due to growth in our real estate portfolio.
(6
(16,997
(101
(0.6
3,732
(2,536
(68.0
(457
(9.8
Other expenses
(51
1,075
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months ended March 31, 2022, we recognized a gain of $1.2 million on the sale of one property, compared to gains of $3.7 million on the sale of six properties during the three months ended December 31, 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.
The increase in other expenses during the three months ended March 31, 2022 was primarily due to $1.1 million of unrealized foreign exchange loss recognized on the quarterly remeasurement of our $100 million CAD revolving borrowings.
Net income and Net earnings per diluted share
(in thousands, except per share data)
32,226
(3,785
(11.7
Net earnings per diluted share
0.19
(0.03
(15.8
The decrease in net income is primarily attributable to $2.5 million decrease in gain on sale of real estate, $1.1 million increase in other expenses, $0.8 million increase in depreciation and amortization, $0.6 million increase in property and operating expenses, partially offset by an increase in $1.2 million of revenue 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.
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
11,151
212
(884
95
(7
(1.0
347
7.9
37
192
<(100.0
11,143
13.5
The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through accretive property acquisitions closed since March 31, 2021. During the twelve months ended March 31, 2022, we invested $777.4 million, excluding capitalized acquisition costs, in 115 properties at a weighted average initial cash capitalization rate of 6.1%.
3,577
11.6
439
9.5
(1,805
(17.0
(2,012
The decrease in general and administrative expenses mainly reflects decreased severance associated with the departure of an executive officer during the three months ended March 31, 2021.
During the three months ended March 31, 2022, we did not recognize any impairment on our investments in rental properties, compared to $2.0 million during the three months ended March 31, 2021. The following table presents the impairment charges for the respective periods:
Carrying value prior to impairment charge
2,818
806
30
The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.
(5
788
4.9
(3,537
(74.7
(0.2
(1,136
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months ended March 31, 2022, we recognized a gain of $1.2 million on the sale of one property, compared to gains of $4.7 million on the sale of eight properties during the three months ended March 31, 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.
The fair value of the earnout liability was remeasured each reporting period, with changes recorded as Change in fair value of earnout liability in the Condensed Consolidated Statements of Income and Comprehensive Income. All earnout milestones were achieved during the year ended December 31, 2021, therefore there is no change in the fair value of the earnout liability during the three months ended March 31, 2022. The change in the fair value of the earnout liability during the three months ended March 31, 2021 reflected a decrease in our share price as compared to December 31, 2020.
4,481
18.7
0.01
The increase in net income is primarily due to revenue growth of $11.1 million, a $2.0 million decrease in impairment of investment in rental properties, and a $1.8 million decrease in general and administrative expenses. These factors were partially offset by a $3.6 million increase in depreciation and amortization, a $3.5 million decrease on gain on sale of real estate, a $1.1 million increase in other expense, a $1.1 million decrease in change in fair value of earnout liability, and a $0.8 million increase in interest expense.
General
We acquire real estate using a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on maximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our leverage profile and overall liquidity position. We believe our leverage strategy has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our current investment grade credit ratings of 'BBB' from S&P Global Ratings ("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 March 31, 2022, we had total debt outstanding of $1.8 billion, Net Debt of $1.7 billion, and a Net Debt to Annualized Adjusted EBITDAre ratio of 5.14x.
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 gains, 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, to pay distributions, and to fund our acquisitions that are under control or expected to close within a short time period. 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. We intend to match fund our acquisitions with an appropriate mix of debt and equity capital. We use cash on hand and borrowings under our Revolving Credit Facility to initially fund acquisitions, which are subsequently repaid or replaced with proceeds from our equity and debt capital markets activities.
As detailed in the contractual obligations table below, we have approximately $51.9 million of expected obligations due throughout the remainder of 2022, primarily consisting of $48.4 million of interest expense due, including the impact of our interest rate swaps, and $2.2 million of mortgage maturities. 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. We expect to source debt capital from unsecured term loans from commercial banks, revolving credit facilities, private placement senior unsecured notes, and public bond offerings.
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. With outstanding borrowings of $266.1 million at March 31, 2022, we have $733.9 million of available capacity under our Revolving Credit Facility.
We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our capital structure.
Equity Capital Resources
Our equity capital is primarily provided through our at-the-market common equity offering program ("ATM Program"), as well as follow-on equity offerings. Under the terms of our ATM Program 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 of March 31, 2022, we have issued common stock with an aggregate gross sales price of $164.7 million under the ATM Program and could issue additional common stock with an aggregate sales price of up to $235.3 million.
During the three months ended March 31, 2022, we issued 6,273,000 shares of common stock under our ATM Program, at a weighted average sale price of $21.82 per share. The net proceeds, after deducting $1.9 million for commissions and $0.3 million for other issuance expenses, were $134.3 million.
Our public offerings have been used to repay debt, fund acquisitions, and for other general corporate purposes.
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.
Unsecured Indebtedness and Capital Markets Activities as of and for the Three Months Ended March 31, 2022
The following table sets forth our outstanding Revolving Credit Facility, Unsecured Term Loans and Senior Unsecured Notes at March 31, 2022.
Applicable reference rate + 0.85% (a)
one-month LIBOR + 1.00%
Total unsecured debt
1,706,118
On January 28, 2022, we amended and restated the Revolving Credit Facility, upsizing the capacity to $1.0 billion, extending the maturity date to March 2026 and reducing the applicable margin to 0.850% per annum.
On February 25, 2022, we repaid the $60.0 million 2022 Unsecured Term Loan with borrowings under our Revolving Credit Facility.
As of March 31, 2022, we had $266.1 million outstanding on our Revolving Credit Facility. We have $733.9 million of remaining capacity on our Revolving Credit Facility as of March 31, 2022.
Debt Covenants
We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of March 31, 2022, 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
The following table provides information with respect to our contractual commitments and obligations as of March 31, 2022 (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 CreditFacility (a)
SeniorNotes
Mortgages
InterestExpense (b)
TenantImprovementAllowances
Operating Leases
48,444
57
1,172
51,853
64,123
1,564
73,269
9,760
62,050
1,613
263,423
58,612
79,621
16,843
45,508
847
729,316
39,874
99,781
989,676
378,518
6,031
2,187,158
At March 31, 2022 investment in rental property of $160.6 million was pledged as collateral against our mortgages.
Additionally, we are a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and we entered into the Founding Owners' Tax Protection Agreement in connection with the Internalization. The tax protection agreements require us to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners' Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. Based on values as of March 31, 2022, 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 are obligated to purchase the properties.
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 bear interest at floating rates based on LIBOR plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense, which will in turn, increase or decrease our net income and cash flow.
We attempt to manage our interest rate risk by entering into interest rate swaps. As of March 31, 2022, we had 28 interest rate swaps outstanding in an aggregate notional amount of $720.1 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.
In addition, we own investments in Canada, and as a result are subject to risk from the effects of exchange rate movements in the Canadian dollar, which may affect future costs and cash flows. We funded a significant portion of our Canadian investments through Canadian dollar borrowings under our Revolving Credit Facility, which is intended to act as a natural hedge against our Canadian dollar investments. The Canadian dollar revolving borrowings are remeasured each reporting period, with the unrealized foreign currency gains and losses flowing through earnings. These unrealized foreign currency gains and losses do not impact our cash flows from operations until settled, and are expected to directly offset the changes in the value of our net investments as a result of changes in the Canadian dollar. Our Canadian investments are recorded at their historical exchange rates, and therefore are not impacted by changes in the value of the Canadian dollar.
Cash and cash equivalents and restricted cash totaled $65.5 million and $18.4 million at March 31, 2022 and March 31, 2021, respectively. The table below shows information concerning cash flows for the three months ended March 31, 2022 and 2021:
(In thousands)
Net cash provided by (used in) investing activities
Decrease in cash and cash equivalents and restricted cash
The increase in net cash provided by operating activities during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, was mainly due to growth in our real estate portfolio.
The increase in cash used in investing activities during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, was mainly due to increased acquisition volume and decreased disposition volume during the three months ended March 31, 2022.
The change in net cash provided by (used in) financing activities during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, mainly reflects an increase proceeds from issuance of common stock under the ATM Program, and increased borrowings on the unsecured revolving credit facility. This change is slightly offset by increase in repayments of unsecured term loans and the unsecured revolving credit facility.
FFO, Core FFO, and AFFO
We compute Funds From Operations ("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. 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 (losses) 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 compute Core Funds From Operations ("Core FFO") by adjusting FFO, as defined by Nareit, to exclude certain GAAP income and expense amounts that we believe are infrequently recurring, unusual in nature, or not related to its core real estate operations, including write-offs or recoveries of accrued rental income, lease termination fees, the change in fair value of our earnout liability, cost of debt extinguishments, unrealized and realized gains or losses on foreign currency transactions, severance, and other extraordinary items. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of our peers, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis.
We compute Adjusted Funds From Operations ("AFFO"), by adjusting Core FFO for certain non-cash revenues and expenses, including straight-line rents, 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, stock-based compensation, 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. We use AFFO as a measure of our performance when we formulate corporate goals, and is a factor in determining management compensation. 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.
Specific to our adjustment for straight-line rents, 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.
FFO, Core FFO, and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO, Core 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 Core FFO and 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 Core FFO and AFFO accordingly.
The following table reconciles net income (which is the most comparable GAAP measure) to FFO, Core FFO, and AFFO:
March 31,2021
Real property depreciation and amortization
34,259
33,451
30,690
(3,732
Provision for impairment on investment in rental properties
FFO
61,504
62,152
51,929
1,326
Severance
1,243
Other expenses (income)
1,126
(10
Core FFO
64,076
62,232
52,606
Straight-line rent adjustment
(4,934
(5,321
(5,074
Adjustment to provision for credit losses
(37
Amortization of debt issuance costs
1,022
Amortization of net mortgage premiums
(27
(26
(35
Loss (gain) on interest rate swaps and other non-cash interest expense
696
Amortization of lease intangibles
(1,158
(899
(728
1,025
AFFO
60,401
58,692
49,410
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 (losses) 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, realized or unrealized gains and losses on foreign currency transactions, 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:
16,997
412
457
413
EBITDA
80,039
83,156
71,194
EBITDAre
78,843
79,631
68,473
Adjustment for current quarter acquisition activity (a)
3,225
1,365
Adjustment for current quarter disposition activity (b)
(79
(180
(278
Adjustment to exclude non-recurring and other expenses (c)
2,100
Adjustment to exclude change in fair value of earnout liability
Adjustment exclude net write-offs of accrued rental income
Adjustment to exclude realized / unrealized foreign exchange loss
1,125
Adjustment to exclude cost of debt extinguishments
Adjusted EBITDAre
84,440
81,453
71,104
Annualized EBITDAre
315,375
318,526
273,888
Annualized Adjusted EBITDAre
337,759
325,812
284,414
Net Debt, Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre
We define Net Debt as gross debt (total reported debt plus debt issuance 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
910,732
472,551
106,559
Debt issuance costs
9,419
9,842
6,988
Gross Debt
1,511,830
(54,103
(21,669
(10,205
Restricted cash
(11,444
(6,100
(8,145
Net Debt
1,737,005
1,671,391
1,493,480
Net Debt to Annualized EBITDAre
5.51x
5.25x
5.45x
Net Debt to Annualized Adjusted EBITDAre
5.14x
5.13x
Critical Accounting Policies and Estimates
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. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, "Summary of Significant Accounting Policies," in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We believe there have been no significant changes during the three months ended March 31, 2022, to the items that we disclosed as our critical accounting policies and estimates in our 2021 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
Interest Rate 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 9 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 had a carrying value and fair value of approximately $1.7 billion and $1.6 billion, respectively, as of March 31, 2022. Changes in market interest rates impact the fair value of our fixed-rate debt, 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 of approximately $90.7 million as of March 31, 2022.
Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on the applicable reference rate plus an applicable margin, and totaled $863.6 million as of March 31, 2022, of which $720.1 million was swapped to a fixed rate by our use of interest rate swaps. Taking into account the effect of our interest rate swaps, a 1% increase or decrease in interest would have a corresponding $1.4 million increase or decrease in interest expense annually.
With the exception of our interest rate swap transactions, we have not engaged in transactions in derivative financial instruments or derivative commodity instruments.
Foreign Currency Exchange Rate Risk
We own investments in Canada, and as a result are subject to risk from the effects of exchange rate movements in the Canadian dollar, which may affect future costs and cash flows. We funded a significant portion of our Canadian investments through Canadian dollar borrowings under our Revolving Credit Facility, which is intended to act as a natural hedge against our Canadian dollar investments. To the extent that currency fluctuations increase or decrease rental revenues, as translated to U.S. dollars, the change in debt service (comprised of interest payments), as translated to U.S. dollars, will partially offset the effect of fluctuations in revenue and, to some extent, mitigate the risk from changes in foreign currency exchange rates. We believe the foreign currency exchange rate risk on the remaining cash flows is immaterial.
Additionally, our Canadian dollar revolving borrowings are remeasured each reporting period, with the unrealized foreign currency gains and losses flowing through earnings. These unrealized foreign currency gains and losses do not impact our cash flows from operations until settled, and are expected to directly offset the changes in the value of our net investments as a result of changes in the Canadian dollar. Our Canadian investments are recorded at their historical exchange rates, and therefore are not impacted by changes in the value of the Canadian dollar.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of and for the quarter ended March 31, 2022, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2022 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 2021 Annual Report on Form 10-K for the year ended December 31, 2021.
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)
3.3
Articles Supplementary of Broadstone Net Lease, Inc. (filed as Exhibit 3.2 to the Corporation's Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)
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)
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)
10.1
Amended and Restated Revolving Credit Agreement, dated as of January 28, 2022, by and among the Company, Broadstone Net Lease, LLC (the "Operating Company"), as the borrower, JPMorgan Chase Bank, N.A., and the other parties thereto (filed as Exhibit 10.1 to the Corporation's Current Report on Form 8-K filed February 3, 2022 and incorporated herein by reference)
10.2
Guaranty, dated January 28, 2022, by Broadstone Net Lease, Inc. in favor of JPMorgan Chase Bank, N.A. (filed as Exhibit 10.2 to the Corporation's Current Report on Form 8-K filed February 3, 2022 and incorporated herein by reference)
10.3*
Fourth Amendment to Revolving Credit and Term Loan Agreement, dated as of March 31, 2022, by and among Broadstone Net Lease, Inc., Broadstone Net Lease, LLC, Manufacturers and Traders Trust Company, and other parties thereto
10.4*
Fourth Amendment to Capital One Term Loan Agreement, dated March 31, 2022, by and among Broadstone Net Lease, Inc., Broadstone Net Lease, Capital One, National Association, and the other parties thereto
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
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Inline XBRL Taxonomy Extension Calculation Linkbase Document
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Inline XBRL Taxonomy Extension Definition Linkbase Document
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Inline XBRL Taxonomy Extension Label Linkbase Document
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Inline XBRL Taxonomy Extension Presentation Linkbase Document
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* 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: May 4, 2022
/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