VEREIT, INC. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see "Risk Factors" in Part I, Item 1A. of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , as supplemented in Part II, Item 1A. of this Quarterly Report on Form 10-Q. Capitalized terms used herein, but not otherwise defined, shall have the meaning ascribed to those terms in the "Part I - Financial Information," including the notes to the consolidated financial statements contained therein. Forward-Looking Statements This Quarterly Report on Form 10-Q includes "forward-looking statements" (within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act of 1934, as amended (the "Exchange Act")) which reflect our expectations and projections regarding future events and plans, future financial condition, results of operations, liquidity and business, including acquisitions, rent receipts, rent relief requests, debt levels, the payment of future dividends and the impact of COVID-19 on our business. Generally, the words "anticipates," "assumes," "believes," "continues," "could," "estimates," "expects," "goals," "intends," "may," "plans," "projects," "seeks," "should," "targets," "will," variations of such words and similar expressions identify forward-looking statements. These forward-looking statements are based on information currently available and involve a number of known and unknown assumptions and risks, uncertainties and other factors, which may be difficult to predict and beyond the Company's control, that could cause actual events and plans or could cause our business, financial condition, liquidity and results of operations to differ materially from those expressed or implied in the forward-looking statements. These factors include, among other things, those discussed below. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable. We disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of changes in underlying assumptions or factors, new information, future events or otherwise, except as may be required by law. The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements: • The duration and extent of the impact of the coronavirus (COVID-19) on our business and the businesses of our tenants (including their ability to timely make rental payments) and the economy generally.
• Federal or state legislation or regulation that could impact the timely
payment of rent by tenants in light of COVID-19.
• Our plans, market and other expectations, objectives, intentions and other
statements that are not historical facts.
• We may be unable to renew leases, lease vacant space or re-lease space as
leases expire on favorable terms or at all.
• We are subject to risks associated with tenant, geographic and industry
concentrations with respect to our properties.
• We may be subject to risks accompanying the management of our industrial
and office partnerships.
• Our properties may be subject to impairment charges.
• We could be subject to unexpected costs or liabilities that may arise from
potential dispositions, including related to limited partnership,
tenant-in-common and
real estate programs") and VEREIT's management with respect to such
programs.
• We are subject to competition in the acquisition and disposition ofproperties and in the leasing of our properties including that we may be
unable to acquire, dispose of, or lease properties on advantageous terms
or at all.
• We could be subject to risks associated with bankruptcies or insolvencies
of tenants, from tenant defaults generally or from the unpredictability of
the business plans and financial condition of our tenants, which are
heightened as a result of the coronavirus (COVID-19) pandemic.
• We have substantial indebtedness, which may affect our ability to paydividends, and expose us to interest rate fluctuation risk and the risk of
default under our debt obligations.
• We may be subject to increases in our borrowing costs as a result of
changes in interest rates and other factors, including the potential
phasing out of London Inter-Bank Offer Rate ("LIBOR") after 2021.
• Our overall borrowing and operating flexibility may be adversely affected
by the terms and restrictions within the indenture governing the senior
unsecured notes (the "Senior Notes"), and the Credit Agreement governing
the terms of the Credit Facility (as both terms are defined in Liquidity
and Capital Resources), and compliance with such covenants may be more
difficult as a result of the impact of COVID-19.
• Our access to capital and terms of future financings may be affected by
adverse changes to our credit rating.
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• We may be affected by the incurrence of additional secured or unsecured debt.
• We may not be able to achieve and maintain profitability.
• We may not generate cash flows sufficient to pay our dividends to
stockholders or meet our debt service obligations.
• We may be affected by risks resulting from losses in excess of insured limits.
• We may fail to remain qualified as a real estate investment trust ("REIT")
for
• We are subject to risks associated with our joint ventures including their
management.
• Compliance with the REIT annual distribution requirements may limit our
operating flexibility.
• We may be unable to retain or hire key personnel.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A. Risk Factors within our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as supplemented in Part II, Item 1A. of this Quarterly Report on Form 10-Q. We use certain defined terms throughout this Quarterly Report on Form 10-Q that have the following meanings: When we refer to "annualized rental income," we mean the rental revenue under our leases on operating properties on a straight-line basis, which includes the effect of rent escalations and any tenant concessions, such as free rent, and our pro rata share of such revenues from properties owned by unconsolidated joint ventures. Annualized rental income excludes any adjustments to rental income due to changes in the collectability assessment, contingent rent, such as percentage rent, and operating expense reimbursements. Management uses annualized rental income as a basis for tenant, industry and geographic concentrations and other metrics within the portfolio. Annualized rental income is not indicative of future performance. When we refer to a "creditworthy tenant," we mean a tenant that has entered into a lease that we determine is creditworthy and may include tenants with an investment grade or below investment grade credit rating, as determined by major credit rating agencies, or unrated tenants. To the extent we determine that a tenant is a "creditworthy tenant" even though it does not have an investment grade credit rating, we do so based on our management's determination that a tenant should have the financial wherewithal to honor its obligations under its lease with us. As explained further below, this determination is based on our management's substantial experience performing credit analysis and is made after evaluating a tenant's due diligence materials that are made available to us, including financial statements and operating data. When we refer to a "direct financing lease," we mean a lease that requires specific treatment due to the significance of the lease payments from the inception of the lease compared to the fair value of the property, term of the lease, a transfer of ownership, or a bargain purchase option. These leases are recorded as a net asset on the balance sheet. The amount recorded is calculated as the fair value of the remaining lease payments on the leases and the estimated fair value of any expected residual property value at the end of the lease term. When we refer to properties that are net leased on a "long term basis," we mean properties with remaining primary lease terms of generally seven to 10 years or longer on average, depending on property type. Under a "net lease," the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. There are various forms of net leases, most typically classified as triple net or double net. Triple net leases typically require that the tenant pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs). Double net leases typically require that the tenant pay all operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance), but excludes some or all major repairs (e.g., roof, structure and parking lot). Accordingly, the owner receives the rent "net" of these expenses, rendering the cash flow associated with the lease predictable for the term of the lease. Under a net lease, the tenant generally agrees to lease the property for a significant term and agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. When we refer to "operating properties" we mean properties owned and consolidated by the Company, omitting properties (the "Excluded Properties ") for which (i) the related mortgage loan is in default, and (ii) management decides to transfer the properties to the lender in connection with settling the mortgage note obligation. At and during the three months endedMarch 31, 2020 and 2019, there were noExcluded Properties . 40
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EffectiveApril 1, 2019 , the Company determined that the real estate portfolio and economic metrics of operating properties should include the Company's pro rata share of square feet and annualized rental income from the Company's unconsolidated joint ventures, based upon the Company's legal ownership percentage, which may, at times, not equal the Company's economic interest because of various provisions in certain joint venture agreements regarding distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns. The Company did not update data presented for prior periods as the impact on prior period metrics was immaterial. As ofMarch 31, 2020 , our portfolio was comprised of 3,853 retail, restaurant, office and industrial real estate properties with an aggregate 88.4 million square feet, of which 99.0% was leased, with a weighted-average remaining lease term of 8.3 years. Omitting the square feet of one redevelopment property and including the pro rata share of square feet and annualized rental income from the Company's unconsolidated joint ventures, we owned an aggregate of 89.5 million square feet, of which 99.1% was leased, with a weighted-average remaining lease term of 8.3 years as ofMarch 31, 2020 . OverviewVEREIT is a full-service real estate operating company which owns and manages one of the largest portfolios of single-tenant commercial properties in theU.S. The Company has 3,853 retail, restaurant, office and industrial operating properties with an aggregate 89.5 million rentable square feet, of which 99.1% was leased as ofMarch 31, 2020 , with a weighted-average remaining lease term of 8.3 years. Operating Highlights and Key Performance Indicators Activity throughMarch 31, 2020 Operations • Acquired controlling financial interests in 25 commercial properties for an aggregate purchase price of$147.1 million , which includes one land parcel for build-to-suit development and$0.9 million of external acquisition-related expenses that were capitalized. • Disposed of 30 properties, including the sale of two consolidated
properties to a newly-formed joint venture (the "
an aggregate gross sales price of
costs and contributions to the
gain of $25.2 million related to the sales.
Debt• Initiated an additional draw, in excess of normal operating requirements,
of $600.0 million on our Revolving Credit Facility to enhance cash
position.
• Total secured debt decreased by
billion.
Equity
• Declared a quarterly dividend of
first quarter of 2020, representing an annualized dividend rate of $0.55
per share.
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Real Estate Portfolio Metrics In managing our portfolio, we are committed to diversification by property type, tenant, geography and industry. Below is a summary of our operating property type diversification and our top ten concentrations as ofMarch 31, 2020 , based on annualized rental income of$1.1 billion . [[Image Removed: chart-b930758c11d652f3aae.jpg]]
(1) Includes redevelopment property, billboards, construction in progress,
land and parking lots.
[[Image Removed: chart-86d31395130a53ee84a.jpg]][[Image Removed: chart-c7fd94403704538fb0d.jpg]] [[Image Removed: chart-308edfb653085debbf3.jpg]][[Image Removed: chart-c42334400ee152c5bd5.jpg]]
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Our financial performance is influenced by the timing of acquisitions and
dispositions and the operating performance of our operating properties. The
following table shows the property statistics of our operating properties as of
March 31, 2020 March 31, 2019
Portfolio Metrics
Operating properties 3,853 3,980
Rentable square feet (in millions) (1) 89.5 94.7
Economic occupancy rate (1)(2) 99.1% 98.9%
Investment-grade tenants (1)(3) 36.7% 41.3%
____________________________________
(1) As of
annualized rental income include the Company's pro rata share of square feet
and annualized rental income from the Company's unconsolidated joint
ventures. As of
rate exclude one redevelopment property. As of
square feet and economic occupancy rate exclude one redevelopment property.
(2) Economic occupancy rate equals the sum of square feet leased (including space
subject to month-to-month agreements) divided by rentable square feet.
(3) Based on annualized rental income of our real estate portfolio as
of
with a credit rating of BBB- or higher by Standard & Poor's Financial
guarantor or the parent company, as applicable.
The following table shows the economic metrics of our operating properties as of
March 31, 2020 March 31, 2019
Economic Metrics
Weighted-average lease term (in years) 8.3 8.7
Lease rollover: (1)
Annual average 6.6% 5.7%
Maximum for a single year 10.9% 7.7%
____________________________________
(1) Through the end of the next five years as of the respective reporting date.
Operating Performance
In addition, management uses the following financial metrics to assess our
operating performance (dollar amounts in thousands, except per share amounts).
Three Months Ended March 31,
2020 2019
Financial Metrics
Total revenues $ 299,182 $ 316,880
Net income $ 86,863
$ 0.07 FFO attributable to common stockholders and limited partners (1)
$ 181,822
$ 180,974
$ 0.17 ____________________________________
(1) See the Non-GAAP Measures section below for descriptions of our non-GAAP
measures and reconciliations to the most comparable measure in accordance
with generally accepted accounting principles in
GAAP").
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Results of Operations
The coronavirus ("COVID-19") has impacted all states where our tenants operate
their businesses or where our properties are located, and measures taken to
prevent or remediate COVID-19, including "shelter-in-place" or "stay-at-home"
orders or other quarantine mandates issued by local, state or federal
authorities, have had an adverse effect on our business and the businesses of
our tenants. While we did not incur significant disruptions to our business
during the three months ended March 31, 2020 from the COVID-19 pandemic, the
full extent of the impact on our business, financial condition, liquidity and
results of operations is uncertain.
Our dedicated property type asset management teams have been in discussion with
tenants to understand the impact of COVID-19 on their businesses. As of May 15,
2020 , the Company received certain rent relief requests, most often in the form
of rent deferral requests, from tenants representing approximately 34% of rental
income on an annualized basis, including some tenants that paid April and May
rent. These rent relief requests vary in timeframes, but are concentrated within
the two to four month range. We evaluate each tenant request on a case-by-case
basis, including by analyzing metrics such as industry segment, corporate
financial health, rent coverage, and the tenant's liquidity. As of May 15, 2020 ,
we had received approximately 81% and 78% of April and May rent, respectively,
which included contractual rent and recoveries paid by tenants to cover
estimated tax, insurance and common area maintenance expenses, including the
Company's pro rata share of such amounts related to properties owned by
unconsolidated joint ventures, and approximately 2% of May rent to be paid in
arrears by a Government agency tenant. However, information regarding historical
rent collections should not serve as an indication of expected future rent
collections. We continue to review receivables related to rent, straight-line
rent and property operating expense reimbursements for collectability and
changes in circumstances that could indicate the carrying value of our real
estate assets or goodwill may not be recoverable. Additionally, given the
economic uncertainty and rapidly-evolving circumstances related to COVID-19, we
are not currently able to predict the level of acquisition and/or disposition
activity for the remainder of 2020.
The Financial Accounting Standards Board (the "FASB") issued a
question-and-answer document, Accounting for Lease Concessions Related to the
Effects of the COVID-19 Pandemic, which, for concessions related to the effects
of COVID-19, allows an entity to elect to not analyze each contract to determine
whether enforceable rights and obligations for concessions exist in the contract
and to elect to apply or not apply the lease modification guidance in Accounting
Standards Codification ("ASC") Topic 842, Leases ("ASC 842"), to those
contracts. For concessions that provide a deferral of payments with no
substantive changes to the consideration in the original contract, we can
evaluate whether to (i) account for these concessions as if there were no
changes made to the lease agreement and accordingly, increase the lease
receivable and continue to recognize income or, (ii) account for the rent
deferrals as variable lease payments. Concessions that substantively increase
the consideration in the original contract are accounted for as a lease
modification under ASC 842, which will require us to reevaluate the lease
classification and remeasure and reallocate the consideration over the remaining
lease term. We are currently evaluating the impact of this guidance and which
elections, if any, we will make for the quarter-ending June 30, 2020 .
Revenues
The table below sets forth, for the periods presented, revenue information and
the dollar amount change year over year (in thousands):
Three Months Ended March 31,
2020 vs 2019
2020 2019 Increase/(Decrease)
Revenues:
Rental $ 298,586 $ 316,843 $ (18,257 )
Fees from managed partnerships 596 37 559
Total revenues $ 299,182 $ 316,880 $ (17,698 )
Rental
The decrease in rental revenue of $18.3 million during the three months ended
March 31, 2020 as compared to the same period in 2019 was primarily due to real
estate dispositions, partially offset by real estate acquisitions. Subsequent to
January 1, 2019 , the Company acquired 91 occupied properties for an aggregate
purchase price of $550.7 million and disposed of 231 consolidated properties for
an aggregate sales price of $1.3 billion .
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Fees from Managed Partnerships Fees from managed partnerships consist of fees earned for providing various services to the Company's unconsolidated joint venture entities. The increase of$0.6 million during the three months endedMarch 31, 2020 as compared to the same period in 2019 was due to fees earned from theIndustrial Partnership andOffice Partnership , which were formed subsequent toMarch 31, 2019 . Operating Expenses The table below sets forth, for the periods presented, certain operating expense information and the dollar amount change year over year (in thousands): Three Months Ended March 31, 2020 vs 2019 2020 2019 Increase/(Decrease) Acquisition-related$ 1,523 $ 985 $ 538
Litigation and non-routine costs, net (8,564 ) (21,492 )
12,928
Property operating 30,490 32,378 (1,888 )
General and administrative 15,056 14,846 210
Depreciation and amortization 124,080 136,555 (12,475 )
Impairments 8,380 11,988 (3,608 )
Restructuring - 9,076 (9,076 )
Total operating expenses $ 170,965 $ 184,336 $ (13,371 )
Acquisition-Related Expenses
Acquisition-related expenses consist of allocated internal salaries related to
time spent on acquiring commercial properties and costs associated with
unconsummated deals.
Litigation and non-routine costs, net
During the three months ended March 31, 2020 , the Company reversed $6.7 million
of prior period estimated costs recorded in 2019 which exceeded actual expenses
incurred and recorded $2.5 million of insurance recoveries and $0.6 million of
litigation costs. During the three months ended March 31, 2019 , the Company
recorded $12.2 million of litigation settlements and $14.7 million of litigation
costs, offset by $48.4 million of insurance recoveries.
Property Operating Expenses
Property operating expenses such as taxes, insurance, ground rent and
maintenance include both reimbursable and non-reimbursable property expenses.
The decrease in property operating expenses of $1.9 million during the three
months ended March 31, 2020 as compared to the same period in 2019 was primarily
due to the impact of property dispositions.
General and Administrative Expenses
General and administrative expenses remained relatively constant during the
three months ended March 31, 2020 as compared to the same period in 2019.
Depreciation and Amortization Expenses
The decrease in depreciation and amortization expenses of $12.5 million during
the three months ended March 31, 2020 as compared to the same period in 2019 was
primarily due to furniture and fixtures that were fully depreciated during 2019,
as they had reached the end of their useful lives, and real estate dispositions,
partially offset by real estate acquisitions.
Impairments
Impairments of $8.4 million and $12.0 million were recorded during the three
months ended March 31, 2020 and 2019, respectively. During the three months
ended March 31, 2020 , certain retail and restaurant properties whose tenants
filed for Chapter 11 bankruptcy were identified by management for potential sale
or were determined would not be re-leased by the tenant.
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Restructuring Expenses There were no restructuring expenses recorded during the three months endedMarch 31, 2020 . During the three months endedMarch 31, 2019 , the Company recorded$9.1 million of restructuring expenses related to the reorganization of the business and cessation of services performed pursuant to the terms of a services agreement (the "Services Agreement") withCCA Acquisition, LLC (the "Cole Purchaser"). Other (Expense) Income and Provision for Income Taxes The table below sets forth, for the periods presented, certain financial information and the dollar amount change year over year (in thousands): Three Months Ended March 31, 2020 vs 2019 2020 2019 Increase/(Decrease) Interest expense$ (64,696 ) $ (71,254 ) $ (6,558 ) Loss on extinguishment and forgiveness of debt, net$ (1,280 ) $ - $ 1,280 Other income (loss), net$ 175 $ (439 ) $ 614
Equity in income of unconsolidated entities
$ (254 ) Gain on disposition of real estate and real estate assets held for sale, net$ 25,249 $ 10,831 $ 14,418 Provision for income taxes$ (1,048 ) $ (1,211 ) $ (163 ) Interest Expense The decrease in interest expense of$6.6 million during the three months endedMarch 31, 2020 as compared to the same period in 2019 was primarily due to decreases in average debt outstanding and weighted average interest rates. AtMarch 31, 2020 , the weighted average interest rate was 3.96%, as compared to 4.44% atMarch 31, 2019 . Loss on Extinguishment and Forgiveness of Debt,Net During the three months endedMarch 31, 2020 , the Company recorded a$1.3 million net loss on the extinguishment and forgiveness of debt, as compared to no amounts recorded for the same period in 2019. During the three months endedMarch 31, 2020 , the Company recognized losses on extinguishment of debt related to the prepayments of mortgage notes payable. Other Income (Loss), Net Other income (loss), net was comprised of individually immaterial items. Equity in Income of Unconsolidated Entities The decrease in equity in income and gain on disposition of unconsolidated entities of$0.3 million during the three months endedMarch 31, 2020 as compared to the same period in 2019, was primarily due to increased expenses related to the Faison JV Bethlehem GA joint venture, partially offset by equity in income from theIndustrial Partnership andOffice Partnership . Gain on Disposition of Real Estate and Real Estate Assets Held for Sale, Net The increase in gain on disposition of real estate and real estate assets held for sale, net of$14.4 million during the three months endedMarch 31, 2020 as compared to the same period in 2019, was due to the Company's disposition of 30 properties for an aggregate sales price of$152.2 million which resulted in a gain of$25.2 million during the three months endedMarch 31, 2020 , as compared to the disposition of 22 properties for an aggregate sales price of$66.0 million during the same period in 2019, which resulted in a gain of$10.8 million . During the three months endedMarch 31, 2020 , the Company did not record any losses related to held for sale properties. During the three months endedMarch 31, 2019 , the Company recorded a loss of less than$0.1 million related to held for sale properties. Provision for Income Taxes The provision for income taxes consists of certain state and local income and franchise taxes. 46
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Non-GAAP Measures Our results are presented in accordance withU.S. GAAP. We also disclose certain non-GAAP measures, as discussed further below. Management uses these non-GAAP financial measures in our internal analysis of results and believes these measures are useful to investors for the reasons explained below. These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance withU.S. GAAP. Funds from Operations and Adjusted Funds from Operations Due to certain unique operating characteristics of real estate companies, as discussed below, theNational Association of Real Estate Investment Trusts, Inc. ("Nareit"), an industry trade group, has promulgated a supplemental performance measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental performance measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income or loss as determined underU.S. GAAP. Nareit defines FFO as net income or loss computed in accordance withU.S. GAAP adjusted for gains or losses from disposition of property, depreciation and amortization of real estate assets, impairment write-downs on real estate, and our pro rata share of FFO adjustments related to unconsolidated partnerships and joint ventures. We calculate FFO in accordance with Nareit's definition described above. In addition to FFO, we use adjusted funds from operations ("AFFO") as a non-GAAP supplemental financial performance measure to evaluate the operating performance of the Company. AFFO, as defined by the Company, excludes from FFO non-routine items such as acquisition-related expenses, litigation and non-routine costs, net, net revenue or expense earned or incurred that is related to the services agreement associated with a discontinued operation, gains or losses on sale of investment securities or mortgage notes receivable, payments on fully reserved loan receivables and restructuring expenses. We also exclude certain non-cash items such as impairments of goodwill and intangible assets, straight-line rent, net direct financing lease adjustments, gains or losses on derivatives, reserves for loan loss, gains or losses on the extinguishment or forgiveness of debt, non-current portion of the tax benefit or expense, equity-based compensation and amortization of intangible assets, deferred financing costs, premiums and discounts on debt and investments, above-market lease assets and below-market lease liabilities. We omit the impact of theExcluded Properties and related non-recourse mortgage notes from FFO to calculate AFFO. Management believes that excluding these costs from FFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of our portfolio over time. AFFO allows for a comparison of the performance of our operations with other publicly-traded REITs, as AFFO, or an equivalent measure, is routinely reported by publicly-traded REITs, and we believe often used by analysts and investors for comparison purposes. For all of these reasons, we believe FFO and AFFO, in addition to net income (loss), as defined byU.S. GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of the Company over time. However, not all REITs calculate FFO and AFFO the same way, so comparisons with other REITs may not be meaningful. FFO and AFFO should not be considered as alternatives to net income (loss) and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. Neither theU.S. Securities and Exchange Commission (the "SEC"), Nareit, nor any other regulatory body has evaluated the acceptability of the exclusions used to adjust FFO in order to calculate AFFO and its use as a non-GAAP financial performance measure. 47
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The table below presents FFO and AFFO for the three months ended
Three Months Ended March 31,
2020 2019
Net income $ 86,863 $ 70,971
Dividends on non-convertible preferred stock (12,948 ) (17,973 )
Gain on disposition of real estate assets and interests in unconsolidated joint ventures, net
(25,249 ) (10,831 )
Depreciation and amortization of real estate assets 123,645 135,861
Impairment of real estate 8,380 11,988
Proportionate share of adjustments for unconsolidated entities
1,131 288
FFO attributable to common stockholders and limited partners
181,822 190,304
Acquisition-related expenses 1,523 985
Litigation and non-routine costs, net (8,564 ) (21,492 )
Loss on investments 541 470
Loss on derivative instruments, net - 34
Amortization of premiums and discounts on debt and investments, net
(689 ) (1,264 )
Amortization of above-market lease assets and deferred lease incentives, net of amortization of below-market lease liabilities
748 731
Net direct financing lease adjustments 365 409
Amortization and write-off of deferred financing costs 2,841 3,494
Loss on extinguishment and forgiveness of debt, net 1,280 -
Straight-line rent (2,054 ) (7,412 )
Equity-based compensation 2,602 2,687
Restructuring expenses - 9,076
Other adjustments, net 228 569Proportionate share of adjustments for unconsolidated entities
331 (188 )
AFFO attributable to common stockholders and limited partners
$ 180,974
Weighted-average shares of Common Stock outstanding - basic
1,077,937,799 968,460,296
Effect of weighted-average Limited Partner OP Units and dilutive securities (1)
1,813,441 24,838,018
Weighted-average shares of Common Stock outstanding - diluted (2)
1,079,751,240 993,298,314
AFFO attributable to common stockholders and limited partners per diluted share
$ 0.17 $ 0.18
____________________________________
(1) Dilutive securities include unvested restricted share awards ("Restricted
Shares"), unvested restricted stock units ("Restricted Stock Units") and
stock options ("Stock Options"). During the three months ended
2019, all Restricted Shares vested.
(2) Weighted-average shares for all periods presented exclude the effect of the
convertible debt as the Company would expect to settle the debt with cash and
any shares underlying Restricted Stock Units that are not issuable based on
the Company's level of achievement of certain performance targets through the
respective reporting period.
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Liquidity and Capital Resources General Our principal liquidity needs for the next twelve months and beyond are to: • fund normal operating expenses;
• fund potential capital expenditures, tenant improvements and leasing costs;
• meet debt service and principal repayment obligations, including balloon
payments on maturing debt;
• pay dividends; and
• fund property acquisitions.
We expect to be able to satisfy these obligations using one or more of the following sources: • cash flow from operations;
• proceeds from real estate dispositions;
• utilization of the existing Revolving Credit Facility;
• cash and cash equivalents balance; and
• issuance of
COVID-19
As previously discussed in the accompanying consolidated financial statements and related notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, we did not incur significant disruptions to our business during the three months endedMarch 31, 2020 from the COVID-19 pandemic. However, the financial impact of COVID-19 could have a material and adverse effect on our results of operations, liquidity and cash flows subsequent toMarch 31, 2020 , in particular due to the potential (i) inability of our tenants to satisfy their rent obligations, (ii) inability of the Company to renew leases, lease vacant space or re-let space as leases expire on favorable terms, or at all, and (iii) difficulty for the Company accessing debt and equity capital on attractive terms, or at all. During the three months endedMarch 31, 2020 , we initiated an additional draw, in excess of normal operating requirements, of$600.0 million on our Revolving Credit Facility to enhance our cash position. The effect of COVID-19 may also negatively impact our future compliance with financial covenants in our Credit Facility, indentures governing our Senior Notes and other debt agreements and result in a default and acceleration of indebtedness which could negatively impact our ability to make additional borrowings under our Credit Facility. The financial impact of COVID-19 could also negatively affect our ability to pay dividends or fund acquisitions. Common Stock Continuous Offering Program The Company has a continuous equity offering program pursuant to which the Company may sell shares of Common Stock having an aggregate offering price of up to$750.0 million from time to time throughApril 15, 2022 in "at-the-market" offerings or certain other transactions (the "ATM Program"). The proceeds from any sale of shares under the ATM Program have been or will be used for general corporate purposes, which may include funding potential acquisitions and repurchasing or repaying outstanding indebtedness. There were no issuances under the ATM Program during the three months endedMarch 31, 2020 . As ofMarch 31, 2020 , the Company had$663.3 million available to be sold under the ATM Program. Share Repurchase Program The Company has a share repurchase program (the "2019 Share Repurchase Program") that permits the Company to repurchase up to$200.0 million of its outstanding Common Stock throughMay 6, 2022 . Under the 2019 Share Repurchase Program, repurchases can be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated stock repurchase transactions, or other methods of acquiring shares in accordance with applicable securities laws and other legal requirements. The 2019 Share Repurchase Program program does not obligate the Company to make any repurchases at a specific time or in a specific situation and repurchases are influenced by prevailing market conditions, the trading price of the Common Stock, the Company's financial performance and other conditions. Shares of Common Stock repurchased by the Company under the 2019 Share Repurchase Program program, if any, will be returned to the status of authorized but unissued shares of Common Stock. There were no share repurchases under the 2019 Share Repurchase Program during the three months endedMarch 31, 2020 . As ofMarch 31, 2020 , the Company had$200.0 million available for share repurchases under the 2019 Share Repurchase Program. 49
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Series F Preferred Stock and Series F Preferred OP Units As ofMarch 31, 2020 , there were approximately 30.9 million shares of Series F Preferred Stock, approximately 30.9 million corresponding General Partner Series F Preferred Units and 49,766 Limited Partner Series F Preferred Units issued and outstanding. Disposition Activity As part of our effort to optimize our real estate portfolio by focusing on holding core assets, during the three months endedMarch 31, 2020 , the Company disposed of 30 properties, including the sale of two consolidated properties to theOffice Partnership , for an aggregate gross sales price of$152.2 million , of which our share was$150.5 million , resulting in proceeds of$140.4 million after closing costs and contributions to theOffice Partnership . We expect to continue to explore opportunities to sell additional properties to provide further financial flexibility, however, due to current economic circumstances, we may not be able to dispose of properties on advantageous terms or at all. Credit Facility Summary and Obligations OnMay 23, 2018 , the General Partner, as guarantor, and the OP, as borrower, entered into a credit agreement withWells Fargo Bank, National Association as administrative agent and other lenders party thereto (the "Credit Agreement"). The Credit Agreement provided for maximum borrowings of$2.9 billion , originally consisting of a$2.0 billion unsecured revolving credit facility (the "Revolving Credit Facility") and a$900.0 million unsecured term loan facility (the "Credit Facility Term Loan," together with the Revolving Credit Facility, the "Credit Facility"). EffectiveDecember 27, 2019 , the Company reduced the amount available under its Revolving Credit Facility from$2.0 billion to$1.5 billion . As ofMarch 31, 2020 ,$871.3 million was outstanding under the Revolving Credit Facility and the full$900.0 million was drawn on the Credit Facility Term Loan. The maximum aggregate dollar amount of letters of credit that may be outstanding at any one time under the Credit Facility is$50.0 million . As ofMarch 31, 2020 , there were no letters of credit outstanding. The Revolving Credit Facility generally bears interest at an annual rate of LIBOR plus 0.775% to 1.55% or Base Rate plus 0.00% to 0.55% (based upon the General Partner's then current credit rating). "Base Rate" is defined as the highest of the prime rate, the federal funds rate plus 0.50% or a floating rate based on one month LIBOR plus 1.0%, determined on a daily basis. The Credit Facility Term Loan generally bears interest at an annual rate of LIBOR plus 0.85% to 1.75%, or Base Rate plus 0.00% to 0.75% (based upon the General Partner's then current credit rating). In addition, the Credit Agreement provides the flexibility for interest rate auctions, pursuant to which, at the Company's election, the Company may request that lenders make competitive bids to provide revolving loans, which competitive bids may be at pricing levels that differ from the foregoing interest rates. Credit Facility Covenants The Credit Facility requires restrictions on corporate guarantees, as well as the maintenance of certain financial covenants. The key financial covenants in the Credit Facility, as defined and calculated per the terms of the Credit Agreement include maintaining the following: Unsecured Credit Facility Key Covenants Required Ratio of total indebtedness to total asset value ? 60% Ratio of adjusted EBITDA to fixed charges ? 1.5x Ratio of secured indebtedness to total asset value ? 45%
Ratio of unsecured indebtedness to unencumbered asset value ? 60% Ratio of unencumbered adjusted NOI to unsecured interest expense ? 1.75x
The Company believes that it was in compliance with the financial covenants
pursuant to the Credit Agreement and is not restricted from accessing any
borrowing availability under the Credit Facility as of
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Corporate Bonds Summary and Obligations As ofMarch 31, 2020 , theOperating Partnership had$2.85 billion aggregate principal amount of Senior Notes outstanding. The indenture governing the Senior Notes requires that the Company be in compliance with certain key financial covenants, including maintaining the following: Corporate Bond Key Covenants Required Limitation on incurrence of total debt ? 65% Limitation on incurrence of secured debt ? 40% Debt service coverage ratio ? 1.5x
Maintenance of total unencumbered assets ? 150%
As ofMarch 31, 2020 , the Company believes that it was in compliance with these financial covenants based on the covenant limits and calculations in place at that time. Convertible Debt Summary and Obligations As ofMarch 31, 2020 , the Company had$321.8 million aggregate principal amount of the 2020 Convertible Notes outstanding. The OP has issued corresponding identical convertible notes to the General Partner. There were no changes to the terms of the 2020 Convertible Notes during the three months endedMarch 31, 2020 and the Company believes that it was in compliance with the financial covenants pursuant to the indenture governing the 2020 Convertible Notes as ofMarch 31, 2020 . Mortgage Notes Payable Summary and Obligations As ofMarch 31, 2020 , the Company had non-recourse mortgage indebtedness of$1.4 billion , which was collateralized by 317 properties, reflecting a decrease fromDecember 31, 2019 of$121.3 million during the three months endedMarch 31, 2020 , primarily related to prepayments of mortgage notes payable. Our mortgage indebtedness bore interest at the weighted-average rate of 5.02% per annum and had a weighted-average maturity of 2.7 years. We may in the future incur additional mortgage debt on the properties we currently own or use long-term non-recourse financing to acquire additional properties. The payment terms of our loan obligations vary. In general, only interest amounts are payable monthly with all unpaid principal and interest due at maturity. Some of our loan agreements require that we comply with specific reporting and financial covenants mainly related to debt coverage ratios and loan-to-value ratios. Each loan that has these requirements has specific ratio thresholds that must be met. Restrictions on Loan Covenants Our mortgage loan obligations generally restrict corporate guarantees and require the maintenance of financial covenants, including maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios), as well as the maintenance of a minimum net worth. The mortgage loan agreements contain no dividend restrictions except in the event of default or when a distribution would drive liquidity below the applicable thresholds. The Company believes that it was in compliance with the financial covenants under the mortgage loan agreements and had no restrictions on the payment of dividends as ofMarch 31, 2020 . Dividends OnFebruary 25, 2020 , the Company's Board of Directors declared a quarterly cash dividend of$0.1375 per share of Common Stock (equaling an annualized dividend rate of$0.55 per share) for the first quarter of 2020 to stockholders of record as ofMarch 31, 2020 , which was paid onApril 15, 2020 . An equivalent distribution by theOperating Partnership is applicable per OP Unit. Our Series F Preferred Stock, as discussed in Note 12 - Equity to our consolidated financial statements, will pay cumulative cash dividends at the rate of 6.70% per annum on their liquidation preference of$25.00 per share (equivalent to$1.675 per share on an annual basis). 51
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Contractual Obligations The following is a summary of our contractual obligations as ofMarch 31, 2020 (in thousands): Payments due by period Less than 1 More than 5 Total year 1-3 years 4-5 years years
Principal payments - mortgage notes$ 1,407,771 $ 89,602 $ 565,966 $ 745,238 $ 6,965 Interest payments - mortgage notes (1) 187,836 53,010 100,545 33,154 1,127 Principal payments - Credit Facility 1,771,313 - 871,313 900,000 - Interest payments - Credit Facility (1) (2) 120,496 33,519 80,357 6,620 - Principal payments - corporate bonds 2,850,000 - - 500,000 2,350,000 Interest payments - corporate bonds 766,201 89,991 239,976 219,212 217,022 Principal payments - convertible debt 321,802 321,802 - - - Interest payments - convertible debt 8,514 8,514 - - - Operating and ground lease commitments 328,693 16,568 44,037 42,628 225,460 Build-to-suit and other commitments (3) 25,543 25,543 - - - Total$ 7,788,169 $ 638,549 $ 1,902,194 $ 2,446,852 $ 2,800,574
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(1) Interest payments due in future periods on the
rate debt were calculated using a forward LIBOR curve.
(2) As of
Credit Facility Term Loan effectively fixed through the use of interest rate
swap agreements. We used the interest rates effectively fixed under our swap
agreements to calculate the debt payment obligations in future periods.(3) Includes one build-to-suit development project, the Company's share of
capital expenditures related to an expansion project of the property held
within an unconsolidated joint venture and letters of credit outstanding.
Cash Flow Analysis for the three months endedMarch 31, 2020 Operating Activities - During the three months endedMarch 31, 2020 , net cash provided by operating activities decreased$22.0 million to$172.0 million from$194.0 million during the same period in 2019. The decrease was primarily due to a decrease in cash insurance recoveries received of$45.9 million and a decrease in cash rental payments received of$13.0 million , offset by a decrease in cash interest payments of$17.0 million , a decrease in litigation settlement payments of$15.7 million and a decrease in restructuring expenses paid of$5.1 million during the three months endedMarch 31, 2020 . Investing Activities - Net cash used in investing activities for the three months endedMarch 31, 2020 decreased$3.2 million to$19.7 million from$22.8 million during the same period in 2019. The decrease was primarily related to an increase in cash proceeds from dispositions of real estate and joint ventures of$79.9 million , offset by an increase in investments in real estate assets of$66.1 million and a decrease in proceeds from the sale of mortgage notes receivables of$8.2 million . Financing Activities - Net cash provided by financing activities of$433.4 million increased$626.9 million during the three months endedMarch 31, 2020 from$193.5 million net cash used in financing activities during the same period in 2019. The change was primarily due to an additional draw on our Revolving Credit Facility in excess of normal operating requirements to enhance our cash position that was initiated during the three months endedMarch 31, 2020 of$600.0 million , of which we received$559.3 million as ofMarch 31, 2020 . Election as a REIT The General Partner elected to be taxed as a REIT forU.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the taxable year endedDecember 31, 2011 . As a REIT, except as discussed below, the General Partner generally is not subject to federal income tax on taxable income that it distributes to its stockholders so long as it distributes at least 90% of its annual taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if the General Partner maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, federal income taxes on certain income and excise taxes on its undistributed income. We believe we are organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year endedDecember 31, 2020 .The Operating Partnership is classified as a partnership forU.S. federal income tax purposes. As a partnership, theOperating Partnership is not a taxable entity forU.S. federal income tax purposes. Instead, each partner in theOperating Partnership is required to take into account its allocable share of theOperating Partnership's income, gains, losses, deductions and credits for each taxable year. However, theOperating Partnership may be subject to certain state and local taxes on its income and property. 52
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Under the limited partnership agreement of the OP, as amended (the "LPA"), theOperating Partnership is required to conduct business in such a manner as to permit the General Partner at all times to qualify as a REIT.The Company conducts all of its business inthe United States andPuerto Rico and, as a result, it files income tax returns in theU.S. federal jurisdiction,Puerto Rico , and various state and local jurisdictions. Certain of the Company's inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation. Inflation We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. However, net leases that require the tenant to pay its allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance, may reduce our exposure to increases in costs and operating expenses resulting from inflation. Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Policies and Significant Accounting Estimates Our accounting policies have been established to conform withU.S. GAAP. The preparation of financial statements in conformity withU.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and 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. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 : •Goodwill Impairment; •Real Estate Investment Impairment; and •Allocation of Purchase Price of Real Estate Assets Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market Risk The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our market risk arises primarily from interest rate risk relating to variable-rate borrowings. To meet our short and long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to manage our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, caps, collars, treasury locks, options and forwards in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. 53
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Interest Rate Risk As ofMarch 31, 2020 , our debt included fixed-rate debt, including debt that has interest rates that are fixed with the use of derivative instruments, with a fair value and carrying value of$5.4 billion and$5.5 billion , respectively. Changes in market interest rates on our fixed rate debt impact the fair value of the debt, but they have no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points, and the fixed rate debt balance remains constant, we expect the fair value of our debt to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from theirMarch 31, 2020 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed rate debt of$115.6 million . A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt of$271.6 million . As ofMarch 31, 2020 , our debt included variable-rate debt with a fair value and carrying value of$886.6 million and$886.5 million , respectively. The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from theirMarch 31, 2020 levels, with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate debt would increase or decrease our interest expense by$8.9 million annually. See Note 6 - Debt to our consolidated financial statements. As ofMarch 31, 2020 , our interest rate swaps had a fair value that resulted in liabilities of$104.5 million . See Note 7 - Derivatives and Hedging Activities to our consolidated financial statements for further discussion. As the information presented above includes only those exposures that existed as ofMarch 31, 2020 , it does not consider exposures or positions arising after that date. The information presented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations. These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs and assume no other changes in our capital structure. InJuly 2017 , theFinancial Conduct Authority ("FCA") announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Company is not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the Secured Overnight Financing Rate ("SOFR") markets. The Company has contracts that are indexed to LIBOR and is monitoring and evaluating the related risks, which include interest amounts on our variable rate debt as discussed in Note 6 - Debt and the swap rate for our interest rate swaps, as discussed in Note 7 - Derivatives and Hedging Activities. See Item 1A. Risk Factors included in the Company's Annual Report on Form 10-K for further discussion on risks related to changes in LIBOR reporting practices, the method in which LIBOR is determined, or the use of alternative reference rates. Credit Risk Concentrations of credit risk arise when a number of tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company is subject to tenant, geographic and industry concentrations. Any downturn of the economic conditions in one or more of these tenants, geographies or industries could result in a material reduction of our cash flows or material losses to us. The factors considered in determining the credit risk of our tenants include, but are not limited to: payment history; credit status and change in status (credit ratings for public companies are used as a primary metric); change in tenant space needs (i.e., expansion/downsize); tenant financial performance; economic conditions in a specific geographic region; and industry specific credit considerations. We believe that the credit risk of our portfolio is reduced by the high quality of our existing tenant base, reviews of prospective tenants' risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants. However, we continue to monitor this in light of the effects of the COVID-19 pandemic. 54
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