BROADSTONE NET LEASE, INC. 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 toBroadstone Net Lease, Inc. , aMaryland corporation incorporated onOctober 18, 2007 , and, as required by context,Broadstone Net Lease, LLC , aNew 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 theSEC onFebruary 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
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"CPI" means the Consumer Price Index for All Urban Consumers (CPI-U):U.S. City Average, All Items, as published by theU.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
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 ofJune 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 throughSEC filings or otherwise. 25
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Real Estate Portfolio Information
The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as ofJune 30, 2022 . The percentages below are calculated based on our ABR of$360.0 million as ofJune 30, 2022 .
Diversification by Property Type
[[Image Removed: img144228974_0.jpg]]
26
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ABR ABR as a % of Square Feet SF as a % of
Property Type # Properties ($'000s) Total Portfolio ('000s) 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
ABR as a % SF as a %
ABR of Total Square Feet of Total
Tenant Property Type # Properties ($'000s) Portfolio ('000s) Portfolio
Jack's Family Quick Service
Restaurants LP* Restaurants 43 $ 7,166 2.0 % 147 0.4 %
Joseph T. Ryerson & Son, Distribution & Warehouse
Inc 11 6,395 1.8 % 1,537 4.5 %
Red Lobster Hospitality Casual Dining
& Red Lobster
Restaurants LLC* 20 6,361 1.8 % 166 0.5 %
J. Alexander's, LLC* Casual Dining 16 6,025 1.7 % 131 0.4 %
Axcelis Technologies, Flex and R&D
Inc. 1 5,991 1.6 % 417 1.2 %
Hensley & Company* Distribution & Warehouse 3 5,871 1.6 % 577 1.7 %
Dollar General General Merchandise
Corporation 57 5,636 1.5 % 531 1.5 %
BluePearl Holdings, Animal Health Services
LLC** 13 5,451 1.5 % 165 0.5 %
Tractor Supply Company General Merchandise 21 5,279 1.5 % 417 1.2 %
Outback Steakhouse of Casual Dining
Florida LLC*1 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 Quick Service
Corporation Restaurants/
Food Processing 27 5,034 1.4 % 156 0.4 %
Big Tex Trailer Automotive/Distribution
Manufacturing, Inc.* &
Warehouse/Manufacturing/
Corporate Headquarters 17 4,957 1.4 % 1,302 3.8 %
Siemens Medical Manufacturing/Flex
Solutions USA, Inc. & and R&D
Siemens Corporation 2 4,936 1.4 % 545 1.6 %
Carvana, LLC* Industrial Services 2 4,510 1.3 % 230 0.7 %
Santa Cruz Valley Healthcare Facilities
Hospital 1 4,500 1.2 % 148 0.4 %
Nestle' Dreyer's Ice Cold Storage
Cream Company 1 4,476 1.2 % 310 0.9 %
Arkansas Surgical Surgical
Hospital 1 4,366 1.2 % 129 0.4 %
American Signature, Inc. Home Furnishings 6 4,224 1.2 % 474 1.4 %
Fresh Express Food Processing
Incorporated 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
ABR as a % SF as a %
ABR of Total Square Feet of Total
Brand Property Type # Properties ($'000s) Portfolio ('000s) Portfolio
Jack's Family Quick Service Restaurants
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 Animal Health Services
Veterinary
Partners** 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 %
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 Healthcare Facilities
Hospital 1 4,500 1.2 % 148 0.4 %
Nestle' Cold Storage 1 4,476 1.2 % 310 0.9 %
Arkansas Surgical Surgical
Hospital 1 4,366 1.2 % 129 0.4 %
Wendy's** Quick Service Restaurants 29 4,320 1.2 % 83 0.2 %
Value City Home Furnishings
Furniture 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
ABR as a % Square SF as a %
ABR of Total Feet of Total
Industry # Properties ($'000s) Portfolio ('000s) 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
[[Image Removed: img144228974_1.jpg]]
ABR as a Square SF as a % ABR as a Square SF as a %
State / # ABR % of Total Feet of Total State / # ABR % of Total Feet of Total
Province Properties ($'000s) Portfolio ('000s) Portfolio Province Properties ($'000s) Portfolio ('000s) 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 ofJune 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 ofJune 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 ofJune 30, 2022 . [[Image Removed: 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 ABR ABR as a % of Square Feet SF as a % of
Year # Properties # Leases ($'000s) Total Portfolio ('000s) 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 ofJune 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 ofJune 30, 2022 is displayed below: Weighted Average Annual Minimum Lease Escalation Frequency % of ABR 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 ofJune 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
[[Image Removed: img144228974_3.jpg]]
33
--------------------------------------------------------------------------------Results of Operations
The following discussion includes the results of our operations for the periods presented.
Three Months EndedJune 30, 2022 Compared to Three Months EndedMarch 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 ofMarch 2022 , and therefore did not materially contribute to Lease revenues, net for the three months endedMarch 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 endedJune 30, 2022 . 34
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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
Provision for impairment of investment in rental properties
During the three months ended
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
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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 endedJune 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 endedMarch 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 endedJune 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 endedMarch 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
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
General and administrative
The decrease in general and administrative expenses mainly reflects decreased
severance expense. During the six months ended
Provision for impairment of investment in rental properties
During the six months ended
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
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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 endedJune 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 endedJune 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 endedDecember 31, 2021 , therefore there is no change in the fair value of the earnout liability during the six months endedJune 30, 2022 . The change in the fair value of the earnout liability during the six months endedJune 30, 2021 reflected an increase in our share price as compared toDecember 31, 2020 .
Other income
The increase in other income during the six months endedJune 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 endedJune 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' fromS&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 ofJune 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 ofJune 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 For the Six
Ended 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
The following table sets forth our outstanding Revolving Credit Facility,
Unsecured Term Loans and Senior Unsecured Notes at
(in thousands, except Outstanding Interest Maturity
interest rates) Balance Rate Date
Applicable
Unsecured revolving credit reference rate +
facility $ 320,657 0.85% (a) Mar. 2026
Unsecured term loans:
one-month LIBOR +
2024 Unsecured Term Loan 190,000 1.00% Jun. 2024
one-month LIBOR +
2026 Unsecured Term Loan 400,000 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
On
As ofJune 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 ofJune 30, 2022 . Subsequent to quarter end, onAugust 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 ofJune 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 ? 1.50 to 1.00 Service Charge 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
Revolving
Credit Tenant
Year of Facility Senior Interest Improvement Operating
Maturity Term Loans (a) Notes Mortgages Expense (b) Allowances 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
41
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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 ofJune 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 inCanada , 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$87.0 million atJune 30, 2022 andJune 30, 2021 , respectively. The table below shows information concerning cash flows for the six months endedJune 30, 2022 and 2021: For the Six Months Ended June 30, June 30, (In thousands) 2022 2021 Net cash provided by operating activities$ 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 endedJune 30, 2022 as compared to the six months endedJune 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 endedJune 30, 2022 as compared to the six months endedJune 30, 2021 , was mainly due to increased acquisition volume and decreased disposition volume during the six months endedJune 30, 2022 . The increase in net cash provided by financing activities during the six months endedJune 30, 2022 as compared to the six months endedJune 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 theSEC 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, theSEC , 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
June 30, March 31, June 30, June 30,
(in thousands, except per share data) 2022 2022 2022 2021
Net income $ 35,552 $ 28,441 $ 63,993 $ 46,780
Real property depreciation and 35,479 34,259 69,738 61,892
amortization
Gain on sale of real estate (4,071 ) (1,196 ) (5,267 ) (8,571 )
Provision for impairment on investment 1,380 - 1,380 2,012
in rental properties
FFO $ 68,340 $ 61,504 $ 129,844 $ 102,113
Net write-offs of accrued rental - 1,326 1,326 442
income
Cost of debt extinguishment - - - 126
Severance 278 120 398 1,275
Change in fair value of earnout - - - 4,480
liability
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 (1 ) - (1 ) (1 )
losses
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 695 659 1,354 (83 ) other non-cash interest expense 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 endedJune 30, 2022 andMarch 31, 2022 , respectively, and($1.5) million of unrealized foreign exchange (gain) for the six months endedJune 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
June 30, March 31, June 30,
(in thousands) 2022 2022 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:
June 30, March 31, June 30,
(in thousands) 2022 2022 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 endedJune 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.
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