UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2021, or
☐
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 001-39529
BROADSTONE NET LEASE, INC.
(Exact name of registrant as specified in its charter)
Maryland
26-1516177
(State or other jurisdiction 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
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 145,811,829 shares of the Registrant’s Common Stock, $0.00025 par value per share, outstanding as of May 3, 2021.
TABLE OF CONTENTS
Page
Part I - FINANCIAL INFORMATION
1
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)
2
Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity (Unaudited)
3
Condensed Consolidated Statements of Cash Flows (Unaudited)
4
Notes to the Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
Cautionary Note Regarding Forward-Looking Statements
Explanatory Note and Certain Defined Terms
Overview
23
Real Estate Portfolio Information
24
Results of Operations
30
Liquidity and Capital Resources
34
Derivative Instruments and Hedging Activities
36
Cash Flows
Contractual Obligations
37
Non-GAAP Measures
Critical Accounting Policies
40
Impact of Recent Accounting Pronouncements
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
41
Part II - OTHER INFORMATION
42
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
43
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)
March 31,
2021
December 31,
2020
Assets
Accounted for using the operating method, net of accumulated depreciation
$
3,395,609
3,354,511
Accounted for using the direct financing method
28,991
29,066
Accounted for using the sales-type method
567
Investment in rental property, net
3,425,167
3,384,144
Cash and cash equivalents
10,205
100,486
Accrued rental income
105,674
102,117
Tenant and other receivables, net
1,022
1,604
Prepaid expenses and other assets
18,862
22,277
Interest rate swap, assets
239
—
Goodwill
339,769
Intangible lease assets, net
288,592
290,913
Debt issuance costs – unsecured revolving credit facility, net
5,842
6,435
Leasing fees, net
10,673
10,738
Total assets
4,206,045
4,258,483
Liabilities and equity
Unsecured revolving credit facility
15,000
Mortgages, net
106,559
107,382
Unsecured term notes, net
1,383,283
1,433,796
Interest rate swap, liabilities
43,662
72,103
Earnout liability
6,385
7,509
Accounts payable and other liabilities
71,072
74,936
Accrued interest payable
9,896
4,023
Intangible lease liabilities, net
77,491
79,653
Total liabilities
1,713,348
1,779,402
Commitments and contingencies (See Note 17)
Equity
Broadstone Net Lease, Inc. stockholders' equity:
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding
Common stock, $0.00025 par value; 500,000 shares authorized, 145,813 shares issued
and outstanding at March 31, 2021; 440,000 shares authorized, 108,609 shares issued
and outstanding at December 31, 2020
27
Class A common stock, $0.00025 par value; no shares authorized, issued or outstanding at
March 31, 2021; 60,000 shares authorized, 37,000 shares issued and outstanding at
December 31, 2020
9
Additional paid-in capital
2,625,320
2,624,997
Cumulative distributions in excess of retained earnings
(274,140
)
(259,673
Accumulated other comprehensive loss
(38,684
(66,255
Total Broadstone Net Lease, Inc. stockholders’ equity
2,312,532
2,299,105
Non-controlling interests
180,165
179,976
Total equity
2,492,697
2,479,081
Total liabilities and equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Income and Comprehensive Income (Loss)
For the Three Months Ended
Revenues
Lease revenues, net
82,698
78,231
Operating expenses
Depreciation and amortization
30,713
31,219
Asset management fees
2,461
Property management fees
1,275
Property and operating expense
4,605
4,115
General and administrative
10,633
Provision for impairment of investment in rental properties
2,012
2,133
Total operating expenses
47,963
47,045
Other income (expenses)
Interest income
Interest expense
(16,108
(20,991
Cost of debt extinguishment
(126
(22
Gain on sale of real estate
4,733
7,619
Income taxes
(413
(549
Internalization expenses
(1,205
Change in fair value of earnout liability
1,124
(4,177
10
Net income
23,960
11,848
Net income attributable to non-controlling interests
(1,737
(1,032
Net income attributable to Broadstone Net Lease, Inc.
22,223
10,816
Weighted average number of common shares outstanding
Basic
145,338
106,108
Diluted
156,724
116,210
Net earnings per share attributable to common stockholders
Basic and diluted
0.15
0.10
Comprehensive income (loss)
Other comprehensive income (loss)
Change in fair value of interest rate swaps
28,680
(58,062
Realized gain on interest rate swaps
(41
(42
52,599
(46,256
Comprehensive (income) loss attributable to non-controlling interests
(3,813
4,020
Comprehensive income (loss) attributable to Broadstone Net Lease, Inc.
48,786
(42,236
Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity
Common
Stock
Class A
Additional
Paid-in
Capital
Cumulative
Distributions
in Excess of
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Non-
controlling
Interests
Total
Stockholders'
Mezzanine
Balance, January 1, 2021
1,737
Issuance of 211 shares of common stock
233
Offering costs, discounts and commissions
(500
Stock-based compensation
1,769
Retirement of 45 shares of restricted 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 ($0.25 per share and OP Unit)
(36,690
(2,963
(39,653
Change in fair value of interest rate swap agreements
26,602
2,078
Realized gain on interest rate swap agreements
(39
(2
Adjustment to non-controlling interests
(953
1,008
(55
Balance, March 31, 2021
Balance, January 1, 2020
26
1,895,935
(208,261
(20,086
111,406
1,779,020
Cumulative effect of accounting change (see Note 2)
(323
710
11,526
322
Issuance of 293 shares of common stock and 3,124 shares of
mezzanine equity common stock
6,097
66,376
Issuance of 5,278 mezzanine non-controlling interests
112,159
Adjustment to carrying value of mezzanine equity non-controlling
interests
(2,416
2,416
Distributions declared ($0.33 per share and OP Unit)
(35,299
(2,100
(37,399
(1,161
(53,014
(3,472
(56,486
(1,576
(38
(40
Balance, March 31, 2020
1,899,616
(233,067
(73,138
106,542
1,699,979
112,158
178,534
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
29,985
30,081
Amortization of debt issuance costs charged to interest expense
879
853
Stock-based compensation expense
Straight-line rent, financing and sales-type lease adjustments
(4,632
(1,610
126
(4,733
(7,619
(1,124
4,177
Leasing fees paid
(286
Adjustment to provision for credit losses
(1
(17
Other non-cash items
192
194
Changes in assets and liabilities, net of acquisition:
Tenant and other receivables
582
(353
1,072
291
(3,894
(5,851
5,873
6,170
Net cash provided by operating activities
51,780
40,319
Investing activities
Acquisition of rental property accounted for using the operating method
(88,532
Cash paid for Internalization
(30,861
Capital expenditures and improvements
(1,334
(48
Proceeds from disposition of rental property, net
22,105
35,383
Change in deposits on investments in rental property
100
Net cash (used in) provided by investing activities
(67,661
4,474
Financing activities
Proceeds from issuance of common stock and Class A common stock, net of offering costs, discounts,
and commissions
(173
131
Cash paid for deferred offering costs
(811
Borrowings on unsecured term notes
60,000
Principal payments on mortgages and unsecured term notes
(50,802
(151,781
Borrowings on unsecured revolving credit facility
167,000
Repayments on unsecured revolving credit facility
(11,000
Cash distributions paid to stockholders
(36,402
(29,148
Cash distributions paid to non-controlling interests
(3,174
(2,681
Debt issuance and extinguishment costs paid
(946
(102
Net cash (used in) provided by financing activities
(76,497
31,608
Net (decrease) increase in cash and cash equivalents and restricted cash
(92,378
76,401
Cash and cash equivalents and restricted cash at beginning of period
110,728
20,311
Cash and cash equivalents and restricted cash at end of period
18,350
96,712
Reconciliation of cash and cash equivalents and restricted cash
Cash and cash equivalents at beginning of period
12,455
Restricted cash at beginning of period
10,242
7,856
Cash and cash equivalents at end of period
93,151
Restricted cash at end of period
8,145
3,561
1. Business Description
Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008. The Corporation focuses on investing in income-producing, net leased commercial properties, primarily in the United States. The Corporation leases industrial, healthcare, restaurant, office, and retail commercial properties under long-term lease agreements. At March 31, 2021, the Corporation owned a diversified portfolio of 661 individual commercial properties with 660 properties located in 41 U.S. states and one property located in British Columbia, Canada.
Broadstone Net Lease, LLC (the Corporation’s operating company, or the “OP”), is the entity through which the Corporation conducts its business and owns (either directly or through subsidiaries) all of the Corporation’s properties. The Corporation is the sole managing member of the OP. The remaining membership units in the OP (“OP Units”), which are referred to as non-controlling interests, are held by members who were issued OP Units pursuant to the Internalization (defined below) or in exchange for their interests in properties acquired by the OP. As the Corporation conducts substantially all of its operations through the OP, it is structured as what is referred to as an umbrella partnership real estate investment trust (“UPREIT”). The Corporation, the OP, and its consolidated subsidiaries are collectively referred to as the “Company.”
Prior to February 7, 2020, the Corporation was externally managed by Broadstone Real Estate, LLC (“BRE”) and Broadstone Asset Management, LLC (the “Asset Manager”) subject to the direction, oversight, and approval of the Company’s board of directors (the “Board of Directors”). The Asset Manager was a wholly owned subsidiary of BRE and all of the Corporation’s officers were employees of BRE. Accordingly, both BRE and the Asset Manager were related parties of the Company. Refer to Note 3 for further discussion concerning related parties and related party transactions.
On February 7, 2020, the Corporation, the OP, BRE, and certain of their respective subsidiaries and affiliates, completed through a series of mergers (the “Mergers”) the internalization of the external management functions previously performed for the Corporation and the OP by BRE and the Asset Manager (such transactions, collectively, the “Internalization”). Upon consummation of the Internalization, the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP and the Company became internally managed. Upon Internalization, the prior Property Management Agreement and Asset Management Agreement were terminated. The Internalization was not considered a “Termination Event” under the terms of the agreements and therefore no fees were paid under them as a result of the Internalization.
On September 18, 2020, the Corporation effected a four-for-one stock split on its then outstanding 26,944 shares of common stock (“Common Stock”) that previously had a $0.001 par value. Concurrent with the stock split, the OP effected a four-for-one stock split of its outstanding OP Units. No fractional shares or OP Units were issued as a result of the stock split. All historic share and per share amounts in these Condensed Consolidated Financial Statements have been adjusted to give retroactive effect to the stock split.
On September 21, 2020, the Corporation completed its initial public offering (“IPO”) and issued an aggregate of 37,000 shares of a new class of common stock, $0.00025 par value per share (“Class A Common Stock”) at $17.00 per share, which includes shares issued pursuant to the underwriters’ partial exercise of their over-allotment option on October 20, 2020, pursuant to a registration statement on Form S-11 (File No. 333-240381), as amended, under the Securities Act of 1933, as amended. Shares of Class A Common Stock were listed on the New York Stock Exchange (“NYSE”) under the symbol “BNL.” On March 20, 2021, each share of Class A Common Stock automatically converted into one share of Common Stock, and effective March 22, 2021, all shares of Common Stock were listed and freely tradeable on the NYSE under the symbol “BNL.” See Note 13.
The following table summarizes the outstanding equity and economic ownership interest of the Corporation and the OP:
March 31, 2021
Shares of Common
OP Units
Total Diluted
Shares
Ownership interest
145,813
11,361
157,174
145,609
11,399
157,008
Percent ownership of OP
92.8
%
7.2
100.0
92.7
7.3
Refer to Note 15 for further discussion regarding the calculation of weighted average shares outstanding.
2. Summary of Significant Accounting Policies
Interim Information
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and Article 10 of the Securities and Exchange Commission’s (“SEC”) Regulation S-X. Accordingly, the Corporation has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2020, included in the Company’s 2020 Annual Report on Form 10-K, filed with the SEC on February 25, 2021. Therefore, the readers of this quarterly report should refer to those audited consolidated financial statements, specifically Note 2, Summary of Significant Accounting Policies, for further discussion of significant accounting policies and estimates. The Corporation believes all adjustments necessary for a fair presentation have been included in these interim Condensed Consolidated Financial Statements (which include only normal recurring adjustments).
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts and operations of the Company. All intercompany balances and transactions have been eliminated in consolidation.
To the extent the Corporation has a variable interest in entities that are not evaluated under the variable interest entity (“VIE”) model, the Corporation evaluates its interests using the voting interest entity model. The Corporation has complete responsibility for the day-to-day management of, authority to make decisions for, and control of the OP. Based on consolidation guidance, the Corporation has concluded that the OP is a VIE as the members in the OP do not possess kick-out rights or substantive participating rights. Accordingly, the Corporation consolidates its interest in the OP. However, because the Corporation holds the majority voting interest in the OP and certain other conditions are met, it qualifies for the exemption from providing certain disclosure requirements associated with investments in VIEs.
The portion of the OP not owned by the Corporation is presented as non-controlling interests as of and during the periods presented.
Basis of Accounting
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP.
Use of Estimates
The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include, but are not limited to, the allocation of purchase price between tangible and intangible assets acquired and liabilities assumed, the value of long-lived assets and goodwill, the provision for impairment, the depreciable lives of rental property, the amortizable lives of intangible assets and liabilities, the provisions for uncollectible rent and credit losses, the fair value of the earnout liability, the fair value of assumed debt, the fair value of the Company’s interest rate swap agreements, and the determination of any uncertain tax positions. Accordingly, actual results may differ from those estimates.
Long-lived Asset Impairment
The Company reviews long-lived assets, other than goodwill, to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. An impairment loss is measured as the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. A significant judgment is made as to if and when impairment should be taken. The Company’s assessment of impairment as of March 31, 2021 was based on the most current information available to the Company. Based upon current market conditions resulting from the COVID-19 pandemic, certain of the Company’s properties may have fair values less than their carrying amounts. However, based on the Company’s plans with respect to each of those properties, the Company believes that their carrying amounts are recoverable and therefore, under applicable GAAP guidance, 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. During the three months ended March 31, 2021 and 2020, the Company recorded impairment charges associated with one property in each respective period. Impairment indicators primarily included changes in the Company’s long-term hold strategy with respect to the individual properties.
6
Inputs used in establishing fair value for real estate assets generally fall within Level 3 of the fair value hierarchy, which are characterized as requiring significant judgment as little or no current market activity may be available for validation. The main indicator used to establish the classification of the inputs is current market conditions, as derived through the use of published commercial real estate market information. The Company determines the valuation of impaired assets using generally accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations, and bona fide purchase offers received from third parties. Management may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.
During the three months ended March 31, 2021 and 2020, the Company recorded impairment charges of $2,012 and $2,133, respectively.
Restricted Cash
Restricted cash includes escrow funds the Company maintains pursuant to the terms of certain mortgages, and lease agreements, and undistributed proceeds from the sale of properties under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), and is reported within Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets.
Restricted cash consisted of the following:
Escrow funds and other
7,852
Undistributed 1031 proceeds
2,390
Rent Received in Advance
Rent received in advance represents tenant payments received prior to the contractual due date, and is included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets. Rent received in advance is as follows:
Rent received in advance
13,331
13,651
Provision for Uncollectible Rent
In accordance with ASC 842, Leases, provisions for uncollectible rent are recorded as an offset to Lease revenues, net on the accompanying Consolidated Statements of Income and Comprehensive Income (Loss).
The following table summarizes the changes in the provision for uncollectible rent:
Beginning balance
201
Provision for uncollectible rent
142
1,033
Ending balance
343
Fair Value Measurements
Recurring Fair Value Measurements
Earnout Liability – In connection with the Internalization, the Company recognized an earnout liability that will be due and payable to the former owners of BRE if certain milestones are achieved during specified periods of time following the closing of the Internalization (the “Earnout Periods”). Under the terms of the agreement, the milestones related to either (a) the 40-day dollar volume-weighted average price of a share of the Company’s common stock (“VWAP per REIT Share”), following the completion of an IPO of the Company’s common stock, or (b) the Company’s AFFO per share, prior to the completion of an IPO.
The Company utilizes third-party valuation experts to assist in estimating the fair value of the earnout liability, and develops estimates by considering weighted-average probabilities of likely outcomes, and using a Monte Carlo simulation and discounted cash flow analysis. These estimates require the Company to make various assumptions about share price volatility and, prior to the IPO, about the timing of an IPO and net asset prices, each of which are unobservable and considered Level 3 inputs in the fair value hierarchy. A
7
change in these inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date. Specifically, advancements in the estimated IPO date assumption increased the earnout liability’s fair value given the earnout’s fixed time horizon. Peer share price volatilities are used to estimate the Company’s expected share price volatility, and the Company’s corresponding ability to achieve the earnout targets. Increases in the volatility assumption would increase the earnout liability’s fair value. Increases in net asset values would also increase the earnout liability’s fair value.
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of March 31, 2021:
Significant Unobservable Inputs
Weighted Average
Assumption Used
Range
Peer stock price volatility
40.0%
26.11% - 53.79%
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of March 31, 2020:
Expected IPO date
March 15, 2021
November 2020 through May 2021
30.0%
22.96% - 43.91%
The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of February 7, 2020, the transaction date:
April 15, 2020
March 2020 through May 2020
20.0%
16.22% to 23.09%
Company's net asset value per diluted share
21.30
(a)
The Company’s net asset value per diluted share was primarily based on the fair value of its real estate investment portfolio, together with the fair value of its other assets and liabilities. The fair value of the Company’s real estate investment portfolio as of the measurement date was determined using market capitalization rates that ranged between 6.05% and 7.09%.
The following table presents a reconciliation of the change in the earnout liability:
Allocation of Internalization purchase price at February 7, 2020
40,119
Change in fair value subsequent to Internalization
44,296
The decrease in fair value subsequent to the Internalization was driven by a lower share price. The decrease was partially offset by an increase in peer stock price volatility, which is attributable to changes in economic circumstances impacting global equity markets.
The balances of financial instruments measured at fair value on a recurring basis are as follows:
Level 1
Level 2
Level 3
(43,662
(6,385
(72,103
(7,509
8
Long-term Debt – The fair value of the Company’s debt was estimated using Level 2 and Level 3 inputs based on recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate (“LIBOR”), U.S. Treasury obligation interest rates, and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect the Company’s judgment as to the approximate current lending rates for loans or groups of loans with similar maturities and assumes that the debt is outstanding through maturity. Market information, as available, or present value techniques were utilized to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist on specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.
The following table summarizes the carrying amount reported on the Condensed Consolidated Balance Sheets and the Company’s estimate of the fair value of the Mortgages, net, Unsecured term notes, net, and Unsecured revolving credit facility, which reflects the fair value of interest rate swaps:
Carrying amount
1,511,830
1,547,667
Fair value
1,608,249
1,679,188
Non-recurring Fair Value Measurements
The Company’s non-recurring fair value measurements at March 31, 2021 and December 31, 2020 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.
Right-of-Use Assets and Lease Liabilities
The Company is a lessee under non-cancelable operating leases associated with its corporate headquarters and other office spaces as well as with leases of land (“ground leases”). The Company records right-of-use assets and lease liabilities associated with these leases. The lease liability is equal to the net present value of the future payments to be made under the lease, discounted using estimates based on observable market factors. The right-of-use asset is generally equal to the lease liability plus initial direct costs associated with the leases. The Company includes in the recognition of the right-of-use asset and lease liability those renewal periods that are reasonably certain to be exercised, based on the facts and circumstances that exist at lease inception. Amounts associated with percentage rent provisions are considered variable lease costs and are not included in the initial measurement of the right-of-use asset or lease liability. The Company has made an accounting policy election, applicable to all asset types, not to separate lease from nonlease components when allocating contract consideration related to operating leases.
Right-of-use assets and lease liabilities associated with operating leases were included in the accompanying Condensed Consolidated Balance Sheets as follows:
Financial Statement Presentation
Right-of-use assets
2,919
3,075
Lease liabilities
2,531
2,659
Stock-Based Compensation
The Company has issued restricted stock awards (“RSAs”) and performance-based restricted stock units (“PRSUs”) under its 2020 Omnibus Equity and Incentive Plan (the “Equity Incentive Plan”). The Company accounts for stock-based incentives in accordance with ASC 718, Compensation – Stock Compensation, which requires that such compensation be recognized in the financial statements based on the award’s estimated grant date fair value. The value of such awards is recognized as compensation expense in General and administrative expenses in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) over the appropriate vesting period on a straight-line basis or at the cumulative amount vested at each balance sheet date, if greater. The Company records forfeitures during the period in which they occur by reversing all previously recorded stock compensation expense associated with the forfeited shares. Dividends declared on RSAs issued under the Equity Incentive Plan are recorded as Cumulative distributions in excess of retained earnings on the Condensed Consolidated Balance Sheets. Accumulated dividends related to forfeited RSAs will be reversed through compensation expense in the period the forfeiture occurs. Dividends accrued on the PRSUs are recorded as Cumulative distributions in excess of retained earnings on the Condensed Consolidated Balance Sheets. Accumulated dividends accrued related to forfeited PRSUs are reversed in the period the forfeiture occurs.
Recently Adopted Accounting Standards
In January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-01, Reference Rate Reform (Topic 848): Scope, which refines the scope of ASC 848, to include all derivative contracts subject to a transition for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest (PAI) as a result of reference rate reform (the “discounting transition”). ASU 2021-01 gives market participants the ability to apply certain aspects of the contract modification and hedge accounting expedients to derivative contracts affected by a discounting transition. ASU 2021-01 permits an entity to elect certain hedging relief if it has designated a derivative as a hedging instrument in a hedging relationship and the terms of the derivative have changed as a result of the discounting transition. The Company will apply the amendments in ASU 2021-01 related to contract modifications and hedging relationships prospectively.
Other Recently Issued Accounting Standards
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in ASU 2020-06 also simplify the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The amendments in ASU 2020-06 are effective for the Company for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The guidance must be adopted as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new guidance.
3. Related-Party Transactions
Prior to the Internalization on February 7, 2020, BRE, a related party in which certain directors of the Corporation had either a direct or indirect ownership interest, and the Asset Manager were considered to be related parties.
Earnout Consideration
In connection with the Internalization, the Company incurred a contingent obligation that would be payable to certain members of the Company’s Board of Directors and employees who had previously been owners and/or employees of BRE, upon the occurrence of certain events (see Note 4). The earnout consideration at March 31, 2021, consisted of $6,385 recorded as Earnout liability, $11,380 recorded as a component of Additional paid-in capital, and $19,430 recorded as a component of Non-controlling interests on the Condensed Consolidated Balance Sheets. The earnout consideration at March 31, 2020, consisted of $44,296 recorded as Earnout liability on the Condensed Consolidated Balance Sheets.
4. Internalization
On February 7, 2020, the Company completed the Internalization and the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP. The effect of the Internalization has been reflected in the Company’s operating results beginning on February 7, 2020.
Condensed Pro Forma Financial Information (Unaudited)
The following pro forma information summarizes selected financial information from the Company’s combined results of operations, as if the Internalization had occurred on January 1, 2019. These results contain certain adjustments totaling $5,646 of income for the three months ended March 31, 2020. These pro forma adjustments reflect the elimination of Internalization expenses and asset management, property management, and disposition fees between the Company and BRE and the Asset Manager in historic financial results, and adjustments to reflect compensation and related costs, incremental general and administrative expenses related to the Internalization, and incremental interest expense associated with the borrowing related to the Internalization. This pro forma information is presented for informational purposes only, and may not be indicative of what actual results of operations would have been had the Internalization occurred at the beginning of the period, nor does it purport to represent the results of future operations.
The condensed pro forma financial information is as follows:
March 31, 2020
13,751
5. Acquisitions of Rental Property
The Company closed on the following acquisitions during the three months ended March 31, 2021:
(in thousands, except number of properties)
Number of
Real Estate
Date
Property Type
Properties
Acquisition Price
February 5, 2021
Healthcare
4,843
February 26, 2021
Restaurant
181
March 11, 2021
Retail
13
26,834
March 30, 2021
11
41,324
14,140
28
87,322
(b)
Acquisition of additional land adjacent to an existing property.
Acquisition price does not include capitalized acquisition costs of $1,235.
The Company did not complete any acquisitions of rental property during the three months ended March 31, 2020.
The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation for completed real estate acquisitions:
Land
19,584
Land improvements
4,355
Buildings and improvements
57,893
Acquired in-place leases(c)
6,725
88,557
(c)
The weighted average amortization period for acquired in-place leases is 16 years for acquisitions completed during the three months ended March 31, 2021.
The above acquisitions were funded using a combination of available cash on hand and revolving credit facility borrowings. All real estate acquisitions closed during the three months ended March 31, 2021, qualified as asset acquisitions and, as such, acquisition costs have been capitalized.
6. Sale of Real Estate
The Company closed on the following sales of real estate, none of which qualified as discontinued operations:
Number of properties disposed
Aggregate sale price
23,062
37,185
Aggregate carrying value
(17,372
(27,764
Additional sales expenses
(957
(1,802
7. Investment in Rental Property and Lease Arrangements
The Company generally leases its investment rental property to established tenants in the industrial, healthcare, restaurant, office, retail, and other industries. At March 31, 2021, the Company had 644 real estate properties which were leased under leases that have been classified as operating leases, 10 that have been classified as direct financing leases, and one that has been classified as a sales-type lease. Of the 10 leases classified as direct financing leases, three include land portions which are accounted for as operating leases. The sales-type lease includes a land portion which is accounted for as an operating lease. Substantially all leases have initial terms of 10 to 20 years. The Company’s leases generally provide for limited increases in rent as a result of fixed increases, increases in the CPI, or increases in the tenant’s sales volume. Generally, tenants are also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and maintain property and liability insurance coverage. The leases also typically provide for one or more multiple year renewal options, at the election of the tenant, and are subject to generally the same terms and conditions as the initial lease.
Investment in Rental Property – Accounted for Using the Operating Method
Rental property subject to non-cancelable operating leases with tenants was as follows:
572,381
555,748
282,426
279,360
2,898,615
2,857,510
Equipment
11,870
3,765,292
3,704,488
Less accumulated depreciation
(369,683
(349,977
Depreciation expense on investment in rental property was as follows:
Depreciation
23,743
23,515
Estimated lease payments to be received under non-cancelable operating leases with tenants at March 31, 2021 are as follows:
Remainder of 2021
224,633
2022
302,580
2023
306,227
2024
302,556
2025
295,351
Thereafter
2,106,544
3,537,891
Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future lease payments due during the initial lease terms. In addition, such amounts exclude any potential variable rent increases that are based on changes in the CPI or future variable rents which may be received under the leases based on a percentage of the tenant’s gross sales.
Investment in Rental Property – Direct Financing Leases
The Company’s net investment in direct financing leases was comprised of the following:
Undiscounted estimated lease payments to be received
44,989
45,782
Estimated unguaranteed residual values
15,203
Unearned revenue
(31,035
(31,753
Reserve for credit losses
(166
Net investment in direct financing leases
12
Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at March 31, 2021 are as follows:
2,387
3,241
3,304
3,361
3,475
29,221
The above rental receipts do not include future lease payments for renewal periods, potential variable CPI rent increases, or variable percentage rent payments that may become due in future periods.
The following table summarizes amounts reported as Lease revenues, net on the Condensed Consolidated Statements of Income and Comprehensive Income (Loss):
Contractual rental amounts billed for operating leases
73,245
72,828
Adjustment to recognize contractual operating lease billings on a straight-line basis
4,367
1,665
Variable rental amounts earned
91
Earned income from direct financing leases
730
987
Earned income from sales-type leases
14
Operating expenses billed to tenants
4,388
3,732
Other income from real estate transactions
49
Adjustment to revenue recognized for uncollectible rental amounts billed
(142
(1,033
Total Lease revenues, net
8. Intangible Assets and Liabilities
The following is a summary of intangible assets and liabilities and related accumulated amortization:
Lease intangibles:
Acquired above-market leases
50,206
54,616
Less accumulated amortization
(15,782
(18,928
Acquired above-market leases, net
34,424
35,688
Acquired in-place leases
344,674
340,958
(90,506
(85,733
Acquired in-place leases, net
254,168
255,225
Total intangible lease assets, net
Acquired below-market leases
107,226
107,788
(29,735
(28,135
Leasing fees
15,517
15,462
(4,844
(4,724
Amortization of intangible lease assets and liabilities was as follows:
Intangible
Acquired in-place leases and leasing fees
6,947
7,695
Above-market and below-market leases
753
1,140
Amortization expense for the three months ended March 31, 2020, includes $577 of accelerated amortization resulting from early lease terminations, compared to none for the three months ended March 31, 2021.
Estimated future amortization of intangible assets and liabilities at March 31, 2021 is as follows:
18,746
22,844
22,531
21,773
20,477
115,403
221,774
9. Unsecured Credit Agreements
The following table summarizes the Company’s unsecured credit agreements:
Outstanding Balance
(in thousands, except interest rates)
Interest
Rate(c) (d)
Maturity
Unsecured revolving credit facility(a)
daily LIBOR + 1.00% (e)
Sep. 2023
2022 Unsecured Term Loan(a)
one-month LIBOR + 1.00% (f)
Feb. 2022
2023 Unsecured Term Loan(a)
265,000
one-month LIBOR + 1.10% (g)
Jan. 2023
2024 Unsecured Term Loan(a)
190,000
Jun. 2024
2026 Unsecured Term Loan(a)
400,000
450,000
one-month LIBOR + 1.00% (h)
Feb. 2026
Senior Notes(a)
Series A
150,000
4.84%
Apr. 2027
Series B
225,000
5.09%
Jul. 2028
Series C
100,000
5.19%
Jul. 2030
475,000
1,405,000
1,440,000
Debt issuance costs, net(b)
(6,717
(6,204
1,398,283
The Company believes it was in compliance with all financial covenants for all periods presented.
Amounts presented include debt issuance costs, net, related to the unsecured term notes and senior notes only.
At March 31, 2021 and December 31, 2020, one-month LIBOR was 0.11% and 0.14%, respectively. At March 31, 2021 daily LIBOR was 0.08%.
(d)
In January 2021, the Company received a credit rating of BBB, changing the applicable margin on variable rate unsecured debt effective February 1, 2021.
(e)
At December 31, 2020, interest rate was one-month LIBOR plus 1.20%.
(f)
At December 31, 2020, interest rate was one-month LIBOR plus 1.25%.
(g)
At December 31, 2020, interest rate was one-month LIBOR plus 1.35%.
(h)
At December 31, 2020, interest rate was one-month LIBOR plus 1.85%.
At March 31, 2021, the weighted average interest rate on all outstanding borrowings was 2.45%, exclusive of interest rate swap agreements.
On March 12, 2021, the Company amended the 2026 Unsecured Term Loan and made a $50,000 paydown on the loan. Prior to the amendment, the borrowings under the 2026 Unsecured Term Loan were subject to interest at variable rates based on LIBOR plus a margin based on the OP’s current credit rating ranging between 1.45% and 2.40% per annum with the applicable margin being 1.60% immediately prior to the amendment. The amendment reduced the margin to a range between 0.85% and 1.65% per annum and based on the OP’s credit rating of BBB, the applicable margin was 1.0% beginning March 12, 2021. All other terms and conditions of the 2026 Unsecured Term Loan remained materially the same as those in effect prior to this amendment.
For the three months ended March 31, 2021, the Company paid $951 in debt issuance costs associated with the amended 2026 Unsecured Term Loan. For each separate debt instrument, on a lender by lender basis, in accordance with ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction was deemed to be new debt, a modification of existing debt, or an extinguishment of existing debt. Debt issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred. Based on the assessment, $946 of debt issuance costs incurred in the three months ended March 31, 2021, were deemed to be related to the modification of existing debt, and therefore have been deferred and are being amortized over the term of the associated debt.
Additionally, $126 of unamortized debt issuance costs were expensed in the three months ended March 31, 2021, and included in Cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss).
Debt issuance costs are amortized as a component of interest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss). The following table summarizes debt issuance cost amortization:
Debt issuance costs amortization
914
888
The Company is subject to various financial and operational covenants and financial reporting requirements pursuant to its unsecured credit agreements. These covenants require the Company to maintain certain financial ratios, including leverage, fixed charge coverage, and debt service coverage, among others. As of March 31, 2021, the Company believes it was in compliance with all of its loan covenants. Failure to comply with the covenants would result in a default which, if the Company were unable to cure or obtain a waiver from the lenders, could accelerate the repayment of the obligations. Further, in the event of default, the Company may be restricted from paying dividends to its stockholders in excess of dividends required to maintain its REIT qualification. Accordingly, an event of default could have a material and adverse impact on the Company.
10. Mortgages
The Company’s mortgages consist of the following:
Origination
Lender
(Month/Year)
Rate
Wilmington Trust National Association
Apr-19
Feb-28
4.92%
47,646
47,945
(a) (b) (c) (j)
Jun-18
Aug-25
4.36%
19,848
19,947
(a) (b) (c) (i)
PNC Bank
Oct-16
Nov-26
3.62%
17,396
17,498
(b) (c)
Sun Life
Mar-12
Oct-21
5.13%
10,361
10,469
(b) (e)
Aegon
Apr-12
Oct-23
6.38%
6,846
7,039
(b) (f)
M&T Bank
Oct-17
Aug-21
one - month
LIBOR+3%
4,769
(b) (d) (g) (h)
106,830
107,667
Debt issuance costs, net
(271
(285
Non-recourse debt includes the indemnification/guaranty of the Corporation and/or OP pertaining to fraud, environmental claims, insolvency and other matters.
Debt secured by related rental property and lease rents.
Debt secured by guaranty of the OP.
Debt secured by guaranty of the Corporation.
Mortgage was assumed in March 2012 as part of an UPREIT transaction. The debt was recorded at fair value at the time of the assumption.
Mortgage was assumed in April 2012 as part of the acquisition of the related property. The debt was recorded at fair value at the time of the assumption.
The Company entered into an interest rate swap agreement in connection with the mortgage, as further described in Note 11.
Mortgage was assumed in October 2017 as part of an UPREIT transaction. The debt was recorded at fair value at the time of the assumption.
(i)
Mortgage was assumed in June 2018 as part of the acquisition of the related property. The debt was recorded at fair value at the time of assumption.
(j)
Mortgage was assumed in April 2019 as part of the acquisition of the related property. The debt was recorded at fair value at the time of assumption.
At March 31, 2021, investment in rental property of $172,440 was pledged as collateral against the Company’s mortgages.
Estimated future principal payments to be made under the above mortgages and the Company’s unsecured credit agreements (see Note 9) at March 31, 2021 are as follows:
17,169
62,907
287,582
192,260
20,195
931,717
Certain of the Company’s mortgage and note payable agreements provide for prepayment fees and can be terminated under certain events of default as defined under the related agreements. These prepayment fees are not reflected as part of the table above.
15
11. Interest Rate Swaps
Interest rate swaps were entered into with certain financial institutions in order to mitigate the impact of interest rate variability over the term of the related debt agreements. The interest rate swaps are considered cash flow hedges. In order to reduce counterparty concentration risk, the Company has a diversification policy for institutions that serve as swap counterparties. Under these agreements, the Company receives monthly payments from the counterparties on these interest rate swaps equal to the related variable interest rates multiplied by the outstanding notional amounts. Certain interest rate swaps amortize on a monthly basis. In turn, the Company pays the counterparties each month an amount equal to a fixed rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that the Company pays a fixed interest rate on its variable-rate borrowings.
The following is a summary of the Company’s outstanding interest rate swap agreements:
Fair Value
Counterparty
Maturity Date
Fixed
Variable Rate Index
Notional
Amount
Bank of America, N.A.
November 2023
2.80
one-month LIBOR
25,000
(1,622
(1,848
Bank of Montreal
July 2024
1.16
40,000
(896
(1,380
January 2025
1.91
(1,236
(1,725
July 2025
2.32
(1,696
(2,351
January 2026
1.92
(1,271
(2,039
2.05
(2,277
(3,523
December 2026
2.33
10,000
(720
(1,156
1.99
(1,314
(2,372
December 2027
2.37
(1,858
(3,234
May 2029
2.09
(1,286
(2,994
Capital One, National Association
December 2021
1.05
(105
(141
December 2024
1.58
(553
(799
2.08
35,000
(2,035
(3,078
April 2026
2.68
(1,325
(1,843
July 2026
1.32
(639
(1,806
(1,860
(3,199
August 2021
1.02
4,731
(14
(25
(a), (b)
September 2022
2.83
(960
(1,139
2.65
(1,524
(1,785
Regions Bank
December 2023
1.18
(576
(763
2.11
(1,324
(3,004
June 2029
2.03
(1,167
(2,843
Truist Financial Corporation
April 2024
(1,200
(1,487
April 2025
2.20
(1,543
(2,084
(1,345
(1,941
December 2025
2.30
(1,719
(2,481
1.93
(1,280
(2,019
U.S. Bank National Association
(1,174
(2,902
August 2029
1.35
(1,445
Wells Fargo Bank, N.A.
February 2021
2.39
(70
October 2024
2.72
(1,154
(1,422
April 2027
(2,388
(3,555
January 2028
75,000
(5,601
(9,650
(43,423
Notional amount at December 31, 2020 was $4,768.
Interest rate swap was assumed in October 2017 as part of an UPREIT transaction.
16
The total amounts recognized, and the location in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss), from converting from variable rates to fixed rates under these agreements were as follows:
Reclassification from
Total Interest Expense
Amount of Gain (Loss)
Accumulated Other
Presented in the Condensed
Recognized in
Comprehensive Loss
Consolidated Statements of
Amount of
Income and Comprehensive
For the Three Months Ended March 31,
Location
Income (Loss)
4,016
16,108
885
20,991
Amounts related to the interest rate swaps expected to be reclassified out of Accumulated other comprehensive loss to Interest expense during the next twelve months are estimated to be a loss of $15,776. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes the risk exposure by limiting counterparties to major banks who meet established credit and capital guidelines.
12. Credit Risk Concentrations
The Company maintained bank balances that, at times, exceeded the federally insured limit during the three months ended March 31, 2021. The Company has not experienced losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts.
The Company has mortgages with three institutions that comprised 63%, 16%, and 10% of total mortgages at March 31, 2021 and December 31, 2020. For the three months ended March 31, 2021 and 2020, the Company had no individual tenants or common franchises that accounted for more than 10% of total revenues.
13. Equity
General
On September 21, 2020, the Corporation completed its IPO and issued 37,000 shares of Class A Common Stock inclusive of the underwriters’ partial exercise of their over-allotment option on October 20, 2020.
Aside from the conversion discussed below, the terms of the Class A Common Stock were identical to the terms of the Common Stock. Each share of Class A Common Stock automatically converted into one share of Common Stock on March 20, 2021, and effective March 22, 2021, all shares of Common Stock were listed and freely tradeable on the NYSE under the ticker “BNL.” The Common Stock and Class A Common Stock are collectively referred to as the Corporation’s “common stock.”
14. Stock-Based Compensation
Restricted Stock Awards
On March 1, 2021 and August 4, 2020, the Company awarded 199 and 341 shares of RSAs, respectively, under the Equity Incentive Plan to certain officers and employees. The holder of RSAs is generally entitled at all times on and after the date of issuance of the restricted common shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The March 1, 2021 RSAs vest over a one, three or four year period from the date of grant. The August 4, 2020 RSAs vest over a three or four year period from the anniversaries of February 7, 2020. The vesting for the RSAs is subject to the employee’s continued service through the applicable vesting dates and in accordance with the terms of the individual award agreements. The August 4, 2020 grant date fair value per share of $20.50 was based on the determined share value established by the Board of Directors (“Determined Share Value”). Prior to the IPO, the Company sold shares of common stock in a private offering at a price equal to the Determined Share Value, which was established at least quarterly by the Board of Directors based on the net asset value (“NAV”) of the Company’s portfolio, input from management and third-party consultants, and such other factors as the Board of Directors determined. The Company’s NAV was calculated using its established valuation process, starting with an estimate of the fair value of the properties in the portfolio as of that date based upon, among other factors, the implied market price for each asset based upon a review of market capitalization rates. The March 1, 2021 grant date fair value per share of $18.66 was based on the market price of the Company’s common stock on the grant date.
17
The following table presents information about the Company’s RSAs:
Compensation cost
1,695
Dividends declared on unvested RSAs
104
Grant date fair value of shares vested during the period
2,522
There were no RSAs at March 31, 2020.
(in thousands, except recognition period)
Unamortized value of RSAs
6,999
5,001
Weighted average amortization period (in years)
3.0
2.8
The following table presents information about the Company’s RSA activity:
For the Three Months Ended March 31, 2021
Number of Shares
Weighted Average Grant
Date Fair Value per Share
Unvested at beginning of period
341
20.50
Granted
199
18.66
Vested
124
20.26
Forfeited
Unvested at end of period
416
19.62
There were no unvested shares at March 31, 2020.
Restricted Stock Units
On March 1, 2021, the Company issued target grants of 132 PRSUs under the Equity Incentive Plan to the officers of the Company. The awards are non-vested restricted stock units where the vesting percentages and the ultimate number of units vesting will be measured 50% based on the relative total shareholder return (“rTSR”) of the Company’s common stock as compared to the rTSR of peer companies over a three-year period, as identified in the grant agreements, and 50% based on the rTSR of the Company’s common stock as compared to the rTSR of the MSCI US REIT Index over a three year measurement period. The payout schedules can produce vesting percentages ranging from 0% to 200% with a target of 100%. rTSR means the percentage appreciation in the fair market value of one share over the three-year measurement period beginning on the date of grant, assuming the reinvestment of dividends on the ex-dividend date. The target number of units is based on achieving a rTSR equal to the 55th percentile of the peer companies and MSCI US REIT Index. Dividends accrue during the measurement period and will be paid on the PRSUs ultimately earned at the end of the measurement period in either cash or common stock, at the direction of the Board’s Compensation Committee. The grant date fair value of the PRSUs was measured using a Monte Carlo simulation model based on assumptions including share price volatility.
The following table presents information about the Company’s PRSUs:
74
Unamortized value of PRSUs
2,600
2.9
There were no PRSUs at March 31, 2020.
18
The following table presents information about the Company’s PRSU activity:
132
24.40
110
15. 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
(104
Net earnings used to compute basic earnings per common share
22,119
Diluted earnings:
Net earnings used to compute basic earnings per share
Net earnings attributable to non-controlling interests
1,032
Net earnings used to compute diluted earnings per common share
23,856
145,672
Less weighted average unvested restricted shares (a)
(334
Weighted average number of common shares outstanding used in
basic earnings per common share
Effects of convertible membership units (b)
11,386
10,102
diluted earnings per common share
Basic earnings per share
Diluted earnings per share
Represents the weighted average effects of 416 unvested restricted shares of common stock as of March 31, 2021, which will be excluded from the computation of earnings per share until they vest. The shares of restricted common stock were not included in the calculation of diluted earnings per share, as the effect of doing so would have been anti-dilutive.
Represents the weighted average effects of 11,361 and 12,226 OP Units outstanding at March 31, 2021 and 2020, respectively. OP Units are included in the diluted earnings per share calculation. However, because such OP Units would also require that the share of the net income attributable to such OP units also be added back to net income, there is no effect to EPS.
16. Supplemental Cash Flow Disclosures
Cash paid for interest was $9,397 and $14,010 for the three months ended March 31, 2021 and 2020, respectively. Cash paid for income taxes was $237 and $195 for the three months ended March 31, 2021 and 2020, respectively.
The following are non-cash transactions and have been excluded from the accompanying Condensed Consolidated Statements of Cash Flows:
•
During the three months ended March 31, 2020, the Corporation issued 69 shares of Common Stock with a value of approximately $5,733 under the terms of the Distribution Reinvestment Plan (“DRIP”). The Company terminated the DRIP effective February 10, 2020.
19
During the three months ended March 31, 2020, the Company issued shares of Common Stock and OP Units, with a total value of approximately $178,535, and earnout consideration with a fair value of $40,119 as consideration for the Internalization and assumed $90,484 of debt.
During the three months ended March 31, 2020, the Company adjusted the carrying value of mezzanine equity non-controlling interests by $2,416, with an offset to Additional paid-in capital, in accordance with the Company’s accounting policy.
At March 31, 2021 and 2020, dividend amounts declared and accrued but not yet paid amounted to $39,329 and $13,160, respectively.
17. Commitments and Contingencies
Litigation
From time to time, the Company is a party to various litigation matters incidental to the conduct of the Company’s business. While the resolution of such matters cannot be predicted with certainty, based on currently available information, the Company does not believe that the final outcome of any of these matters will have a material effect on its consolidated financial position, results of operations, or liquidity.
Property and Acquisition Related
In connection with ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company is not aware of any non-compliance, liability, claim, or other environmental condition that would have a material effect on its consolidated financial position, results of operations, or liquidity.
Balances associated with tenant improvement allowances are included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets as follows:
Tenant improvement allowances
903
1,981
The Company is a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and to the Founding Owners’ Tax Protection Agreement in connection with the Internalization. The tax protection agreements require the Company to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. The Company is required to allocate an amount of nonrecourse liabilities to each beneficiary that is at least equal to the minimum liability amount, as contained in the agreements. The minimum liability amount and the associated allocation of nonrecourse liabilities are calculated in accordance with applicable tax regulations, are completed at the OP level, and do not represent GAAP accounting. Therefore, there is no impact to the Condensed Consolidated Financial Statements. Based on values as of March 31, 2021, taxable sales of the applicable properties would trigger liability under the agreements of approximately $22,300. Based on information available, the Company does not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future.
Obligations Under Operating Leases
Subsequent to the Internalization, the Company leases office space for its corporate headquarters and other locations under non-cancellable operating leases with expiration dates ranging from 2021 to 2023. These leases contain provisions for fixed monthly payments, subject to rent escalations. None of the leases are subject to any sublease agreement. The lease for the corporate headquarters is with an affiliated third party.
The Company also leases land at certain properties under non-cancellable operating leases (“ground leases”) with initial lease terms ranging from 2034 to 2066. These leases contain provisions for fixed monthly payments, subject to rent escalations. One lease requires the Company to make annual rent payments calculated based upon sales generated at the property (“percentage rent”). None of the leases are subject to any sublease agreement.
20
The following table summarizes the total lease costs associated with operating leases:
Operating lease costs
Office leases
158
52
Ground leases
33
Variable lease costs
Total lease costs
205
103
The following table summarizes payments associated with obligations under operating leases, reported as Net cash provided by operating activities on the accompanying Condensed Consolidated Statements of Cash Flows:
Operating lease payments
241
128
Estimated future lease payments required under non-cancelable operating leases at March 31, 2021, and a reconciliation to the lease liabilities, is as follows:
548
690
505
120
121
2,290
Total undiscounted cash flows
4,274
Less imputed interest
(1,743
The above rental payments include future minimum lease payments due during the initial lease terms. Such amounts exclude any contingent amounts associated with percentage rent that may become due in future periods.
18. Subsequent Events
On April 15, 2021, the Company paid distributions totaling $39,293.
On April 30, 2021, the Board of Directors declared a quarterly distribution of $0.255 per share on the Company’s common stock and OP Units for the second quarter of 2021, which will be payable on or before July 15, 2021 to stockholders and unit holders of record as of June 30, 2021.
Subsequent to March 31, 2021, the Company drew additional borrowings on the Revolving Credit Facility in the aggregate amount of $24,000.
21
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except where the context suggests otherwise, as used in this Quarterly Report on Form 10-Q, the terms “BNL,” “we,” “us,” “our,” and “our company” refer to Broadstone Net Lease, Inc., a Maryland corporation incorporated on October 18, 2007, and, as required by context, Broadstone Net Lease, LLC, a New York limited liability company (the “OP”), which we refer to as the or our “OP,” and to their respective subsidiaries.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends, that are intended to be made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other comparable words. All of the forward-looking statements included in this Quarterly Report on Form 10-Q are subject to various risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results, performance, and achievements could differ materially from those expressed in or by the forward-looking statements and may be affected by a variety of risks and other factors. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from such forward-looking statements.
Important factors that could cause results to differ materially from the forward-looking statements are described in Item 1. “Business,” Item 1A. “Risk Factors,” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K, as filed with the SEC on February 25, 2021. The “Risk Factors” of our 2020 Annual Report should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this Quarterly Report on Form 10-Q.
You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report on Form 10-Q. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this Quarterly Report on Form 10-Q will increase with the passage of time. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
Unless the context otherwise requires, the following terms and phrases are used throughout this MD&A as described below:
“annualized base rent” or “ABR” means the annualized contractual cash rent due for the last month of the reporting period, excluding the impacts of short-term rent deferrals, abatements, free rent, or discounted rent periods and adjusted to remove rent from properties sold during the month and to include a full month of contractual cash rent for properties acquired during the last month.
“cash capitalization rate” represents the estimated first year cash yield to be generated on a real estate investment property, which was estimated at the time of investment based on the contractually specified cash base rent for the first full year after the date of the investment, divided by the purchase price for the property;
“CPI” means the Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, All Items, as published by the U.S. Bureau of Labor Statistics, or other similar index which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services;
“occupancy” or a specified percentage of our portfolio that is “occupied” means as of a specified date the quotient of (1) the total rentable square footage of our properties minus the square footage of our properties that are vacant and from which we are not receiving any rental payment, and (2) the total square footage of our properties; and
“Revolving Credit Facility” means our $900 million unsecured revolving credit facility, dated September 21, 2020, with J.P. Morgan Chase Bank, N.A. and the other lenders party thereto.
We acquire, own, and manage primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, office, and retail property types. As of March 31, 2021, our portfolio has grown to 661 properties, with 660 properties located in 41 U.S. states and one property located in British Columbia, Canada.
We focus on investing in real estate that is operated by creditworthy single tenants in industries characterized by positive business drivers and trends. We target properties that are an integral part of the tenants’ businesses and for which there are therefore opportunities to secure long-term net leases. Through long-term net leases, our tenants are able to retain operational control of their strategically important locations, while allocating their debt and equity capital to fund their core business operations rather than real estate ownership.
-
Diversified Portfolio. As of March 31, 2021, our portfolio comprised approximately 28.4 million rentable square feet of operational space, and was highly diversified based on property type, geography, tenant, and industry, and is cross-diversified within each (e.g., property-type diversification within a geographic concentration):
o
Property Type: We are focused primarily on industrial, healthcare, restaurant, office, and retail property types based on our extensive experience in and conviction around these sectors. Within these sectors, we have meaningful concentrations in manufacturing, distribution and warehouse, clinical, casual dining, quick service restaurant, strategic operations, corporate headquarters, food processing, flex/research and development, and cold storage.
Geographic Diversity: Our properties are located in 41 U.S. states and British Columbia, Canada, with no single geographic concentration exceeding 10.2% of our ABR.
Tenant and Industry Diversity: Our properties are occupied by approximately 185 different commercial tenants who operate 171 different brands that are diversified across 55 differing industries, with no single tenant accounting for more than 2.4% of our ABR.
Strong In-Place Leases with Significant Remaining Lease Term. As of March 31, 2021, our portfolio was approximately 99.7% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 10.6 years, excluding renewal options.
Standard Contractual Base Rent Escalation. Approximately 98.2% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.1%.
Extensive Tenant Financial Reporting. Approximately 88.1% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 7.1% of our ABR is received from tenants who are not required to provide us with specified financial information under the terms of our lease, but whose financial statements are available publicly, either through SEC filings or otherwise.
The following charts summarize our portfolio diversification by property type, tenant, brand, industry and geographic location as of March 31, 2021. The percentages below are calculated based on our ABR of $302.3 million as of March 31, 2021.
Diversification by Property Type
# Properties
ABR
($'000s)
ABR as a % of
Total Portfolio
Square Feet
('000s)
SF as a % of
Industrial
Manufacturing
56
42,455
14.0
7,732
27.3
Distribution & Warehouse
31
40,250
13.3
7,414
26.1
Food Processing
18,386
6.1
2,132
7.5
Flex and R&D
16,934
5.6
1,457
5.1
Cold Storage
12,578
4.2
933
3.3
Services
7,168
2.4
429
1.5
Industrial Total
130
137,771
45.6
20,097
70.8
Clinical
50
24,958
8.3
1,062
3.7
Surgical
9,166
306
1.1
Animal Health Services
8,209
2.7
314
Life Science
7,994
2.6
550
1.9
Healthcare Services
7,520
2.5
302
Healthcare Total
116
57,847
19.1
2,534
8.9
Quick Service Restaurants
156
25,495
8.4
530
Casual Dining
88
19,858
6.6
563
2.0
Restaurant Total
244
45,353
15.0
1,093
3.9
Automotive
68
12,767
844
General Merchandise
71
12,215
4.1
855
Home Furnishings
6,932
2.3
860
Retail Total
154
31,914
10.6
2,559
9.0
Office
Strategic Operations
13,639
4.5
1,021
3.6
Corporate Headquarters
10,016
671
Call Center
5,716
392
1.4
Office Total
29,371
9.7
2,084
7.4
661
302,256
28,367
25
Diversification by Tenant
Tenant
Red Lobster Hospitality & Red Lobster
Restaurants LLC*
7,306
196
0.7
Jack's Family Restaurants LP*
7,026
147
0.5
Axcelis Technologies, Inc.
5,859
417
Hensley & Company*
5,756
577
Outback Steakhouse of Florida LLC*1
5,192
1.7
140
BluePearl Holdings, LLC*
5,137
Krispy Kreme Doughnut Corporation
Quick Service Restaurants/
5,034
0.6
Big Tex Trailer Manufacturing, Inc.*
Automotive/Distribution &
Warehouse/Manufacturing/ Corporate Headquarters
4,860
1.6
1,302
4.6
Siemens Medical Solutions USA, Inc. &
Siemens Corporation
Manufacturing/Flex
and R&D
4,718
545
Nestle' Dreyer's Ice Cream Company
4,409
310
Total Top 10 Tenants
152
55,297
18.3
3,944
13.9
Arkansas Surgical Hospital
4,260
129
0.4
Nationwide Mutual Insurance Company*
4,165
407
American Signature, Inc.
4,142
474
Cascade Aerospace Inc.
4,122
231
0.8
Tractor Supply Company
3,872
1.3
300
Aventiv Technologies, LLC
3,819
1.2
Fresh Express Incorporated
335
Bob Evans Restaurants, LLC*
3,566
Zips Car Wash, LLC*
3,292
57
0.2
Centene Management Company, LLC
3,267
220
Total Top 20 Tenants
216
93,621
31.0
6,367
22.4
Tenant’s properties include 20 Outback Steakhouse restaurants and two Carrabba’s Italian Grill restaurants.
*
Subject to a master lease.
Diversification by Brand
Brand
Red Lobster*
Jack's Family Restaurants*
Axcelis
Hensley*
Bob Evans Farms*1
Casual Dining/Food
Processing
5,449
1.8
292
1.0
Wendy's#
38
5,433
113
BluePearl Veterinary Partners*
Krispy Kreme
Big Tex Trailers*
Warehouse/Manufacturing/
Siemens
Total Top 10 Brands
190
56,578
18.7
3,899
13.7
Outback Steakhouse*
4,492
Nestle'
Taco Bell#
32
4,226
82
0.3
Nationwide Mutual Insurance Co.*
Value City Furniture
Cascade Aerospace
Tractor Supply Co.
Securus Technologies
Chiquita
Total Top 20 Brands
270
97,904
32.4
6,447
22.7
#
Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.
Brand includes one BEF Foods, Inc property and 22 Bob Evans Restaurants, LLC properties.
Diversification by Industry
Industry
ABR as a % of Total Portfolio
Square Feet ('000s)
Restaurants
46,018
15.2
1,118
4.0
Healthcare Facilities
44,345
14.7
1,738
Food Distributors
12,907
4.3
1,556
5.5
Auto Parts & Equipment
39
12,369
Specialized Consumer Services
47
11,790
720
Packaged Foods & Meats
11,371
1,130
Metal & Glass Containers
9,686
3.2
2,206
7.8
9,152
522
Home Furnishing Retail
8,711
1,149
Aerospace & Defense
7,760
921
Distributors
6,909
966
3.4
Specialty Stores
6,913
3.1
Electronic Components
6,658
2.2
466
Air Freight & Logistics
6,494
2.1
436
Industrial Machinery
6,021
1,174
Other (40 industries)
125
95,152
31.5
10,894
38.4
Untenanted properties
96
Diversification by Geography
State
ABR as a
% of Total
Portfolio
Square
Feet
SF as a
TX
54
30,771
10.2
3,207
11.3
VA
4,368
IL
19,339
6.4
1,976
7.0
WA
4,155
150
CA
15,735
5.2
1,554
MO
3,882
733
FL
46
15,663
801
KY
3,473
167
WI
15,655
1,611
5.7
LA
3,128
175
MI
35
14,760
4.9
1,439
NE
2,959
509
OH
14,125
4.7
1,369
4.8
MD
2,882
293
IN
12,830
1,765
6.2
MS
2,736
0.9
334
NC
12,134
1,245
4.4
NM
2,731
97
MN
11,501
3.8
1,757
IA
2,704
622
NY
10,323
680
SC
2,466
308
TN
10,225
390
UT
2,328
280
MA
9,994
1,009
3.5
CT
1,653
55
PA
9,785
1,146
WV
1,642
0.1
AL
8,761
206
MT
1,544
AZ
8,553
761
CO
1,434
94
AR
7,380
282
NV
1,311
81
GA
6,554
976
ND
OK
6,440
786
DE
663
KS
5,407
639
WY
307
NJ
4,900
366
Total US
660
298,134
98.6
28,136
99.2
Total Canada
Grand Total
Lease Expirations
As of March 31, 2021, the ABR weighted average remaining term of our leases was approximately 10.6 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Approximately 44.9% of our rental revenue was derived from leases that will expire after 2030, and no more than 9.0% of our rental revenue was derived from leases that expire in any single year prior to 2030. The following chart sets forth our lease expirations based upon the terms of the leases in place as of March 31, 2021.
Expiration
Year
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041+
properties
61
86
44
leases
29
The following table presents certain information based on lease expirations by year. Amounts are in thousands, except for number of properties.
Expiration Year
964
2,409
4,841
515
13,662
1,689
6.0
7,833
682
18,586
1,404
22,917
7.6
2,010
7.1
27,171
9.6
19,357
2,538
49,088
16.2
4,927
17.4
7,145
725
26,225
8.7
3,014
16,385
5.4
1,693
5,479
361
10,498
1,471
16,914
969
17,256
1,367
6,805
8,988
6,887
347
12,846
452
The following discussion includes the results of our operations for the periods presented. We have included an analysis of the three months ended March 31, 2021, as compared to the three months ended December 31, 2020 and March 31, 2020. We have included the comparison of the immediately preceding quarter given our Internalization and initial public offering’s (“IPO”) significant impact to our results of operations and financial condition, and therefore comparability, of the prior year periods. We believe the quarter-over-quarter analysis is beneficial to investors as it compares the results of operations on a more comparable basis, and aligns with our strategic growth priorities under a different leverage and liquidity profile going forward.
Three Months Ended March 31, 2021 Compared to Three Months Ended December 31, 2020
Lease Revenues, net
Increase/(Decrease)
72,558
687
Adjustment to recognize contractual operating lease
billings on a straight-line basis
4,256
111
455
(364
(80.0
)%
756
(26
(3.4
>100%
4,389
(0.0
(16
>(100)%
Adjustment to revenue recognized for uncollectible
rental amounts billed
(112
(30
26.8
82,291
The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through accretive property acquisitions during the fourth quarter of 2020. During the fourth quarter of 2020, we invested $100.3 million, excluding capitalized acquisition costs, in 19 properties at a weighted average initial cash cap rate of 6.9%. Most of these acquisitions closed during the month of December, and therefore did not materially contribute to Lease revenues, net for the three months ended December 31, 2020.
Operating Expenses
30,182
531
4,986
(381
(7.6
9,232
1,401
1,678
19.9
46,078
1,885
The increase in general and administrative expenses mainly reflects increased severance associated with the departure of an executive officer during the three months ended March 31, 2021.
During the three months ended March 31, 2021, we recognized $2.0 million of impairment on our investments in rental properties, compared to $1.7 million during the three months ended December 31, 2020. The following table presents the impairment charges for their respective period:
Number of properties
Carrying value prior to impairment charge
2,818
4,228
806
2,550
Impairment charge
The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.
25.0
(17,123
(1,015
(5.9
(3
123
5,260
(527
(10.0
141
(554
(182
(100.0
(6,706
7,830
(5
(33.3
The decrease in interest expense reflects a decrease in our weighted average cost of borrowings combined with decreased average outstanding borrowings in the comparable period. In January 2021, we received an initial credit rating of BBB with a stable outlook from S&P Global Ratings (“S&P”), which had the effect of lowering the applicable margin on our then existing $965 million of bank loans by 25 basis points beginning in February 2021, as well as a 20 basis point decrease in the applicable margin on Revolving Credit Facility borrowings. We also repriced our 2026 Unsecured Term Loan in March 2021, reducing the applicable margin by an additional 60 basis points, and simultaneously repaid $50 million.
As part of the Internalization, we may be required to pay additional earnout consideration if certain milestones are achieved during the Earnout Periods. We record the fair value of this contingent consideration in the Condensed Consolidated Balance Sheets, and update the fair value at the end of each reporting period. To the extent the change in fair value relates to a portion of the earnout consideration that is classified as a liability, we record the change through earnings. We estimate the fair value of the earnout liability by considering weighted-average probabilities of likely outcomes, and using a Monte Carlo simulation and discounted cash flow analysis to estimate fair value. These estimates require us to make various assumptions about future share prices, and other items that are unobservable and are considered Level 3 inputs in the fair value hierarchy. The change in the fair value of the earnout liability during the three months ended March 31, 2021, reflects a decrease in our share price as compared to December 31, 2020.
Net income and Net earnings per diluted share
(in thousands, except per share data)
17,619
6,341
36.0
Net earnings per diluted share
0.11
0.04
36.4
The increase in net income is primarily due to a $7.8 million increase in income from the change in fair value of our earnout liability and a $1.0 million decrease in interest expense. These factors were partially offset by a $1.4 million increase in general and administrative expenses.
GAAP net income includes items such as gain or loss on sale of real estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons.
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
2,702
(257
(26.0
656
17.6
(44
(89.8
891
(86.3
4,467
The increase in Lease revenues, net, was primarily attributable to growth in our real estate portfolio through accretive property acquisitions during 2020. During the fourth quarter of 2020, we invested $100.3 million, excluding capitalized acquisition costs, in 19 properties at a weighted average initial cash cap rate of 6.9%. Most of these acquisitions closed during the month of December, and therefore did not contribute to Lease revenues, net for the three months ended March 31, 2020.
(506
(1.6
(2,461
(1,275
490
11.9
4,791
82.0
(121
(5.7
918
Asset management fees and Property management fees
The decrease in asset management fees and property management fees was due to the completion of the Internalization in February 2020, which terminated the associated agreements with our third-party manager.
The increase in general and administrative expenses mainly reflects the impact of the Internalization associated with our newly acquired employee base. Following the Internalization, our asset and property management fees were replaced with compensation and related expenses, along with associated general and administrative expenses for the three months ended March 31, 2020.
During the three months ended March 31, 2021, we recognized $2.0 million of impairment on our investments in rental properties, compared to $2.1 million during the three months ended March 31, 2020. The following table presents the impairment charges for their respective periods:
22,133
20,000
(4
(44.4
(4,883
(23.3
(2,886
(37.9
(136
(24.8
5,301
The decrease in interest expense primarily reflects a decrease in our average outstanding borrowings, combined with a decrease in our weighted average cost of borrowings. In September 2020, we used the proceeds of our IPO to repay $456.7 million of outstanding borrowings, including accrued interest, significantly reducing our leverage profile. In January 2021, we received an initial credit rating of BBB with a stable outlook from S&P, which had the effect of lowering the applicable margin on our then existing $965 million of bank loans by 25 basis points beginning in February 2021. We also repriced and partially repaid our 2026 Unsecured Term Loan in March 2021, reducing the applicable margin and principal balance by an additional 60 basis points and $50 million, respectively.
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months ended March 31, 2021, we recognized gains of $4.7 million on the sale of eight properties, compared to gains of $7.6 million on the sale of 10 properties during the three months ended March 31, 2020.
During the three months ended March 31, 2020, we incurred $1.2 million of third-party fees and consulting expenses associated with the Internalization that closed on February 7, 2020. We did not incur these expenses during the three months ended March 31, 2021.
The change in the fair value of the earnout liability during the three months ended March 31, 2021, reflects a decrease in our period end share price.
12,112
0.05
50.0
The increase in net income, is primarily due to a $5.3 million increase in income from the change in fair value of our earnout liability, a $4.9 million decrease in interest expense, revenue growth of $4.5 million, and a $1.2 million decrease in internalization expenses. These factors were partially offset by a $2.9 million decrease in the gain on sale of real estate.
We acquire real estate using a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on maximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our leverage profile and overall liquidity position. We believe our leverage strategy has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our investment grade credit ratings of BBB from S&P and Baa3 from Moody’s Investors Service (“Moody’s”). We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with lenders and with rating agencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As of March 31, 2021, we had total debt outstanding of $1.5 billion, Net Debt of $1.5 billion, and a Net Debt to Annualized Adjusted EBITDAre ratio of approximately 5.25x.
Net Debt and Annualized Adjusted EBITDAre are non-GAAP financial measures, and Annualized Adjusted EBITDAre is calculated based upon EBITDA, EBITDAre, and Adjusted EBITDAre, each of which is also a non-GAAP financial measure. Refer to Non-GAAP Measures below for further details concerning our calculation of non-GAAP measures and reconciliations to the comparable GAAP measure.
Liquidity/REIT Requirements
Liquidity is a measure of our ability to meet potential cash requirements, including our ongoing commitments to repay debt, fund our operations, acquire properties, make distributions to our stockholders, and other general business needs. As a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gain, on an annual basis. As a result, it is unlikely that we will be able to retain substantial cash balances to meet our long-term liquidity needs, including repayment of debt and the acquisition of additional properties, from our annual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital.
Short-term Liquidity Requirements
Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including our general and administrative expenses as well as interest payments on our outstanding debt, and to pay distributions. We do not currently anticipate making significant capital expenditures or incurring other significant property costs because of the strong occupancy levels across our portfolio and the nature of our leases. We expect to meet our short-term liquidity requirements primarily from cash and cash equivalents balances and net cash provided by operating activities, supplemented by borrowings under our Revolving Credit Facility.
As detailed in the contractual obligations table below, we have approximately $61.7 million of expected obligations due to be paid throughout the remainder of 2021, primarily consisting of $17.2 million of mortgage maturities, and $43.1 million of interest expense due, including the impact of our interest rate swaps. We expect our cash provided by operating activities, as discussed below, will be sufficient to pay for our current obligations including interest expense on our borrowings. We expect to either repay the maturing mortgages with available cash on hand generated from our results of operations or borrowings under our Revolving Credit Facility, or refinance with property-level borrowings.
Long-term Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds necessary to repay debt and invest in additional revenue generating properties. Debt capital is provided through unsecured term notes, revolving credit facilities, and senior unsecured notes. Further, we anticipate having the ability to access the public unsecured bond market, which was historically largely unavailable to us prior to our IPO.
The source and mix of our debt capital in the future will be impacted by market conditions as well as our continued focus on lengthening our debt maturity profile to better align with our portfolio’s lease terms, staggering debt maturities to reduce the risk that a significant amount of debt will mature in any single year in the future, and managing our exposure to interest rate risk. Our $60 million 2022 Unsecured Term Loan has a short-term maturity date of February 2022. We expect to either repay the 2022 Unsecured Term Loan with available cash on hand, or with borrowings under our Revolving Credit Facility. With outstanding borrowings of $15 million at March 31, 2021, we have $885 million of available capacity under our Revolving Credit Facility.
We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our capital structure.
Equity Capital Resources
On September 21, 2020, we completed our IPO and issued 37 million shares of stock for net proceeds of $588.3 million, including shares issued subsequently pursuant to the underwriters’ partial exercise of their over-allotment option. We used $216.5 million of the net proceeds to fully repay the outstanding borrowings and accrued interest under our then existing revolving credit agreement and $240.2 million of the proceeds to fully repay the outstanding principal and accrued interest associated with an unsecured term loan.
As we continue to invest in accretive real estate properties, we expect to balance our debt and equity capitalization, while maintaining a Net Debt to Annualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of follow-on equity offerings and an at-the-market (“ATM”) program. As of March 31, 2021, we have successfully deployed the remaining proceeds from our IPO.
Unsecured Indebtedness and Capital Markets Activities as of and for the Three Months Ended March 31, 2021
The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and Senior Notes at March 31, 2021.
Outstanding
Balance
Revolving Credit Facility
daily LIBOR + 1.00%
Sept. 2023
2022 Unsecured Term Loan
one-month LIBOR + 1.00%
2023 Unsecured Term Loan
one-month LIBOR + 1.10%
2024 Unsecured Term Loan
2026 Unsecured Term Loan
Senior Notes
As announced on January 21, 2021, S&P assigned the Company an initial credit rating of 'BBB' with a stable outlook. As a result of this credit rating, the margin of our existing bank loans was reduced by 25 basis points beginning in February 2021, the applicable margin on borrowings under our Revolving Credit Facility was reduced by 20 basis points, and our access to a diverse set of advantageous funding sources should expand. During the quarter, Moody’s reaffirmed our ‘Baa3’ credit rating and updated their outlook from ‘stable’ to ‘positive.
On March 12, 2021, we amended our $450 million 2026 Unsecured Term Loan, reducing the applicable margin an additional 60 basis points based on our current credit rating. In connection with the amendment, we repaid in full the outstanding commitments for two lenders and elected to repay an additional $10 million in outstanding principal, bringing the outstanding balance to $400 million as of March 31, 2021.
On March 31, 2021, we drew $15 million on our Revolving Credit Facility to fund an acquisition. We have $885 million of remaining capacity on our Revolving Credit Facility as of March 31, 2021.
Debt Covenants
We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of March 31, 2021, we believe we were in compliance with all of our covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification.
Covenants
Requirement
Leverage Ratio
≤ 0.60 to 1.00
Secured Indebtedness Ratio
≤ 0.40 to 1.00
Unencumbered Coverage Ratio
≥ 1.75 to 1.00
Fixed Charge Coverage Ratio
≥ 1.50 to 1.00
Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value
Dividends and Other Restricted Payments
Only applicable in case of default
We are exposed to interest rate risk arising from changes in interest rates on the floating-rate borrowings under our unsecured credit facilities and a certain mortgage. Borrowings pursuant to our unsecured credit facilities and the mortgage bear interest at floating rates based on LIBOR plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense, which will in turn, increase or decrease our net income and cash flow.
We attempt to manage our interest rate risk by entering into interest rate swaps. As of March 31, 2021, we had 32 interest rate swaps outstanding in an aggregate notional amount of $824.7 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable-rate borrowings. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes.
Cash and cash equivalents and restricted cash totaled $18.4 million, $110.7 million, and $96.7 million at March 31, 2021, December 31, 2020 and March 31, 2020, respectively. The table below shows information concerning cash flows for the three months ended March 31, 2021, December 31, 2020, and March 31, 2020:
(In thousands)
46,064
(76,443
32,120
Increase in cash and cash equivalents and restricted cash
1,741
The increase in net cash provided by operating activities during the three months ended March 31, 2021 as compared to the three months ended December 31, 2020 and March 31, 2020, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization.
The change in net cash (used in) provided by investing activities during the three months ended March 31, 2021 as compared to the three months ended December 31, 2020, was mainly due to decreased acquisition volume quarter-over-quarter. The change in net cash (used in) provided by investing activities during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, was mainly due to increased acquisition volume and decreased proceeds from disposal of properties in 2021 offset by decrease in cash paid in connection with the Internalization.
The change in net cash (used in) provided by financing activities during the three months ended March 31, 2021 as compared to the three months ended December 31, 2020 mainly reflects a net repayment of debt in 2021 as compared to net proceeds from our IPO in 2020. During the three months ended March 31, 2021, we made a $50 million paydown on our 2026 Unsecured Term Loan using cash on hand and remaining proceeds from our IPO in 2020. During the three months ended December 31, 2020 our underwriters partially exercised their overallotment option, resulting in the issuance of an additional 3.5 million shares for net proceeds of approximately $55.9 million. The change in net cash (used in) provided by financing activities during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, mainly reflects a net repayment of debt in 2021, compared to net borrowings during the three months ended March 31, 2020.
The following table provides information with respect to our contractual commitments and obligations as of March 31, 2021 (in thousands). Refer to the discussion in the Liquidity and Capital Resources section above for further discussion over our short and long-term obligations.
Year of
Term Loans
Revolving Credit Facility(a)
Senior
Notes
Mortgages
and Notes
Payable
Expense(b)
Improvement
Allowances(c)
Operating
Leases
43,052
61,672
2,907
55,574
119,171
7,582
51,007
339,094
2,260
45,921
238,301
42,362
62,678
56,717
82,083
1,016,090
915,000
319,999
1,837,006
We may extend the Revolving Credit Facility twice, each for a six-month period, subject to certain conditions, including the payment of an extension fee equal to 0.0625% of the revolving commitments.
Interest expense is projected based on the outstanding borrowings and interest rates in effect as of March 31, 2021. This amount includes the impact of interest rate swap agreements.
We expect to pay tenant improvement allowances out of cash flows from operations or from additional borrowings.
At March 31, 2021 and December 31, 2020, investment in rental property of $172.4 million and $173.5 million, respectively, was pledged as collateral against our mortgages.
Additionally, we are a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and we entered into the Founding Owners’ Tax Protection Agreement in connection with the Internalization. The tax protection agreements require us to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. Based on values as of March 31, 2021, taxable sales of the applicable properties would trigger liability under the four agreements of approximately $22.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above.
FFO and AFFO
We compute FFO in accordance with the standards established by the Board of Governors of Nareit, the worldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. To derive Adjusted Funds From Operations (“AFFO”), we modify the Nareit computation of FFO to include other adjustments to GAAP net income related to certain non-cash and non-recurring revenues and expenses, including straight-line rents, the change in fair value of our earnout liability, cost of debt extinguishments, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, realized gains or losses on foreign currency transactions, internalization expenses, stock-based compensation, severance, extraordinary items, and other specified non-cash items. We believe that excluding such items assists
management and investors in distinguishing whether changes in our operations are due to growth or decline of operations at our properties or from other factors.
Our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market rentals over time. Our leases do not include significant front-loading or back-loading of payments, or significant rent-free periods. Therefore, we find it useful to evaluate rent on a contractual basis as it allows for comparison of existing rental rates to market rental rates. In situations where we granted short-term rent deferrals as a result of the COVID-19 pandemic, and such deferrals were probable of collection and expected to be repaid within a short term, we continued to recognize the same amount of GAAP lease revenues each period. Consistent with GAAP lease revenues, the short-term deferrals associated with COVID-19 did not impact our AFFO.
We further exclude the change in fair value of our earnout liability, costs or gains recorded on the extinguishment of debt, non-cash interest expense and gains, the amortization of debt issuance costs, net mortgage premiums, and lease intangibles, realized gains and losses on foreign currency transactions, internalization expenses, stock-based compensation and severance, as these items are not indicative of ongoing operational results. We use AFFO as a measure of our performance when we formulate corporate goals.
FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers, primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is a useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.
Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate AFFO. In the future, the SEC, Nareit, or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of AFFO accordingly.
The following table reconciles net income (which is the most comparable GAAP measure) to FFO and AFFO:
Real property depreciation and amortization
30,690
30,161
31,210
(5,260
Provision for impairment on investment in rental properties
FFO
51,929
44,198
37,572
Straight-line rent adjustment
(5,125
(1,612
(6
Amortization of debt issuance costs
917
Amortization of net mortgage premiums
(35
(36
Gain on interest rate swaps and other non-cash interest expense
Amortization of lease intangibles
(728
(1,150
(1,138
182
1,205
1,193
Severance
1,243
6,706
Other expenses
(10
(15
AFFO
49,410
46,894
41,068
EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre
We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. EBITDA is a measure commonly used in our industry. We believe that this ratio provides investors and analysts with a measure of our performance that includes our operating results unaffected by the differences in capital structures, capital investment cycles and useful life of related assets compared to other companies in our industry. We compute EBITDAre in accordance with the definition adopted by Nareit, as EBITDA excluding gains (loss) from the sales of depreciable property and provisions for impairment on investment in real estate. We believe EBITDA and EBITDAre are useful to investors and analysts because they provide important supplemental information about our operating performance exclusive of certain non-cash and other costs. EBITDA and EBITDAre are not measures of financial
performance under GAAP, and our EBITDA and EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA and EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.
We are focused on a disciplined and targeted acquisition strategy, together with active asset management that includes selective sales of properties. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, each discussed further below, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with our lenders and rating agencies regarding our credit rating. As we fund new acquisitions using our unsecured Revolving Credit Facility, our leverage profile and Net Debt will be immediately impacted by current quarter acquisitions. However, the full benefit of EBITDAre from newly acquired properties will not be received in the same quarter in which the properties are acquired. Additionally, EBITDAre for the quarter includes amounts generated by properties that have been sold during the quarter. Accordingly, the variability in EBITDAre caused by the timing of our acquisitions and dispositions can temporarily distort our leverage ratios. We adjust EBITDAre (“Adjusted EBITDAre”) for the most recently completed quarter (i) to recalculate as if all acquisitions and dispositions had occurred at the beginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either non-cash, such as cost of debt extinguishments or the change in fair value of our earnout liability, or that we believe are one time, or unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future, and (iii) to eliminate the impact of lease termination fees and other items that are not a result of normal operations. We then annualize quarterly Adjusted EBITDAre by multiplying it by four (“Annualized Adjusted EBITDAre”). You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to be inaccurate. Our actual reported EBITDAre for future periods may be significantly different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.
The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA and EBITDAre:
17,123
413
549
EBITDA
71,194
64,783
64,607
Provision for impairment of investment in
rental properties
EBITDAre
68,473
61,201
59,121
The following table reconciles EBITDAre to Adjusted EBITDAre. Information is also presented with respect to Annualized EBITDAre and Annualized Adjusted EBITDAre:
Adjustment for current quarter acquisition activity (a)
1,365
1,703
Adjustment for current quarter disposition activity (b)
(278
(318
Adjustment to exclude non-recurring and other expenses (c)
2,100
Adjustment to exclude change in fair value of earnout liability
Adjustment exclude write-off of accrued rental income
442
242
3,993
Adjustment to exclude cost of debt extinguishments
Adjusted EBITDAre
71,104
69,716
68,233
Annualized EBITDAre
273,888
244,805
236,484
Annualized Adjusted EBITDAre
284,414
278,867
272,932
Reflects an adjustment to give effect to all acquisitions during the quarter as if they had been acquired as of the beginning of the quarter.
Reflects an adjustment to give effect to all dispositions during the quarter as if they had been sold as of the beginning of the quarter.
Amounts include $1.2 million of severance and $0.9 million of accelerated stock-based compensation associated with the departure of executive officers in 2021, and expense directly associated with the Internalization in 2020.
Net Debt, Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre
We define Net Debt as gross debt (total reported debt plus deferred financing costs) less cash and cash equivalents and restricted cash. We believe that the presentation of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre is useful to investors and analysts because these ratios provide information about gross debt less cash and cash equivalents, which could be used to repay debt, compared to our performance as measured using EBITDAre, and is used in communications with lenders and rating agencies regarding our credit rating. The following table reconciles total debt (which is the most comparable GAAP measure) to Net Debt, and presents the ratio of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre, respectively:
Debt
353,300
1,672,587
Mortgages and notes payable, net
110,464
Debt issuance costs
6,988
6,489
7,767
Gross Debt
2,144,118
(10,205
(100,486
(93,151
Restricted cash
(8,145
(10,242
(3,561
Net Debt
1,493,480
1,436,939
2,047,406
Net Debt to Annualized EBITDAre
5.45x
5.87x
8.66x
Net Debt to Annualized Adjusted EBITDAre
5.25x
5.15x
7.50x
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as other disclosures in the financial statements. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, “Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We believe there have been no significant changes during the three months ended March 31, 2021, to the items that we disclosed as our critical accounting policies in our 2020 Annual Report on Form 10-K.
For information on the impact of recent accounting pronouncements on our business, see Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks, one of the most predominant of which is a change in interest rates. Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variable-rate debt. Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced. We attempt to manage interest rate risk by entering into long-term fixed rate debt or by entering into interest rate swaps to convert certain variable-rate debt to a fixed rate. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. Further information concerning our interest rate swaps can be found in Note 11 in our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q.
Our fixed-rate debt includes our Senior Notes, mortgages, and variable-rate debt converted to a fixed rate with the use of interest rate swaps. Our fixed-rate debt and outstanding interest rate swaps had carrying values and fair values of approximately $1.4 billion and $1.5 billion, respectively, as of March 31, 2021. Changes in market interest rates impact the fair value of our fixed-rate debt and interest rate swaps, but they have no impact on interest incurred or on cash flows. For instance, if interest rates were to increase 1%, and the fixed-rate debt balance were to remain constant, we would expect the fair value of our debt to decrease, similar to how the price of a bond decreases as interest rates rise. A 1% increase in market interest rates would have resulted in a decrease in the fair value of our fixed-rate debt and interest rate swaps of approximately $74.5 million as of March 31, 2021.
Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on LIBOR plus an applicable margin, and totaled $934.7 million as of March 31, 2021, of which $824.7 million was swapped to a fixed rate by our use of interest rate swaps. Taking into account the effect of our interest rate swaps, a 1% increase or decrease in interest would have a corresponding $1.1 million increase or decrease in interest expense annually.
With the exception of our interest rate swap transactions, we have not engaged in transactions in derivative financial instruments or derivative commodity instruments.
As of March 31, 2021, our financial instruments were not exposed to significant market risk due to foreign currency exchange risk.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of and for the quarter ended March 31, 2021, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to legal proceedings that we believe would reasonably be expected to have material adverse effect on our business, financial condition or results of operations. We are not aware of any material legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject, nor are we aware of any such legal proceedings contemplated by government agencies.
Item 1A. Risk Factors.
There have been no material changes from the risk factors set forth in our Form 10-K.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities.
None.
Item 3.Defaults Upon Senior Securities.
Item 4.Mine Safety Disclosures.
Not applicable.
Item 5.Other Information.
Item 6.Exhibits
No.
Description
Articles of Incorporation of Broadstone Net Lease, Inc. (filed as Exhibit 3.1 to the Corporation’s Registration Statement on Form 10 filed April 24, 2017 and incorporated herein by reference)
Articles of Amendment of Broadstone Net Lease, Inc. (filed as Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)
Articles Supplementary of Broadstone Net Lease, Inc. (filed as Exhibit 3.2 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)
Articles of Amendment of Broadstone Net Lease, Inc. (filed as Exhibit 3.3 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)
Second Amended and Restated Bylaws of Broadstone Net Lease, Inc., adopted March 23, 2020 (filed as Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed March 25, 2020 and incorporated herein by reference)
10.1*
Form of Broadstone Net Lease, Inc. 2020 Omnibus Equity and Incentive Plan Restricted Stock Unit Award Agreement
Third Amendment to Capital One Term Loan Agreement, dated as of March 12, 2021, by and among Broadstone Net Lease, Inc., Broadstone Net Lease, Capital One, National Association, as administrative agent, and the lenders party thereto (filed as Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed March 18, 2021 and incorporated herein by reference)
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*†
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*†
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
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Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)
Filed herewith.
†
In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 5, 2021
/s/ Christopher J. Czarnecki
Christopher J. Czarnecki
Chief Executive Officer and President
/s/ Ryan M. Albano
Ryan M. Albano
Executive Vice President and Chief Financial Officer