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Broadstone Net Lease, Inc. - Quarter Report: 2022 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, 2022, or

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

Commission File Number 001-39529

 

BROADSTONE NET LEASE, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

26-1516177

(State or other jurisdiction 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 173,115,020 shares of the Registrant's Common Stock, $0.00025 par value per share, outstanding as of August 2, 2022.

 

 


 

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 (Unaudited)

2

 

Condensed Consolidated Statements of Stockholders' 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

24

 

Cautionary Note Regarding Forward-Looking Statements

24

 

Regulation FD Disclosures

24

 

Explanatory Note and Certain Defined Terms

24

 

Overview

25

 

Real Estate Portfolio Information

26

 

Results of Operations

34

 

Liquidity and Capital Resources

39

 

Derivative Instruments and Hedging Activities

42

 

Cash Flows

42

 

Non-GAAP Measures

43

 

Critical Accounting Policies and Estimates

46

 

Impact of Recent Accounting Pronouncements

46

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

Item 4.

Controls and Procedures

47

Part II - OTHER INFORMATION

48

Item 1.

Legal Proceedings

48

Item 1A.

Risk Factors

48

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3.

Defaults upon Senior Securities

48

Item 4.

Mine Safety Disclosures

48

Item 5.

Other Information

48

Item 6.

Exhibits

49

 

 


 

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,
2022

 

 

December 31,
2021

 

Assets

 

 

 

 

 

 

Accounted for using the operating method:

 

 

 

 

 

 

Land

 

$

731,208

 

 

$

655,374

 

Land improvements

 

 

320,513

 

 

 

295,329

 

Buildings and improvements

 

 

3,503,478

 

 

 

3,242,618

 

Equipment

 

 

10,422

 

 

 

11,870

 

Total accounted for using the operating method

 

 

4,565,621

 

 

 

4,205,191

 

Less accumulated depreciation

 

 

(479,952

)

 

 

(430,141

)

Accounted for using the operating method, net

 

 

4,085,669

 

 

 

3,775,050

 

Accounted for using the direct financing method

 

 

28,584

 

 

 

28,782

 

Accounted for using the sales-type method

 

 

571

 

 

 

571

 

Investment in rental property, net

 

 

4,114,824

 

 

 

3,804,403

 

Cash and cash equivalents

 

 

16,813

 

 

 

21,669

 

Accrued rental income

 

 

124,297

 

 

 

116,874

 

Tenant and other receivables, net

 

 

2,069

 

 

 

1,310

 

Prepaid expenses and other assets

 

 

22,916

 

 

 

17,275

 

Interest rate swap, assets

 

 

26,562

 

 

 

 

Goodwill

 

 

339,769

 

 

 

339,769

 

Intangible lease assets, net

 

 

316,119

 

 

 

303,642

 

Debt issuance costs – unsecured revolving credit facility, net

 

 

6,956

 

 

 

4,065

 

Leasing fees, net

 

 

9,117

 

 

 

9,641

 

Total assets

 

$

4,979,442

 

 

$

4,618,648

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

320,657

 

 

$

102,000

 

Mortgages, net

 

 

95,453

 

 

 

96,846

 

Unsecured term loans, net

 

 

587,098

 

 

 

646,671

 

Senior unsecured notes, net

 

 

844,178

 

 

 

843,801

 

Interest rate swap, liabilities

 

 

 

 

 

27,171

 

Accounts payable and other liabilities

 

 

42,923

 

 

 

38,038

 

Dividends payable

 

 

49,541

 

 

 

45,914

 

Accrued interest payable

 

 

6,086

 

 

 

6,473

 

Intangible lease liabilities, net

 

 

66,864

 

 

 

70,596

 

Total liabilities

 

 

2,012,800

 

 

 

1,877,510

 

 

 

 

 

 

 

 

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, 172,023 and 162,383 shares issued
   and outstanding at June 30, 2022 and December 31, 2021, respectively

 

 

43

 

 

 

41

 

Additional paid-in capital

 

 

3,125,377

 

 

 

2,924,168

 

Cumulative distributions in excess of retained earnings

 

 

(350,127

)

 

 

(318,476

)

Accumulated other comprehensive income (loss)

 

 

23,397

 

 

 

(28,441

)

Total Broadstone Net Lease, Inc. stockholders' equity

 

 

2,798,690

 

 

 

2,577,292

 

Non-controlling interests

 

 

167,952

 

 

 

163,846

 

Total equity

 

 

2,966,642

 

 

 

2,741,138

 

Total liabilities and equity

 

$

4,979,442

 

 

$

4,618,648

 

 

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

1


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(Unaudited)

(in thousands, except per share amounts)

 

 

 

For the Three Months Ended
June 30,

 

 

For the Six Months Ended
June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenues, net

 

$

98,013

 

 

$

84,759

 

 

$

191,854

 

 

$

167,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

35,511

 

 

 

31,225

 

 

 

69,801

 

 

 

61,938

 

Property and operating expense

 

 

4,696

 

 

 

4,572

 

 

 

9,740

 

 

 

9,177

 

General and administrative

 

 

9,288

 

 

 

8,655

 

 

 

18,116

 

 

 

19,288

 

Provision for impairment of investment in rental properties

 

 

1,380

 

 

 

 

 

 

1,380

 

 

 

2,012

 

Total operating expenses

 

 

50,875

 

 

 

44,452

 

 

 

99,037

 

 

 

92,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

6

 

 

 

 

 

 

11

 

Interest expense

 

 

(17,888

)

 

 

(15,430

)

 

 

(34,784

)

 

 

(31,538

)

Cost of debt extinguishment

 

 

 

 

 

 

 

 

 

 

 

(126

)

Gain on sale of real estate

 

 

4,071

 

 

 

3,838

 

 

 

5,267

 

 

 

8,571

 

Income taxes

 

 

(401

)

 

 

(301

)

 

 

(813

)

 

 

(714

)

Change in fair value of earnout liability

 

 

 

 

 

(5,604

)

 

 

 

 

 

(4,480

)

Other income

 

 

2,632

 

 

 

4

 

 

 

1,506

 

 

 

14

 

Net income

 

 

35,552

 

 

 

22,820

 

 

 

63,993

 

 

 

46,780

 

Net income attributable to non-controlling interests

 

 

(2,036

)

 

 

(1,606

)

 

 

(3,719

)

 

 

(3,343

)

Net income attributable to Broadstone Net Lease, Inc.

 

$

33,516

 

 

$

21,214

 

 

$

60,274

 

 

$

43,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

169,555

 

 

 

146,119

 

 

 

166,698

 

 

 

145,728

 

Diluted

 

 

180,256

 

 

 

157,430

 

 

 

177,346

 

 

 

157,115

 

Net earnings per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.20

 

 

$

0.14

 

 

$

0.36

 

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

35,552

 

 

$

22,820

 

 

$

63,993

 

 

$

46,780

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swaps

 

 

18,772

 

 

 

(2,911

)

 

 

53,733

 

 

 

25,769

 

Realized loss (gain) on interest rate swaps

 

 

695

 

 

 

(42

)

 

 

1,354

 

 

 

(83

)

Comprehensive income

 

 

55,019

 

 

 

19,867

 

 

 

119,080

 

 

 

72,466

 

Comprehensive income attributable to non-controlling interests

 

 

(3,151

)

 

 

(1,399

)

 

 

(6,941

)

 

 

(5,212

)

Comprehensive income attributable to Broadstone Net Lease, Inc.

 

$

51,868

 

 

$

18,468

 

 

$

112,139

 

 

$

67,254

 

 

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

2


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

(in thousands, except per share amounts)

 

 

 

Common
Stock

 

 

Additional
Paid-in
Capital

 

 

Cumulative
Distributions
in Excess of
Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Non-
controlling
Interests

 

 

Total
Stockholders'
Equity

 

Balance, January 1, 2022

 

$

41

 

 

$

2,924,168

 

 

$

(318,476

)

 

$

(28,441

)

 

$

163,846

 

 

$

2,741,138

 

Net income

 

 

 

 

 

 

 

 

26,758

 

 

 

 

 

 

1,683

 

 

 

28,441

 

Issuance of 6,427 shares of common stock

 

 

1

 

 

 

136,825

 

 

 

 

 

 

 

 

 

 

 

 

136,826

 

Offering costs, discounts, and commissions

 

 

 

 

 

(2,218

)

 

 

 

 

 

 

 

 

 

 

 

(2,218

)

Stock-based compensation, net of one share
   of restricted stock forfeited

 

 

 

 

 

929

 

 

 

 

 

 

 

 

 

 

 

 

929

 

Retirement of 59 shares of common stock

 

 

 

 

 

(1,301

)

 

 

 

 

 

 

 

 

 

 

 

(1,301

)

Distributions declared ($0.265 per share and OP Unit)

 

 

 

 

 

 

 

 

(45,270

)

 

 

 

 

 

(2,845

)

 

 

(48,115

)

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

32,893

 

 

 

2,068

 

 

 

34,961

 

Realized loss on interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

620

 

 

 

39

 

 

 

659

 

Adjustment to non-controlling interests

 

 

 

 

 

(1,843

)

 

 

 

 

 

(45

)

 

 

1,888

 

 

 

 

Balance, March 31, 2022

 

$

42

 

 

$

3,056,560

 

 

$

(336,988

)

 

$

5,027

 

 

$

166,679

 

 

$

2,891,320

 

Net income

 

 

 

 

 

 

 

 

33,516

 

 

 

 

 

 

2,036

 

 

 

35,552

 

Issuance of 3,281 shares of common stock

 

 

1

 

 

 

69,420

 

 

 

 

 

 

 

 

 

 

 

 

69,421

 

Offering costs, discounts, and commissions

 

 

 

 

 

(992

)

 

 

 

 

 

 

 

 

 

 

 

(992

)

Stock-based compensation, net of eight shares
   of restricted stock forfeited

 

 

 

 

 

1,381

 

 

 

 

 

 

 

 

 

 

 

 

1,381

 

Distributions declared ($0.270 per share and OP Unit)

 

 

 

 

 

 

 

 

(46,655

)

 

 

 

 

 

(2,852

)

 

 

(49,507

)

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

17,697

 

 

 

1,075

 

 

 

18,772

 

Realized loss on interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

655

 

 

 

40

 

 

 

695

 

Adjustment to non-controlling interests

 

 

 

 

 

(992

)

 

 

 

 

 

18

 

 

 

974

 

 

 

 

Balance, June 30, 2022

 

$

43

 

 

$

3,125,377

 

 

$

(350,127

)

 

$

23,397

 

 

$

167,952

 

 

$

2,966,642

 

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

 

3


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders' Equity - Continued

(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 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 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.

4


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

For the Six Months Ended
June 30,

 

 

 

2022

 

 

2021

 

Operating activities

 

 

 

 

 

 

Net income

 

$

63,993

 

 

$

46,780

 

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

 

 

67,476

 

 

 

60,570

 

Provision for impairment of investment in rental properties

 

 

1,380

 

 

 

2,012

 

Amortization of debt issuance costs and original issuance discount charged to interest expense

 

 

1,704

 

 

 

1,799

 

Stock-based compensation expense

 

 

2,310

 

 

 

2,720

 

Straight-line rent, direct financing and sales-type lease adjustments

 

 

(8,513

)

 

 

(9,609

)

Cost of debt extinguishment

 

 

 

 

 

126

 

Gain on sale of real estate

 

 

(5,267

)

 

 

(8,571

)

Change in fair value of earnout liability

 

 

 

 

 

4,480

 

Other non-cash items

 

 

628

 

 

 

139

 

Changes in assets and liabilities, net of acquisition:

 

 

 

 

 

 

Tenant and other receivables

 

 

(326

)

 

 

986

 

Prepaid expenses and other assets

 

 

1,040

 

 

 

1,088

 

Accounts payable and other liabilities

 

 

(6,079

)

 

 

(3,367

)

Accrued interest payable

 

 

(387

)

 

 

(138

)

Net cash provided by operating activities

 

 

117,959

 

 

 

99,015

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Acquisition of rental property accounted for using the operating method

 

 

(377,966

)

 

 

(284,300

)

Capital expenditures and improvements

 

 

(18,289

)

 

 

(1,336

)

Proceeds from disposition of rental property, net

 

 

16,402

 

 

 

43,144

 

Change in deposits on investments in rental property

 

 

(118

)

 

 

(220

)

Net cash used in investing activities

 

 

(379,971

)

 

 

(242,712

)

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Proceeds from issuance of common stock, net of $3,229 and $10,842 offering
   costs, discounts, and commissions in 2022 and 2021, respectively

 

 

202,628

 

 

 

253,647

 

Principal payments on mortgages and unsecured term loans

 

 

(61,389

)

 

 

(51,593

)

Borrowings on unsecured revolving credit facility

 

 

380,783

 

 

 

175,600

 

Repayments on unsecured revolving credit facility

 

 

(161,000

)

 

 

(175,600

)

Cash distributions paid to stockholders

 

 

(88,361

)

 

 

(73,278

)

Cash distributions paid to non-controlling interests

 

 

(5,647

)

 

 

(5,927

)

Cash paid for earnout liability

 

 

 

 

 

(1,926

)

Debt issuance and extinguishment costs paid

 

 

(3,795

)

 

 

(946

)

Net cash provided by financing activities

 

 

263,219

 

 

 

119,977

 

Net increase (decrease) in cash and cash equivalents and restricted cash

 

 

1,207

 

 

 

(23,720

)

Cash and cash equivalents and restricted cash at beginning of period

 

 

27,769

 

 

 

110,728

 

Cash and cash equivalents and restricted cash at end of period

 

$

28,976

 

 

$

87,008

 

 

 

 

 

 

 

 

Reconciliation of cash and cash equivalents and restricted cash

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

21,669

 

 

$

100,486

 

Restricted cash at beginning of period

 

 

6,100

 

 

 

10,242

 

Cash and cash equivalents and restricted cash at beginning of period

 

$

27,769

 

 

$

110,728

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

16,813

 

 

$

78,987

 

Restricted cash at end of period

 

 

12,163

 

 

 

8,021

 

Cash and cash equivalents and restricted cash at end of period

 

$

28,976

 

 

$

87,008

 

 

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

5


 

 

Broadstone Net Lease, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

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, 2022, the Corporation owned a diversified portfolio of 764 individual commercial properties with 757 properties located in 44 U.S. states and seven properties located in four Canadian provinces.

Broadstone Net Lease, LLC (the Corporation's operating company, or the "OP"), is the entity through which the Corporation conducts its business and owns (either directly or through subsidiaries) all of the Corporation's properties. The Corporation is the sole managing member of the OP. The membership units not owned by the Corporation are referred to as OP Units or non-controlling interests. As the Corporation conducts substantially all of its operations through the OP, it is structured as what is referred to as an umbrella partnership real estate investment trust ("UPREIT"). The Corporation, the OP, and its consolidated subsidiaries are collectively referred to as the "Company."

Pursuant to the Corporation's initial public offering ("IPO"), a new class of common stock ("Class A Common Stock") was issued. On March 20, 2021, each share of Class A Common Stock automatically converted into one share of common stock, and effective March 22, 2021, all shares of common stock were listed and freely tradeable on the NYSE under the symbol "BNL."

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

 

 

 

June 30, 2022

 

 

December 31, 2021

 

(in thousands)

 

Shares of
Common Stock

 

 

OP Units

 

 

Total Diluted
Shares

 

 

Shares of
Common Stock

 

 

OP Units

 

 

Total Diluted
Shares

 

Ownership interest

 

 

172,023

 

 

 

10,323

 

 

 

182,346

 

 

 

162,383

 

 

 

10,323

 

 

 

172,706

 

Percent ownership of OP

 

 

94.3

%

 

 

5.7

%

 

 

100.0

%

 

 

94.0

%

 

 

6.0

%

 

 

100.0

%

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

6


 

2. Summary of Significant Accounting Policies

Interim Information

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information (Accounting Standards Codification ("ASC") 270, Interim Reporting) and Article 10 of the Securities and Exchange Commission's ("SEC") Regulation S-X. Accordingly, the Corporation has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2021, included in the Company's 2021 Annual Report on Form 10-K, filed with the SEC on February 23, 2022. Therefore, the readers of this quarterly report should refer to those audited consolidated financial statements, specifically Note 2, Summary of Significant Accounting Policies, for further discussion of significant accounting policies and estimates. The Corporation believes all adjustments necessary for a fair presentation have been included in these interim Condensed Consolidated Financial Statements (which include only normal recurring adjustments).

Principles of Consolidation

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

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

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

Basis of Accounting

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

Use of Estimates

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

Long-lived Asset Impairment

The Company reviews long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the long-lived asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the long-lived asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. An impairment loss is measured as the amount by which the carrying amount of the long-lived asset or asset group exceeds its fair value. Significant judgment is made to determine if and when impairment should be taken. The Company's assessment of impairment as of June 30, 2022 and 2021 was based on the most current information available to the Company. Certain of the Company's properties may have fair values less than their carrying amounts. However, based on the Company's plans with respect to each of those properties, the Company believes that their carrying amounts are recoverable and therefore, no impairment charges were recognized other than those described below. If the operating conditions mentioned above deteriorate or if the Company's expected holding period for assets changes, subsequent tests for impairments could result in additional impairment charges in the future.

7


 

 

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

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

 

 

For the Three Months Ended
June 30,

 

 

For the Six Months Ended
June 30,

 

(in thousands, except number of properties)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Number of properties

 

 

1

 

 

 

 

 

 

1

 

 

 

1

 

Impairment charge

 

$

1,380

 

 

$

 

 

$

1,380

 

 

$

2,012

 

Restricted Cash

Restricted cash includes escrow funds the Company maintains pursuant to the terms of certain mortgages, lease agreements, and undistributed proceeds from the sale of properties under Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"), and is reported within Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets. Restricted cash consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2022

 

 

2021

 

Escrow funds and other

 

$

6,634

 

 

$

6,100

 

Undistributed 1031 proceeds

 

 

5,529

 

 

 

 

 

 

$

12,163

 

 

$

6,100

 

Rent Received in Advance

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

 

(in thousands)

 

June 30,
2022

 

 

December 31,
2021

 

Rent received in advance

 

$

13,533

 

 

$

15,162

 

Fair Value Measurements

Recurring Fair Value Measurements

The balances of financial instruments measured at fair value on a recurring basis are as follows (see Note 11):

 

 

 

June 30, 2022

 

(in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swap, assets

 

$

26,562

 

 

$

 

 

$

26,562

 

 

$

 

 

 

 

December 31, 2021

 

(in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swap, liabilities

 

$

(27,171

)

 

$

 

 

$

(27,171

)

 

$

 

 

8


 

Long-term Debt – The fair value of the Company's debt was estimated using Level 1, Level 2, and Level 3 inputs based on recent secondary market trades of the Company's 2031 Senior Unsecured Public Notes (see Note 9), recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate ("LIBOR"), U.S. Treasury obligation interest rates, and discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect the Company's judgment as to the approximate current lending rates for loans or groups of loans with similar maturities and assumes that the debt is outstanding through maturity. Market information, as available, or present value techniques were utilized to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist on specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.

The following table summarizes the carrying amount reported on the Condensed Consolidated Balance Sheets and the Company's estimate of the fair value of the unsecured revolving credit facility, mortgages, unsecured term loans, and senior unsecured notes which reflects the fair value of interest rate swaps:

 

(in thousands)

 

June 30,
2022

 

 

December 31,
2021

 

Carrying amount

 

$

1,856,377

 

 

$

1,699,160

 

Fair value

 

 

1,758,160

 

 

 

1,785,701

 

Non-recurring Fair Value Measurements

The Company's non-recurring fair value measurements at June 30, 2022 and December 31, 2021 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.

Stock-Based Compensation

The Company has issued restricted stock awards ("RSAs") and performance-based restricted stock units ("PRSUs") under its 2020 Omnibus Equity and Incentive Plan (the "Equity Incentive Plan"). Subject to any adjustment as provided in the Equity Incentive Plan, up to 9,000,000 shares may be issued to awards granted under the Equity Incentive Plan. The Company accounts for stock-based incentives in accordance with ASC 718, Compensation – Stock Compensation, which requires that such compensation be recognized in the financial statements based on the award's estimated grant date fair value. The value of such awards is recognized as compensation expense in General and administrative expenses in the Condensed Consolidated Statements of Income and Comprehensive Income over the appropriate vesting period on a straight-line basis or at the cumulative amount vested at each balance sheet date, if greater. The Company records forfeitures during the period in which they occur by reversing all previously recorded stock compensation expense associated with the forfeited shares. Dividends declared on RSAs issued under the Equity Incentive Plan are recorded as Cumulative distributions in excess of retained earnings on the Condensed Consolidated Balance Sheets. Accumulated dividends related to forfeited RSAs are reversed through compensation expense in the period the forfeiture occurs. Dividends accrued on the PRSUs are recorded as Cumulative distributions in excess of retained earnings on the Condensed Consolidated Balance Sheets. Accumulated dividends accrued related to forfeited PRSUs are reversed in the period the forfeiture occurs.

Recently Adopted Accounting Standards

In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in ASU 2020-06 also simplify the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity's Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments. The amendments in ASU 2020-06 were effective for the Company beginning January 1, 2022. The Company uses the two-class method of computing basic and diluted earnings per share. Based on the nature of the Company's potentially dilutive instruments, the treasury stock method is not used in computing dilutive earnings per share. Accordingly, the adoption of ASU 2020-06 did not have a material impact on the Company.

 

9


 

3. Related-Party Transactions

Prior to the Company's internalization on February 7, 2020, the Company 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"). As part of the internalization the Asset Manager and BRE merged into the Company. Accordingly, both BRE and the Asset Manager were related parties of the Company.

Earnout Consideration

In connection with the Company's internalization, the Company incurred a contingent obligation that would be payable to certain members of the Board of Directors and employees who had previously been owners and/or employees of BRE, upon the occurrence of certain events (see Note 4). On June 16, 2021, the Company achieved the earnout milestone applicable to tranche 1 of the earnout. As a result, the Company issued 145,195 shares of common stock, 247,899 OP Units and paid $1.9 million of cash during the three and six months ended June 30, 2021. The Company achieved the remaining volume-weighted average price ("VWAP") milestones and paid all earnout tranches (see Note 4) during the year ended December 31, 2021. As such, there was no such activity during the three and six months ended June 30, 2022.

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 1,019,874 OP Units held by an affiliated third party to 1,019,874 shares of common stock at a total conversion value of $16.2 million. There were no OP Units converted to common stock during the three and six months ended June 30, 2022.

4. Internalization

On February 7, 2020, the Company completed an internalization where 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 Company's internalization, the Company was required to pay additional earnout consideration of up to $75.0 million payable in four tranches of $10.0 million, $15.0 million, $25.0 million, and $25.0 million if certain milestones related to the 40-day volume-weighted average price of a share of the Company's common stock ("VWAP per REIT Share") were achieved. The consideration consisted of a combination of cash, shares of the Company's common stock, and OP Units, based on the same proportions paid in the base consideration.

As of December 31, 2021, the Company achieved all four VWAP milestones, thereby triggering the payout of all earnout tranches. Below is a summary of the shares of common stock and OP Units issued, and cash paid for each earnout tranche:

 

(in thousands, except per share amounts)

 

 

Shares of

 

 

 

 

 

 

 

 

40-Day

 

 

 

 

 

Common Stock

 

 

OP Units

 

 

 

 

 

VWAP of a

 

 

 

Tranche

 

Issued

 

 

Issued

 

 

Cash Paid

 

 

REIT Share

 

 

Achievement Date

1

 

 

145

 

 

 

248

 

 

$

1,926

 

(a)

$

22.50

 

 

June 16, 2021

2

 

 

218

 

 

 

371

 

 

 

2,888

 

(a)

 

23.75

 

 

July 14, 2021

3

 

 

363

 

 

 

620

 

 

 

4,117

 

 

 

24.375

 

 

September 21, 2021

4

 

 

363

 

 

 

620

 

 

 

4,117

 

 

 

25.00

 

 

September 21, 2021

(a)
Cash payments include amounts earned for dividends.

 

 

10


 

5. Acquisitions of Rental Property

The Company closed on the following acquisitions during the six months ended June 30, 2022:

 

(in thousands, except number of properties)

 

Number of

 

 

Real Estate

 

 

Date

 

Property Type

 

Properties

 

 

Acquisition Price

 

 

January 7, 2022

 

Retail

 

 

2

 

 

$

2,573

 

 

February 10, 2022

 

Industrial

 

 

1

 

 

 

21,733

 

 

February 15, 2022

 

Retail

 

 

1

 

 

 

1,341

 

 

February 28, 2022

 

Industrial

 

 

1

 

 

 

5,678

 

 

March 4, 2022

 

Retail

 

 

6

 

 

 

79,061

 

 

March 31, 2022

 

Restaurant

 

 

16

 

 

 

99,587

 

 

April 12, 2022

 

Retail

 

 

1

 

 

 

1,680

 

 

April 12, 2022

 

Industrial

 

 

1

 

 

 

7,522

 

 

April 13, 2022

 

Industrial

 

 

1

 

 

 

16,250

 

 

April 19, 2022

 

Retail

 

 

1

 

 

 

1,780

 

 

May 16, 2022

 

Retail

 

 

1

 

 

 

2,264

 

 

June 7, 2022

 

Retail

 

 

1

 

 

 

11,510

 

 

June 13, 2022

 

Retail

 

 

1

 

 

 

1,638

 

 

June 15, 2022

 

Retail

 

 

1

 

 

 

1,884

 

 

June 21, 2022

 

Industrial

 

 

5

 

 

 

78,500

 

 

June 29, 2022

 

Healthcare

 

 

1

 

 

 

12,467

 

 

June 30, 2022

 

Industrial

 

 

1

 

 

 

29,500

 

 

 

 

 

 

 

42

 

 

$

374,968

 

(a)

(a)
Acquisition price excludes capitalized acquisition costs of $3.1 million and a $17.4 million building expansion agreed to as a forward commitment in connection with a prior acquisition (see Note 18).

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

 

(b)

 

 

 

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

 

(c)

(b)
Acquisition of additional land adjacent to an existing property.
(c)
Acquisition price excludes capitalized acquisition costs of $3.0 million.

 

11


 

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
June 30,

 

(in thousands)

 

2022

 

 

2021

 

Land

 

$

77,088

 

 

$

48,477

 

Land improvements

 

 

26,002

 

 

 

15,844

 

Buildings and improvements

 

 

253,500

 

 

 

197,064

 

Acquired in-place leases(d)

 

 

29,585

 

 

 

22,729

 

Acquired above-market lease (e)

 

 

 

 

 

211

 

Acquired below-market lease (f)

 

 

(76

)

 

 

 

Non-real estate liabilities assumed

 

 

(8,051

)

 

 

 

 

 

$

378,048

 

(g)

$

284,325

 

(d)
The weighted average amortization period for acquired in-place leases is 20 years and 14 years for acquisitions completed during the six months ended June 30, 2022 and 2021, respectively.
(e)
The weighted average amortization period for the acquired above-market leases is 10 years for acquisitions completed during the six months ended June 30, 2021. There were no above-market leases acquired during the six months ended June 30, 2022.
(f)
The weighted average amortization period for acquired below-market leases is nine years for acquisitions completed during the six months ended June 30, 2022. There were no below-market leases acquired during the six months ended June 30, 2021.
(g)
Excludes $17.4 million building expansion agreed to as a forward commitment in connection with a prior acquisition (see Note 18).

The above acquisitions were funded using a combination of available cash on hand, and proceeds from equity issuances and revolving credit facility borrowings. All real estate acquisitions closed during the six months ended June 30, 2022 and 2021, qualified as asset acquisitions and, as such, acquisition costs have been capitalized.

Subsequent to June 30, 2022, 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 1, 2022

 

Retail

 

 

2

 

 

$

3,052

 

July 7, 2022

 

Retail

 

 

1

 

 

 

2,171

 

July 8, 2022

 

Industrial

 

 

11

 

 

 

75,000

 

 

 

 

 

 

14

 

 

$

80,223

 

 

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)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Number of properties disposed

 

 

3

 

 

 

11

 

 

 

4

 

 

 

19

 

Aggregate sale price

 

$

11,889

 

 

$

22,276

 

 

$

17,101

 

 

$

45,338

 

Aggregate carrying value

 

 

(7,311

)

 

 

(17,201

)

 

 

(11,135

)

 

 

(34,573

)

Additional sales expenses

 

 

(507

)

 

 

(1,237

)

 

 

(699

)

 

 

(2,194

)

Gain on sale of real estate

 

$

4,071

 

 

$

3,838

 

 

$

5,267

 

 

$

8,571

 

 

12


 

7. Investment in Rental Property and Lease Arrangements

The Company generally leases its investment rental property to established tenants in the industrial, healthcare, restaurant, retail, and office property types. At June 30, 2022, the Company had 764 real estate properties, 751 of which were leased under leases that have been classified as operating leases, 10 that have been classified as direct financing leases, one that has been classified as a sales-type lease, and two that were vacant. Of the 10 leases classified as direct financing leases, three include land portions which are accounted for as operating leases. The sales-type lease includes a land portion which is accounted for as an operating lease. Most leases have initial terms of 10 to 20 years. The Company's leases generally provide for limited increases in rent as a result of fixed increases, increases in the Consumer Price Index ("CPI"), or increases in the tenant's sales volume. Generally, tenants are also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and maintain property and liability insurance coverage. The leases also typically provide for one or more multiple year renewal options, at the election of the tenant, and are subject to generally the same terms and conditions as the initial lease.

Investment in Rental Property – Accounted for Using the Operating Method

Depreciation expense on investment in rental property was as follows:

 

 

 

For the Three Months Ended
June 30,

 

 

For the Six Months Ended
June 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Depreciation

 

$

27,730

 

 

$

24,144

 

 

$

54,388

 

 

$

47,887

 

Estimated lease payments to be received under non-cancelable operating leases with tenants at June 30, 2022 are as follows:

 

(in thousands)

 

 

 

Remainder of 2022

 

$

178,218

 

2023

 

 

359,960

 

2024

 

 

357,102

 

2025

 

 

350,807

 

2026

 

 

341,436

 

Thereafter

 

 

2,695,940

 

 

 

$

4,283,463

 

Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future lease payments due during the initial lease terms. Such amounts exclude any potential variable rent increases that are based on changes in the CPI or future variable rents which may be received under the leases based on a percentage of the tenant's gross sales. Additionally, certain of our leases provide tenants with the option to terminate their leases in exchange for termination penalties, or that are contingent upon the occurrence of a future event. Future lease payments within the table above have not been adjusted for these termination rights.

Investment in Rental Property – Direct Financing Leases

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

 

(in thousands)

 

June 30,
2022

 

 

December 31,
2021

 

Undiscounted estimated lease payments to be received

 

$

40,983

 

 

$

42,602

 

Estimated unguaranteed residual values

 

 

15,203

 

 

 

15,203

 

Unearned revenue

 

 

(27,473

)

 

 

(28,893

)

Reserve for credit losses

 

 

(129

)

 

 

(130

)

Net investment in direct financing leases

 

$

28,584

 

 

$

28,782

 

Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at June 30, 2022 are as follows:

 

(in thousands)

 

 

 

Remainder of 2022

 

$

1,622

 

2023

 

 

3,304

 

2024

 

 

3,361

 

2025

 

 

3,475

 

2026

 

 

3,547

 

Thereafter

 

 

25,674

 

 

 

$

40,983

 

 

13


 

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:

 

 

 

For the Three Months Ended
June 30,

 

 

For the Six Months Ended
June 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Contractual rental amounts billed for operating leases

 

$

87,505

 

 

$

75,011

 

 

$

171,901

 

 

$

148,256

 

Adjustment to recognize contractual operating lease billings on a
   straight-line basis

 

 

5,090

 

 

 

4,724

 

 

 

10,111

 

 

 

9,533

 

Net write-offs of accrued rental income

 

 

 

 

 

 

 

 

(1,326

)

 

 

(442

)

Variable rental amounts earned

 

 

291

 

 

 

114

 

 

 

477

 

 

 

205

 

Earned income from direct financing leases

 

 

721

 

 

 

728

 

 

 

1,444

 

 

 

1,458

 

Interest income from sales-type leases

 

 

15

 

 

 

15

 

 

 

29

 

 

 

29

 

Operating expenses billed to tenants

 

 

4,263

 

 

 

4,196

 

 

 

8,998

 

 

 

8,584

 

Other income from real estate transactions

 

 

134

 

 

 

28

 

 

 

176

 

 

 

33

 

Adjustment to revenue recognized for uncollectible rental
   amounts billed, net

 

 

(6

)

 

 

(57

)

 

 

44

 

 

 

(199

)

Total lease revenues, net

 

$

98,013

 

 

$

84,759

 

 

$

191,854

 

 

$

167,457

 

 

8. Intangible Assets and Liabilities

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

 

(in thousands)

 

June 30,
2022

 

 

December 31,
2021

 

Lease intangibles:

 

 

 

 

 

 

Acquired above-market leases

 

$

46,772

 

 

$

47,147

 

Less accumulated amortization

 

 

(18,052

)

 

 

(16,807

)

Acquired above-market leases, net

 

 

28,720

 

 

 

30,340

 

Acquired in-place leases

 

 

407,993

 

 

 

380,766

 

Less accumulated amortization

 

 

(120,594

)

 

 

(107,464

)

Acquired in-place leases, net

 

 

287,399

 

 

 

273,302

 

Total intangible lease assets, net

 

$

316,119

 

 

$

303,642

 

Acquired below-market leases

 

$

105,293

 

 

$

105,310

 

Less accumulated amortization

 

 

(38,429

)

 

 

(34,714

)

Intangible lease liabilities, net

 

$

66,864

 

 

$

70,596

 

Leasing fees

 

$

14,650

 

 

$

14,786

 

Less accumulated amortization

 

 

(5,533

)

 

 

(5,145

)

Leasing fees, net

 

$

9,117

 

 

$

9,641

 

 

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

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Acquired in-place leases and leasing fees

 

Depreciation and amortization

 

$

7,749

 

 

$

7,058

 

 

$

15,350

 

 

$

14,005

 

Above-market and below-market leases

 

Lease revenues, net

 

 

1,170

 

 

 

665

 

 

 

2,331

 

 

 

1,418

 

Estimated future amortization of intangible assets and liabilities at June 30, 2022 is as follows:

 

(in thousands)

 

 

 

Remainder of 2022

 

$

13,338

 

2023

 

 

26,512

 

2024

 

 

25,752

 

2025

 

 

24,455

 

2026

 

 

23,105

 

Thereafter

 

 

145,210

 

 

 

$

258,372

 

 

14


 

 

9. Unsecured Credit Agreements

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

 

 

 

Outstanding Balance

 

 

 

 

 

(in thousands, except interest rates)

 

June 30,
2022

 

 

December 31,
2021

 

 

Interest
Rate

 

Maturity
Date

Unsecured revolving
   credit facility

 

$

320,657

 

 

$

102,000

 

 

Applicable reference
rate +
0.85% (a) (b) (c)

 

Mar. 2026

Unsecured term loans:

 

 

 

 

 

 

 

 

 

 

2022 Unsecured Term Loan

 

 

 

 

 

60,000

 

 

one-month LIBOR
+
1.00% (c)

 

Feb. 2022 (d)

2024 Unsecured Term Loan

 

 

190,000

 

 

 

190,000

 

 

one-month LIBOR
+
1.00% (c)

 

Jun. 2024

2026 Unsecured Term Loan

 

 

400,000

 

 

 

400,000

 

 

one-month LIBOR
+
1.00% (c)

 

Feb. 2026

Total unsecured term loans

 

 

590,000

 

 

 

650,000

 

 

 

 

 

Unamortized debt issuance costs, net

 

 

(2,902

)

 

 

(3,329

)

 

 

 

 

Total unsecured term loans, net

 

 

587,098

 

 

 

646,671

 

 

 

 

 

Senior unsecured notes:

 

 

 

 

 

 

 

 

 

 

2027 Senior Unsecured Notes -
   Series A

 

 

150,000

 

 

 

150,000

 

 

4.84%

 

Apr. 2027

2028 Senior Unsecured Notes -
   Series B

 

 

225,000

 

 

 

225,000

 

 

5.09%

 

Jul. 2028

2030 Senior Unsecured Notes -
   Series C

 

 

100,000

 

 

 

100,000

 

 

5.19%

 

Jul. 2030

2031 Senior Unsecured Public Notes

 

 

375,000

 

 

 

375,000

 

 

2.60%

 

Sep. 2031

Total senior unsecured notes

 

 

850,000

 

 

 

850,000

 

 

 

 

 

Unamortized debt issuance costs and
   original issuance discount, net

 

 

(5,822

)

 

 

(6,199

)

 

 

 

 

Total senior unsecured notes, net

 

 

844,178

 

 

 

843,801

 

 

 

 

 

Total unsecured debt, net

 

$

1,751,933

 

 

$

1,592,472

 

 

 

 

 

(a)
At June 30, 2022, a balance of $243.0 million was subject to the one-month Secured Overnight Financing Rate of 1.69%. The remaining balance includes $100 million CAD borrowings remeasured to $77.7 million USD, which was subject to the one-month Canadian Dollar Offered Rate of 2.23%.
(b)
At December 31, 2021, interest rate was one-month LIBOR plus 1.00%
(c)
At June 30, 2022 and December 31, 2021, one-month LIBOR was 1.79% and 0.10%, respectively.
(d)
The 2022 Unsecured Term Loan was paid in full in February 2022, with borrowings from the unsecured revolving credit facility.

At June 30, 2022, the weighted average interest rate on all outstanding borrowings was 3.33%, exclusive of interest rate swap agreements.

The Company is subject to various financial and operational covenants and financial reporting requirements pursuant to its unsecured credit agreements. These covenants require the Company to maintain certain financial ratios, including leverage, fixed charge coverage, debt service coverage, aggregate debt ratio, consolidated income available for debt to annual debt service charge, total unencumbered assets to total unsecured debt, and secured debt ratio, among others. As of June 30, 2022, and for all periods presented the Company believes it was in compliance with all of its loan covenants. Failure to comply with the covenants would result in a default which, if the Company were unable to cure or obtain a waiver from the lenders, could accelerate the repayment of the obligations. Further, in the event of default, the Company may be restricted from paying dividends to its stockholders in excess of dividends required to maintain its REIT qualification. Accordingly, an event of default could have a material and adverse impact on the Company.

On January 28, 2022, the Company amended and restated the unsecured revolving credit facility to increase the available borrowings to $1.0 billion and extend the maturity date to March 31, 2026. In addition to USD, borrowings under the unsecured revolving credit facility can be made in Pound Sterling, Euros or Canadian Dollars ("CAD") up to an aggregate amount of $500.0 million. Prior to the amendment, borrowings under the credit facility were subject to interest at variable rates based on LIBOR plus a margin based on the Company's current credit rating ranging between 0.825% to 1.55% per annum. Borrowings under the amended credit facility are subject to interest only payments at variable rates equal to the applicable reference rate plus a margin based on the Company's credit rating, ranging between 0.725% and 1.400%. In addition, the amended credit facility is subject to a facility fee on the amount of the revolving commitments, based on the Company's credit rating. The applicable facility fee is 0.200% per annum.

For the six months ended June 30, 2022, the Company incurred $3.8 million in debt issuance costs associated with the unsecured revolving credit facility. For the six months ended June 30, 2021, the Company incurred $1.0 million 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, 2022 and 2021.

15


 

For each separate debt instrument, on a lender by lender basis, in accordance with ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction was deemed to be new debt, a modification of existing debt, or an extinguishment of existing debt. Debt issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred.

With respect to the unsecured revolving credit facility amendment, the transaction was deemed to be new debt and therefore, the debt issuance costs incurred during the six months ended June 30, 2022, have been deferred and are being amortized over the term of the associated debt. With respect to the amended 2026 Unsecured Term Loan, the transaction was deemed to be a modification of existing debt and therefore the $0.9 million of debt issuance costs paid to lenders were deferred and are being amortized over the term of the associated debt. The remaining debt issuance costs of $0.1 million were expensed as incurred during the six months ended June 30, 2021.

Debt issuance costs and original issuance discounts are amortized as a component of Interest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income. The following table summarizes debt issuance cost and original issuance discount amortization:

 

 

 

For the Three Months Ended
June 30,

 

 

For the Six Months Ended
June 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Debt issuance costs and original issuance discount amortization

 

$

900

 

 

$

956

 

 

$

1,756

 

 

$

1,870

 

 

 

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

 

2022

 

 

2021

 

 

 

Wilmington Trust National Association

 

Apr-19

 

Feb-28

 

4.92%

 

$

46,142

 

 

$

46,760

 

 

(a) (b) (c) (d)

Wilmington Trust National Association

 

Jun-18

 

Aug-25

 

4.36%

 

 

19,355

 

 

 

19,557

 

 

(a) (b) (c) (e)

PNC Bank

 

Oct-16

 

Nov-26

 

3.62%

 

 

16,886

 

 

 

17,094

 

 

(b) (c)

T2 Durham I, LLC

 

Jul-21

 

Jul-24

 

Greater of Prime +
1.25% or 5.00%

 

 

7,500

 

 

 

7,500

 

 

(b) (f)

Aegon

 

Apr-12

 

Oct-23

 

6.38%

 

 

5,837

 

 

 

6,249

 

 

(b) (g)

Total mortgages

 

 

 

 

 

 

 

 

95,720

 

 

 

97,160

 

 

 

Debt issuance costs, net

 

 

 

 

 

 

 

 

(267

)

 

 

(314

)

 

 

Mortgages, net

 

 

 

 

 

 

 

$

95,453

 

 

$

96,846

 

 

 

(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.
(c)
Debt secured by guaranty of the OP.
(d)
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.
(e)
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.
(f)
Mortgage is subject to interest at a daily floating annual rate equal to the Prime Rate plus 1.25%, but no less than 5.00% per annum. At June 30, 2022 and December 31, 2021, the interest rate was 6.00% and 5.00%, respectively.
(g)
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.

 

At June 30, 2022, investment in rental property of $159.5 million was pledged as collateral against the Company's mortgages.

Estimated future principal payments to be made under the above mortgages and the Company's unsecured credit agreements (see Note 9) at June 30, 2022 are as follows:

(in thousands)

 

 

 

Remainder of 2022

 

$

1,466

 

2023

 

 

7,582

 

2024

 

 

199,760

 

2025

 

 

20,195

 

2026

 

 

737,500

 

Thereafter

 

 

889,874

 

 

 

$

1,856,377

 

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

16


 

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)

 

 

 

 

June 30, 2022

 

 

December 31, 2021

 

 

Counterparty

 

Maturity Date

 

Fixed
Rate

 

 

Notional
Amount

 

 

Fair
Value

 

 

Notional
Amount

 

 

Fair
Value

 

 

Wells Fargo Bank, N.A.

 

October 2024

 

 

2.72

%

 

$

15,000

 

 

$

110

 

 

$

15,000

 

 

$

(702

)

 

Capital One, National Association

 

December 2024

 

 

1.58

%

 

 

15,000

 

 

 

510

 

 

 

15,000

 

 

 

(241

)

 

Bank of Montreal

 

January 2025

 

 

1.91

%

 

 

25,000

 

 

 

672

 

 

 

25,000

 

 

 

(649

)

 

Truist Financial Corporation

 

April 2025

 

 

2.20

%

 

 

25,000

 

 

 

520

 

 

 

25,000

 

 

 

(905

)

 

Bank of Montreal

 

July 2025

 

 

2.32

%

 

 

25,000

 

 

 

459

 

 

 

25,000

 

 

 

(1,049

)

 

Truist Financial Corporation

 

July 2025

 

 

1.99

%

 

 

25,000

 

 

 

697

 

 

 

25,000

 

 

 

(767

)

 

Truist Financial Corporation

 

December 2025

 

 

2.30

%

 

 

25,000

 

 

 

517

 

 

 

25,000

 

 

 

(1,125

)

 

Bank of Montreal

 

January 2026

 

 

1.92

%

 

 

25,000

 

 

 

833

 

 

 

25,000

 

 

 

(760

)

 

Bank of Montreal

 

January 2026

 

 

2.05

%

 

 

40,000

 

 

 

1,162

 

 

 

40,000

 

 

 

(1,415

)

 

Capital One, National Association

 

January 2026

 

 

2.08

%

 

 

35,000

 

 

 

980

 

 

 

35,000

 

 

 

(1,274

)

 

Truist Financial Corporation

 

January 2026

 

 

1.93

%

 

 

25,000

 

 

 

826

 

 

 

25,000

 

 

 

(768

)

 

Capital One, National Association

 

April 2026

 

 

2.68

%

 

 

15,000

 

 

 

121

 

 

 

15,000

 

 

 

(941

)

 

Capital One, National Association

 

July 2026

 

 

1.32

%

 

 

35,000

 

 

 

2,076

 

 

 

35,000

 

 

 

(205

)

 

Bank of Montreal

 

December 2026

 

 

2.33

%

 

 

10,000

 

 

 

233

 

 

 

10,000

 

 

 

(538

)

 

Bank of Montreal

 

December 2026

 

 

1.99

%

 

 

25,000

 

 

 

941

 

 

 

25,000

 

 

 

(936

)

 

Toronto-Dominion Bank

 

March 2027

 

 

2.46

%

 

 

15,531

 

 

 

660

 

 

 

 

 

 

 

 

Wells Fargo Bank, N.A.

 

April 2027

 

 

2.72

%

 

 

25,000

 

 

 

170

 

 

 

25,000

 

 

 

(1,887

)

 

Bank of Montreal

 

December 2027

 

 

2.37

%

 

 

25,000

 

 

 

637

 

 

 

25,000

 

 

 

(1,570

)

 

Capital One, National Association

 

December 2027

 

 

2.37

%

 

 

25,000

 

 

 

616

 

 

 

25,000

 

 

 

(1,575

)

 

Wells Fargo Bank, N.A.

 

January 2028

 

 

2.37

%

 

 

75,000

 

 

 

1,864

 

 

 

75,000

 

 

 

(4,741

)

 

Bank of Montreal

 

May 2029

 

 

2.09

%

 

 

25,000

 

 

 

1,195

 

 

 

25,000

 

 

 

(1,316

)

 

Regions Bank

 

May 2029

 

 

2.11

%

 

 

25,000

 

 

 

1,143

 

 

 

25,000

 

 

 

(1,356

)

 

Regions Bank

 

June 2029

 

 

2.03

%

 

 

25,000

 

 

 

1,265

 

 

 

25,000

 

 

 

(1,222

)

 

U.S. Bank National Association

 

June 2029

 

 

2.03

%

 

 

25,000

 

 

 

1,284

 

 

 

25,000

 

 

 

(1,220

)

 

U.S. Bank National Association

 

August 2029

 

 

1.35

%

 

 

25,000

 

 

 

2,407

 

 

 

25,000

 

 

 

(9

)

 

Regions Bank

 

March 2032

 

 

2.69

%

 

 

15,531

 

 

 

1,103

 

 

 

 

 

 

 

 

U.S. Bank National Association

 

March 2032

 

 

2.70

%

 

 

15,531

 

 

 

1,126

 

 

 

 

 

 

 

 

Bank of Montreal

 

March 2034

 

 

2.81

%

 

 

31,064

 

 

 

2,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

717,657

 

 

$

26,562

 

 

$

640,000

 

 

$

(27,171

)

 

 

At June 30, 2022, the weighted average fixed rate on all outstanding interest rate swaps was 2.11%.

 

17


 

The total amounts recognized, and the location in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income, from converting from variable rates to fixed rates under these agreements were as follows:

 

 

 

Amount of Gain (Loss)

 

 

Reclassification from

 

 

Total Interest Expense

 

 

 

Recognized in

 

 

Accumulated Other

 

 

Presented in the Condensed

 

(in thousands)

 

Accumulated Other

 

 

Comprehensive Income (Loss)

 

 

Consolidated Statements of

 

 

 

Comprehensive

 

 

 

 

Amount of

 

 

Income and Comprehensive

 

For the Three Months Ended June 30,

 

Income (Loss)

 

 

Location

 

Loss

 

 

Income

 

2022

 

$

18,772

 

 

Interest expense

 

$

3,122

 

 

$

17,888

 

2021

 

 

(2,911

)

 

Interest expense

 

 

4,039

 

 

 

15,430

 

 

 

 

Amount of Gain

 

 

Reclassification from

 

 

Total Interest Expense

 

 

 

Recognized in

 

 

Accumulated Other

 

 

Presented in the Condensed

 

 

 

Accumulated Other

 

 

Comprehensive Income (Loss)

 

 

Consolidated Statements of

 

(in thousands)

 

Comprehensive

 

 

 

 

Amount of

 

 

Income and Comprehensive

 

For the Six Months Ended June 30,

 

Income (Loss)

 

 

Location

 

Loss

 

 

Income

 

2022

 

$

53,733

 

 

Interest expense

 

$

6,987

 

 

$

34,784

 

2021

 

 

25,769

 

 

Interest expense

 

 

8,055

 

 

 

31,538

 

Amounts related to the interest rate swaps expected to be reclassified out of Accumulated other comprehensive income (loss) to Interest expense during the next twelve months are estimated to be a gain of $4.8 million. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes the risk exposure by limiting counterparties to only 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)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

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 247,899 non-controlling OP Units on June 22, 2021. There were no OP Units issued during the three and six months ended June 30, 2022.

 

13. Credit Risk Concentrations

The Company maintained bank balances that, at times, exceeded the federally insured limit during the six months ended June 30, 2022. The Company has not experienced losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts.

For the three and six months ended June 30, 2022 and 2021, the Company had no individual tenants or common franchises that accounted for more than 10% of Lease revenues, net.

 

 

18


 

14. Equity

The Company established an at-the-market common equity offering program ("ATM Program"), through which it may, from time to time, publicly offer and sell shares of common stock having an aggregate gross sales price of up to $400.0 million. The ATM Program provides for forward sale agreements, enabling the Company to set the price of shares upon pricing the offering, while delaying the issuance of shares and the receipt of the net proceeds. As of June 30, 2022, the Company has issued common stock with an aggregate gross sales price of $234.0 million under the ATM Program and could issue additional common stock with an aggregate sales price of up to $166.0 million under the ATM Program.

The following table presents information about the Company's ATM Program activity:

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

(in thousands, except per share amounts)

 

June 30, 2022

 

 

June 30, 2022

 

Number of common shares issued

 

 

3,236

 

 

 

9,509

 

Weighted average sale price per share

 

$

21.42

 

 

$

21.69

 

Net proceeds

 

$

68,321

 

 

$

202,647

 

Gross proceeds

 

 

69,313

 

 

 

205,857

 

There was no ATM Program activity during the three and six months ended June 30, 2021.

On June 28, 2021, the Corporation completed its first public follow-on equity offering and issued 11,500,000 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 $10.6 million and $0.4 million of other expenses, were $253.5 million. The Company used the net proceeds to repay the remaining $160.6 million principal due under the Company's revolving credit facility. The remaining net proceeds will be used for general business purposes, including acquisitions.

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 145,195 shares of common stock on June 22, 2021. There was no such activity during the three and six months ended June 30, 2022.

15. Stock-Based Compensation

Restricted Stock Awards

During the three and six months ended June 30, 2022, the Company awarded 32,868 and 174,913 shares of RSAs, respectively, to officers, employees and non-employee directors, under the Equity Incentive Plan. During the three and six months ended June 30, 2021, the Company issued 1,665 and 201,095 shares of RSAs, respectively. The holder of RSAs is generally entitled at all times on and after the date of issuance of the restricted common shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The RSAs vest over a one, three, or four year period from the date of the grant and are subject to the holder's continued service through the applicable vesting dates and in accordance with the terms of the individual award agreements. The weighted average value of awards granted during the three and six months ended June 30, 2022, were $20.23 and $21.39, respectively, which were based on the market price per share of the Company's common stock on the grant date. The weighted average value of awards granted during the three and six months ended June 30, 2021, were $19.76 and $18.66, respectively.

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

 

 

 

For the Three Months Ended
June 30,

 

 

For the Six Months Ended
June 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Compensation cost (a)

 

$

877

 

 

$

728

 

 

$

1,487

 

 

$

2,423

 

Dividends declared on unvested RSAs

 

 

106

 

 

 

97

 

 

 

203

 

 

201

 

Fair value of shares vested during the period

 

 

 

 

 

774

 

 

 

3,209

 

 

 

3,296

 

(a)
Includes $0.1 million compensation cost recognized from RSAs granted to non-employee directors for the three and six months ended June 30, 2022.

 

(in thousands, except recognition period)

 

June 30, 2022

 

 

December 31, 2021

 

Unamortized value of RSAs

 

$

6,794

 

 

$

4,715

 

Weighted average amortization period (in years)

 

 

2.5

 

 

 

2.4

 

 

 

19


 

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

 

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

 

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

 

 

367

 

 

$

20.33

 

 

 

416

 

 

$

19.62

 

Granted

 

 

33

 

 

 

20.23

 

 

 

2

 

 

 

19.76

 

Vested

 

 

 

 

 

 

 

 

(40

)

 

 

19.81

 

Forfeited

 

 

(8

)

 

 

19.95

 

 

 

 

 

 

 

Unvested at end of period

 

 

392

 

 

 

20.33

 

 

 

378

 

 

 

19.60

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

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

 

 

372

 

 

$

19.62

 

 

 

341

 

 

$

20.50

 

Granted

 

 

175

 

 

 

21.39

 

 

 

201

 

 

 

18.67

 

Vested

 

 

(146

)

 

 

19.80

 

 

 

(164

)

 

 

20.15

 

Forfeited

 

 

(9

)

 

 

20.06

 

 

 

 

 

 

 

Unvested at end of period

 

 

392

 

 

 

20.33

 

 

 

378

 

 

 

19.60

 

Performance-based Restricted Stock Units

The Company issued target grants of 121,883 and 132,189 PRSUs, during the six months ended June 30, 2022 and 2021, respectively, under the Equity Incentive Plan to the officers of the Company. There were no PRSUs granted during the three months ended June 30, 2022 and 2021, respectively. The awards are non-vested restricted stock units where the vesting percentages and the ultimate number of units vesting will be measured 50% based on the relative total shareholder return ("rTSR") of the Company's common stock as compared to the rTSR of peer companies, as identified in the grant agreements, over a three-year period, and 50% based on the rTSR of the Company's common stock as compared to the rTSR of the MSCI US REIT Index over a three year measurement period. Vesting percentages range from 0% to 200% with a target of 100%. rTSR means the percentage appreciation in the fair market value of one share over the three year measurement period beginning on the date of grant, assuming the reinvestment of dividends on the ex-dividend date. The target number of units is based on achieving a rTSR equal to the 55th percentile of the peer companies and MSCI US REIT Index. Dividends accrue during the measurement period and will be paid on the PRSUs ultimately earned at the end of the measurement period in either cash or common stock, at the direction of the Board's Compensation Committee. The grant date fair value of the PRSUs was measured using a Monte Carlo simulation model based on assumptions including share price volatility.

 

The following tables present information about the Company's PRSUs:

 

 

 

For the Three Months Ended
June 30,

 

 

For the Six Months Ended
June 30,

 

(in thousands, except recognition period)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Compensation cost

 

$

504

 

 

$

223

 

 

$

823

 

 

$

297

 

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Unamortized value of PRSUs

 

$

4,490

 

 

$

1,931

 

Weighted average amortization period (in years)

 

 

2.3

 

 

 

2.2

 

 

 

20


 

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

 

 

For the Three Months Ended June 30,

 

 

 

2022

 

 

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

 

 

232

 

 

$

26.25

 

 

 

110

 

 

$

24.40

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(1

)

 

 

27.93

 

 

 

 

 

 

 

Unvested at end of period

 

 

231

 

 

 

26.25

 

 

 

110

 

 

 

24.40

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

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

 

 

122

 

 

 

27.93

 

 

 

132

 

 

 

24.40

 

Vested

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(1

)

 

 

27.93

 

 

 

(22

)

 

 

24.40

 

Unvested at end of period

 

 

231

 

 

 

26.25

 

 

 

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)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Basic earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Broadstone Net Lease, Inc. common
   shareholders

 

$

33,516

 

 

$

21,214

 

 

$

60,274

 

 

$

43,437

 

Less: earnings allocated to unvested restricted shares

 

 

(105

)

 

 

(97

)

 

 

(202

)

 

 

(201

)

Net earnings used to compute basic earnings per common share

 

$

33,411

 

 

$

21,117

 

 

$

60,072

 

 

$

43,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings used to compute basic earnings per share

 

$

33,411

 

 

$

21,117

 

 

$

60,072

 

 

$

43,236

 

Net earnings attributable to non-controlling interests

 

 

2,036

 

 

 

1,606

 

 

 

3,719

 

 

 

3,343

 

Net earnings used to compute diluted earnings per common share

 

$

35,447

 

 

$

22,723

 

 

$

63,791

 

 

$

46,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

169,933

 

 

 

146,506

 

 

 

167,072

 

 

 

146,089

 

Less: weighted average unvested restricted shares (a)

 

 

(378

)

 

 

(387

)

 

 

(374

)

 

 

(361

)

Weighted average number of common shares outstanding used in
   basic earnings per common share

 

 

169,555

 

 

 

146,119

 

 

 

166,698

 

 

 

145,728

 

Effects of restricted stock units (b)

 

 

378

 

 

 

219

 

 

 

325

 

 

 

147

 

Effects of convertible membership units (c)

 

 

10,323

 

 

 

11,092

 

 

 

10,323

 

 

 

11,240

 

Weighted average number of common shares outstanding used in
   diluted earnings per common share

 

 

180,256

 

 

 

157,430

 

 

 

177,346

 

 

 

157,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.20

 

 

$

0.14

 

 

$

0.36

 

 

$

0.30

 

Diluted earnings per share

 

$

0.20

 

 

$

0.14

 

 

$

0.36

 

 

$

0.30

 

(a)
Represents the weighted average effects of 391,187 and 378,516 unvested restricted shares of common stock as of June 30, 2022 and 2021, respectively, 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 10,323,206 and 10,481,872 OP Units outstanding at June 30, 2022 and 2021, 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.

21


 

17. Supplemental Cash Flow Disclosures

Cash paid for interest was $32.1 million and $30.0 million for the six months ended June 30, 2022 and 2021, respectively. Cash paid for income taxes was $1.0 million and $0.7 million for the six months ended June 30, 2022 and 2021, 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, 2021, the Company converted 1,164,461 OP Units valued at $18.5 million to 1,164,461 shares of common stock. There were no OP Units converted to common stock during the six months ended June 30, 2022.
At June 30, 2022 and 2021, dividend amounts declared and accrued but not yet paid amounted to $49.5 million and $43.2 million, respectively.
At June 30, 2022 and 2021, the Company adjusted the carrying value of Non-controlling interests to reflect their share of the book value of the OP by $2.9 million and $7.9 million, respectively, with the reallocation recorded as an offset to Additional paid-in capital and Accumulated other comprehensive income (loss).

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 cost and damages related to environmental matters. The Company is not aware of any non-compliance, liability, claim, or other environmental condition that would have a material effect on its consolidated financial position, results of operations, or liquidity.

The Company had a commitment to fund a building expansion project related to a previous acquisition for a total of $17.4 million, in exchange for an increase in base rent. In June 2022, the Company fulfilled this commitment and the base rent increased accordingly.

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, 2022, taxable sales of the applicable properties would trigger liability under the agreements of approximately $22.3 million. Based on information available, the Company does not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future.

In the normal course of business, the Company enters into various types of commitments to purchase real estate properties. These commitments are generally subject to the Company's customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated to purchase the properties.

19. Subsequent Events

On July 15, 2022, the Company paid distributions totaling $49.2 million.

On July 28, 2022, the Board of Directors declared a quarterly distribution of $0.270 per share on the Company's common stock and OP Units for the third quarter of 2022, which will be payable on or before October 14, 2022 to stockholders and OP unitholders of record as of September 30, 2022.

Subsequent to June 30, 2022, the Company continued to expand its operations through the acquisition of additional rental property and associated intangible assets and liabilities. The Company acquired approximately $80.2 million of rental property and associated intangible assets and liabilities (see Note 5).

22


 

On August 1, 2022, the Company entered into two new unsecured bank term loans, including a $200.0 million, five year term loan that matures in 2027 (the "2027 Unsecured Term Loan"), and a $300.0 million, seven year term loan that matures in 2029 (the "2029 Unsecured Term Loan"). Borrowings on the new term loans bear interest at variable rates based on the Secured Overnight Financing Rate plus a margin based on the Company's credit rating, ranging between 0.80% and 1.60% per annum for the 2027 Unsecured Term Loan, and 1.15% and 2.20% per annum for the 2029 Unsecured Term Loan. The applicable margin is 0.95% and 1.25% for the 2027 Unsecured Term Loan and 2029 Unsecured Term Loan, respectively. Proceeds from the loans were used to repay in full the $190.0 million unsecured term loan set to mature in 2024, including accrued interest, and a portion of the outstanding balance on the unsecured revolving credit facility.

Subsequent to June 30, 2022, the Company paid down $318.0 million, and borrowed $94.0 million on the unsecured revolving credit facility, the proceeds of which were used to fund acquisitions and for other general corporate purposes.

Through August 3, 2022, the Company issued 962,200 shares of common stock at a weighted average sale price of $21.44 per share under the ATM Program. The net proceeds, after deducting $0.3 million of commissions and other offering costs, were $20.3 million.

 

 

23


 

 

 

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

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

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

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 2021 Annual Report on Form 10-K, as filed with the SEC on February 23, 2022. The "Risk Factors" of our 2021 Annual Report should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this Quarterly Report on Form 10-Q.

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

Regulation FD Disclosures

We use any of the following to comply with our disclosure obligations under Regulation FD: SEC filings, press releases, public conference calls, or our website. We routinely post important information on our website at www.Broadstone.com, including information that may be deemed material. We encourage our shareholders and others interested in our company to monitor these distribution channels for material disclosures. Our website address is included in this Quarterly Report as a textual reference only and the information on the website is not incorporated by reference in this Quarterly Report.

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 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 excluding capitalized acquisitions costs;

24


 

"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" or "leased" 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 $1.0 billion unsecured revolving credit facility, dated January 28, 2022, with J.P. Morgan Chase Bank, N.A. and the other lenders party thereto.

Overview

We are an internally-managed real estate investment trust ("REIT") that acquires, owns, and manages primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, retail, and office property types. During the six months ended June 30, 2022, we invested $392.4 million, excluding capitalized acquisition costs, in 42 properties at a weighted average initial cash capitalization rate of 6.1%. The acquisitions included properties in industrial (47.2% of the total volume acquired during the six months ended June 30, 2022, based on ABR), restaurant (25.4%), retail (23.8%), and healthcare (3.6%) asset classes located across 21 U.S. states and four Canadian provinces with a weighted average initial lease term and minimum annual rent increases of 19.6 years and 1.8%, respectively. As of June 30, 2022, our portfolio has grown to 764 properties, with 757 properties located in 44 U.S. states and seven properties located in four Canadian provinces.

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

-
Diversified Portfolio. As of June 30, 2022, our portfolio comprised approximately 34.4 million rentable square feet of operational space, and was highly diversified based on property type, geography, tenant, and industry, and is cross-diversified within each (e.g., property-type diversification within a geographic concentration):
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 manufacturing, distribution and warehouse, casual dining, clinical, quick service restaurants, food processing, general merchandise, and flex/research and development.
Geographic Diversification: Our properties are located in 44 U.S. states and four Canadian provinces, with no single geographic concentration exceeding 10.4% of our ABR.
Tenant and Industry Diversification: Our properties are occupied by approximately 213 different commercial tenants who operate 203 different brands that are diversified across 57 differing industries, with no single tenant accounting for more than 2.0% of our ABR.
-
Strong In-Place Leases with Significant Remaining Lease Term. As of June 30, 2022, our portfolio was approximately 99.8% leased with an ABR weighted average remaining lease term of approximately 10.6 years, excluding renewal options.
-
Standard Contractual Base Rent Escalation. Approximately 97.3% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.0%.
-
Extensive Tenant Financial Reporting. Approximately 94.0% of our tenants, based on ABR, provide financial reporting, of which 85.0% are required to provide us with specified financial information on a periodic basis, and an additional 9.0% of our tenants report financial statements publicly, either through SEC filings or otherwise.

 

25


 

Real Estate Portfolio Information

The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as of June 30, 2022. The percentages below are calculated based on our ABR of $360.0 million as of June 30, 2022.

 

Diversification by Property Type

img144228974_0.jpg 

 

 

 

 

 

 

26


 

Property Type

 

# Properties

 

 

ABR
($'000s)

 

 

ABR as a % of
Total Portfolio

 

 

Square Feet
('000s)

 

 

SF as a % of
Total Portfolio

 

Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

 

69

 

 

$

55,116

 

 

 

15.3

%

 

 

10,046

 

 

 

29.2

%

Distribution & Warehouse

 

 

47

 

 

 

51,375

 

 

 

14.3

%

 

 

9,526

 

 

 

27.7

%

Food Processing

 

 

17

 

 

 

24,200

 

 

 

6.7

%

 

 

2,730

 

 

 

7.9

%

Flex and R&D

 

 

7

 

 

 

17,296

 

 

 

4.8

%

 

 

1,457

 

 

 

4.3

%

Cold Storage

 

 

4

 

 

 

12,724

 

 

 

3.5

%

 

 

933

 

 

 

2.7

%

Industrial Services

 

 

22

 

 

 

10,765

 

 

 

3.0

%

 

 

587

 

 

 

1.7

%

Industrial Total

 

 

166

 

 

 

171,476

 

 

 

47.6

%

 

 

25,279

 

 

 

73.5

%

Healthcare

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical

 

 

52

 

 

 

26,770

 

 

 

7.4

%

 

 

1,091

 

 

 

3.2

%

Healthcare Services

 

 

28

 

 

 

12,528

 

 

 

3.5

%

 

 

463

 

 

 

1.3

%

Animal Health Services

 

 

27

 

 

 

10,437

 

 

 

2.9

%

 

 

405

 

 

 

1.2

%

Surgical

 

 

12

 

 

 

10,274

 

 

 

2.9

%

 

 

329

 

 

 

0.9

%

Life Science

 

 

9

 

 

 

7,722

 

 

 

2.1

%

 

 

549

 

 

 

1.6

%

Untenanted

 

 

1

 

 

 

 

 

 

 

 

 

18

 

 

 

0.1

%

Healthcare Total

 

 

129

 

 

 

67,731

 

 

 

18.8

%

 

 

2,855

 

 

 

8.3

%

Restaurant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casual Dining

 

 

101

 

 

 

26,738

 

 

 

7.4

%

 

 

675

 

 

 

2.0

%

Quick Service Restaurants

 

 

146

 

 

 

24,787

 

 

 

6.9

%

 

 

499

 

 

 

1.4

%

Restaurant Total

 

 

247

 

 

 

51,525

 

 

 

14.3

%

 

 

1,174

 

 

 

3.4

%

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Merchandise

 

 

126

 

 

 

23,924

 

 

 

6.6

%

 

 

1,802

 

 

 

5.2

%

Automotive

 

 

66

 

 

 

12,196

 

 

 

3.4

%

 

 

771

 

 

 

2.3

%

Home Furnishings

 

 

13

 

 

 

7,030

 

 

 

2.0

%

 

 

797

 

 

 

2.3

%

Untenanted

 

 

1

 

 

 

 

 

 

 

 

 

34

 

 

 

0.1

%

Retail Total

 

 

206

 

 

 

43,150

 

 

 

12.0

%

 

 

3,404

 

 

 

9.9

%

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Headquarters

 

 

7

 

 

 

10,429

 

 

 

2.9

%

 

 

679

 

 

 

2.0

%

Strategic Operations

 

 

5

 

 

 

9,806

 

 

 

2.7

%

 

 

615

 

 

 

1.8

%

Call Center

 

 

4

 

 

 

5,902

 

 

 

1.7

%

 

 

391

 

 

 

1.1

%

Office Total

 

 

16

 

 

 

26,137

 

 

 

7.3

%

 

 

1,685

 

 

 

4.9

%

Total

 

 

764

 

 

$

360,019

 

 

 

100.0

%

 

 

34,397

 

 

 

100.0

%

 

27


 

Diversification by Tenant

Tenant

 

Property Type

 

# Properties

 

 

ABR
($'000s)

 

 

ABR as a %
of Total
Portfolio

 

 

Square Feet
('000s)

 

 

SF as a %
of Total
Portfolio

 

Jack's Family Restaurants LP*

 

Quick Service Restaurants

 

 

43

 

 

$

7,166

 

 

 

2.0

%

 

 

147

 

 

 

0.4

%

Joseph T. Ryerson & Son, Inc

 

Distribution & Warehouse

 

 

11

 

 

 

6,395

 

 

 

1.8

%

 

 

1,537

 

 

 

4.5

%

Red Lobster Hospitality & Red Lobster
   Restaurants LLC
*

 

Casual Dining

 

 

20

 

 

 

6,361

 

 

 

1.8

%

 

 

166

 

 

 

0.5

%

J. Alexander's, LLC*

 

Casual Dining

 

 

16

 

 

 

6,025

 

 

 

1.7

%

 

 

131

 

 

 

0.4

%

Axcelis Technologies, Inc.

 

Flex and R&D

 

 

1

 

 

 

5,991

 

 

 

1.6

%

 

 

417

 

 

 

1.2

%

Hensley & Company*

 

Distribution & Warehouse

 

 

3

 

 

 

5,871

 

 

 

1.6

%

 

 

577

 

 

 

1.7

%

Dollar General Corporation

 

General Merchandise

 

 

57

 

 

 

5,636

 

 

 

1.5

%

 

 

531

 

 

 

1.5

%

BluePearl Holdings, LLC**

 

Animal Health Services

 

 

13

 

 

 

5,451

 

 

 

1.5

%

 

 

165

 

 

 

0.5

%

Tractor Supply Company

 

General Merchandise

 

 

21

 

 

 

5,279

 

 

 

1.5

%

 

 

417

 

 

 

1.2

%

Outback Steakhouse of Florida LLC*1

 

Casual Dining

 

 

22

 

 

 

5,278

 

 

 

1.5

%

 

 

140

 

 

 

0.4

%

Total Top 10 Tenants

 

 

 

 

207

 

 

 

59,453

 

 

 

16.5

%

 

 

4,228

 

 

 

12.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AHF, LLC*

 

Distribution & Warehouse/
Manufacturing

 

 

5

 

 

 

5,142

 

 

 

1.4

%

 

 

982

 

 

 

2.8

%

Krispy Kreme Doughnut Corporation

 

Quick Service Restaurants/
Food Processing

 

 

27

 

 

 

5,034

 

 

 

1.4

%

 

 

156

 

 

 

0.4

%

Big Tex Trailer Manufacturing, Inc.*

 

Automotive/Distribution &
Warehouse/Manufacturing/ Corporate Headquarters

 

 

17

 

 

 

4,957

 

 

 

1.4

%

 

 

1,302

 

 

 

3.8

%

Siemens Medical Solutions USA, Inc. &
   Siemens Corporation

 

Manufacturing/Flex
and R&D

 

 

2

 

 

 

4,936

 

 

 

1.4

%

 

 

545

 

 

 

1.6

%

Carvana, LLC*

 

Industrial Services

 

 

2

 

 

 

4,510

 

 

 

1.3

%

 

 

230

 

 

 

0.7

%

Santa Cruz Valley Hospital

 

Healthcare Facilities

 

 

1

 

 

 

4,500

 

 

 

1.2

%

 

 

148

 

 

 

0.4

%

Nestle' Dreyer's Ice Cream Company

 

Cold Storage

 

 

1

 

 

 

4,476

 

 

 

1.2

%

 

 

310

 

 

 

0.9

%

Arkansas Surgical Hospital

 

Surgical

 

 

1

 

 

 

4,366

 

 

 

1.2

%

 

 

129

 

 

 

0.4

%

American Signature, Inc.

 

Home Furnishings

 

 

6

 

 

 

4,224

 

 

 

1.2

%

 

 

474

 

 

 

1.4

%

Fresh Express Incorporated

 

Food Processing

 

 

1

 

 

 

4,144

 

 

 

1.2

%

 

 

335

 

 

 

1.0

%

Total Top 20 Tenants

 

 

 

 

270

 

 

$

105,742

 

 

 

29.4

%

 

 

8,839

 

 

 

25.7

%

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

* Subject to a master lease.

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

Diversification by Brand

Brand

 

Property Type

 

# Properties

 

 

ABR
($'000s)

 

 

ABR as a %
of Total
Portfolio

 

 

Square Feet
('000s)

 

 

SF as a %
of Total
Portfolio

 

Jack's Family Restaurants*

 

Quick Service Restaurants

 

 

43

 

 

$

7,166

 

 

 

2.0

%

 

 

147

 

 

 

0.4

%

Ryerson

 

Distribution & Warehouse

 

 

11

 

 

 

6,395

 

 

 

1.8

%

 

 

1,537

 

 

 

4.5

%

Red Lobster*

 

Casual Dining

 

 

20

 

 

 

6,361

 

 

 

1.8

%

 

 

166

 

 

 

0.5

%

Axcelis

 

Flex and R&D

 

 

1

 

 

 

5,991

 

 

 

1.6

%

 

 

417

 

 

 

1.2

%

Hensley*

 

Distribution & Warehouse

 

 

3

 

 

 

5,871

 

 

 

1.6

%

 

 

577

 

 

 

1.7

%

Dollar General

 

General Merchandise

 

 

57

 

 

 

5,636

 

 

 

1.5

%

 

 

531

 

 

 

1.5

%

BluePearl Veterinary Partners**

 

Animal Health Services

 

 

13

 

 

 

5,451

 

 

 

1.5

%

 

 

165

 

 

 

0.5

%

Bob Evans Farms*1

 

Casual Dining/Food Processing

 

 

21

 

 

 

5,352

 

 

 

1.5

%

 

 

281

 

 

 

0.9

%

Tractor Supply Co.

 

General Merchandise

 

 

21

 

 

 

5,279

 

 

 

1.5

%

 

 

417

 

 

 

1.2

%

AHF Products*

 

Distribution & Warehouse/
Manufacturing

 

 

5

 

 

 

5,142

 

 

 

1.4

%

 

 

982

 

 

 

2.8

%

Total Top 10 Brands

 

 

 

 

195

 

 

 

58,644

 

 

 

16.2

%

 

 

5,220

 

 

 

15.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Krispy Kreme

 

Quick Service Restaurants/
Food Processing

 

 

27

 

 

 

5,034

 

 

 

1.4

%

 

 

156

 

 

 

0.4

%

Big Tex Trailers*

 

Automotive/Distribution &
Warehouse/Manufacturing/
Corporate Headquarters

 

 

17

 

 

 

4,957

 

 

 

1.4

%

 

 

1,302

 

 

 

3.8

%

Siemens

 

Manufacturing/Flex
and R&D

 

 

2

 

 

 

4,936

 

 

 

1.4

%

 

 

545

 

 

 

1.6

%

Outback Steakhouse*

 

Casual Dining

 

 

20

 

 

 

4,566

 

 

 

1.3

%

 

 

126

 

 

 

0.4

%

Carvana*

 

Industrial Services

 

 

2

 

 

 

4,510

 

 

 

1.3

%

 

 

230

 

 

 

0.7

%

Santa Cruz Valley Hospital

 

Healthcare Facilities

 

 

1

 

 

 

4,500

 

 

 

1.2

%

 

 

148

 

 

 

0.4

%

Nestle'

 

Cold Storage

 

 

1

 

 

 

4,476

 

 

 

1.2

%

 

 

310

 

 

 

0.9

%

Arkansas Surgical Hospital

 

Surgical

 

 

1

 

 

 

4,366

 

 

 

1.2

%

 

 

129

 

 

 

0.4

%

Wendy's**

 

Quick Service Restaurants

 

 

29

 

 

 

4,320

 

 

 

1.2

%

 

 

83

 

 

 

0.2

%

Value City Furniture

 

Home Furnishings

 

 

6

 

 

 

4,224

 

 

 

1.2

%

 

 

474

 

 

 

1.4

%

Total Top 20 Brands

 

 

 

 

301

 

 

$

104,533

 

 

 

29.0

%

 

 

8,723

 

 

 

25.4

%

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.

28


 

Diversification by Industry

Industry

 

# Properties

 

 

ABR
($'000s)

 

 

ABR as a %
of Total
Portfolio

 

 

Square Feet ('000s)

 

 

SF as a %
of Total
Portfolio

 

Healthcare Facilities

 

 

102

 

 

$

53,633

 

 

 

14.9

%

 

 

2,029

 

 

 

5.9

%

Restaurant

 

 

250

 

 

 

52,296

 

 

 

14.5

%

 

 

1,217

 

 

 

3.5

%

Packaged Foods & Meats

 

 

11

 

 

 

17,698

 

 

 

4.9

%

 

 

1,914

 

 

 

5.6

%

Distributors

 

 

27

 

 

 

15,699

 

 

 

4.4

%

 

 

2,695

 

 

 

7.8

%

Food Distributors

 

 

8

 

 

 

14,678

 

 

 

4.1

%

 

 

1,786

 

 

 

5.2

%

Specialty Stores

 

 

31

 

 

 

13,930

 

 

 

3.9

%

 

 

1,338

 

 

 

3.9

%

Auto Parts & Equipment

 

 

39

 

 

 

12,672

 

 

 

3.5

%

 

 

2,387

 

 

 

6.9

%

Home Furnishings Retail

 

 

18

 

 

 

12,459

 

 

 

3.5

%

 

 

1,858

 

 

 

5.4

%

Specialized Consumer Services

 

 

47

 

 

 

12,218

 

 

 

3.4

%

 

 

722

 

 

 

2.1

%

Metal & Glass Containers

 

 

8

 

 

 

9,898

 

 

 

2.7

%

 

 

2,206

 

 

 

6.4

%

Healthcare Services

 

 

18

 

 

 

9,213

 

 

 

2.6

%

 

 

515

 

 

 

1.5

%

General Merchandise Stores

 

 

90

 

 

 

9,011

 

 

 

2.5

%

 

 

817

 

 

 

2.4

%

Aerospace & Defense

 

 

7

 

 

 

8,694

 

 

 

2.4

%

 

 

952

 

 

 

2.8

%

Internet & Direct Marketing Retail

 

 

3

 

 

 

6,881

 

 

 

1.9

%

 

 

447

 

 

 

1.3

%

Electronic Components

 

 

2

 

 

 

6,806

 

 

 

1.9

%

 

 

466

 

 

 

1.4

%

Other (42 industries)

 

 

101

 

 

 

104,233

 

 

 

28.9

%

 

 

12,996

 

 

 

37.7

%

Untenanted properties

 

 

2

 

 

 

 

 

 

 

 

 

52

 

 

 

0.2

%

Total

 

 

764

 

 

$

360,019

 

 

 

100.0

%

 

 

34,397

 

 

 

100.0

%

 

29


 

Diversification by Geographic Location

img144228974_1.jpg 

State /
Province

 

#
Properties

 

 

ABR
($'000s)

 

 

ABR as a
% of Total
Portfolio

 

 

Square Feet ('000s)

 

 

SF as a %
of Total
Portfolio

 

 

 

State /
Province

 

#
Properties

 

 

ABR
($'000s)

 

 

ABR as a
% of Total
Portfolio

 

 

Square Feet ('000s)

 

 

SF as a %
of Total
Portfolio

 

TX

 

 

70

 

 

$

37,549

 

 

 

10.4

%

 

 

3,636

 

 

 

10.6

%

 

 

LA

 

 

4

 

 

 

3,401

 

 

 

0.9

%

 

 

194

 

 

 

0.6

%

IL

 

 

27

 

 

 

21,566

 

 

 

6.0

%

 

 

2,002

 

 

 

5.8

%

 

 

NE

 

 

6

 

 

 

3,037

 

 

 

0.8

%

 

 

509

 

 

 

1.5

%

WI

 

 

35

 

 

 

20,744

 

 

 

5.8

%

 

 

2,163

 

 

 

6.3

%

 

 

MD

 

 

4

 

 

 

2,987

 

 

 

0.8

%

 

 

293

 

 

 

0.9

%

MI

 

 

49

 

 

 

17,130

 

 

 

4.8

%

 

 

1,633

 

 

 

4.7

%

 

 

NM

 

 

8

 

 

 

2,815

 

 

 

0.8

%

 

 

96

 

 

 

0.3

%

FL

 

 

42

 

 

 

16,122

 

 

 

4.5

%

 

 

844

 

 

 

2.5

%

 

 

MS

 

 

8

 

 

 

2,774

 

 

 

0.8

%

 

 

334

 

 

 

1.0

%

OH

 

 

38

 

 

 

15,786

 

 

 

4.4

%

 

 

1,416

 

 

 

4.1

%

 

 

IA

 

 

4

 

 

 

2,754

 

 

 

0.8

%

 

 

622

 

 

 

1.8

%

CA

 

 

10

 

 

 

15,622

 

 

 

4.3

%

 

 

1,493

 

 

 

4.3

%

 

 

SC

 

 

13

 

 

 

2,494

 

 

 

0.7

%

 

 

308

 

 

 

0.9

%

IN

 

 

30

 

 

 

15,035

 

 

 

4.2

%

 

 

1,858

 

 

 

5.4

%

 

 

WV

 

 

16

 

 

 

2,486

 

 

 

0.7

%

 

 

109

 

 

 

0.3

%

MN

 

 

21

 

 

 

14,600

 

 

 

4.0

%

 

 

2,285

 

 

 

6.6

%

 

 

CO

 

 

4

 

 

 

2,459

 

 

 

0.7

%

 

 

126

 

 

 

0.4

%

TN

 

 

49

 

 

 

13,995

 

 

 

3.9

%

 

 

866

 

 

 

2.5

%

 

 

UT

 

 

3

 

 

 

2,379

 

 

 

0.7

%

 

 

280

 

 

 

0.8

%

NC

 

 

36

 

 

 

13,742

 

 

 

3.8

%

 

 

1,425

 

 

 

4.1

%

 

 

CT

 

 

2

 

 

 

1,758

 

 

 

0.5

%

 

 

55

 

 

 

0.2

%

AZ

 

 

9

 

 

 

13,213

 

 

 

3.7

%

 

 

909

 

 

 

2.6

%

 

 

MT

 

 

7

 

 

 

1,563

 

 

 

0.4

%

 

 

43

 

 

 

0.1

%

AL

 

 

53

 

 

 

11,950

 

 

 

3.3

%

 

 

873

 

 

 

2.5

%

 

 

NV

 

 

2

 

 

 

1,336

 

 

 

0.4

%

 

 

81

 

 

 

0.2

%

GA

 

 

33

 

 

 

11,356

 

 

 

3.1

%

 

 

1,576

 

 

 

4.6

%

 

 

DE

 

 

4

 

 

 

1,154

 

 

 

0.3

%

 

 

133

 

 

 

0.4

%

NY

 

 

26

 

 

 

10,718

 

 

 

3.0

%

 

 

680

 

 

 

2.0

%

 

 

ND

 

 

2

 

 

 

943

 

 

 

0.3

%

 

 

28

 

 

 

0.1

%

MA

 

 

5

 

 

 

10,456

 

 

 

2.9

%

 

 

1,026

 

 

 

3.0

%

 

 

VT

 

 

2

 

 

 

420

 

 

 

0.1

%

 

 

24

 

 

 

0.1

%

AR

 

 

12

 

 

 

8,767

 

 

 

2.4

%

 

 

544

 

 

 

1.6

%

 

 

WY

 

 

1

 

 

 

307

 

 

 

0.1

%

 

 

21

 

 

 

0.1

%

OK

 

 

21

 

 

 

7,597

 

 

 

2.1

%

 

 

977

 

 

 

2.8

%

 

 

OR

 

 

1

 

 

 

136

 

 

 

0.0

%

 

 

9

 

 

 

0.1

%

KY

 

 

24

 

 

 

7,486

 

 

 

2.1

%

 

 

946

 

 

 

2.7

%

 

 

SD

 

 

1

 

 

 

81

 

 

 

0.0

%

 

 

9

 

 

 

0.0

%

PA

 

 

17

 

 

 

7,080

 

 

 

2.0

%

 

 

1,037

 

 

 

3.0

%

 

 

Total US

 

 

757

 

 

$

351,970

 

 

 

97.8

%

 

 

33,967

 

 

 

98.8

%

MO

 

 

12

 

 

 

6,064

 

 

 

1.7

%

 

 

1,136

 

 

 

3.3

%

 

 

BC

 

 

2

 

 

$

4,633

 

 

 

1.3

%

 

 

253

 

 

 

0.7

%

KS

 

 

11

 

 

 

5,489

 

 

 

1.5

%

 

 

648

 

 

 

1.9

%

 

 

ON

 

 

3

 

 

 

2,085

 

 

 

0.6

%

 

 

101

 

 

 

0.3

%

VA

 

 

17

 

 

 

5,451

 

 

 

1.5

%

 

 

204

 

 

 

0.6

%

 

 

AB

 

 

1

 

 

 

981

 

 

 

0.2

%

 

 

51

 

 

 

0.1

%

NJ

 

 

3

 

 

 

4,904

 

 

 

1.4

%

 

 

366

 

 

 

1.1

%

 

 

MB

 

 

1

 

 

 

350

 

 

 

0.1

%

 

 

25

 

 

 

0.1

%

WA

 

 

15

 

 

 

4,264

 

 

 

1.2

%

 

 

150

 

 

 

0.4

%

 

 

Total Canada

 

 

7

 

 

$

8,049

 

 

 

2.2

%

 

 

430

 

 

 

1.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total

 

 

764

 

 

$

360,019

 

 

 

100.0

%

 

 

34,397

 

 

 

100.0

%

 

 

30


 

Our Leases

We typically lease our properties pursuant to long-term net leases that often have renewal options. Substantially all of our leases are net, meaning our tenants are generally obligated to pay all expenses associated with the leased property (such as real estate taxes, insurance, maintenance, repairs, and capital costs).

As of June 30, 2022, approximately 99.8% of our portfolio, representing all but two of our properties, was subject to a lease. Because substantially all of our properties are leased under long-term leases, we are not currently required to perform significant ongoing leasing activities on our properties.

As of June 30, 2022, the ABR weighted average remaining term of our leases was approximately 10.6 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Approximately 67.4% of our ABR was derived from leases that will expire in 2030 and after, and no more than 6.5% of our ABR was derived from leases that expire in any single year prior to 2030. The following chart sets forth our lease expirations based upon the terms of the leases in place as of June 30, 2022.

img144228974_2.jpg 

 

31


 

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

Expiration Year

 

# Properties

 

 

# Leases

 

 

ABR
($'000s)

 

 

ABR as a % of
Total Portfolio

 

 

Square Feet
('000s)

 

 

SF as a % of
Total Portfolio

 

2022

 

 

1

 

 

 

2

 

 

$

1,566

 

 

 

0.4

%

 

 

46

 

 

 

0.1

%

2023

 

 

7

 

 

 

8

 

 

 

5,412

 

 

 

1.5

%

 

 

538

 

 

 

1.6

%

2024

 

 

11

 

 

 

11

 

 

 

14,036

 

 

 

3.9

%

 

 

1,689

 

 

 

4.9

%

2025

 

 

20

 

 

 

23

 

 

 

8,527

 

 

 

2.4

%

 

 

698

 

 

 

2.0

%

2026

 

 

35

 

 

 

32

 

 

 

19,235

 

 

 

5.4

%

 

 

1,413

 

 

 

4.1

%

2027

 

 

29

 

 

 

28

 

 

 

23,531

 

 

 

6.5

%

 

 

2,019

 

 

 

5.9

%

2028

 

 

33

 

 

 

31

 

 

 

23,061

 

 

 

6.4

%

 

 

2,291

 

 

 

6.7

%

2029

 

 

71

 

 

 

39

 

 

 

22,061

 

 

 

6.1

%

 

 

2,711

 

 

 

7.9

%

2030

 

 

101

 

 

 

57

 

 

 

53,636

 

 

 

14.9

%

 

 

5,110

 

 

 

14.8

%

2031

 

 

33

 

 

 

28

 

 

 

8,547

 

 

 

2.4

%

 

 

805

 

 

 

2.3

%

2032

 

 

59

 

 

 

44

 

 

 

30,701

 

 

 

8.5

%

 

 

3,437

 

 

 

10.0

%

2033

 

 

49

 

 

 

23

 

 

 

18,360

 

 

 

5.1

%

 

 

1,575

 

 

 

4.6

%

2034

 

 

33

 

 

 

22

 

 

 

6,240

 

 

 

1.7

%

 

 

409

 

 

 

1.2

%

2035

 

 

17

 

 

 

13

 

 

 

12,494

 

 

 

3.5

%

 

 

1,927

 

 

 

5.6

%

2036

 

 

86

 

 

 

21

 

 

 

25,732

 

 

 

7.2

%

 

 

2,854

 

 

 

8.3

%

2037

 

 

24

 

 

 

9

 

 

 

17,762

 

 

 

4.9

%

 

 

1,369

 

 

 

4.0

%

2038

 

 

33

 

 

 

29

 

 

 

6,842

 

 

 

1.9

%

 

 

306

 

 

 

0.9

%

2039

 

 

11

 

 

 

6

 

 

 

6,860

 

 

 

1.9

%

 

 

803

 

 

 

2.3

%

2040

 

 

31

 

 

 

5

 

 

 

5,744

 

 

 

1.6

%

 

 

312

 

 

 

0.9

%

2041

 

 

40

 

 

 

8

 

 

 

19,850

 

 

 

5.5

%

 

 

1,731

 

 

 

5.0

%

Thereafter

 

 

38

 

 

 

9

 

 

 

29,822

 

 

 

8.3

%

 

 

2,302

 

 

 

6.7

%

Untenanted properties

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

52

 

 

 

0.2

%

Total

 

 

764

 

 

 

448

 

 

$

360,019

 

 

 

100.0

%

 

 

34,397

 

 

 

100.0

%

 

32


 

Substantially all of our leases provide for periodic contractual rent escalations. As of June 30, 2022, leases contributing 97.3% of our ABR provided for increases in future ABR, generally ranging from 1.5% to 2.5% annually, with an ABR weighted average annual minimum increase equal to 2.0% of base rent. Generally, our rent escalators increase rent on specified dates by a fixed percentage. Our escalations provide us with a source of organic revenue growth and a measure of inflation protection. Additional information on lease escalation frequency and weighted average annual escalation rates as of June 30, 2022 is displayed below:

Lease Escalation Frequency

 

% of ABR

 

 

Weighted Average Annual Minimum Increase (a)

 

Annually

 

 

78.2

%

 

 

2.3

%

Every 2 years

 

 

0.1

%

 

 

1.8

%

Every 3 years

 

 

2.9

%

 

 

3.0

%

Every 4 years

 

 

1.1

%

 

 

2.4

%

Every 5 years

 

 

8.0

%

 

 

1.8

%

Other escalation frequencies

 

 

7.0

%

 

 

1.6

%

Flat

 

 

2.7

%

 

 

 

Total/Weighted Average (b)

 

 

100.0

%

 

 

2.0

%

(a)
Represents the ABR weighted average annual minimum increase of the entire portfolio as if all escalations occurred annually. For leases where rent escalates by the greater of a stated fixed percentage or the change in CPI, we have assumed an escalation equal to the stated fixed percentage in the lease. As of June 30, 2022, leases contributing 8.0% of our ABR provide for rent increases equal to the lesser of a stated fixed percentage or the change in CPI. As any future increase in CPI is unknowable at this time, we have not included an increase in the rent pursuant to these leases in the weighted average annual minimum increase presented.
(b)
Weighted by ABR.

The escalation provisions of our leases (by percentage of ABR) as of June 30, 2022, are displayed in the following chart:

img144228974_3.jpg 

 

33


 

Results of Operations

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

Three Months Ended June 30, 2022 Compared to Three Months Ended March 31, 2022

Lease Revenues, net

 

 

For the Three Months Ended

 

 

June 30,

 

March 31,

 

Increase/(Decrease)

(in thousands)

 

2022

 

2022

 

$

 

%

Contractual rental amounts billed for operating leases

 

$

87,505

 

 

$

84,396

 

 

$

3,109

 

 

3.7

%

Adjustment to recognize contractual operating lease
   billings on a straight-line basis

 

 

5,090

 

 

 

5,021

 

 

 

69

 

 

1.4

%

Net write-offs of accrued rental income

 

 

  —

 

 

 

(1,326

)

 

 

1,326

 

 

(100.0

)%

Variable rental amounts earned

 

 

291

 

 

 

186

 

 

 

105

 

 

56.5

%

Earned income from direct financing leases

 

 

721

 

 

 

723

 

 

 

(2

)

 

(0.3

)%

Interest income from sales-type leases

 

 

15

 

 

 

14

 

 

 

1

 

 

7.1

%

Operating expenses billed to tenants

 

 

4,263

 

 

 

4,735

 

 

 

(472

)

 

(10.0

)%

Other income from real estate transactions

 

 

134

 

 

 

42

 

 

 

92

 

 

>100.0

%

Adjustment to revenue recognized for uncollectible
   rental amounts billed, net

 

 

(6

)

 

 

50

 

 

 

(56

)

 

<(100.0

)%

Total Lease revenues, net

 

$

98,013

 

 

$

93,841

 

 

$

4,172

 

 

4.4

%

The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through property acquisitions. As we acquire properties throughout the period, the full benefit of lease revenues from newly acquired properties will not be realized in the quarter of acquisition. During the first quarter of 2022, we invested $210.0 million, excluding capitalized acquisition costs, in 27 properties at a weighted average initial cash capitalization rate of 5.7%. Most of these acquisitions closed during the month of March 2022, and therefore did not materially contribute to Lease revenues, net for the three months ended March 31, 2022. The increase was also partially attributable to our $182.4 million of acquisitions during the second quarter of 2022 at a 6.4% weighted average initial cash capitalization rate, the full benefit of which we anticipate will be realized during the third quarter of 2022. Additionally, we did not record any write-offs of accrued rental income during the three months ended June 30, 2022.

 

34


 

Operating Expenses

 

 

For the Three Months Ended

 

 

 

June 30,

 

 

March 31,

 

 

Increase/(Decrease)

 

(in thousands)

 

2022

 

 

2022

 

 

$

 

 

%

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

35,511

 

 

$

34,290

 

 

$

1,221

 

 

 

3.6

%

Property and operating expense

 

 

4,696

 

 

 

5,044

 

 

 

(348

)

 

 

(6.9

)%

General and administrative

 

 

9,288

 

 

 

8,828

 

 

 

460

 

 

 

5.2

%

Provision for impairment of investment in rental properties

 

 

1,380

 

 

 

 

 

 

1,380

 

 

 

100.0

%

Total operating expenses

 

$

50,875

 

 

$

48,162

 

 

$

2,713

 

 

 

5.6

%

Depreciation and amortization

The increase in depreciation and amortization for the three months ended June 30, 2022 was primarily due to growth in our real estate portfolio.

Provision for impairment of investment in rental properties

During the three months ended June 30, 2022 we recognized $1.4 million of impairment on our investments in rental properties due to change in our long-term hold strategy for a single property, compared to no impairment recognized during the three months ended March 31, 2022. The following table presents the impairment charges for the respective periods:

 

 

 

For the Three Months Ended

 

 

 

June 30,

 

 

March 31,

 

(in thousands, except number of properties)

 

2022

 

 

2022

 

Number of properties

 

 

1

 

 

 

 

Carrying value prior to impairment charge

 

$

3,674

 

 

$

 

Fair value

 

 

2,294

 

 

 

 

Impairment charge

 

$

1,380

 

 

$

 

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

 

35


 

Other income (expenses)

 

 

For the Three Months Ended

 

 

June 30,

 

March 31,

 

Increase/(Decrease)

(in thousands)

 

2022

 

2022

 

$

 

%

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(17,888

 

)

 

$

(16,896

 

)

 

$

992

 

 

 

5.9

%

Gain on sale of real estate

 

 

 

4,071

 

 

 

 

 

1,196

 

 

 

 

 

2,875

 

 

 

>100.0

%

Income taxes

 

 

(401

 

)

 

 

(412

 

)

 

 

(11

 

)

 

(2.7

)%

Other income (expenses)

 

 

 

2,632

 

 

 

 

(1,126

 

)

 

 

(3,758

 

)

 

>100.0

%

Interest expense

The increase in interest expense reflects an increase in our weighted average cost of borrowings combined with increased average outstanding borrowings during the three months ended June 30, 2022 compared to during the three months ended March 31, 2022. During the second quarter we increased total outstanding borrowings by $53.8 million to partially fund our acquisitions. Of our $1.9 billion of total outstanding indebtedness, approximately $200.5 million, or 10.8% is variable, and therefore subject to the impact of fluctuations in interest rates.

Gain on sale of real estate

Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months ended June 30, 2022, we recognized a gain of $4.1 million on the sale of three properties, compared to a gain of $1.2 million on the sale of one property during the three months ended March 31, 2022. Our proactive asset management strategy includes determining to sell any of our properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives.

Other income (expenses)

The change in other income (expenses) during the three months ended June 30, 2022 was primarily due to $2.6 million of an unrealized foreign exchange gain recognized on the quarterly remeasurement of our $100 million CAD revolver borrowings, compared to a $1.1 million unrealized foreign exchange loss recognized during the three months ended March 31, 2022.

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)

 

2022

 

 

2022

 

 

$

 

 

%

 

Net income

 

$

35,552

 

 

$

28,441

 

 

$

7,111

 

 

 

25.0

%

Net earnings per diluted share

 

 

0.20

 

 

 

0.16

 

 

 

0.04

 

 

 

25.0

%

The increase in net income is primarily attributable to a $4.2 million increase in lease revenue associated with growth in our real estate portfolio, a $3.8 million increase in unrealized foreign exchange gains, and a $2.9 million increase in gain on sale of real estate, partially offset by a $1.4 million increase in impairment of investment in rental properties, a $1.2 million increase in depreciation and amortization, and a $1.0 million increase in interest expense.

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.

36


 

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Lease Revenues, net

 

 

 

For the Six Months Ended

 

 

June 30,

 

Increase/(Decrease)

(in thousands)

 

2022

 

2021

 

$

 

%

Contractual rental amounts billed for operating leases

 

$

171,901

 

 

$

148,256

 

 

$

23,645

 

 

15.9

%

Adjustment to recognize contractual operating lease
   billings on a straight-line basis

 

 

10,111

 

 

 

9,533

 

 

 

578

 

 

6.1

%

Net write-offs of accrued rental income

 

 

(1,326

)

 

 

(442

)

 

 

(884

)

 

>100.0

%

Variable rental amounts earned

 

 

477

 

 

 

205

 

 

 

272

 

 

>100.0

%

Earned income from direct financing leases

 

 

1,444

 

 

 

1,458

 

 

 

(14

)

 

(1.0

)%

Interest income from sales-type leases

 

 

29

 

 

 

29

 

 

 

  —

 

 

  —

%

Operating expenses billed to tenants

 

 

8,998

 

 

 

8,584

 

 

 

414

 

 

4.8

%

Other income from real estate transactions

 

 

176

 

 

 

33

 

 

 

143

 

 

>100.0

%

Adjustment to revenue recognized for uncollectible
   rental amounts billed, net

 

 

44

 

 

 

(199

)

 

 

243

 

 

>100.0

%

Total Lease revenues, net

 

$

191,854

 

 

$

167,457

 

 

$

24,397

 

 

14.6

%

The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through property acquisitions closed since June 30, 2021. During the twelve months ended June 30, 2022, we invested $765.8 million, excluding capitalized acquisition costs, in 96 properties at a weighted average initial cash capitalization rate of 6.2%.

Operating Expenses

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

Increase/(Decrease)

 

(in thousands)

 

2022

 

 

2021

 

 

$

 

 

%

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

69,801

 

 

$

61,938

 

 

$

7,863

 

 

 

12.7

%

Property and operating expense

 

 

9,740

 

 

 

9,177

 

 

 

563

 

 

 

6.1

%

General and administrative

 

 

18,116

 

 

 

19,288

 

 

 

(1,172

)

 

 

(6.1

)%

Provision for impairment of investment in rental properties

 

 

1,380

 

 

 

2,012

 

 

 

(632

)

 

 

(31.4

)%

Total operating expenses

 

$

99,037

 

 

$

92,415

 

 

$

6,622

 

 

 

7.2

%

Depreciation and amortization

The increase in depreciation and amortization for the six months ended June 30, 2022 was primarily due to growth in our real estate portfolio.

General and administrative

The decrease in general and administrative expenses mainly reflects decreased severance expense. During the six months ended June 30, 2021, we recognized severance associated with the departure of a named executive officer.

Provision for impairment of investment in rental properties

During the six months ended June 30, 2022, we recognized $1.4 million of impairment on our investments in rental properties, compared to $2.0 million during the six months ended June 30, 2021. The following table presents the impairment charges for the respective periods:

 

 

For the Six Months Ended

 

 

 

June 30,

 

(in thousands, except number of properties)

 

2022

 

 

2021

 

Number of properties

 

 

1

 

 

 

1

 

Carrying value prior to impairment charge

 

$

3,674

 

 

$

2,818

 

Fair value

 

 

2,294

 

 

 

806

 

Impairment charge

 

$

1,380

 

 

$

2,012

 

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

37


 

Other income (expenses)

 

 

For the Six Months Ended

 

 

June 30,

 

Increase/(Decrease)

(in thousands)

 

2022

 

2021

 

$

 

%

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

 

 

 

 

$

11

 

 

 

$

(11

 

)

 

<(100.0

)%

Interest expense

 

 

(34,784

 

)

 

 

(31,538

 

)

 

 

 

3,246

 

 

 

10.3

%

Cost of debt extinguishment

 

 

 

 

 

 

 

(126

 

)

 

 

(126

 

)

 

<(100.0

)%

Gain on sale of real estate

 

 

 

5,267

 

 

 

 

 

8,571

 

 

 

 

(3,304

 

)

 

(38.5

)%

Income taxes

 

 

(813

 

)

 

 

(714

 

)

 

 

99

 

 

 

13.9

%

Change in fair value of earnout liability

 

 

 

 

 

 

 

(4,480

 

)

 

 

 

4,480

 

 

 

<(100.0

)%

Other income

 

 

 

1,506

 

 

 

 

14

 

 

 

 

 

1,492

 

 

 

>100.0

%

Interest expense

The increase in interest expense reflects an increase in our weighted average cost of borrowings combined with increased average outstanding borrowings during the six months ended June 30, 2022 compared to during the six months ended June 30, 2021. Since June 30, 2021 we increased total outstanding borrowings by $360.4 million to partially fund our acquisitions. Of our $1.9 billion of total outstanding indebtedness, approximately $200.5 million, or 10.8% is variable, and therefore subject to the impact of fluctuations in interest rates.

Gain on sale of real estate

Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the six months ended June 30, 2022, we recognized a gain of $5.3 million on the sale of four properties, compared to a gain of $8.6 million on the sale of 19 properties during the six months ended June 30, 2021. Our proactive asset management strategy includes determining to sell any of our properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives.

Change in fair value of earnout liability

The fair value of the earnout liability was remeasured each reporting period, with changes recorded as Change in fair value of earnout liability in the Condensed Consolidated Statements of Income and Comprehensive Income. All earnout milestones were achieved during the year ended December 31, 2021, therefore there is no change in the fair value of the earnout liability during the six months ended June 30, 2022. The change in the fair value of the earnout liability during the six months ended June 30, 2021 reflected an increase in our share price as compared to December 31, 2020.

Other income

The increase in other income during the six months ended June 30, 2022 was primarily due to a $1.5 million unrealized foreign exchange gain recognized on the quarterly remeasurement of our $100 million CAD revolver borrowings. The specific CAD revolver borrowings were drawn during the first quarter of 2022, with no similar activity during the six months ended June 30, 2021.

Net income and Net earnings per diluted share

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

Increase/(Decrease)

 

(in thousands, except per share data)

 

2022

 

 

2021

 

 

$

 

 

%

 

Net income

 

$

63,993

 

 

$

46,780

 

 

$

17,213

 

 

 

36.8

%

Net earnings per diluted share

 

 

0.36

 

 

 

0.30

 

 

 

0.06

 

 

 

20.0

%

 

The increase in net income is primarily due to revenue growth of $24.4 million, a $4.5 million increase in change in fair value of earnout liability, a $1.5 million increase in unrealized foreign exchange gain, and a $1.2 million decrease in general and administrative expenses. These factors were partially offset by a $7.9 million increase in depreciation and amortization, a $3.3 million decrease on gain on sale of real estate, and a $3.2 million increase in interest expense.

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.

38


 

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 current investment grade credit ratings of 'BBB' from S&P Global Ratings ("S&P") and 'Baa2' from Moody's Investors Service ("Moody's"). We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with lenders and with rating agencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As of June 30, 2022, we had total debt outstanding of $1.9 billion, Net Debt of $1.8 billion, and a Net Debt to Annualized Adjusted EBITDAre ratio of 5.3x.

Net Debt and Annualized Adjusted EBITDAre are non-GAAP financial measures, and Annualized Adjusted EBITDAre is calculated based upon EBITDA, EBITDAre, and Adjusted EBITDAre, each of which is also a non-GAAP financial measure. Refer to Non-GAAP Measures below for further details concerning our calculation of non-GAAP measures and reconciliations to the comparable GAAP measure.

Liquidity/REIT Requirements

Liquidity is a measure of our ability to meet potential cash requirements, including our ongoing commitments to repay debt, fund our operations, acquire properties, make distributions to our stockholders, and other general business needs. As a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gains, on an annual basis. As a result, it is unlikely that we will be able to retain substantial cash balances to meet our long-term liquidity needs, including repayment of debt and the acquisition of additional properties, from our annual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital.

Short-term Liquidity Requirements

Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including our general and administrative expenses as well as interest payments on our outstanding debt, to pay distributions, and to fund our acquisitions that are under control or expected to close within a short time period. We do not currently anticipate making significant capital expenditures or incurring other significant property costs, including as a result of inflationary pressures in the current economic environment, because of the strong occupancy levels across our portfolio and the net lease nature of our leases. We expect to meet our short-term liquidity requirements primarily from cash and cash equivalents balances and net cash provided by operating activities, supplemented by borrowings under our Revolving Credit Facility. We intend to match fund our acquisitions with an appropriate mix of debt and equity capital. We use cash on hand and borrowings under our Revolving Credit Facility to initially fund acquisitions, which are subsequently repaid or replaced with proceeds from our equity and debt capital markets activities.

As detailed in the contractual obligations table below, we have approximately $36.0 million of expected obligations due throughout the remainder of 2022, primarily consisting of $34.1 million of interest expense due, including the impact of our interest rate swaps, and $1.5 million of mortgage maturities. We expect our cash provided by operating activities, as discussed below, will be sufficient to pay for our current obligations including interest expense on our borrowings. We expect to either repay the maturing mortgages with available cash on hand generated from our results of operations or borrowings under our Revolving Credit Facility, or refinance with property-level borrowings.

Long-term Liquidity Requirements

Our long-term liquidity requirements consist primarily of funds necessary to repay debt and invest in additional revenue generating properties. We expect to source debt capital from unsecured term loans from commercial banks, revolving credit facilities, private placement senior unsecured notes, and public bond offerings.

The source and mix of our debt capital in the future will be impacted by market conditions as well as our continued focus on lengthening our debt maturity profile to better align with our portfolio's long-term leases, staggering debt maturities to reduce the risk that a significant amount of debt will mature in any single year in the future, and managing our exposure to interest rate risk. As of June 30, 2022, we have $679.3 million of available capacity under our Revolving Credit Facility.

We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success

39


 

will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our capital structure.

Equity Capital Resources

Our equity capital is primarily provided through our at-the-market common equity offering program ("ATM Program"), as well as follow-on equity offerings. Under the terms of our ATM Program we may, from time to time, publicly offer and sell shares of our common stock having an aggregate gross sales price of up to $400 million. The ATM Program provides for forward sale agreements, enabling us to set the price of shares upon pricing the offering while delaying the issuance of shares and the receipt of the net proceeds. As of June 30, 2022, we have issued common stock with an aggregate gross sales price of $234.0 million under the ATM Program and could issue additional common stock with an aggregate sales price of up to $166.0 million.

The following table presents information about the Company's ATM Program activity:

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

(in thousands, except per share amounts)

 

June 30, 2022

 

 

June 30, 2022

 

Number of common shares issued

 

 

3,236

 

 

 

9,509

 

Weighted average sale price per share

 

$

21.42

 

 

$

21.69

 

Net proceeds

 

$

68,321

 

 

$

202,647

 

Gross proceeds

 

 

69,313

 

 

 

205,857

 

Our public offerings have been used to repay debt, fund acquisitions, and for other general corporate purposes.

As we continue to invest in accretive real estate properties, we expect to balance our debt and equity capitalization, while maintaining a Net Debt to Annualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of follow-on equity offerings and the ATM Program.

Unsecured Indebtedness and Capital Markets Activities as of and for the Six Months Ended June 30, 2022

The following table sets forth our outstanding Revolving Credit Facility, Unsecured Term Loans and Senior Unsecured Notes at June 30, 2022.

(in thousands, except interest rates)

 

Outstanding
Balance

 

 

Interest
Rate

 

Maturity
Date

Unsecured revolving credit facility

 

$

320,657

 

 

Applicable reference rate + 0.85% (a)

 

Mar. 2026

Unsecured term loans:

 

 

 

 

 

 

 

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

Total unsecured term loans

 

 

590,000

 

 

 

 

 

Senior unsecured notes:

 

 

 

 

 

 

 

2027 Senior Unsecured Notes - Series A

 

 

150,000

 

 

4.84%

 

Apr. 2027

2028 Senior Unsecured Notes - Series B

 

 

225,000

 

 

5.09%

 

Jul. 2028

2030 Senior Unsecured Notes - Series C

 

 

100,000

 

 

5.19%

 

Jul. 2030

2031 Senior Unsecured Public Notes

 

 

375,000

 

 

2.60%

 

Sep. 2031

Total senior unsecured notes

 

 

850,000

 

 

 

 

 

Total unsecured debt

 

$

1,760,657

 

 

 

 

 

(a)
At June 30, 2022, a balance of $243.0 million was subject to the one-month Secured Overnight Financing Rate of 1.69%. The remaining balance includes $100 million CAD borrowings remeasured to $77.7 million USD, which was subject to the one-month Canadian Dollar Offered Rate of 2.23%.

On January 28, 2022, we amended and restated the Revolving Credit Facility, upsizing the capacity to $1.0 billion, extending the maturity date to March 2026 and reducing the applicable margin to 0.85% per annum.

On February 25, 2022, we repaid the $60.0 million 2022 Unsecured Term Loan with borrowings under our Revolving Credit Facility.

As of June 30, 2022, we had $320.7 million outstanding on our Revolving Credit Facility. We have $679.3 million of remaining capacity on our Revolving Credit Facility as of June 30, 2022.

Subsequent to quarter end, on August 1, 2022, we entered into two new unsecured bank term loans, including a $200 million, five year term loan that matures in 2027 (the "2027 Unsecured Term Loan"), and a $300 million, seven year term loan that matures in 2029 (the

40


 

"2029 Unsecured Term Loan"). Borrowings on the new term loans bear interest at variable rates based on the Secured Overnight Financing Rate ("SOFR") plus a margin based on our credit rating ranging between 0.80% and 1.60% per annum for the 2027 Unsecured Term Loan, and 1.15% and 2.20% per annum for the 2029 Unsecured Term Loan. The initial applicable margin was 0.95% and 1.25% for the 2027 Unsecured Term Loan and 2029 Unsecured Term Loan, respectively. Proceeds from the loans were used to repay in full our $190 million unsecured term loan set to mature in 2024, including accrued interest, and a portion of the outstanding balance on our Revolver.

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, 2022, we believe we were in compliance with all of our covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification.

 

Covenants

 

Requirements

Leverage Ratio

 

 0.60 to 1.00

Secured Indebtedness Ratio

 

 0.40 to 1.00

Unencumbered Coverage Ratio

 

 1.75 to 1.00

Fixed Charge Coverage Ratio

 

≥ 1.50 to 1.00

Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value

 

≤ 0.60 to 1.00

Dividends and Other Restricted Payments

 

Only applicable in case of default

Aggregate Debt Ratio

 

≤ 0.60 to 1.00

Consolidated Income Available for Debt to Annual Debt Service Charge

 

≥ 1.50 to 1.00

Total Unencumbered Assets to Total Unsecured Debt

 

≥ 1.50 to 1.00

Secured Debt Ratio

 

≤ 0.40 to 1.00

Contractual Obligations

The following table provides information with respect to our contractual commitments and obligations as of June 30, 2022 (in thousands). Refer to the discussion in the Liquidity and Capital Resources section above for further discussion over our short and long-term obligations.

Year of
Maturity

 

Term Loans

 

 

Revolving Credit
Facility
(a)

 

 

Senior
Notes

 

 

Mortgages

 

 

Interest
Expense
(b)

 

 

Tenant
Improvement
Allowances

 

 

Operating
Leases

 

 

Total

 

Remainder
   of 2022

 

$

 

 

$

 

 

$

 

 

$

1,466

 

 

$

34,078

 

 

$

57

 

 

$

424

 

 

$

36,025

 

2023

 

 

 

 

 

 

 

 

 

 

 

7,582

 

 

 

67,463

 

 

 

 

 

 

705

 

 

 

75,750

 

2024

 

 

190,000

 

 

 

 

 

 

 

 

 

9,760

 

 

 

64,088

 

 

 

 

 

 

320

 

 

 

264,168

 

2025

 

 

 

 

 

 

 

 

 

 

 

20,195

 

 

 

60,660

 

 

 

 

 

 

326

 

 

 

81,181

 

2026

 

 

400,000

 

 

 

320,657

 

 

 

 

 

 

16,843

 

 

 

42,122

 

 

 

 

 

 

332

 

 

 

779,954

 

Thereafter

 

 

 

 

 

 

 

 

850,000

 

 

 

39,874

 

 

 

88,769

 

 

 

 

 

 

3,739

 

 

 

982,382

 

Total

 

$

590,000

 

 

$

320,657

 

 

$

850,000

 

 

$

95,720

 

 

$

357,180

 

 

$

57

 

 

$

5,846

 

 

$

2,219,460

 

(a)
The Revolving Credit Facility contains two six-month extension options 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, 2022. This amount includes the impact of interest rate swap agreements.

At June 30, 2022 investment in rental property of $159.5 million was pledged as collateral against our mortgages.

41


 

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, 2022, taxable sales of the applicable properties would trigger liability under the four agreements of approximately $22.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above.

In the normal course of business, we enter into various types of commitments to purchase real estate properties. These commitments are generally subject to our customary due diligence process and, accordingly, a number of specific conditions must be met before we are obligated to purchase the properties.

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 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 the interest rate risk on variable rate borrowings by entering into interest rate swaps. As of June 30, 2022, we had 28 interest rate swaps outstanding in an aggregate notional amount of $717.7 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.

In addition, we own investments in Canada, and as a result are subject to risk from the effects of exchange rate movements in the Canadian dollar, which may affect future costs and cash flows. We funded a significant portion of our Canadian investments through Canadian dollar borrowings under our Revolving Credit Facility, which is intended to act as a natural hedge against our Canadian dollar investments. The Canadian dollar revolving borrowings are remeasured each reporting period, with the unrealized foreign currency gains and losses flowing through earnings. These unrealized foreign currency gains and losses do not impact our cash flows from operations until settled, and are expected to directly offset the changes in the value of our net investments as a result of changes in the Canadian dollar. Our Canadian investments are recorded at their historical exchange rates, and therefore are not impacted by changes in the value of the Canadian dollar.

Cash Flows

Cash and cash equivalents and restricted cash totaled $29.0 million and $87.0 million at June 30, 2022 and June 30, 2021, respectively. The table below shows information concerning cash flows for the six months ended June 30, 2022 and 2021:

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2022

 

 

2021

 

Net cash provided by operating activities

 

$

117,959

 

 

$

99,015

 

Net cash used in investing activities

 

 

(379,971

)

 

 

(242,712

)

Net cash provided by financing activities

 

 

263,219

 

 

 

119,977

 

Increase (decrease) in cash and cash equivalents and restricted cash

 

$

1,207

 

 

$

(23,720

)

 

The increase in net cash provided by operating activities during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, was mainly due to growth in our real estate portfolio and associated incremental net lease revenues.

The increase in cash used in investing activities during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, was mainly due to increased acquisition volume and decreased disposition volume during the six months ended June 30, 2022.

The increase in net cash provided by financing activities during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, mainly reflects an increased borrowings on the unsecured revolving credit facility to fund the increased acquisition volume.

42


 

Non-GAAP Measures

FFO, Core FFO, and AFFO

We compute Funds From Operations ("FFO") in accordance with the standards established by the Board of Governors of Nareit, the worldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers, primarily because it excludes the effect of real estate depreciation and amortization and net gains (losses) on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions.

We compute Core Funds From Operations ("Core FFO") by adjusting FFO, as defined by Nareit, to exclude certain GAAP income and expense amounts that we believe are infrequently recurring, unusual in nature, or not related to its core real estate operations, including write-offs or recoveries of accrued rental income, lease termination fees, the change in fair value of our earnout liability, cost of debt extinguishments, unrealized and realized gains or losses on foreign currency transactions, severance, and other extraordinary items. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of our peers, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis.

We compute Adjusted Funds From Operations ("AFFO"), by adjusting Core FFO for certain non-cash revenues and expenses, including straight-line rents, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, stock-based compensation, and other specified non-cash items. We believe that excluding such items assists management and investors in distinguishing whether changes in our operations are due to growth or decline of operations at our properties or from other factors. We use AFFO as a measure of our performance when we formulate corporate goals, and is a factor in determining management compensation. We believe that AFFO is a useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by non-cash revenues or expenses.

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

FFO, Core FFO, and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO, Core FFO and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.

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

43


 

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

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

(in thousands, except per share data)

 

June 30,
2022

 

 

March 31,
2022

 

 

June 30,
2022

 

 

June 30,
2021

 

Net income

 

$

35,552

 

 

$

28,441

 

 

$

63,993

 

 

$

46,780

 

Real property depreciation and amortization

 

 

35,479

 

 

 

34,259

 

 

 

69,738

 

 

 

61,892

 

Gain on sale of real estate

 

 

(4,071

)

 

 

(1,196

)

 

 

(5,267

)

 

 

(8,571

)

Provision for impairment on investment in rental properties

 

 

1,380

 

 

 

 

 

 

1,380

 

 

 

2,012

 

FFO

 

$

68,340

 

 

$

61,504

 

 

$

129,844

 

 

$

102,113

 

Net write-offs of accrued rental income

 

 

 

 

 

1,326

 

 

 

1,326

 

 

 

442

 

Cost of debt extinguishment

 

 

 

 

 

 

 

 

 

 

 

126

 

Severance

 

 

278

 

 

 

120

 

 

 

398

 

 

 

1,275

 

Change in fair value of earnout liability

 

 

 

 

 

 

 

 

 

 

 

4,480

 

Other (income) expenses (a)

 

 

(2,632

)

 

 

1,126

 

 

 

(1,506

)

 

 

(14

)

Core FFO

 

$

65,986

 

 

$

64,076

 

 

$

130,062

 

 

$

108,422

 

Straight-line rent adjustment

 

 

(4,965

)

 

 

(4,934

)

 

 

(9,899

)

 

 

(10,053

)

Adjustment to provision for credit losses

 

 

(1

)

 

 

 

 

 

(1

)

 

 

(1

)

Amortization of debt issuance costs

 

 

900

 

 

 

856

 

 

 

1,756

 

 

 

1,870

 

Amortization of net mortgage premiums

 

 

(25

)

 

 

(27

)

 

 

(52

)

 

 

(72

)

Loss (gain) on interest rate swaps and other non-cash interest expense

 

 

695

 

 

 

659

 

 

 

1,354

 

 

 

(83

)

Amortization of lease intangibles

 

 

(1,167

)

 

 

(1,158

)

 

 

(2,325

)

 

 

(1,369

)

Stock-based compensation

 

 

1,381

 

 

 

929

 

 

 

2,310

 

 

 

2,720

 

AFFO

 

$

62,804

 

 

$

60,401

 

 

$

123,205

 

 

$

101,434

 

(a)
Amount includes ($2.6) million and $1.1 million of unrealized and realized foreign exchange (gain) loss during the three months ended June 30, 2022 and March 31, 2022, respectively, and ($1.5) million of unrealized foreign exchange (gain) for the six months ended June 30, 2022, primarily associated with our CAD denominated revolving borrowings.

 

44


 

EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre

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

We are focused on a disciplined and targeted acquisition strategy, together with active asset management that includes selective sales of properties. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, each discussed further below, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with our lenders and rating agencies regarding our credit rating. As we fund new acquisitions using our unsecured Revolving Credit Facility, our leverage profile and Net Debt will be immediately impacted by current quarter acquisitions. However, the full benefit of EBITDAre from newly acquired properties will not be received in the same quarter in which the properties are acquired. Additionally, EBITDAre for the quarter includes amounts generated by properties that have been sold during the quarter. Accordingly, the variability in EBITDAre caused by the timing of our acquisitions and dispositions can temporarily distort our leverage ratios. We adjust EBITDAre ("Adjusted EBITDAre") for the most recently completed quarter (i) to recalculate as if all acquisitions and dispositions had occurred at the beginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either non-cash, such as cost of debt extinguishments, realized or unrealized gains and losses on foreign currency transactions, or the change in fair value of our earnout liability, or that we believe are one time, or unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future, and (iii) to eliminate the impact of lease termination fees and other items that are not a result of normal operations. We then annualize quarterly Adjusted EBITDAre by multiplying it by four ("Annualized Adjusted EBITDAre"). You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to be inaccurate. Our actual reported EBITDAre for future periods may be significantly different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.

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

 

 

For the Three Months Ended

 

(in thousands)

 

June 30,
2022

 

 

March 31,
2022

 

 

June 30,
2021

 

Net income

 

$

35,552

 

 

$

28,441

 

 

$

22,820

 

Depreciation and amortization

 

 

35,511

 

 

 

34,290

 

 

 

31,225

 

Interest expense

 

 

17,888

 

 

 

16,896

 

 

 

15,430

 

Income taxes

 

 

401

 

 

 

412

 

 

 

301

 

EBITDA

 

$

89,352

 

 

$

80,039

 

 

$

69,776

 

Provision for impairment of investment in rental properties

 

 

1,380

 

 

 

 

 

 

 

Gain on sale of real estate

 

 

(4,071

)

 

 

(1,196

)

 

 

(3,838

)

EBITDAre

 

$

86,661

 

 

$

78,843

 

 

$

65,938

 

Adjustment for current quarter acquisition activity (a)

 

 

2,780

 

 

 

3,225

 

 

 

2,761

 

Adjustment for current quarter disposition activity (b)

 

 

(141

)

 

 

(79

)

 

 

(353

)

Adjustment to exclude change in fair value of earnout liability

 

 

 

 

 

 

 

 

5,604

 

Adjustment exclude net write-offs of accrued rental income

 

 

 

 

 

1,326

 

 

 

 

Adjustment to exclude realized / unrealized foreign exchange (gain) loss

 

 

(2,632

)

 

 

1,125

 

 

 

 

Adjusted EBITDAre

 

$

86,668

 

 

$

84,440

 

 

$

73,950

 

Annualized EBITDAre

 

$

346,642

 

 

$

315,375

 

 

$

263,761

 

Annualized Adjusted EBITDAre

 

$

346,672

 

 

$

337,759

 

 

$

295,808

 

(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.

45


 

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

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

 

(in thousands)

 

June 30,
2022

 

 

March 31,
2022

 

 

June 30,
2021

 

Debt

 

 

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

320,657

 

 

$

266,118

 

 

$

 

Unsecured term loans, net

 

 

587,098

 

 

 

586,884

 

 

 

910,994

 

Senior unsecured notes, net

 

 

844,178

 

 

 

843,990

 

 

 

472,637

 

Mortgages, net

 

 

95,453

 

 

 

96,141

 

 

 

105,748

 

Debt issuance costs

 

 

8,991

 

 

 

9,419

 

 

 

6,625

 

Gross Debt

 

 

1,856,377

 

 

 

1,802,552

 

 

 

1,496,004

 

Cash and cash equivalents

 

 

(16,813

)

 

 

(54,103

)

 

 

(78,987

)

Restricted cash

 

 

(12,163

)

 

 

(11,444

)

 

 

(8,021

)

Net Debt

 

$

1,827,401

 

 

$

1,737,005

 

 

$

1,408,996

 

Net Debt to Annualized EBITDAre

 

5.3x

 

 

5.5x

 

 

5.3x

 

Net Debt to Annualized Adjusted EBITDAre

 

5.3x

 

 

5.1x

 

 

4.8x

 

Critical Accounting Policies and Estimates

This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as other disclosures in the financial statements. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, "Summary of Significant Accounting Policies," in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We believe there have been no significant changes during the six months ended June 30, 2022, to the items that we disclosed as our critical accounting policies and estimates in our 2021 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

Interest Rate Risk

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

Our fixed-rate debt includes our Senior Unsecured Notes, mortgages, and variable-rate debt converted to a fixed rate with the use of interest rate swaps. Our fixed-rate debt had a carrying value and fair value of approximately $1.7 billion and $1.6 billion, respectively, as of June 30, 2022. Changes in market interest rates impact the fair value of our fixed-rate debt, but they have no impact on interest incurred or on cash flows. For instance, if interest rates were to increase 1%, and the fixed-rate debt balance were to remain constant,

46


 

we would expect the fair value of our debt to decrease, similar to how the price of a bond decreases as interest rates rise. A 1% increase in market interest rates would have resulted in a decrease in the fair value of our fixed-rate debt of approximately $82.4 million as of June 30, 2022.

Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on the applicable reference rate plus an applicable margin, and totaled $918.2 million as of June 30, 2022, of which $717.7 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 rates would have a corresponding $2.0 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.

Foreign Currency Exchange Rate Risk

We own investments in Canada, and as a result are subject to risk from the effects of exchange rate movements in the Canadian dollar, which may affect future costs and cash flows. We funded a significant portion of our Canadian investments through Canadian dollar borrowings under our Revolving Credit Facility, which is intended to act as a natural hedge against our Canadian dollar investments. To the extent that currency fluctuations increase or decrease rental revenues, as translated to U.S. dollars, the change in debt service (comprised of interest payments), as translated to U.S. dollars, will partially offset the effect of fluctuations in revenue and, to some extent, mitigate the risk from changes in foreign currency exchange rates. We believe the foreign currency exchange rate risk on the remaining cash flows is immaterial.

Additionally, our Canadian dollar revolving borrowings are remeasured each reporting period, with the unrealized foreign currency gains and losses flowing through earnings. These unrealized foreign currency gains and losses do not impact our cash flows from operations until settled, and are expected to directly offset the changes in the value of our net investments as a result of changes in the Canadian dollar. Our Canadian investments are recorded at their historical exchange rates, and therefore are not impacted by changes in the value of the Canadian dollar.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of and for the quarter ended June 30, 2022, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

47


 

 

Part II – OTHER INFORMATION

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

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in our 2021 Annual Report on Form 10-K for the year ended December 31, 2021.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

 

 

 

 

48


 

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)

 

 

 

4.1

 

Indenture, dated as of September 15, 2021, among the Issuer, the Company and the Trustee, including the form of the Guarantee (filed as Exhibit 4.1 to the Corporation's Current Report on Form 8-K filed September 10, 2021 and incorporated herein by reference)

 

 

 

4.2

 

First Supplemental Indenture, dated as of September 15, 2021, among the Issuer, the Company and the Trustee, including the form of the Notes (filed as Exhibit 4.2 to the Corporation's Current Report on Form 8-K filed September 10, 2021 and incorporated herein by reference)

 

 

 

10.1*

 

Broadstone Net Lease, Inc. Change in Control Severance Protection Policy

 

 

 

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.

49


 

 

 

 

 

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, 2022

 

/s/ Christopher J. Czarnecki

 

 

Christopher J. Czarnecki

 

 

Chief Executive Officer and President

 

 

 

Date: August 4, 2022

 

/s/ Ryan M. Albano

 

 

Ryan M. Albano

 

 

Executive Vice President and Chief Financial Officer

 

50