Broadstone Net Lease, Inc. - Quarter Report: 2021 June (Form 10-Q)

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 June 30, 2021, or

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

Commission File Number 001-39529

BROADSTONE NET LEASE, INC.

(Exact name of registrant as specified in its charter)


Maryland	26-1516177
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

800 Clinton Square

Rochester, New York

14604

(Address of principal executive offices)

(Zip Code)

(585) 287-6500

(Registrant’s telephone number, including area code)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.00025 par value

BNL

The New York Stock Exchange

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

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

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
Emerging growth company	☒

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

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

There were 158,830,350 shares of the Registrant’s Common Stock, $0.00025 par value per share, outstanding as of August 2, 2021.

BROADSTONE NET LEASE, INC.

TABLE OF CONTENTS


		Page
Part I - FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets (Unaudited)	1
	Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)	2
	Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows (Unaudited)	5
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Cautionary Note Regarding Forward-Looking Statements	26
	Explanatory Note and Certain Defined Terms	26
	Overview	27
	Real Estate Portfolio Information	28
	Results of Operations	34
	Liquidity and Capital Resources	37
	Derivative Instruments and Hedging Activities	40
	Cash Flows	40
	Contractual Obligations	41
	Non-GAAP Measures	41
	Critical Accounting Policies	44
	Impact of Recent Accounting Pronouncements	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44
Part II - OTHER INFORMATION		45
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46

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)


	June 30, 2021			December 31, 2020
Assets
Accounted for using the operating method, net of accumulated depreciation	$	3,534,884		$	3,354,511
Accounted for using the direct financing method		28,911			29,066
Accounted for using the sales-type method		566			567
Investment in rental property, net		3,564,361			3,384,144
Cash and cash equivalents		78,987			100,486
Accrued rental income		109,278			102,117
Tenant and other receivables, net		618			1,604
Prepaid expenses and other assets		18,846			22,277
Goodwill		339,769			339,769
Intangible lease assets, net		296,134			290,913
Debt issuance costs – unsecured revolving credit facility, net		5,250			6,435
Leasing fees, net		10,368			10,738
Total assets	$	4,423,611		$	4,258,483

Liabilities and equity
Unsecured revolving credit facility	$	—		$	—
Mortgages, net		105,748			107,382
Unsecured term notes, net		1,383,631			1,433,796
Interest rate swap, liabilities		46,335			72,103
Earnout liability		10,063			7,509
Accounts payable and other liabilities		75,463			74,936
Accrued interest payable		3,885			4,023
Intangible lease liabilities, net		74,978			79,653
Total liabilities		1,700,103			1,779,402

Commitments and contingencies (See Note 18)

Equity
Broadstone Net Lease, Inc. stockholders' equity:
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $0.00025 par value; 500,000 shares authorized, 158,583 shares issued and outstanding at June 30, 2021; 440,000 shares authorized, 108,609 shares issued and outstanding at December 31, 2020		40			27
Class A common stock, $0.00025 par value; no shares authorized, issued or outstanding at June 30, 2021; 60,000 shares authorized, 37,000 shares issued and outstanding at December 31, 2020		—			9
Additional paid-in capital		2,890,131			2,624,997
Cumulative distributions in excess of retained earnings		(293,622	)		(259,673	)
Accumulated other comprehensive loss		(41,896	)		(66,255	)
Total Broadstone Net Lease, Inc. stockholders’ equity		2,554,653			2,299,105
Non-controlling interests		168,855			179,976
Total equity		2,723,508			2,479,081
Total liabilities and equity	$	4,423,611		$	4,258,483

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

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

(Unaudited)

(in thousands, except per share amounts)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
Revenues
Lease revenues, net	$	84,759		$	80,371		$	167,457		$	158,602

Operating expenses
Depreciation and amortization		31,225			39,921			61,938			71,140
Asset management fees		—			—			—			2,461
Property management fees		—			—			—			1,275
Property and operating expense		4,572			4,190			9,177			8,305
General and administrative		8,655			5,700			19,288			11,542
Provision for impairment of investment in rental properties		—			534			2,012			2,667
Total operating expenses		44,452			50,345			92,415			97,390

Other income (expenses)
Interest income		6			11			11			20
Interest expense		(15,430	)		(19,513	)		(31,538	)		(40,504	)
Cost of debt extinguishment		—			—			(126	)		(22	)
Gain on sale of real estate		3,838			1,046			8,571			8,665
Income taxes		(301	)		(402	)		(714	)		(951	)
Internalization expenses		—			(389	)		—			(1,594	)
Change in fair value of earnout liability		(5,604	)		6,321			(4,480	)		2,144
Other income (expenses)		4			(2	)		14			(24	)
Net income		22,820			17,098			46,780			28,946
Net income attributable to non-controlling interests		(1,606	)		(1,745	)		(3,343	)		(2,777	)
Net income attributable to Broadstone Net Lease, Inc.	$	21,214		$	15,353		$	43,437		$	26,169

Weighted average number of common shares outstanding
Basic		146,119			107,422			145,728			106,765
Diluted		157,430			119,648			157,115			117,929

Net earnings per share attributable to common stockholders
Basic and diluted	$	0.14		$	0.14		$	0.30		$	0.25
Comprehensive income (loss)
Net income	$	22,820		$	17,098		$	46,780		$	28,946
Other comprehensive income (loss)
Change in fair value of interest rate swaps		(2,911	)		(6,056	)		25,769			(64,118	)
Realized gain on interest rate swaps		(42	)		(41	)		(83	)		(83	)
Comprehensive income (loss)		19,867			11,001			72,466			(35,255	)
Comprehensive (income) loss attributable to non-controlling interests		(1,399	)		(1,123	)		(5,212	)		2,897
Comprehensive income (loss) attributable to Broadstone Net Lease, Inc.	$	18,468		$	9,878		$	67,254		$	(32,358	)

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

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity

(Unaudited)

(in thousands, except per share amounts)


	Common Stock		Class A Common Stock			Additional Paid-in Capital			Cumulative Distributions in Excess of Retained Earnings			Accumulated Other Comprehensive Loss			Non- controlling Interests			Total Stockholders' Equity
Balance, January 1, 2021	$	27	$	9		$	2,624,997		$	(259,673	)	$	(66,255	)	$	179,976		$	2,479,081
Net income		—		—			—			22,223			—			1,737			23,960
Issuance of 211 shares of common stock		—		—			233			—			—			—			233
Offering costs, discounts and commissions		—		—			(500	)		—			—			—			(500	)
Stock-based compensation		—		—			1,769			—			—			—			1,769
Retirement of 45 shares of restricted common stock		—		—			(832	)		—			—			—			(832	)
Conversion of 37,000 Class A common stock to 37,000 shares of common stock		9		(9	)		—			—			—			—			—
Conversion of 38 OP Units to 38 shares of common stock		—		—			606			—			—			(606	)		—
Distributions declared ($0.250 per share and OP Unit)		—		—			—			(36,690	)		—			(2,963	)		(39,653	)
Change in fair value of interest rate swap agreements		—		—			—			—			26,602			2,078			28,680
Realized gain on interest rate swap agreements		—		—			—			—			(39	)		(2	)		(41	)
Adjustment to non-controlling interests		—		—			(953	)		—			1,008			(55	)		—
Balance, March 31, 2021	$	36	$	—		$	2,625,320		$	(274,140	)	$	(38,684	)	$	180,165		$	2,492,697
Net income		—		—			—			21,214			—			1,606			22,820
Issuance of 11,659 shares of common stock		4		—			264,795			—			—			—			264,799
Issuance of 248 OP Units		—		—			—			—			—			—			—
Offering costs, discounts and commissions		—		—			(11,013	)		—			—			—			(11,013	)
Stock-based compensation		—		—			951			—			—			—			951
Retirement of 16 shares of restricted common stock		—		—			(309	)		—			—			—			(309	)
Conversion of 1,127 OP Units to 1,127 shares of common stock		—		—			17,859			—			—			(17,859	)		—
Distributions declared ($0.255 per share and OP Unit)		—		—			—			(40,696	)		—			(2,788	)		(43,484	)
Change in fair value of interest rate swap agreements		—		—			—			—			(2,708	)		(203	)		(2,911	)
Realized gain on interest rate swap agreements		—		—			—			—			(38	)		(4	)		(42	)
Adjustment to non-controlling interests		—		—			(7,472	)		—			(466	)		7,938			—
Balance, June 30, 2021	$	40	$	—		$	2,890,131		$	(293,622	)	$	(41,896	)	$	168,855		$	2,723,508

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

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity

(Unaudited)

(in thousands, except per share amounts)


	Common Stock		Class A Common Stock		Additional Paid-in Capital			Cumulative Distributions in Excess of Retained Earnings			Accumulated Other Comprehensive Loss			Non- controlling Interests			Total Stockholders' Equity			Mezzanine Equity Common Stock		Mezzanine Equity Non- controlling Interests			Total Mezzanine Equity
Balance, January 1, 2020	$	26	$	—	$	1,895,935		$	(208,261	)	$	(20,086	)	$	111,406		$	1,779,020		$	—	$	—		$	—
Cumulative effect of accounting change		—		—		—			(323	)		—			—			(323	)		—		—			—
Net income		—		—		—			10,816			—			710			11,526			—		322			322
Issuance of 293 shares of common stock and 3,124 shares of mezzanine equity common stock		—		—		6,097			—			—			—			6,097			66,376		—			66,376
Issuance of 5,278 mezzanine non-controlling interests		—		—		—			—			—			—			—			—		112,159			112,159
Adjustment to carrying value of mezzanine equity non-controlling interests		—		—		(2,416	)		—			—			—			(2,416	)		—		2,416			2,416
Distributions declared ($0.330 per share and OP Unit)		—		—		—			(35,299	)		—			(2,100	)		(37,399	)		—		(1,161	)		(1,161	)
Change in fair value of interest rate swap agreements		—		—		—			—			(53,014	)		(3,472	)		(56,486	)		—		(1,576	)		(1,576	)
Realized gain on interest rate swap agreements		—		—		—			—			(38	)		(2	)		(40	)		—		(2	)		(2	)
Balance, March 31, 2020	$	26	$	—	$	1,899,616		$	(233,067	)	$	(73,138	)	$	106,542		$	1,699,979		$	66,376	$	112,158		$	178,534
Net income		—		—		—			15,353			—			992			16,345			—		753			753
Issuance of 11 shares of common stock		—		—		232			—			—			—			232			—		—			—
Adjustment to carrying value of mezzanine equity non-controlling interests		—		—		(97	)		—			—			—			(97	)		—		97			97
Distributions declared ($0.110 per share and OP Unit)		—		—		—			(11,817	)		—			(701	)		(12,518	)		—		(581	)		(581	)
Change in fair value of interest rate swap agreements		—		—		—			—			(5,438	)		(351	)		(5,789	)		—		(267	)		(267	)
Realized gain on interest rate swap agreements		—		—		—			—			(37	)		(3	)		(40	)		—		(1	)		(1	)
Balance, June 30, 2020	$	26	$	—	$	1,899,751		$	(229,531	)	$	(78,613	)	$	106,479		$	1,698,112		$	66,376	$	112,159		$	178,535

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

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	For the Six Months Ended June 30,
	2021			2020
Operating activities
Net income	$	46,780		$	28,946
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		60,570			71,020
Provision for impairment of investment in rental properties		2,012			2,667
Amortization of debt issuance costs charged to interest expense		1,799			1,637
Stock-based compensation expense		2,720			—
Straight-line rent, financing and sales-type lease adjustments		(9,609	)		(7,757	)
Cost of debt extinguishment		126			22
Gain on sale of real estate		(8,571	)		(8,665	)
Change in fair value of earnout liability		4,480			(2,144	)
Leasing fees paid		(319	)		—
Adjustment to provision for credit losses		(1	)		(127	)
Other non-cash items		459			228
Changes in assets and liabilities, net of acquisition:
Tenant and other receivables		986			(4,111	)
Prepaid expenses and other assets		1,088			(235	)
Accounts payable and other liabilities		(3,367	)		(2,573	)
Accrued interest payable		(138	)		550
Net cash provided by operating activities		99,015			79,458

Investing activities
Acquisition of rental property accounted for using the operating method		(284,300	)		—
Cash paid for Internalization		—			(30,861	)
Capital expenditures and improvements		(1,336	)		(3,824	)
Proceeds from disposition of rental property, net		43,144			45,423
Change in deposits on investments in rental property		(220	)		—
Net cash (used in) provided by investing activities		(242,712	)		10,738

Financing activities
Proceeds from issuance of common stock and Class A common stock, net of $10,842 and $0 offering costs, discounts, and commissions in 2021 and 2020, respectively		253,647			131
Cash paid for deferred offering costs		—			(1,055	)
Borrowings on unsecured term notes		—			60,000
Principal payments on mortgages and unsecured term notes		(51,593	)		(152,533	)
Borrowings on unsecured revolving credit facility		175,600			192,000
Repayments on unsecured revolving credit facility		(175,600	)		(141,000	)
Cash distributions paid to stockholders		(73,278	)		(52,779	)
Cash distributions paid to non-controlling interests		(5,927	)		(5,307	)
Cash paid for earnout liability		(1,926	)		—
Debt issuance and extinguishment costs paid		(946	)		(122	)
Net cash provided by (used in) financing activities		119,977			(100,665	)
Net decrease in cash and cash equivalents and restricted cash		(23,720	)		(10,469	)
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	$	87,008		$	9,842

Reconciliation of cash and cash equivalents and restricted cash
Cash and cash equivalents at beginning of period	$	100,486		$	12,455
Restricted cash at beginning of period		10,242			7,856
Cash and cash equivalents and restricted cash at beginning of period	$	110,728		$	20,311

Cash and cash equivalents at end of period	$	78,987		$	9,241
Restricted cash at end of period		8,021			601
Cash and cash equivalents and restricted cash at end of period	$	87,008		$	9,842

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

Broadstone Net Lease, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except per share amounts)

1. Business Description

Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008. The Corporation focuses on investing in income-producing, net leased commercial properties, primarily in the United States. The Corporation leases industrial, healthcare, restaurant, retail, and office commercial properties under long-term lease agreements. At June 30, 2021, the Corporation owned a diversified portfolio of 684 individual commercial properties with 683 properties located in 42 U.S. states and one property located in British Columbia, Canada.

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

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

On February 7, 2020, the Corporation, the OP, BRE, and certain of their respective subsidiaries and affiliates, completed through a series of mergers (the “Mergers”) the internalization of the external management functions previously performed for the Corporation and the OP by BRE and the Asset Manager (such transactions, collectively, the “Internalization”). Upon consummation of the Internalization, the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP and the Company became internally managed. Upon Internalization, the prior Property Management Agreement and Asset Management Agreement were terminated. The Internalization was not considered a “Termination Event” under the terms of the agreements and therefore no fees were paid under them as a result of the Internalization.

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

On September 21, 2020, the Corporation completed its initial public offering (“IPO”) and issued an aggregate of 37,000 shares of a new class of common stock, $0.00025 par value per share (“Class A Common Stock”) at $17.00 per share, which includes shares issued pursuant to the underwriters’ partial exercise of their over-allotment option on October 20, 2020, pursuant to a registration statement on Form S-11 (File No. 333-240381), as amended, under the Securities Act of 1933, as amended. Shares of Class A Common Stock were listed on the New York Stock Exchange (“NYSE”) under the symbol “BNL.” On March 20, 2021, each share of Class A Common Stock automatically converted into one share of Common Stock, and effective March 22, 2021, all shares of Common Stock were listed and freely tradeable on the NYSE under the symbol “BNL.” See Note 14.

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


	June 30, 2021									December 31, 2020
(in thousands)	Shares of Common Stock			OP Units			Total Diluted Shares			Shares of Common Stock			OP Units			Total Diluted Shares
Ownership interest		158,583			10,482			169,065			145,609			11,399			157,008
Percent ownership of OP		93.8	%		6.2	%		100.0	%		92.7	%		7.3	%		100.0	%

Refer to Note 16 for further discussion regarding the calculation of weighted average shares outstanding.

2. Summary of Significant Accounting Policies

Interim Information

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

Principles of Consolidation

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

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

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

Basis of Accounting

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

Use of Estimates

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

Long-lived Asset Impairment

The Company reviews long-lived assets, 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 June 30, 2021 was based on the most current information available to the Company. Certain of the Company’s properties may have fair values less than their carrying amounts. However, based on the Company’s plans with respect to each of those properties, the Company believes that their carrying amounts are recoverable and therefore, 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.

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

The following table summarizes the Company's impairment charges, resulting primarily from changes in the Company's long-term hold strategy with respect to the individual properties.


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in thousands, except number of properties)	2021		2020		2021		2020
Number of properties		—		2		1		3
Impairment charge	$	—	$	534	$	2,012	$	2,667

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:


	June 30,		December 31,
(in thousands)	2021		2020
Escrow funds and other	$	8,021	$	7,852
Undistributed 1031 proceeds		—		2,390
	$	8,021	$	10,242

Rent Received in Advance

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


(in thousands)	June 30, 2021		December 31, 2020
Rent received in advance	$	13,396	$	13,651

Provision for Uncollectible Rent

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

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


	For the Three Months Ended June 30,					For the Six Months Ended June 30,
(in thousands)	2021		2020			2021		2020
Beginning balance	$	343	$	1,033		$	201	$	—
Provision for uncollectible rent		57		1,190			199		2,223
Write-offs		—		(1	)		—		(1	)
Ending balance	$	400	$	2,222		$	400	$	2,222

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 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 June 30, 2021:


Significant Unobservable Inputs	Weighted Average Assumption Used	Range
Peer stock price volatility	40.0%	26.02% - 51.90%

The table below provides a summary of the significant unobservable inputs used to estimate the fair value of the earnout liability as of June 30, 2020:


Significant Unobservable Inputs	Weighted Average Assumption Used		Range
Expected IPO date	October 21, 2020		September 2020 through February 2021
Peer stock price volatility	35.0%		25.67% - 58.92%
Company's net asset value per diluted share	$	17.77	(a)

(a) The Company’s net asset value per diluted share was primarily based on the fair value of its real estate investment portfolio, together with the fair value of its other assets and liabilities. The fair value of the Company’s real estate investment portfolio as of the measurement date was determined using market capitalization rates that ranged between 6.11% and 7.17%.

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


Significant Unobservable Inputs	Weighted Average Assumption Used		Range
Expected IPO date	April 15, 2020		March 2020 through May 2020
Peer stock price volatility	20.0%		16.22% to 23.09%
Company's net asset value per diluted share	$	21.30	(b)

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

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(in thousands)	2021			2020			2021			2020
Beginning balance	$	6,385		$	44,296		$	7,509		$	—
Allocation of Internalization purchase price at February 7, 2020		—			—			—			40,119
Change in fair value subsequent to Internalization		5,604			(6,321	)		4,480			(2,144	)
Payout of tranches earned		(1,926	)		—			(1,926	)		—
Ending balance	$	10,063		$	37,975		$	10,063		$	37,975

The changes in fair value were driven primarily by fluctuations in the Company's share price.

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


	June 30, 2021
(in thousands)	Total			Level 1		Level 2			Level 3
Interest rate swap, liabilities		(46,335	)		—		(46,335	)		—
Earnout liability		(10,063	)		—		—			(10,063	)


	December 31, 2020
(in thousands)	Total			Level 1		Level 2			Level 3
Interest rate swap, liabilities	$	(72,103	)	$	—	$	(72,103	)	$	—
Earnout liability		(7,509	)		—		—			(7,509	)

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

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


(in thousands)	June 30, 2021		December 31, 2020
Carrying amount	$	1,496,004	$	1,547,667
Fair value		1,615,365		1,679,188

Non-recurring Fair Value Measurements

The Company’s non-recurring fair value measurements at June 30, 2021 and December 31, 2020 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.

Right-of-Use Assets and Lease Liabilities

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

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


		June 30,		December 31,
(in thousands)	Financial Statement Presentation	2021		2020
Right-of-use assets	Prepaid expenses and other assets	$	2,743	$	3,075
Lease liabilities	Accounts payable and other liabilities		2,383		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). During the three and six months ended June 30, 2021, the Company achieved the earnout milestone applicable to tranche 1 of the earnout (see Note 4). As a result, the Company issued 145 shares of common stock, 248 OP Units and paid $1,926 of cash on June 22, 2021.

Conversion of OP Units to Common Stock

During the three and six months ended June 30, 2021, in a non-cash transaction (see Note 17), the Company converted 1,020 OP Units held by an affiliated third party to 1,020 shares of common stock at a total conversion value of $16,175.

4. Internalization

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

In accordance with the Internalization, the Company is required to pay additional earnout consideration of up to $75,000 payable in four tranches of $10,000, $15,000, $25,000, and $25,000 if certain milestones related to the 40-day VWAP per REIT Share are achieved.

The consideration will consist of a combination of cash, shares of the Company’s common stock, and OP Units, based on the same proportions paid in the base consideration.

On June 16, 2021, the Company achieved a 40-day VWAP of $22.50, thereby triggering the payout of tranche 1 of the earnout representing 145 shares of common stock, 248 OP units, and $1,926 of cash, including amounts accrued for dividends.

For the remaining earnout tranches, the applicable 40-day VWAP per REIT Share and the applicable Earnout Periods are as follows:


		Number of
		Shares and				40-Day
(in thousands, except per share amounts)		OP Units		Approximate		VWAP of a
Tranche	Earnout Target(a)	Payable(b)		Amount of Cash (c)		REIT Share		Applicable Earnout Period
2	$15,000		589	$	2,470	$	23.75	September 2020 - September 2022
3	$25,000		983	$	4,117	$	24.375	September 2021 - September 2025
4	$25,000		983	$	4,117	$	25.00	September 2021 - September 2025

(a) Initial contractual value of applicable earnout tranche based on a $21.25 price per share/unit of common stock and OP Units. Does not take into account the

actual per share price of common stock and OP Units at the time an applicable earnout tranche may be earned and paid.

(b) Calculated based on $21.25 price per share/unit of common stock and OP Units.

On July 14, 2021 the Company achieved a 40-day VWAP of $23.75, thereby triggering the payout of tranche 2 of the earnout.

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 $389 and $6,137 of income, respectively, for the three and six months ended June 30, 2020. These pro forma adjustments reflect the elimination of Internalization expenses and asset management, property management, and disposition fees between the Company and BRE and the Asset Manager in historic financial results, and adjustments to reflect compensation and related costs, incremental general and administrative expenses related to the Internalization, and incremental interest expense associated with the borrowing related to the Internalization. This pro forma information is presented for informational purposes only, and may not be indicative of what actual results of operations would have been had the Internalization occurred at the beginning of the period, nor does it purport to represent the results of future operations.

The condensed pro forma financial information is as follows:


	For the Three Months Ended		For the Six Months Ended
(in thousands)	June 30, 2020		June 30, 2020
Revenues	$	80,371	$	158,602
Net income		17,487		31,340

5. Acquisitions of Rental Property

The Company closed on the following acquisitions during the six months ended June 30, 2021:


(in thousands, except number of properties)		Number of		Real Estate
Date	Property Type	Properties		Acquisition Price
February 5, 2021	Healthcare		1	$	4,843
February 26, 2021	Restaurant	(a)			181
March 11, 2021	Retail		13		26,834
March 30, 2021	Retail		11		41,324
March 31, 2021	Healthcare		3		14,140
June 4, 2021	Retail		2		19,420
June 9, 2021	Industrial		1		8,500
June 9, 2021	Industrial		11		106,578
June 25, 2021	Retail		8		12,131
June 28, 2021	Healthcare		4		15,300
June 30, 2021	Retail		1		1,279
June 30, 2021	Healthcare		7		30,750
			62	$	281,280	(b)

(a) Acquisition of additional land adjacent to an existing property.

(b) Acquisition price does not include capitalized acquisition costs of $3,045.

The Company did not complete any acquisitions of rental property during the six months ended June 30, 2020.

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


	For the Six Months Ended
(in thousands)	June 30, 2021
Land	$	48,477
Land improvements		15,844
Buildings and improvements		197,064
Acquired in-place leases(c)		22,729
Acquired above-market lease (d)		211
	$	284,325

(c) The weighted average amortization period for acquired in-place leases is 14 years for acquisitions completed during the six months ended June 30, 2021.

(d) The weighted average amortization period for acquired above-market leases is 10 years for acquisitions completed during the six months ended June 30, 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 six months ended June 30, 2021, qualified as asset acquisitions and, as such, acquisition costs have been capitalized.

Subsequent to June 30, 2021, the Company closed on the following acquisitions (see Note 19):


(in thousands, except number of properties)		Number of		Real Estate
Date	Property Type	Properties		Acquisition Price
July 2, 2021	Industrial	(e)		$	4,500
July 21, 2021	Retail		1		5,565
July 29, 2021	Retail		3		4,586
July 29, 2021	Industrial		1		13,041
July 30, 2021	Industrial		2		11,011
			7	$	38,703

(e) Acquisition of land related to an existing property.

6. Sale of Real Estate

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(in thousands, except number of properties)	2021			2020			2021			2020
Number of properties disposed		11			3			19			13
Aggregate sale price	$	22,276		$	10,538		$	45,338		$	47,723
Aggregate carrying value		(17,201	)		(8,994	)		(34,573	)		(36,758	)
Additional sales expenses		(1,237	)		(498	)		(2,194	)		(2,300	)
Gain on sale of real estate	$	3,838		$	1,046		$	8,571		$	8,665

7. Investment in Rental Property and Lease Arrangements

The Company generally leases its investment rental property to established tenants in the industrial, healthcare, restaurant, retail, and office, and other industries. At June 30, 2021, the Company had 667 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:


(in thousands)	June 30, 2021			December 31, 2020
Land	$	597,779		$	555,748
Land improvements		291,981			279,360
Buildings and improvements		3,023,490			2,857,510
Equipment		11,870			11,870
		3,925,120			3,704,488
Less accumulated depreciation		(390,236	)		(349,977	)
	$	3,534,884		$	3,354,511

Depreciation expense on investment in rental property was as follows:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Depreciation	$	24,144	$	23,560	$	47,887	$	47,075

Estimated lease payments to be received under non-cancelable operating leases with tenants at June 30, 2021 are as follows:


(in thousands)
Remainder of 2021	$	155,434
2022		313,871
2023		317,645
2024		314,115
2025		307,083
Thereafter		2,206,838
	$	3,614,986

Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future lease payments due during the initial lease terms. Such amounts exclude any potential variable rent increases that are based on changes in the CPI or future variable rents which may be received under the leases based on a percentage of the tenant’s gross sales. Additionally, certain of our leases provide tenants with the option to terminate their leases in exchange for termination penalties, or that are contingent upon the occurrence of a future event. Future lease payments within the table above have not been adjusted for these termination rights. During the three months ended June 30, 2021, the Company executed a lease amendment that provides a tenant the option, but not the obligation, to early terminate its lease in exchange for a termination payment representing approximately 113% of the remaining minimum lease payments.

Investment in Rental Property – Direct Financing Leases

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


(in thousands)	June 30, 2021			December 31, 2020
Undiscounted estimated lease payments to be received	$	44,193		$	45,782
Estimated unguaranteed residual values		15,203			15,203
Unearned revenue		(30,320	)		(31,753	)
Reserve for credit losses		(165	)		(166	)
Net investment in direct financing leases	$	28,911		$	29,066

Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at June 30, 2021 are as follows:


(in thousands)
Remainder of 2021	$	1,591
2022		3,241
2023		3,304
2024		3,361
2025		3,475
Thereafter		29,221
	$	44,193

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

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(in thousands)	2021			2020			2021			2020
Contractual rental amounts billed for operating leases	$	75,011		$	67,342		$	148,256		$	140,170
Adjustment to recognize contractual operating lease billings on a straight-line basis		4,724			8,276			9,091			9,941
Variable rental amounts earned		114			51			205			74
Earned income from direct financing leases		728			855			1,458			1,842
Earned income from sales-type leases		15			—			29			—
Operating expenses billed to tenants		4,196			4,335			8,584			8,067
Other income from real estate transactions		28			702			33			731
Adjustment to revenue recognized for uncollectible rental amounts billed		(57	)		(1,190	)		(199	)		(2,223	)
Total Lease revenues, net	$	84,759		$	80,371		$	167,457		$	158,602

8. Intangible Assets and Liabilities

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


(in thousands)	June 30, 2021			December 31, 2020
Lease intangibles:
Acquired above-market leases	$	50,139		$	54,616
Less accumulated amortization		(16,927	)		(18,928	)
Acquired above-market leases, net		33,212			35,688
Acquired in-place leases		359,962			340,958
Less accumulated amortization		(97,040	)		(85,733	)
Acquired in-place leases, net		262,922			255,225
Total intangible lease assets, net	$	296,134		$	290,913
Acquired below-market leases	$	106,366		$	107,788
Less accumulated amortization		(31,388	)		(28,135	)
Intangible lease liabilities, net	$	74,978		$	79,653
Leasing fees	$	15,384		$	15,462
Less accumulated amortization		(5,016	)		(4,724	)
Leasing fees, net	$	10,368		$	10,738

Amortization of intangible lease assets and liabilities was as follows:


(in thousands)		For the Three Months Ended June 30,					For the Six Months Ended June 30,
Intangible	Financial Statement Presentation	2021		2020			2021		2020
Acquired in-place leases and leasing fees	Depreciation and amortization	$	7,058	$	16,339		$	14,005	$	24,034
Above-market and below-market leases	Lease revenues, net		665		(1,016	)		1,418		124

Amortization expense for the three and six months ended June 30, 2020, includes $11,481 and $12,058, respectively, of accelerated amortization resulting from early lease terminations, compared to none for the three and six months ended June 30, 2021.

Estimated future amortization of intangible assets and liabilities at June 30, 2021 is as follows:


(in thousands)
Remainder of 2021	$	13,031
2022		24,090
2023		23,778
2024		23,019
2025		21,723
Thereafter		125,883
	$	231,524

9. Unsecured Credit Agreements

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


	Outstanding Balance
(in thousands, except interest rates)	June 30, 2021			December 31, 2020			Interest Rate(c) (d)	Maturity Date
Unsecured revolving credit facility(a)	$	—		$	—		(e) (f)	Sep. 2023
2022 Unsecured Term Loan(a)		60,000			60,000		one-month LIBOR + 1.00% (g)	Feb. 2022
2023 Unsecured Term Loan(a)		265,000			265,000		one-month LIBOR + 1.10% (h)	Jan. 2023
2024 Unsecured Term Loan(a)		190,000			190,000		one-month LIBOR + 1.00% (g)	Jun. 2024
2026 Unsecured Term Loan(a)		400,000			450,000		one-month LIBOR + 1.00% (i)	Feb. 2026
Senior Notes(a)
Series A		150,000			150,000		4.84%	Apr. 2027
Series B		225,000			225,000		5.09%	Jul. 2028
Series C		100,000			100,000		5.19%	Jul. 2030
		475,000			475,000
Total unsecured debt		1,390,000			1,440,000
Debt issuance costs, net(b)		(6,369	)		(6,204	)
Total unsecured debt, net	$	1,383,631		$	1,433,796

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

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

(c) At June 30, 2021 and December 31, 2020, one-month LIBOR was 0.10% and 0.14%, respectively. At June 30, 2021 daily LIBOR was 0.09%.

(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 June 30, 2021, borrowings on the revolving credit facility were subject to interest at one-month LIBOR plus 1.00% or daily LIBOR rates plus 1.00%.

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

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

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

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

At June 30, 2021, the weighted average interest rate on all outstanding borrowings was 2.46%, 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 six months ended June 30, 2021, the Company paid $951 in debt issuance costs associated with the amended 2026 Unsecured Term Loan. The Company did not incur debt issuance costs during the three months ended June 30, 2021. 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 during the six months ended June 30, 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 during the six months ended June 30, 2021, and included in Cost of debt extinguishment in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss).

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Debt issuance costs amortization	$	956	$	821	$	1,870	$	1,709

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 June 30, 2021, the Company believes it was in compliance with all of its loan covenants. Failure to comply with the covenants would result in a default which, if the Company were unable to cure or obtain a waiver from the lenders, could accelerate the repayment of the obligations. Further, in the event of default, the Company may be restricted from paying dividends to its stockholders in excess of dividends required to maintain its REIT qualification. Accordingly, an event of default could have a material and adverse impact on the Company.

10. Mortgages

The Company’s mortgages consist of the following:


	Origination	Maturity
(in thousands, except interest rates)	Date	Date	Interest	June 30,			December 31,
Lender	(Month/Year)	(Month/Year)	Rate	2021			2020
Wilmington Trust National Association	Apr-19	Feb-28	4.92%	$	47,357		$	47,945		(a) (b) (c) (j)
Wilmington Trust National Association	Jun-18	Aug-25	4.36%		19,753			19,947		(a) (b) (c) (i)
PNC Bank	Oct-16	Nov-26	3.62%		17,297			17,498		(b) (c)
Sun Life	Mar-12	Oct-21	5.13%		10,252			10,469		(b) (e) (k)
Aegon	Apr-12	Oct-23	6.38%		6,650			7,039		(b) (f)
M&T Bank	Oct-17	Aug-21	one - month LIBOR+3%		4,695			4,769		(b) (d) (g) (h) (l)
Total mortgages					106,004			107,667
Debt issuance costs, net					(256	)		(285	)
Mortgages, net				$	105,748		$	107,382

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

(b) Debt secured by related rental property and lease rents.

(d) Debt secured by guaranty of the Corporation.

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

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

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

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

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

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

(k) Mortgage was refinanced on July 30, 2021, see Note 19.

(l) Mortgage was paid in full on August 1, 2021, see Note 19.

At June 30, 2021, investment in rental property of $171,349 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 June 30, 2021 are as follows:


(in thousands)
Remainder of 2021	$	16,343
2022		62,907
2023		272,582
2024		192,260
2025		20,195
Thereafter		931,717
	$	1,496,004

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

11. Interest Rate Swaps

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

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


(in thousands, except interest rates)								Fair Value
Counterparty	Maturity Date	Fixed Rate			Variable Rate Index	Notional Amount		June 30, 2021			December 31, 2020
Bank of America, N.A.	November 2023		2.80	%	one-month LIBOR	$	25,000	$	(1,435	)	$	(1,848	)
Bank of Montreal	July 2024		1.16	%	one-month LIBOR		40,000		(807	)		(1,380	)
Bank of Montreal	January 2025		1.91	%	one-month LIBOR		25,000		(1,149	)		(1,725	)
Bank of Montreal	July 2025		2.32	%	one-month LIBOR		25,000		(1,616	)		(2,351	)
Bank of Montreal	January 2026		1.92	%	one-month LIBOR		25,000		(1,282	)		(2,039	)
Bank of Montreal	January 2026		2.05	%	one-month LIBOR		40,000		(2,276	)		(3,523	)
Bank of Montreal	December 2026		2.33	%	one-month LIBOR		10,000		(762	)		(1,156	)
Bank of Montreal	December 2026		1.99	%	one-month LIBOR		25,000		(1,454	)		(2,372	)
Bank of Montreal	December 2027		2.37	%	one-month LIBOR		25,000		(2,102	)		(3,234	)
Bank of Montreal	May 2029		2.09	%	one-month LIBOR		25,000		(1,766	)		(2,994	)
Capital One, National Association	December 2021		1.05	%	one-month LIBOR		15,000		(71	)		(141	)
Capital One, National Association	December 2024		1.58	%	one-month LIBOR		15,000		(514	)		(799	)
Capital One, National Association	January 2026		2.08	%	one-month LIBOR		35,000		(2,031	)		(3,078	)
Capital One, National Association	April 2026		2.68	%	one-month LIBOR		15,000		(1,310	)		(1,843	)
Capital One, National Association	July 2026		1.32	%	one-month LIBOR		35,000		(825	)		(1,806	)
Capital One, National Association	December 2027		2.37	%	one-month LIBOR		25,000		(2,107	)		(3,199	)
M&T Bank	August 2021		1.02	%	one-month LIBOR		4,694		(4	)		(25	)	(a), (b)
M&T Bank	September 2022		2.83	%	one-month LIBOR		25,000		(791	)		(1,139	)
M&T Bank	November 2023		2.65	%	one-month LIBOR		25,000		(1,349	)		(1,785	)
Regions Bank	December 2023		1.18	%	one-month LIBOR		25,000		(506	)		(763	)
Regions Bank	May 2029		2.11	%	one-month LIBOR		25,000		(1,809	)		(3,004	)
Regions Bank	June 2029		2.03	%	one-month LIBOR		25,000		(1,664	)		(2,843	)
Truist Financial Corporation	April 2024		1.99	%	one-month LIBOR		25,000		(1,074	)		(1,487	)
Truist Financial Corporation	April 2025		2.20	%	one-month LIBOR		25,000		(1,451	)		(2,084	)
Truist Financial Corporation	July 2025		1.99	%	one-month LIBOR		25,000		(1,292	)		(1,941	)
Truist Financial Corporation	December 2025		2.30	%	one-month LIBOR		25,000		(1,695	)		(2,481	)
Truist Financial Corporation	January 2026		1.93	%	one-month LIBOR		25,000		(1,290	)		(2,019	)
U.S. Bank National Association	June 2029		2.03	%	one-month LIBOR		25,000		(1,662	)		(2,902	)
U.S. Bank National Association	August 2029		1.35	%	one-month LIBOR		25,000		(357	)		(1,445	)
Wells Fargo Bank, N.A.	February 2021		2.39	%	one-month LIBOR		35,000		—			(70	)
Wells Fargo Bank, N.A.	October 2024		2.72	%	one-month LIBOR		15,000		(1,055	)		(1,422	)
Wells Fargo Bank, N.A.	April 2027		2.72	%	one-month LIBOR		25,000		(2,491	)		(3,555	)
Wells Fargo Bank, N.A.	January 2028		2.37	%	one-month LIBOR		75,000		(6,338	)		(9,650	)
								$	(46,335	)	$	(72,103	)

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

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

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 Loss

Accumulated Other

Presented in the Condensed

Recognized in

Comprehensive Loss

Consolidated Statements of

(in thousands)

Accumulated Other

Amount of

Income and Comprehensive

For the Three Months Ended June 30,

Comprehensive Loss

Location

Loss

Income (Loss)

2021

(2,911

)

Interest expense

4,039

15,430

2020

(6,056

)

Interest expense

3,416

19,513

Amount of Gain

Reclassification from

Total Interest Expense

(Loss)

Accumulated Other

Presented in the Condensed

Recognized in

Comprehensive Loss

Consolidated Statements of

(in thousands)

Accumulated Other

Amount of

Income and Comprehensive

For the Six Months Ended June 30,

Comprehensive Loss

Location

Loss

Income (Loss)

2021

25,769

Interest expense

8,055

31,538

2020

(64,118

)

Interest expense

4,301

40,504

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 $15,821. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes the risk exposure by limiting counterparties to major banks who meet established credit and capital guidelines.

12. Non-Controlling Interests

The following table summarizes OP Units exchanged for shares of common stock:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
OP Units exchanged for shares of common stock		1,127		—		1,165		—
Value of units exchanged	$	17,859	$	—	$	18,465	$	—

On June 16, 2021, the Company achieved the VWAP milestone applicable to tranche 1 of the earnout (see Note 4). As a result, the OP issued 248 non-controlling OP Units on June 22, 2021.

13. Credit Risk Concentrations

The Company maintained bank balances that, at times, exceeded the federally insured limit during the six months ended June 30, 2021. The Company has not experienced losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts.

The Company has mortgages with three institutions that comprised 63%, 16%, and 10% of total mortgages at June 30, 2021 and December 31, 2020. For the three and six months ended June 30, 2021 and 2020, the Company had no individual tenants or common franchises that accounted for more than 10% of total revenues.

14. Equity

General

On June 28, 2021, the Corporation completed its first public follow-on equity offering and issued 11,500 shares of Common Stock, including shares issued pursuant to the underwriters' full exercise of their over-allotment option, at $23.00 per share. The net proceeds, after deducting underwriting discounts and commissions of $10,580 and $433 of other expenses, were $253,487. The Company used the net proceeds to repay the remaining $160,600 principal due under the Company's revolving credit facility. The remaining net proceeds will be used for general business purposes, including acquisitions. As of June 30, 2021, the Company had $404 of accrued offering costs related to the public follow-on equity offering.

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.”

On June 16, 2021, the Company achieved the VWAP milestone applicable to tranche 1 of the earnout (see Note 4). As a result, the Company issued 145 shares of common stock on June 22, 2021.

15. Stock-Based Compensation

Restricted Stock Awards

On March 1, 2021, the Company awarded 199 shares of RSAs to certain officers and employees under the Equity Incentive Plan. The holder of RSAs is generally entitled at all times on and after the date of issuance of the restricted common shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The RSAs vest over a one, three or four year period from the date of grant and are subject to the employee’s continued service through the applicable vesting dates and in accordance with the terms of the individual award agreements. The grant date fair value per share of $18.66 was based on the market price of the Company’s common stock on the grant date.

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


	For the Three Months Ended		For the Six Months Ended
(in thousands)	June 30, 2021		June 30, 2021
Compensation cost	$	728	$	2,423
Dividends declared on unvested RSAs		97		201
Grant date fair value of shares vested during the period		774		3,296

There were no RSAs at June 30, 2020.


(in thousands, except recognition period)	June 30, 2021		December 31, 2020
Unamortized value of RSAs	$	6,304	$	5,001
Weighted average amortization period (in years)		2.8		2.8

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


	For the Three Months Ended June 30, 2021					For the Six Months Ended June 30, 2021
(in thousands, except per share amounts)	Number of Shares			Weighted Average Grant Date Fair Value per Share		Number of Shares			Weighted Average Grant Date Fair Value per Share
Unvested at beginning of period		416		$	19.62		341		$	20.50
Granted		2			19.76		201			18.67
Vested		(40	)		19.81		(164	)		20.15
Forfeited		—			—		—			—
Unvested at end of period		378		$	19.60		378		$	19.60

There were no unvested shares at June 30, 2020.

Performance-based Restricted Stock Units

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

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


	For the Three Months Ended		For the Six Months Ended
(in thousands, except recognition period)	June 30, 2021		June 30, 2021
Compensation cost	$	223	$	297

			June 30, 2021
Unamortized value of PRSUs			$	2,377
Weighted average amortization period (in years)				2.7

There were no PRSUs at June 30, 2020.

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


	For the Three Months Ended June 30, 2021				For the Six Months Ended June 30, 2021
(in thousands, except per share amounts)	Number of Shares		Weighted Average Grant Date Fair Value per Share		Number of Shares		Weighted Average Grant Date Fair Value per Share
Unvested at beginning of period		110	$	24.40		—	$	—
Granted		—		—		132		24.40
Vested		—		—		—		—
Forfeited		—		—		22		24.40
Unvested at end of period		110	$	24.40		110	$	24.40

16. Earnings per Share

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


	For the Three Months Ended June 30,					For the Six Months Ended June 30,
(in thousands, except per share amounts)	2021			2020		2021			2020
Basic earnings:
Net earnings attributable to Broadstone Net Lease, Inc. common shareholders	$	21,214		$	15,353	$	43,437		$	26,169
Less earnings allocated to unvested restricted shares		(97	)		—		(201	)		—
Net earnings used to compute basic earnings per common share	$	21,117		$	15,353	$	43,236		$	26,169


Diluted earnings:
Net earnings used to compute basic earnings per share	$	21,117		$	15,353	$	43,236		$	26,169
Net earnings attributable to non-controlling interests		1,606			1,745		3,343			2,777
Net earnings used to compute diluted earnings per common share	$	22,723		$	17,098	$	46,579		$	28,946

Weighted average number of common shares outstanding		146,506			107,422		146,089			106,765
Less weighted average unvested restricted shares (a)		(387	)		—		(361	)		—
Weighted average number of common shares outstanding used in basic earnings per common share		146,119			107,422		145,728			106,765
Effects of restricted stock units (b)		219			—		147			—
Effects of convertible membership units (c)		11,092			12,226		11,240			11,164
Weighted average number of common shares outstanding used in diluted earnings per common share		157,430			119,648		157,115			117,929

Basic earnings per share	$	0.14		$	0.14	$	0.30		$	0.25
Diluted earnings per share	$	0.14		$	0.14	$	0.30		$	0.25

(a) Represents the weighted average effects of 378 unvested restricted shares of common stock as of June 30, 2021, which will be excluded from the computation of

earnings per share until they vest. The shares of restricted common stock were not included in the calculation of diluted earnings per share, as the effect of doing

so would have been anti-dilutive.

(b) Represents the weighted average effects of shares of common stock to be issued as though the end of the period were the end of the performance period (see Note

15).

(c) Represents the weighted average effects of 10,482 and 12,226 OP Units outstanding at June 30, 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.

17. Supplemental Cash Flow Disclosures

Cash paid for interest was $29,961 and $38,400 for the six months ended June 30, 2021 and 2020, respectively. Cash paid for income taxes was $734 and $945 for the six months ended June 30, 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 six months ended June 30, 2020, the Corporation issued 275 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.



During the six months ended June 30, 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 six months ended June 30, 2020, the Company adjusted the carrying value of mezzanine equity non-controlling interests by $2,513, with an offset to Additional paid-in capital, in accordance with the Company’s accounting policy.



During the six months ended June 30, 2021, the Company converted 1,165 OP Units valued at $18,466 to 1,165 shares of common stock.



At June 30, 2021, dividend amounts declared and accrued but not yet paid amounted to $43,184.



During the six months ended June 30, 2020, the Company executed lease modifications that resulted in the lease classification changing from direct financing lease to operating lease for four properties. At the modification date, the net investment in the original lease, and therefore the carrying value of the assets recognized, amounted to $9,055.

18. Commitments and Contingencies

Litigation

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

Property and Acquisition Related

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

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


(in thousands)	June 30, 2021		December 31, 2020
Tenant improvement allowances	$	313	$	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 June 30, 2021, taxable sales of the applicable properties would trigger liability under the agreements of approximately $22,300. Based on information available, the Company does not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future.

Obligations Under Operating Leases

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

The Company also leases land at certain properties under non-cancellable operating leases (“ground leases”) with initial lease terms ranging from 2034 to 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.

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


		For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in thousands)	Financial Statement Presentation	2021		2020		2021		2020
Operating lease costs
Office leases	General and administrative	$	157	$	155	$	315	$	207
Ground leases	Property and operating expense		34		34		67		67
Variable lease costs
Ground leases	Property and operating expense		14		12		28		30
Total lease costs		$	205	$	201	$	410	$	304

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Operating lease payments	$	186	$	183	$	427	$	311

Estimated future lease payments required under non-cancelable operating leases at June 30, 2021, and a reconciliation to the lease liabilities, is as follows:


(in thousands)
Remainder of 2021	$	363
2022		690
2023		505
2024		120
2025		121
Thereafter		2,290
Total undiscounted cash flows		4,089
Less imputed interest		(1,706	)
Lease liabilities	$	2,383

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

19. Subsequent Events

On July 15, 2021, the Company paid distributions totaling $43,111.

On July 29, 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 third quarter of 2021, which will be payable on or before October 15, 2021 to stockholders and unit holders of record as of September 30, 2021.

Subsequent to June 30, 2021, the Company continued to expand its operations through the acquisition of additional rental property and associated intangible assets and liabilities. The Company acquired approximately $38,700 of rental property and associated intangible assets and liabilities.

Subsequent to June 30, 2021, the Company paid one mortgage with a principal balance of $4,683 in full. Additionally, the Company refinanced one mortgage with a principal balance of $10,209 for a new principal balance of $7,500. Interest on the mortgage is at a daily floating annual rate equal to the Prime Rate plus 1.25%, but no less than 5.0% per annum, through the maturity date of July 2024. The interest rate at origination is 5.0%.

On July 14, 2021, the Company achieved a 40-day VWAP of $23.75, thereby triggering the payout of tranche 2 of the earnout representing 217 shares of common stock, 372 OP units, and $2,889 of cash, including amounts accrued for dividends.

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

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

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

Cautionary Note Regarding Forward-Looking Statements

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

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

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

Explanatory Note and Certain Defined Terms

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



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



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



“CPI” means the Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, All Items, as published by the U.S. Bureau of Labor Statistics, or other similar index which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services;



“occupancy” or a specified percentage of our portfolio that is “occupied” means as of a specified date the quotient of (1) the total rentable square footage of our properties minus the square footage of our properties that are vacant and from which we are not receiving any rental payment, and (2) the total square footage of our properties; and



“Revolving Credit Facility” means our $900 million unsecured revolving credit facility, dated September 21, 2020, with J.P. Morgan Chase Bank, N.A. and the other lenders party thereto.

Overview

We acquire, own, and manage primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, retail, and office property types. As of June 30, 2021, our portfolio has grown to 684 properties, with 683 properties located in 42 U.S. states and one property located in British Columbia, Canada.

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

Diversified Portfolio. As of June 30, 2021, our portfolio comprised approximately 30.2 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):



Property Type: We are focused primarily on industrial, healthcare, restaurant, retail, and office property types based on our extensive experience in and conviction around these sectors. Within these sectors, we have meaningful concentrations in distribution and warehouse, manufacturing, clinical, quick service restaurant, casual dining, food processing, flex/research and development, general merchandise, strategic operations, and automotive.



Geographic Diversity: Our properties are located in 42 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 192 different commercial tenants who operate 179 different brands that are diversified across 55 differing industries, with no single tenant accounting for more than 2.3% of our ABR.

Strong In-Place Leases with Significant Remaining Lease Term. As of June 30, 2021, our portfolio was approximately 99.7% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 10.4 years, excluding renewal options.

Standard Contractual Base Rent Escalation. Approximately 97.9% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.0%.

Extensive Tenant Financial Reporting. Approximately 85.5% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 9.0% 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.

Real Estate Portfolio Information

The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as of June 30, 2021. The percentages below are calculated based on our ABR of $313.2 million as of June 30, 2021.

Diversification by Property Type


Property Type	# Properties		ABR ($'000s)		ABR as a % of Total Portfolio			Square Feet ('000s)		SF as a % of Total Portfolio
Industrial
Distribution & Warehouse		42	$	46,668		14.9	%		8,950		29.6	%
Manufacturing		56		42,724		13.6	%		7,732		25.6	%
Food Processing		14		18,455		5.9	%		2,132		7.1	%
Flex and R&D		7		16,934		5.4	%		1,457		4.8	%
Cold Storage		4		12,600		4.0	%		933		3.1	%
Services		19		7,787		2.5	%		445		1.5	%
Industrial Total		142		145,168		46.3	%		21,649		71.7	%
Healthcare
Clinical		50		24,831		7.9	%		1,055		3.6	%
Animal Health Services		27		10,188		3.3	%		405		1.3	%
Surgical		11		9,592		3.1	%		316		1.0	%
Healthcare Services		27		7,829		2.5	%		315		1.0	%
Life Science		9		7,539		2.4	%		549		1.8	%
Untenanted		2		-		0.0	%		23		0.1	%
Healthcare Total		126		59,979		19.2	%		2,663		8.8	%
Restaurant
Quick Service Restaurants		148		24,468		7.8	%		505		1.7	%
Casual Dining		84		19,657		6.3	%		543		1.8	%
Untenanted		2		—		0.0	%		10		0.0	%
Restaurant Total		234		44,125		14.1	%		1,058		3.5	%
Retail
General Merchandise		82		14,472		4.6	%		1,072		3.5	%
Automotive		68		12,830		4.1	%		844		2.8	%
Home Furnishings		13		6,916		2.2	%		797		2.6	%
Untenanted		2		—		0.0	%		63		0.2	%
Retail Total		165		34,218		10.9	%		2,776		9.1	%
Office
Strategic Operations		7		13,835		4.4	%		1,021		3.4	%
Corporate Headquarters		6		10,167		3.3	%		671		2.2	%
Call Center		4		5,731		1.8	%		392		1.3	%
Office Total		17		29,733		9.5	%		2,084		6.9	%
Total		684	$	313,223		100.0	%		30,230		100.0	%

Diversification by Tenant


Tenant	Property Type	# Properties		ABR ($'000s)		ABR as a % of Total Portfolio			Square Feet ('000s)		SF as a % of Total Portfolio
Red Lobster Hospitality & Red Lobster Restaurants LLC*	Casual Dining		24	$	7,307		2.3	%		196		0.6	%
Jack's Family Restaurants LP*	Quick Service Restaurants		43		7,026		2.2	%		147		0.5	%
Joseph T. Ryerson & Son, Inc	Distribution & Warehouse		11		6,395		2.0	%		1,537		5.1	%
Axcelis Technologies, Inc.	Flex and R&D		1		5,859		1.9	%		417		1.4	%
Hensley & Company*	Distribution & Warehouse		3		5,756		1.8	%		577		1.9	%
BluePearl Holdings, LLC*	Animal Health Services		13		5,308		1.7	%		160		0.5	%
Outback Steakhouse of Florida LLC*1	Casual Dining		22		5,192		1.7	%		140		0.5	%
Krispy Kreme Doughnut Corporation	Quick Service Restaurants/ Food Processing		27		5,034		1.6	%		156		0.5	%
Siemens Medical Solutions USA, Inc. & Siemens Corporation	Manufacturing/Flex and R&D		2		4,862		1.6	%		545		1.8	%
Big Tex Trailer Manufacturing, Inc.*	Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters		17		4,860		1.6	%		1,302		4.3	%
Total Top 10 Tenants			163		57,599		18.4	%		5,177		17.1	%

Nestle' Dreyer's Ice Cream Company	Cold Storage		1		4,409		1.4	%		310		1.0	%
Arkansas Surgical Hospital	Surgical		1		4,260		1.4	%		129		0.4	%
Nationwide Mutual Insurance Company*	Strategic Operations		2		4,248		1.4	%		407		1.3	%
Cascade Aerospace Inc.	Manufacturing		1		4,187		1.4	%		231		0.8	%
American Signature, Inc.	Home Furnishings		6		4,141		1.3	%		474		1.6	%
Tractor Supply Company	General Merchandise		15		3,872		1.2	%		300		1.0	%
Fresh Express Incorporated	Food Processing		1		3,869		1.2	%		335		1.1	%
Aventiv Technologies, LLC	Corporate Headquarters		1		3,819		1.2	%		154		0.5	%
Dollar General Corporation	General Merchandise		35		3,510		1.1	%		320		1.1	%
Centene Management Company, LLC	Strategic Operations		1		3,377		1.1	%		220		0.8	%
Total Top 20 Tenants			227	$	97,291		31.1	%		8,057		26.7	%

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

* Subject to a master lease.

Diversification by Brand


Brand	Property Type	# Properties		ABR ($'000s)		ABR as a % of Total Portfolio			Square Feet ('000s)		SF as a % of Total Portfolio
Red Lobster*	Casual Dining		24	$	7,307		2.3	%		196		0.6	%
Jack's Family Restaurants*	Quick Service Restaurants		43		7,026		2.2	%		147		0.5	%
Ryerson	Distribution & Warehouse		11		6,395		2.0	%		1,537		5.1	%
Axcelis	Flex and R&D		1		5,859		1.9	%		417		1.4	%
Hensley*	Distribution & Warehouse		3		5,756		1.8	%		577		1.9	%
BluePearl Veterinary Partners*	Animal Health Services		13		5,308		1.7	%		160		0.5	%
Bob Evans Farms*1	Casual Dining/Food Processing		21		5,246		1.7	%		282		1.0	%
Krispy Kreme	Quick Service Restaurants/ Food Processing		27		5,034		1.6	%		156		0.5	%
Siemens	Manufacturing/Flex and R&D		2		4,862		1.6	%		545		1.8	%
Big Tex Trailers*	Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters		17		4,860		1.6	%		1,302		4.3	%
Total Top 10 Brands			162		57,653		18.4	%		5,319		17.6	%

Wendy's**	Quick Service Restaurants		31		4,532		1.5	%		88		0.3	%
Outback Steakhouse*	Casual Dining		20		4,492		1.4	%		126		0.4	%
Nestle'	Cold Storage		1		4,409		1.4	%		310		1.0	%
Arkansas Surgical Hospital	Surgical		1		4,260		1.4	%		129		0.4	%
Nationwide Mutual Insurance Co.*	Strategic Operations		2		4,248		1.4	%		407		1.3	%
Cascade Aerospace	Manufacturing		1		4,187		1.4	%		231		0.8	%
Value City Furniture	Home Furnishings		6		4,142		1.3	%		474		1.6	%
Taco Bell**	Quick Service Restaurants		31		4,101		1.3	%		80		0.3	%
Tractor Supply Co.	General Merchandise		15		3,872		1.2	%		300		1.0	%
Chiquita	Food Processing		1		3,869		1.2	%		335		1.1	%
Total Top 20 Brands			271	$	99,765		31.9	%		7,799		25.8	%

1 Brand includes one BEF Foods, Inc property and 20 Bob Evans Restaurants, LLC properties.

* Subject to a master lease.

** Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.

Diversification by Industry


Industry	# Properties		ABR ($'000s)		ABR as a % of Total Portfolio			Square Feet ('000s)		ABR as a % of Total Portfolio
Healthcare Facilities		99	$	47,073		15.0	%		1,874		6.2	%
Restaurants		234		44,788		14.3	%		1,082		3.6	%
Distributors		24		13,889		4.4	%		2,519		8.3	%
Food Distributors		7		12,957		4.1	%		1,556		5.1	%
Auto Parts & Equipment		39		12,396		4.0	%		2,387		7.9	%
Specialized Consumer Services		47		12,004		3.8	%		720		2.4	%
Packaged Foods & Meats		6		11,390		3.6	%		1,130		3.7	%
Metal & Glass Containers		8		9,686		3.1	%		2,206		7.3	%
Healthcare Services		18		9,018		2.9	%		515		1.7	%
Home Furnishing Retail		16		8,696		2.8	%		1,149		3.8	%
Specialty Stores		19		8,279		2.7	%		1,023		3.4	%
Aerospace & Defense		6		7,825		2.5	%		921		3.0	%
Electronic Components		2		6,658		2.1	%		466		1.6	%
Air Freight & Logistics		3		6,516		2.1	%		436		1.5	%
General Merchandise Stores		60		6,090		2.0	%		533		1.8	%
Other (40 industries)		90		95,958		30.6	%		11,617		38.4	%
Untenanted properties		6		—		—			96		0.3	%
Total		684	$	313,223		100.0	%		30,230		100.0	%

Diversification by Geography


State	# Properties		ABR ($'000s)		ABR as a % of Total Portfolio			Square Feet ('000s)		SF as a % of Total Portfolio			State	# Properties		ABR ($'000s)		ABR as a % of Total Portfolio			Square Feet ('000s)		SF as a % of Total Portfolio
TX		59	$	32,074		10.2	%		3,366		11.1	%	MO		10	$	4,781		1.5	%		959		3.2	%
IL		26		19,922		6.4	%		1,991		6.6	%	WA		15		4,185		1.3	%		150		0.5	%
FL		47		16,345		5.2	%		859		2.8	%	KY		18		4,110		1.3	%		338		1.1	%
CA		11		15,735		5.0	%		1,554		5.1	%	LA		3		3,128		1.0	%		175		0.6	%
WI		32		15,655		5.0	%		1,611		5.3	%	NE		6		2,967		0.9	%		509		1.7	%
MI		35		14,762		4.7	%		1,439		4.8	%	MD		4		2,903		0.9	%		293		1.0	%
OH		34		14,149		4.5	%		1,364		4.5	%	NM		8		2,764		0.9	%		96		0.3	%
NC		35		12,810		4.1	%		1,308		4.3	%	MS		8		2,736		0.9	%		334		1.1	%
MN		21		12,761		4.1	%		2,029		6.7	%	IA		4		2,704		0.9	%		622		2.1	%
IN		29		12,690		4.0	%		1,759		5.8	%	SC		13		2,466		0.8	%		308		1.0	%
PA		16		10,923		3.5	%		1,416		4.7	%	WV		16		2,456		0.8	%		109		0.4	%
TN		43		10,694		3.4	%		516		1.7	%	UT		3		2,328		0.7	%		280		0.9	%
NY		26		10,532		3.4	%		680		2.3	%	CT		2		1,690		0.5	%		55		0.2	%
MA		5		10,286		3.3	%		1,026		3.4	%	MT		7		1,544		0.5	%		43		0.1	%
AZ		8		8,553		2.7	%		761		2.5	%	CO		3		1,434		0.5	%		94		0.3	%
AL		44		7,981		2.5	%		186		0.6	%	NV		2		1,311		0.4	%		81		0.3	%
AR		11		7,385		2.4	%		282		0.9	%	DE		4		1,124		0.4	%		133		0.4	%
GA		21		7,334		2.3	%		1,056		3.5	%	ND		2		933		0.3	%		28		0.1	%
OK		20		7,080		2.3	%		944		3.1	%	WY		1		307		0.1	%		21		0.1	%
VA		17		5,364		1.7	%		204		0.7	%	VT		1		305		0.1	%		15		0.1	%
KS		10		4,925		1.6	%		639		2.1	%	Total US		683	$	309,036		98.6	%		29,999		99.2	%
NJ		3		4,900		1.6	%		366		1.2	%	Total Canada		1		4,187		1.4	%		231		0.8	%
													Grand Total		684	$	313,223		100.0	%		30,230		100.0	%

Lease Expirations

As of June 30, 2021, the ABR weighted average remaining term of our leases was approximately 10.4 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Approximately 45.8% of our rental revenue was derived from leases that will expire after 2030, and no more than 8.7% 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 June 30, 2021.


Expiration Year	2021		2022		2023		2024		2025		2026		2027		2028		2029		2030		2031		2032		2033		2034		2035		2036		2037		2038		2039		2040+
Number of properties		2		3		6		11		19		34		27		36		66		96		23		44		42		32		16		82		24		33		12		70
Number of leases		2		4		7		11		22		31		27		30		34		52		18		29		16		21		12		19		9		29		7		11

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


Expiration Year	# Properties		ABR ($'000s)		ABR as a % of Total Portfolio			Square Feet ('000s)		SF as a % of Total Portfolio
2021		2	$	294		0.1	%		37		0.1	%
2022		3		2,410		0.8	%		85		0.3	%
2023		6		4,848		1.5	%		515		1.7	%
2024		11		13,811		4.4	%		1,689		5.6	%
2025		19		7,872		2.5	%		682		2.3	%
2026		34		18,626		5.9	%		1,404		4.6	%
2027		27		23,148		7.4	%		2,010		6.7	%
2028		36		27,307		8.7	%		2,746		9.1	%
2029		66		20,638		6.6	%		2,647		8.8	%
2030		96		51,029		16.3	%		5,030		16.6	%
2031		23		7,527		2.4	%		737		2.4	%
2032		44		25,963		8.3	%		3,014		10.0	%
2033		42		16,858		5.4	%		1,717		5.7	%
2034		32		5,817		1.9	%		376		1.2	%
2035		16		11,461		3.7	%		1,552		5.1	%
2036		82		23,320		7.4	%		2,506		8.3	%
2037		24		17,256		5.5	%		1,367		4.5	%
2038		33		6,805		2.2	%		306		1.0	%
2039		12		9,066		2.9	%		933		3.1	%
2040		33		5,906		1.9	%		317		1.1	%
Thereafter		37		13,261		4.2	%		464		1.5	%
Untenanted properties		6		—		—			96		0.3	%
Total		684	$	313,223		100.0	%		30,230		100.0	%

Results of Operations

The following discussion includes the results of our operations for the periods presented.

Three Months Ended June 30, 2021 Compared to Three Months Ended March 31, 2021

Lease Revenues, net


	For the Three Months Ended
	June 30,			March 31,			Increase/(Decrease)
(in thousands)	2021			2021			$			%
Contractual rental amounts billed for operating leases	$	75,011		$	73,245		$	1,766		2.4	%
Adjustment to recognize contractual operating lease billings on a straight-line basis		4,724			4,367			357		8.2	%
Variable rental amounts earned		114			91			23		25.3	%
Earned income from direct financing leases		728			730			(2	)	(0.3	)%
Earned income from sales-type leases		15			14			1		7.1	%
Operating expenses billed to tenants		4,196			4,388			(192	)	(4.4	)%
Other income from real estate transactions		28			5			23		>100.0	%
Adjustment to revenue recognized for uncollectible rental amounts billed		(57	)		(142	)		85		(59.9	)%
Total Lease revenues, net	$	84,759		$	82,698		$	2,061		2.5	%

The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through accretive property acquisitions during the first quarter of 2021. During the first quarter of 2021, we invested $87.3 million, excluding capitalized acquisition costs, in 28 properties at a weighted average initial cash cap rate of 6.4%. Most of these acquisitions closed during the month of March 2021, and therefore did not materially contribute to Lease revenues, net for the three months ended March 31, 2021.

Operating Expenses


	For the Three Months Ended
	June 30,		March 31,		Increase/(Decrease)
(in thousands)	2021		2021		$			%
Operating expenses
Depreciation and amortization	$	31,225	$	30,713	$	512			1.7	%
Property and operating expense		4,572		4,605		(33	)		(0.7	)%
General and administrative		8,655		10,633		(1,978	)		(18.6	)%
Provision for impairment of investment in rental properties		—		2,012		(2,012	)		(100.0	)%
Total operating expenses	$	44,452	$	47,963	$	(3,511	)		(7.3	)%

General and administrative

The decrease in general and administrative expenses for the three months ended June 30, 2021 was primarily due to the payment of severance associated with the departure of an executive officer during the three months ended March 31, 2021.

Provision for impairment of investment in rental properties

During the three months ended March 31, 2021, we recognized $2.0 million of impairment on our investments in rental properties. No properties were impaired during the three months ended June 30, 2021. The following table presents the impairment charges for the three months ended March 31, 2021:


(in thousands, except number of properties)
Number of properties		1
Carrying value prior to impairment charge	$	2,818
Fair value		806
Impairment charge	$	2,012

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

Other income (expenses)


	For the Three Months Ended
	June 30,			March 31,			Increase/(Decrease)
(in thousands)	2021			2021			$			%
Other income (expenses)
Interest income	$	6		$	5		$	1		20.0	%
Interest expense		(15,430	)		(16,108	)		(678	)	(4.2	)%
Cost of debt extinguishment		—			(126	)		(126	)	(100.0	)%
Gain on sale of real estate		3,838			4,733			(895	)	(18.9	)%
Income taxes		(301	)		(413	)		(112	)	(27.1	)%
Change in fair value of earnout liability		(5,604	)		1,124			(6,728	)	>(100.0	)%
Other income (expenses)		4			10			(6	)	(60.0	)%

Change in fair value of earnout liability

As part of the Internalization, we may be required to pay additional earnout consideration if certain milestones are achieved during the Earnout Periods. We record the fair value of this contingent consideration in the Condensed Consolidated Balance Sheets, and update the fair value at the end of each reporting period. To the extent the change in fair value relates to a portion of the earnout consideration that is classified as a liability, we record the change through earnings. We estimate the fair value of the earnout liability by considering weighted-average probabilities of likely outcomes, and using a Monte Carlo simulation and discounted cash flow analysis to estimate fair value. These estimates require us to make various assumptions about future share prices, and other items that are unobservable and are considered Level 3 inputs in the fair value hierarchy. The change in the fair value of the earnout liability during the three months ended June 30, 2021, reflects an increase in our share price as compared to March 31, 2021.

Net income and Net earnings per diluted share


	For the Three Months Ended
	June 30,		March 31,		Increase/(Decrease)
(in thousands, except per share data)	2021		2021		$			%
Net income	$	22,820	$	23,960	$	(1,140	)		(4.8	)%
Net earnings per diluted share		0.14		0.15		(0.01	)		(6.7	)%

The decrease in net income is primarily due to a $6.7 million change in the fair value of our earnout liability, partially offset by a $2.1 million increase in revenues, a $2.0 million decrease in general and administrative expenses and $2.0 million decrease in impairment of investment in rental properties.

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.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Lease Revenues, net


	For the Six Months Ended
	June 30,						Increase/(Decrease)
(in thousands)	2021			2020			$			%
Contractual rental amounts billed for operating leases	$	148,256		$	140,170		$	8,086		5.8	%
Adjustment to recognize contractual operating lease billings on a straight-line basis		9,091			9,941			(850	)	(8.6	)%
Variable rental amounts earned		205			74			131		>100.0	%
Earned income from direct financing leases		1,458			1,842			(384	)	(20.8	)%
Earned income from sales-type leases		29			—			29		100.0	%
Operating expenses billed to tenants		8,584			8,067			517		6.4	%
Other income from real estate transactions		33			731			(698	)	(95.5	)%
Adjustment to revenue recognized for uncollectible rental amounts billed		(199	)		(2,223	)		2,024		(91.0	)%
Total Lease revenues, net	$	167,457		$	158,602		$	8,855		5.6	%

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 and first quarter of 2021. During this period, we invested $187.6 million, excluding capitalized acquisition costs, in 47 properties at a weighted average initial cash cap rate of 6.6%. We did not acquire any properties during the first half of 2020 as a result of the COVID-19 pandemic.

Operating Expenses


	For the Six Months Ended
	June 30,				Increase/(Decrease)
(in thousands)	2021		2020		$			%
Operating expenses
Depreciation and amortization	$	61,938	$	71,140	$	(9,202	)		(12.9	)%
Asset management fees		—		2,461		(2,461	)		(100.0	)%
Property management fees		—		1,275		(1,275	)		(100.0	)%
Property and operating expense		9,177		8,305		872			10.5	%
General and administrative		19,288		11,542		7,746			67.1	%
Provision for impairment of investment in rental properties		2,012		2,667		(655	)		(24.6	)%
Total operating expenses	$	92,415	$	97,390	$	(4,975	)		(5.1	)%

Depreciation and amortization

The decrease in depreciation and amortization was due to the accelerated amortization resulting from early lease termination during the six months ended June 30, 2020 (as a result of the COVID-19 pandemic), compared to none during the six months ended June 30, 2021.

Asset management fees and Property management fees

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

General and administrative

The increase in general and administrative expenses mainly reflects the impact of the Internalization associated with our newly acquired employee base. Following the Internalization, our asset and property management fees were replaced with compensation and related expenses, along with associated general and administrative expenses in February 2020.

Other income (expenses)


	For the Six Months Ended
	June 30,						Increase/(Decrease)
(in thousands)	2021			2020			$			%
Other income (expenses)
Interest income	$	11		$	20		$	(9	)	(45.0	)%
Interest expense		(31,538	)		(40,504	)		(8,966	)	22.1	%
Cost of debt extinguishment		(126	)		(22	)		104		>100.0	%
Gain on sale of real estate		8,571			8,665			(94	)	(1.1	)%
Income taxes		(714	)		(951	)		(237	)	(24.9	)%
Internalization expenses		—			(1,594	)		(1,594	)	(100.0	)%
Change in fair value of earnout liability		(4,480	)		2,144			(6,624	)	>(100.0	)%
Other income (expenses)		14			(24	)		38		>(100.0	)%

Interest expense

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

Internalization expenses

During the six months ended June 30, 2020, we incurred $1.6 million of third-party fees and consulting expenses associated with the Internalization. We did not incur these expenses during the six months ended June 30, 2021.

Change in fair value of earnout liability

The change in the fair value of the earnout liability during the six months ended June 30, 2021, reflects a increase in our period end share price.

Net income and Net earnings per diluted share


	For the Six Months Ended
	June 30,				Increase/(Decrease)
(in thousands, except per share data)	2021		2020		$		%
Net income	$	46,780	$	28,946	$	17,834		61.6	%
Net earnings per diluted share		0.30		0.25		0.05		20.0	%

The increase in net income, is primarily due to revenue growth of $8.9 million, a $9.2 million decrease in depreciation and amortization expenses, a $9.0 million decrease in interest expense, a $3.8 million decrease in asset and property management fees, and a $1.6 million decrease in Internalization expenses. These factors were partially offset by a $7.7 million increase in general and administrative expenses and $6.6 million change in the fair value of our earnout liability.

Liquidity and Capital Resources

General

We acquire real estate using a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on maximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our leverage profile and overall liquidity position. We believe our leverage strategy has allowed us to take advantage of the lower cost of

debt while simultaneously strengthening our balance sheet, as evidenced by our investment grade credit ratings of BBB from S&P and Baa3 from Moody’s Investors Service (“Moody’s”). We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with lenders and with rating agencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As of June 30, 2021, we had total debt outstanding of $1.5 billion, Net Debt of $1.4 billion, and a Net Debt to Annualized Adjusted EBITDAre ratio of approximately 4.76x.

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 $45.7 million of expected obligations due to be paid throughout the remainder of 2021, primarily consisting of $16.3 million of mortgage maturities, and $28.7 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 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. We currently have full capacity available under our $900 million Revolving Credit Facility.

We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our capital structure.

Equity Capital Resources

On September 21, 2020, we completed our IPO and issued 37 million shares of stock for net proceeds of $588.3 million, including shares issued subsequently pursuant to the underwriters’ partial exercise of their over-allotment option. 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.

On June 28, 2021, we completed our first public follow-on equity offering and issued 11.5 million shares of stock for net proceeds of $253.5 million, including shares issued pursuant to the underwriters' full exercise of their over-allotment option. We used the net proceeds to repay the remaining $160.6 million principal due under the revolving credit facility. The remaining net proceeds will be used for general business purposes, including acquisitions.

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.

Unsecured Indebtedness and Capital Markets Activities as of and for the Six Months Ended June 30, 2021

The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and Senior Notes at June 30, 2021.


(in thousands, except interest rates)	Outstanding Balance		Interest Rate	Maturity Date
Revolving Credit Facility	$	—	one-month LIBOR + 1.00% or daily LIBOR + 1.00%	Sept. 2023
2022 Unsecured Term Loan		60,000	one-month LIBOR + 1.00%	Feb. 2022
2023 Unsecured Term Loan		265,000	one-month LIBOR + 1.10%	Jan. 2023
2024 Unsecured Term Loan		190,000	one-month LIBOR + 1.00%	Jun. 2024
2026 Unsecured Term Loan		400,000	one-month LIBOR + 1.00%	Feb. 2026
Senior Notes
Series A		150,000	4.84%	Apr. 2027
Series B		225,000	5.09%	Jul. 2028
Series C		100,000	5.19%	Jul. 2030
		475,000
Total unsecured debt		1,390,000

As announced on January 21, 2021, S&P assigned the Company an initial credit rating of 'BBB' with a stable outlook. As a result of this credit rating, the margin of our existing bank loans was reduced by 25 basis points beginning in February 2021, the applicable margin on borrowings under our Revolving Credit Facility was reduced by 20 basis points, and our access to a diverse set of advantageous funding sources should expand. During the three months ended March 31, 2021, 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.

We have full capacity available under our $900 million Revolving Credit Facility as of June 30, 2021.

Debt Covenants

We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of June 30, 2021, we believe we were in compliance with all of our covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification.


Covenants		Requirement
Leverage Ratio		≤ 0.60 to 1.00
Secured Indebtedness Ratio		≤ 0.40 to 1.00
Unencumbered Coverage Ratio		≥ 1.75 to 1.00
Fixed Charge Coverage Ratio		≥ 1.50 to 1.00
Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value		≤ 0.60 to 1.00
Dividends and Other Restricted Payments		Only applicable in case of default

Derivative Instruments and Hedging Activities

We are exposed to interest rate risk arising from changes in interest rates on the floating-rate borrowings under our unsecured credit facilities and a certain mortgage. Borrowings pursuant to our unsecured credit facilities and the mortgage bear interest at floating rates based on LIBOR plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense, which will in turn, increase or decrease our net income and cash flow.

We attempt to manage our interest rate risk by entering into interest rate swaps. As of June 30, 2021, we had 32 interest rate swaps outstanding in an aggregate notional amount of $824.7 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable-rate borrowings. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes.

Cash Flows

Cash and cash equivalents and restricted cash totaled $87.0 million and $9.8 million at June 30, 2021 and June 30, 2020, respectively. The table below shows information concerning cash flows for the six months ended June 30, 2021 and 2020:


	For the Six Months Ended
(In thousands)	June 30, 2021			June 30, 2020
Net cash provided by operating activities	$	99,015		$	79,458
Net cash (used in) provided by investing activities		(242,712	)		10,738
Net cash provided by (used in) financing activities		119,977			(100,665	)
Decrease in cash and cash equivalents and restricted cash	$	(23,720	)	$	(10,469	)

The increase in net cash provided by operating activities during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization.

The increase in cash used in investing activities during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, was mainly due to increased acquisition volume in 2021 offset by decrease in cash paid in connection with the Internalization.

The change in net cash provided by (used in) by financing activities during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 mainly reflects net proceeds from our first public follow-on equity offering during the second quarter of 2021 as compared to net repayment of debt in the first half of 2020.

Contractual Obligations

The following table provides information with respect to our contractual commitments and obligations as of June 30, 2021 (in thousands). Refer to the discussion in the Liquidity and Capital Resources section above for further discussion over our short and long-term obligations.


Year of Maturity	Term Loans		Revolving Credit Facility(a)		Senior Notes		Mortgages and Notes Payable		Interest Expense(b)		Tenant Improvement Allowances(c)		Operating Leases		Total
Remainder of 2021	$	—	$	—	$	—	$	16,343	$	28,650	$	313	$	363	$	45,669
2022		60,000		—		—		2,907		55,404		—		690		119,001
2023		265,000		—		—		7,582		50,908		—		505		323,995
2024		190,000		—		—		2,260		45,939		—		120		238,319
2025		—		—		—		20,195		42,377		—		121		62,693
Thereafter		400,000		—		475,000		56,717		82,158		—		2,290		1,016,165
Total	$	915,000	$	—	$	475,000	$	106,004	$	305,436	$	313	$	4,089	$	1,805,842

(a) We may extend the Revolving Credit Facility twice, each for a six-month period, subject to certain conditions, including the payment of an extension fee equal to 0.0625% of the revolving commitments.

(b) Interest expense is projected based on the outstanding borrowings and interest rates in effect as of June 30, 2021. This amount includes the impact of interest rate swap agreements.

At June 30, 2021 and December 31, 2020, investment in rental property of $171.3 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 June 30, 2021, taxable sales of the applicable properties would trigger liability under the four agreements of approximately $22.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above.

Non-GAAP Measures

FFO and AFFO

We compute FFO in accordance with the standards established by the Board of Governors of Nareit, the worldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. To derive Adjusted Funds From Operations (“AFFO”), we modify the Nareit computation of FFO to include other adjustments to GAAP net income related to certain non-cash and non-recurring revenues and expenses, including straight-line rents, the change in fair value of our earnout liability, cost of debt extinguishments, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, realized gains or losses on foreign currency transactions, internalization expenses, stock-based compensation, severance, extraordinary items, and other specified non-cash items. We believe that excluding such items assists management and investors in distinguishing whether changes in our operations are due to growth or decline of operations at our properties or from other factors.

Our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market rental rates over time. Our leases do not include significant front-loading or back-loading of payments, or significant rent-free periods. Therefore, we find it useful to evaluate rent on a contractual basis as it allows for comparison of existing rental rates to market rental rates. In situations where we granted short-term rent deferrals as a result of the COVID-19 pandemic, and such deferrals were probable of collection and expected to be repaid within a short term, we continued to recognize the same amount of GAAP lease revenues each period. Consistent with GAAP lease revenues, the short-term deferrals associated with COVID-19 did not impact our AFFO.

We further exclude the change in fair value of our earnout liability, costs or gains recorded on the extinguishment of debt, non-cash interest expense and gains, the amortization of debt issuance costs, net mortgage premiums, and lease intangibles, realized gains and losses on foreign currency transactions, internalization expenses, stock-based compensation and severance, as these items are not indicative of ongoing operational results. We use AFFO as a measure of our performance when we formulate corporate goals.

FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers, primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is a useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.

Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate AFFO. In the future, the SEC, Nareit, or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of AFFO accordingly.

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


	For the Three Months Ended						For the Six Months Ended
(in thousands, except per share data)	June 30, 2021			March 31, 2021			June 30, 2021			June 30, 2020
Net income	$	22,820		$	23,960		$	46,780		$	28,946
Real property depreciation and amortization		31,202			30,690			61,892			71,109
Gain on sale of real estate		(3,838	)		(4,733	)		(8,571	)		(8,665	)
Provision for impairment on investment in rental properties		—			2,012			2,012			2,667
FFO	$	50,184		$	51,929		$	102,113		$	94,057
Straight-line rent adjustment		(4,979	)		(4,632	)		(9,611	)		(7,763	)
Adjustment to provision for credit losses		—			(1	)		(1	)		(127	)
Cost of debt extinguishment		—			126			126			22
Amortization of debt issuance costs		956			914			1,870			1,709
Amortization of net mortgage premiums		(37	)		(35	)		(72	)		(72	)
Gain on interest rate swaps and other non-cash interest expense		(42	)		(41	)		(83	)		(83	)
Amortization of lease intangibles		(641	)		(728	)		(1,369	)		(119	)
Internalization expenses		—			—			—			1,594
Stock-based compensation		951			1,769			2,720			—
Severance		32			1,243			1,275			26
Change in fair value of earnout liability		5,604			(1,124	)		4,480			(2,144	)
Other expenses		(4	)		(10	)		(14	)		24
AFFO	$	52,024		$	49,410		$	101,434		$	87,124

EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre

We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. EBITDA is a measure commonly used in our industry. We believe that this ratio provides investors and analysts with a measure of our performance that includes our operating results unaffected by the differences in capital structures, capital investment cycles and useful life of related assets compared to other companies in our industry. We compute EBITDAre in accordance with the definition adopted by Nareit, as EBITDA excluding gains (loss) from the sales of depreciable property and provisions for impairment on investment in real estate. We believe EBITDA and EBITDAre are useful to investors and analysts because they provide important supplemental information about our operating performance exclusive of certain non-cash and other costs. EBITDA and EBITDAre are not measures of financial performance under GAAP, and our EBITDA and EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA and EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.

We are focused on a disciplined and targeted acquisition strategy, together with active asset management that includes selective sales of properties. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, each discussed further below, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with our lenders and rating agencies regarding our credit rating. As we fund new acquisitions using our unsecured Revolving Credit Facility, our leverage profile and Net Debt will be immediately impacted by current quarter acquisitions. However, the full benefit of EBITDAre from newly acquired properties will not be received in the same quarter in which the properties are acquired. Additionally, EBITDAre for the quarter includes amounts generated by properties that have been sold during the quarter. Accordingly, the variability in EBITDAre caused by the timing of our acquisitions and dispositions can temporarily distort our leverage ratios. We adjust EBITDAre (“Adjusted EBITDAre”) for the most recently completed quarter (i) to recalculate as if all acquisitions and dispositions had occurred at the beginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either non-cash, such as cost of debt extinguishments or the change in fair value of our earnout liability, or that we believe are one time, or unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future,

and (iii) to eliminate the impact of lease termination fees and other items that are not a result of normal operations. We then annualize quarterly Adjusted EBITDAre by multiplying it by four (“Annualized Adjusted EBITDAre”). You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to be inaccurate. Our actual reported EBITDAre for future periods may be significantly different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.

The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA, EBITDAre and Adjusted EBITDAre. Information is also presented with respect to Annualized EBITDAre and Annualized Adjusted EBITDAre:


	For the Three Months Ended
(in thousands)	June 30, 2021			March 31, 2021
Net income	$	22,820		$	23,960
Depreciation and amortization		31,225			30,713
Interest expense		15,430			16,108
Income taxes		301			413
EBITDA	$	69,776		$	71,194
Provision for impairment of investment in rental properties		—			2,012
Gain on sale of real estate		(3,838	)		(4,733	)
EBITDAre	$	65,938		$	68,473
Adjustment for current quarter acquisition activity (a)		2,761			1,365
Adjustment for current quarter disposition activity (b)		(353	)		(278	)
Adjustment to exclude non-recurring and other expenses (c)		—			2,100
Adjustment to exclude change in fair value of earnout liability		5,604			(1,124	)
Adjustment exclude write-off of accrued rental income		—			442
Adjustment to exclude cost of debt extinguishments		—			126
Adjusted EBITDAre	$	73,950		$	71,104
Annualized EBITDAre	$	263,761		$	273,888
Annualized Adjusted EBITDAre	$	295,808		$	284,414

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

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

(c) Amounts include $1.2 million of severance and $0.9 million of accelerated stock-based compensation associated with the departure of executive officers during the three months ended March 31, 2021.

Net Debt, Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre

We define Net Debt as gross debt (total reported debt plus deferred financing costs) less cash and cash equivalents and restricted cash. We believe that the presentation of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre is useful to investors and analysts because these ratios provide information about gross debt less cash and cash equivalents, which could be used to repay debt, compared to our performance as measured using EBITDAre, and is used in communications with lenders and rating agencies regarding our credit rating. The following table reconciles total debt (which is the most comparable GAAP measure) to Net Debt, and presents the ratio of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre, respectively:


(in thousands)	June 30, 2021			March 31, 2021
Debt
Revolving Credit Facility	$	—		$	15,000
Unsecured term notes, net		1,383,631			1,383,283
Mortgages and notes payable, net		105,748			106,559
Debt issuance costs		6,625			6,988
Gross Debt		1,496,004			1,511,830
Cash and cash equivalents		(78,987	)		(10,205	)
Restricted cash		(8,021	)		(8,145	)
Net Debt	$	1,408,996		$	1,493,480
Net Debt to Annualized EBITDAre	5.34x			5.45x
Net Debt to Annualized Adjusted EBITDAre	4.76x			5.25x

Critical Accounting Policies

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as other disclosures in the financial statements. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, “Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We believe there have been no significant changes during the six months ended June 30, 2021, to the items that we disclosed as our critical accounting policies in our 2020 Annual Report on Form 10-K.

Impact of Recent Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Our fixed-rate debt includes our Senior Notes, mortgages, and variable-rate debt converted to a fixed rate with the use of interest rate swaps. Our fixed-rate debt and outstanding interest rate swaps had carrying values and fair values of approximately $1.4 billion and $1.5 billion, respectively, as of June 30, 2021. Changes in market interest rates impact the fair value of our fixed-rate debt and interest rate swaps, but they have no impact on interest incurred or on cash flows. For instance, if interest rates were to increase 1%, and the fixed-rate debt balance were to remain constant, we would expect the fair value of our debt to decrease, similar to how the price of a bond decreases as interest rates rise. A 1% increase in market interest rates would have resulted in a decrease in the fair value of our fixed-rate debt and interest rate swaps of approximately $73.4 million as of June 30, 2021.

Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on LIBOR plus an applicable margin, and totaled $919.7 million as of June 30, 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 $1.0 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 June 30, 2021, our financial instruments were not exposed to significant market risk due to foreign currency exchange risk.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of and for the quarter ended June 30, 2021, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are subject to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to legal proceedings that we believe would reasonably be expected to have material adverse effect on our business, financial condition or results of operations. We are not aware of any material legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject, nor are we aware of any such legal proceedings contemplated by government agencies.

Item 1A. Risk Factors.

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

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits


No.		Description

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

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

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

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

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

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

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

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

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

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

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

* Filed herewith.

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

SIGNATURES

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


		BROADSTONE NET LEASE, INC.

Date: August 4, 2021		/s/ Christopher J. Czarnecki
		Christopher J. Czarnecki
		Chief Executive Officer and President

Date: August 4, 2021		/s/ Ryan M. Albano
		Ryan M. Albano
		Executive Vice President and Chief Financial Officer