ESSENTIAL PROPERTIES REALTY TRUST, INC. In this Quarterly Report on Form 10-Q, we refer toEssential Properties Realty Trust, Inc. , aMaryland corporation, together with its consolidated subsidiaries, including its operating partnership,Essential Properties, L.P. , as "we," "us," "our" or the "Company," unless we specifically state otherwise or the context indicates otherwise. Special Note Regarding Forward-Looking Statements This quarterly report contains forward-looking statements within the meaning 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"). In particular, many statements pertaining to our business and growth strategies, investment, financing and leasing activities, the ongoing impact of the COVID-19 pandemic on us and our tenants and various responses thereto, and trends in our business, including trends in the market for long-term, net leases of freestanding, single-tenant properties, are forward-looking. When used in this quarterly report, the words "estimate," "anticipate," "expect," "believe," "intend," "may," "will," "should," "seek," "approximately," "plan," and variations of such words, and similar words or phrases, that are predictions of future events or trends and that do not relate solely to historical matters, are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements; accordingly, you should not rely on forward-looking statements as predictions of future events. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise, and may not be able to be realized. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). Moreover, the limitations associated with forward-looking statements have been exacerbated by the COVID-19 pandemic, which has introduced significant increased uncertainty into the overall business and economic environment. The following factors, among others, could cause actual results and future events to differ materially from those set expressed and implied by the forward-looking statements: •general business and economic conditions; •ongoing adverse effects of the COVID-19 pandemic on us and our tenants, including the ability of our tenants to pay rent to us in accordance with their lease agreements and deferral agreements, and our ability to access debt and equity capital on reasonable terms; •volatility and uncertainty in the credit markets and broader financial markets, including potential fluctuations in the Consumer Price Index ("CPI"); •risks inherent in the real estate business, including tenant defaults or bankruptcies, illiquidity of real estate investments, fluctuations in real estate values and the general economic climate in local markets, competition for tenants in such markets, potential liability relating to environmental matters and potential damages from natural disasters; •the performance, financial condition and liquidity of our tenants; •the availability of suitable properties to invest in and our ability to invest in and lease those properties on favorable terms; •our ability to renew leases, lease vacant space or re-lease space as existing leases expire or are terminated; •the degree and nature of our competition; •our failure to generate sufficient cash flows to service our outstanding indebtedness; •our ability to access debt and equity capital on attractive terms; •fluctuating interest rates; •availability of qualified personnel and our ability to retain our key management personnel; •changes in, or the failure or inability to comply with, applicable law or regulation; •our failure to maintain our qualification for taxation as a real estate investment trust ("REIT"); •changes in theU.S. tax law and otherU.S. laws, whether or not specific to REITs; and 43 -------------------------------------------------------------------------------- Table of Contents •additional factors discussed in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this quarterly report and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law. Because we operate in a highly competitive and rapidly changing environment, new risks emerge from time to time, and it is not possible for management to predict all such risks, nor can management assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those expressed or implied by any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. See "COVID-19 Pandemic Update" below for a discussion of the impact of the pandemic on our business, including operational changes we have implemented, performance indicators, such as rent collections throughOctober 31, 2020 , and factors that we anticipate will inform our future decisions and actions. The current operating environment continues to evolve rapidly and may differ significantly from region to region. Accordingly, it is difficult to predict the ongoing impact of the pandemic on our business and the actions we may take in response thereto. The extent of the impact that COVID-19 will have on our business going forward, including our financial condition, results of operations and cash flows is dependent on multiple factors, many of which are unknown. For additional information, see Item 1A. Risk Factors. Overview We are an internally managed real estate company that invests in, owns and manages primarily single-tenant properties that are net leased on a long-term basis to middle-market companies operating service-oriented or experience- based businesses. We generally invest in and lease freestanding, single-tenant commercial real estate facilities where a tenant services its customers and conducts activities that are essential to the generation of the tenant's sales and profits. We were organized onJanuary 12, 2018 as aMaryland corporation. We have elected to be taxed as a real estate investment trust ("REIT") for federal income tax purposes beginning with the year endedDecember 31, 2018 , and we believe that our current organization, operations and intended distributions will allow us to continue to so qualify. OnJune 25, 2018 , we completed the initial public offering ("IPO") of our common stock. Our common stock is listed on theNew York Stock Exchange under the ticker symbol "EPRT". We generally lease each of our properties to a single tenant pursuant to a long-term triple-net lease, and we generate our cash from operations primarily through the monthly lease payments, or base rent we receive from the tenants that occupy our properties. As ofSeptember 30, 2020 , we had a portfolio of 1,096 properties (inclusive of two undeveloped land parcels and 92 properties which secure our investments in mortgage loans receivable) that was diversified by tenant, concept, industry and geography, had annualized base rent of$167.7 million and was 99.4% occupied. "Annualized base rent" means annualized contractually specified cash base rent in effect onSeptember 30, 2020 for all of our leases (including those accounted for as loans or direct financing leases) commenced as of that date and annualized cash interest on our mortgage loans receivable as of that date. Substantially all of our leases provide for periodic contractual rent escalations. As ofSeptember 30, 2020 , leases contributing 99.2% of our annualized base rent provided for increases in future annual base rent, generally ranging from 1% to 4%, with a weighted average annual escalation equal to 1.5% of base rent. As ofSeptember 30, 2020 , leases contributing 94.1% of annualized base rent were triple-net, which means that our tenant is responsible for all operating expenses, such as maintenance, insurance, utility and tax expense, related to the leased property (including any increases in those costs that may occur as a result of inflation). Our remaining 44 -------------------------------------------------------------------------------- Table of Contents leases were "double net," where the tenant is responsible for certain expenses, such as taxes and insurance, but we retain responsibility for other expenses, generally related to maintenance and structural component replacement that may be required on such leased properties in the future. We also incur property-level expenses associated with our vacant properties and we occasionally incur nominal property-level expenses that are not paid by our tenants, such as the costs of periodically making site inspections of our properties though we do not expect these expenses to be significant. Since our properties are predominantly single-tenant properties, which are generally subject to long-term leases, it is not necessary for us to perform any significant ongoing leasing activities with respect to our properties. As ofSeptember 30, 2020 , the weighted average remaining term of our leases was 14.6 years (based on annualized base rent), excluding renewal options that have not been exercised, with 3.6% of our annualized base rent attributable to leases expiring prior toJanuary 1, 2025 . Renewal options are exercisable at the option of our tenants upon expiration of the current base lease term. Our leases providing for tenant renewal options generally provide for periodic contractual rent escalations during any renewed term that are similar to those applicable during the initial term of the lease. As ofSeptember 30, 2020 , 60.4% of our annualized base rent was attributable to master leases, where we have leased multiple properties to the tenant under a master lease. Since properties are generally leased under a master lease on an "all or none" basis, the structure prevents a tenant from "cherry picking" locations, where it unilaterally gives up underperforming properties while maintaining its leasehold interest in well-performing properties. COVID-19 Pandemic Update COVID-19 has created significant uncertainty and economic disruption, which is likely to persist, or increase, for a period of unknown duration. The pandemic has adversely affected us and our tenants, and the full extent to which it will adversely affect our financial condition, liquidity, and results of operations is difficult to predict and depends on evolving factors, including the duration and scope of the pandemic, and governmental and social responses thereto. We continue to closely monitor the impact of COVID-19 on all aspects of our business, including our portfolio and the creditworthiness of our tenants. As the pandemic intensified at the end of the first quarter of 2020, we adopted a more cautious investment strategy, as we placed an increased emphasis on liquidity, prudent balance sheet management and financial flexibility. InMarch 2020 , we initiated steps to safeguard the health and safety of our employees, and transitioned all of our employees to a remote work environment. We successfully executed our business continuity plan, with all of our core financial, operational and telecommunication systems operating from a cloud-based environment with no disruption. More recently, our employees have been able to work in our headquarters, located inPrinceton, New Jersey , on a schedule designed to promote appropriate social distancing and health and safety. The impact of the pandemic is rapidly evolving. It continues to adversely impact commercial activity and cause uncertainty and volatility in financial markets. The pandemic has adversely affected our tenants' ability to meet their financial obligations to us (including the payment of rent and deferred rent), exposed us to increased risk of tenant default or bankruptcy, and impaired the value of certain of our properties. The pandemic has caused a large number of our tenants, to suspend or reduce their operations, which has adversely affected their ability to pay rent to us. As ofOctober 31, 2020 , we estimate that properties operated by tenants contributing approximately 99.0% of our annualized base rent as ofSeptember 30, 2020 were operating in a full or limited capacity and, as of such date, we granted tenant-requested rent deferrals relating to approximately$18.1 million of rent, representing 10.8% of our annualized base rent as ofSeptember 30, 2020 . During the three months endedSeptember 30, 2020 , we collected substantially all of the$1.3 million in deferred rent we were owed from tenants where repayment was anticipated. The adverse impacts of the pandemic and the responses designed to mitigate its effects (such as local, state, regional or national lockdowns or other limitations on business activities) have varied, and likely will continue to vary, by geography. It is possible that our properties and tenants located in certain areas will be more adversely affected than our properties and tenants located in other areas. While our properties are diversified by geography, we derive approximately 13.1%, 10.1%, 6.5%, 5.4%, 4.5%, 4.3% and 4.1% of our annualized base rent as ofSeptember 30, 2020 fromTexas ,Georgia ,Florida ,Arkansas ,Arizona ,Ohio andAlabama respectively. If the pandemic surges in these states or other areas from which we derive significant revenue, the adverse impact of the pandemic on us and our tenants would likely increase. Similarly, we derive approximately 13.3%, 8.6%, 4.8%, 3.7%, 2.5% and 1.3% of our annualized base rent as ofSeptember 30, 2020 from tenants operating in the following industries: early childhood education, restaurants (casual dining and family dining), health and fitness, 45 -------------------------------------------------------------------------------- Table of Contents entertainment, movie theaters and home furnishings. These industries have been particularly adversely affected by the pandemic, and it is possible that their ability to pay rent to us could be further impaired. See "Our Real Estate Investment Portfolio-Diversification by Industry" and "-Diversification by Geography," below for additional information about our exposure to various states and industries. The pandemic could cause our occupancy to decrease, which would lead to increased property-level expenses, as we would be obligated to pay costs (e.g., real estate taxes, maintenance costs and insurance) that would otherwise be paid by a tenant at a property subject to a triple-net lease. Additionally, while we recently have begun to accelerate our investment program, the pandemic has caused us to adopt a more cautious investment strategy, as we emphasize liquidity and financial flexibility, that has slowed our pace of external growth. Conditions in the bank lending and capital markets have been volatile and may deteriorate as a result of the pandemic, and our ability, and that of our tenants, to access capital may become constrained or eliminated, or the terms on which capital may be accessed may deteriorate significantly. One of our main operating functions is our proactive asset management approach. Accordingly, we continue to actively engage in discussions with our tenants regarding the impact of COVID-19 on their business operations, liquidity, and financial position, and, where appropriate, negotiate rent deferrals or other concessions. As noted above, as ofOctober 31, 2020 , we estimate that properties operated by tenants contributing approximately 99.0% of our annualized base rent as ofSeptember 30, 2020 were operating in a full or limited capacity. ThroughOctober 31, 2020 , we received approximately 91.0% of contractual base rent that was due forOctober 2020 and, as of such date. we granted tenant-requested rent deferrals relating to approximately$18.1 million of rent, which represents 10.8% of our annualized base rent as ofSeptember 30, 2020 . These rent deferrals were negotiated on a tenant-by-tenant basis, and, in general, allow a tenant to defer all or a portion of its rent for the second and third quarter of 2020, with all of the deferred rent to be paid to us pursuant to a schedule that generally extends up to 24 months from the original due date of the deferred rent. It is possible that the existing deterioration, or further deterioration, in our tenants' ability to operate their businesses caused by COVID-19 or otherwise, will cause our tenants to be unable or unwilling to meet their contractual obligations to us, including the payment of rent (including deferred rent) or to request further rent deferrals or other forms of rent relief, such as rent reductions. Given the significant uncertainty around the duration and severity of the impact of COVID-19, we are unable to predict the impact it will have on our tenants' continued ability to pay rent (including deferred rent). Therefore, information provided regarding October rent collections should not serve as an indication of expected future rent collections. The extent to which COVID-19 impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, geographic and industry variations in COVID-19's impact and actions taken to contain COVID-19. The impact of COVID-19 on our tenants and properties will likely have a continuing adverse impact on us, particularly if tenants are unable to meet their rental payment obligations to us (including the payment of deferred rent), our vacancy rate increases or if we choose to grant further rent deferrals or other concessions. Liquidity and Capital Resources Substantially all of our cash from operations is generated by our investments in real estate and loans and direct financing lease receivables. As ofSeptember 30, 2020 , we had$2.2 billion of net investments in our investment portfolio, consisting of investments in 1,096 properties (inclusive of two undeveloped land parcels and 92 properties which secure our investments in mortgage loans receivable), with annualized base rent of$167.7 million . As described above, due to COVID-19, we have deferred approximately$18.1 million of contractual base rent, which represents 10.8% of our annualized base rent as ofSeptember 30, 2020 . While we expect to receive deferred rent in accordance with the terms of the deferral agreements that we have entered into with our tenants, these deferrals will have the effect of delaying our receipt of operating cash flow. Our short-term liquidity requirements consist primarily of funds necessary to pay our operating expenses, including principal and interest payments on our outstanding indebtedness, and the general and administrative expenses of servicing our portfolio and operating our business. Since our occupancy level is high and substantially all of our leases are triple-net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with the properties they lease from us, with the result being that we have limited property-level expense. When a property becomes vacant through a tenant default or expiration of the lease term with no tenant renewal or re-leasing, we incur the property costs not paid by the tenant, as well as those property costs accruing 46 -------------------------------------------------------------------------------- Table of Contents during the time it takes to locate a substitute tenant or to sell the property. As ofSeptember 30, 2020 , four of our property locations were vacant and not subject to a lease (excluding two undeveloped land parcels), which represents a 99.4% occupancy rate. We expect to incur some property costs from time to time in periods during which properties that become vacant are being marketed for lease or sale. In addition, we may recognize an expense for certain property costs, such as real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations. The amount of such property costs can vary quarter-to-quarter based on the timing of property vacancies and the level of underperforming properties; however, we do not expect that such costs will be significant to our operations. COVID-19 has introduced significant business uncertainty, and it could result in increased vacancy throughout our portfolio. To the extent we see an increase in vacancy, it would cause us to incur increased property costs. While COVID-19 has caused us to slow our investment pace, we intend to continue to grow our portfolio over the long term through additional real estate investments. To accomplish this objective, we seek to invest in real estate with a combination of debt and equity capital and with cash from operations that we do not distribute to our stockholders. When we sell properties, we generally reinvest the cash proceeds from those sales in new property acquisitions. Our short-term liquidity requirements also include the funding needs associated with 32 properties where we have agreed to provide construction financing or reimburse the tenant for certain development, construction and renovation costs in exchange for contractually specified interest or rent that generally increases in proportion with our funding. As ofSeptember 30, 2020 , we had agreed to provide construction financing or reimburse the tenant for certain development, construction and renovation costs in an aggregate amount of$66.7 million , and, as of the same date, we had funded$47.2 million of this commitment. We expect to fund the balance of such commitment byDecember 31, 2021 . Additionally, as ofNovember 3, 2020 , we were under contract to acquire 32 properties with an aggregate purchase price of$49.9 million , subject to completion of our due diligence procedures and customary closing conditions. We expect to meet our short-term liquidity requirements, including our investment in potential future acquisitions, primarily with cash and cash equivalents, net cash from operating activities and borrowings under the Revolving Credit Facility. Our long-term liquidity requirements consist primarily of funds necessary to invest in additional properties and repay indebtedness. We expect to meet our long-term liquidity requirements through various sources of capital, including net cash from operating activities, borrowings under our Revolving Credit Facility, future financings, sales of equity securities, including under our ATM Program, proceeds from select sales of our properties and other secured and unsecured borrowings (including potential issuances under theMaster Trust Funding Program). However, at any point in time, there may be a number of factors that could have a material and adverse effect on our ability to access these capital sources, including unfavorable conditions in the overall equity and credit markets, our degree of leverage, our unencumbered asset base, borrowing restrictions imposed by our lenders, general market conditions for REITs, our operating performance, liquidity and market perceptions about us. The success of our business strategy will depend, to a significant degree, on our ability to access these various capital sources. An additional liquidity need is funding the distributions that we expect will be required for us to continue to qualify for taxation as a REIT. During the nine months endedSeptember 30, 2020 , our board of directors declared total cash distributions of$0.69 per share of common stock. Holders of OP Units issued by ourOperating Partnership are entitled to distributions per unit equivalent to those paid by us per share of common stock. During the nine months endedSeptember 30, 2020 , we paid$62.2 million of distributions to common stockholders and OP Unit holders, and, as ofSeptember 30, 2020 , we recorded$24.2 million of distributions payable to common stockholders and OP Unit holders. To continue to qualify for taxation as a REIT, we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. As a result of this requirement, we cannot rely on retained earnings to fund our business needs to the same extent as other entities that are not REITs. If we do not have sufficient funds available to us from our operations to fund our business needs, we will need to find alternative ways to fund those needs. Such alternatives may include, among other things, selling properties (whether or not the sales price is optimal or otherwise meets our strategic long-term objectives), incurring additional indebtedness or issuing equity securities in public or private transactions. The availability and attractiveness of the terms of these potential sources of financing cannot be assured. Generally, our debt capital is initially provided on a short-term, temporary basis through our Revolving Credit Facility. We manage our long-term leverage position through the issuance of long-term fixed-rate debt on a secured or unsecured basis. By seeking to match the expected cash inflows from our long-term investments with the 47 -------------------------------------------------------------------------------- Table of Contents expected cash outflows for our long-term debt, we seek to "lock in," for as long as is economically feasible, the expected positive difference between our scheduled cash inflows on the investments and the cash outflows on our debt obligations. In this way, we seek to reduce the risk that increases in interest rates would adversely impact our results of operations. We use various financial instruments designed to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies such as interest rate swaps and caps, depending on our analysis of the interest rate environment and the costs and risks of such strategies. Although we are not required to maintain a particular leverage ratio and may not be able to do so, we generally intend to target, over time, a level of net debt (which includes recourse and non-recourse borrowings and any outstanding preferred stock less unrestricted cash and cash held for the benefit of lenders) that is less than six times our annualized adjusted EBITDA. As ofSeptember 30, 2020 , all of our long-term debt was fixed-rate debt or was effectively converted to a fixed-rate for the term of the debt through swap arrangements and our weighted average debt maturity was 5.0 years. As we grow our real estate portfolio, we intend to manage our long-term debt maturities to reduce the risk that a significant amount of our debt will mature in any single year in the future. Over time, we may access additional long-term debt capital with future debt issuances through our Master Trust Funding Program. Future sources of debt capital may also include term borrowings from insurance companies, banks and other sources, single-asset mortgage financing and CMBS borrowings, and may offer us the opportunity to lower our cost of funding and further diversify our sources of debt capital. Over time, we may choose to issue preferred equity as a part of our overall funding strategy. As our outstanding debt matures, we may refinance it as it comes due or choose to repay it using cash and cash equivalents or borrowings under the Revolving Credit Facility. Management believes that the cash generated by our operations, together with our cash and cash equivalents atSeptember 30, 2020 , our borrowing availability under the Revolving Credit Facility and our potential access to additional sources of capital, will be sufficient to fund our operations for the foreseeable future and allow us to invest in the real estate for which we currently have made commitments. However, the ultimate impact that COVID-19 will have on our financial condition and cash flows is uncertain and will vary depending on various factors, including the timing and manner in which operations resume at certain of our properties that have been closed or operating in reduced capacities due to the pandemic, potential future lockdowns or other measures implemented to mitigate the spread of COVID-19, the ability of tenants to pay deferred rent and the possibility that we may defer additional rent or grant additional rent concessions in the future. Description of Certain Debt The following table summarizes the Company's outstanding indebtedness as ofSeptember 30, 2020 andDecember 31, 2019 : Principal Outstanding Weighted Average Interest
Rate (1)
September 30, December 31, September 30, December 31,
(in thousands) Maturity Date 2020 2019 2020 2019
Unsecured term loans:
April 2019 Term Loan April 2024 $ 200,000 $ 200,000 3.3% 3.3%
November 2019 Term Loan November 2026 430,000 250,000 3.0%
3.1%
Revolving credit facility April 2023 - 46,000 -% 3.1% Secured borrowings: Series 2017-1 Notes June 2047 174,182 239,102 4.2% 4.2% Total principal outstanding$ 804,182 $ 735,102 3.3%
3.5%
_____________________________________
(1)Interest rates are presented after giving effect to our interest rate swap agreements, where applicable. Unsecured Revolving Credit Facility andApril 2019 Term Loan Through ourOperating Partnership , we are party to an Amended Credit Agreement with a group of lenders, which provides for revolving loans of up to$400.0 million (the "Revolving Credit Facility") and up to an additional$200.0 million in term loans (the "April 2019 Term Loan"). The Revolving Credit Facility matures inApril 2023 , with an extension option of up to 12-months exercisable by theOperating Partnership , subject to certain conditions, and theApril 2019 Term Loan matures inApril 2024 . The 48 -------------------------------------------------------------------------------- Table of Contents loans under each of the Revolving Credit Facility and theApril 2019 Term Loan Facility initially bear interest at an annual rate of applicable LIBOR plus the applicable margin (which applicable margin varies between the Revolving Credit Facility and theApril 2019 Term Loan). The applicable LIBOR is the rate with a term equivalent to the interest period applicable to the relevant borrowing. The applicable margin will initially be a spread set according to a leverage-based pricing grid. At theOperating Partnership's election, on and after receipt of an investment grade corporate credit rating from S&P Global Ratings, a division of S&P or Moody's, the applicable margin will be a spread set according to our corporate credit ratings by S&P and/or Moody's. Each of the Revolving Credit Facility and theApril 2019 Term Loan is freely pre-payable at any time and is mandatorily payable if borrowings exceed the borrowing base or the revolving facility limit.The Operating Partnership may re-borrow amounts paid down on the Revolving Credit Facility but not on theApril 2019 Term Loan.The Operating Partnership is required to pay revolving credit fees throughout the term of the Revolving Credit Agreement based upon its usage of the Revolving Credit Facility, at a rate which depends on its usage of such facility during the period before we receive an investment grade corporate credit rating from S&P or Moody's, and which rate shall be based on the corporate credit rating from S&P and/or Moody's after the time, if applicable, we receive such a rating. The Amended Credit Agreement has an accordion feature to increase, subject to certain conditions, the maximum availability of credit (either through increased revolving commitments or additional term loans) by up to$200.0 million .The Operating Partnership is the borrower under the Amended Credit Agreement, and we and each of the subsidiaries of theOperating Partnership that owns a direct or indirect interest in an eligible real property asset are guarantors under the Amended Credit Agreement. Under the terms of the Amended Credit Agreement, we are subject to various restrictive financial and nonfinancial covenants which, among other things, require us to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth. The Amended Credit Agreement restricts our ability to pay distributions to our stockholders under certain circumstances. However, we may make distributions to the extent necessary to maintain our qualification as a REIT under the Internal Revenue Code of 1986, as amended. The Amended Credit Agreement contains certain additional covenants that, subject to exceptions, limit or restrict our incurrence of indebtedness and liens, disposition of assets, transactions with affiliates, mergers and fundamental changes, modification of organizational documents, changes to fiscal periods, making of investments, negative pledge clauses and lines of business and REIT qualification.November 2019 Term Loan OnNovember 26, 2019 , we, through ourOperating Partnership , entered into a$430.0 million term loan credit facility (the "November 2019 Term Loan") with a group of lenders. TheNovember 2019 Term Loan provides for term loans to be drawn up to an aggregate amount of$430.0 million with a maturity ofNovember 26, 2026 . OnDecember 9, 2019 , we borrowed$250.0 million under theNovember 2019 Term Loan and, onMarch 26, 2020 , we borrowed the remaining$180.0 million available under theNovember 2019 Term Loan. Borrowings under theNovember 2019 Term Loan bear interest at an annual rate of applicable LIBOR plus the applicable margin. The applicable LIBOR will be the rate with a term equivalent to the interest period applicable to the relevant borrowing. The applicable margin will initially be a spread set according to a leverage-based pricing grid. At theOperating Partnership's irrevocable election, on and after receipt of an investment grade corporate credit rating from S&P or Moody's, the applicable margin will be a spread set according to our corporate credit ratings provided by S&P and/or Moody's. TheNovember 2019 Term Loan is pre-payable at any time by theOperating Partnership , provided, that if the loans under theNovember 2019 Term Loan are repaid on or beforeNovember 26, 2020 , they are subject to a two percent prepayment premium, and if repaid thereafter but on or beforeNovember 26, 2021 , they are subject to a one percent prepayment premium. AfterNovember 26, 2021 the loans may be repaid without penalty.The Operating Partnership may not re-borrow amounts paid down on theNovember 2019 Term Loan. TheNovember 2019 Term Loan has an accordion feature to increase, subject to certain conditions, the maximum availability of the facility up to an aggregate of$500 million .The Operating Partnership is the borrower under theNovember 2019 Term Loan, and our Company and each of its subsidiaries that owns a direct or indirect interest in an eligible real property asset are guarantors under the facility. Under the terms of theNovember 2019 Term Loan, we are subject to various restrictive financial and nonfinancial covenants which, among other things, require us to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth. 49 -------------------------------------------------------------------------------- Table of Contents TheNovember 2019 Term Loan restricts our ability to pay distributions to our stockholders under certain circumstances. However, we may make distributions to the extent necessary to maintain our qualification as a REIT under the Internal Revenue Code of 1986, as amended. TheNovember 2019 Term Loan contains certain additional covenants that, subject to exceptions, limit or restrict our incurrence of indebtedness and liens, disposition of assets, transactions with affiliates, mergers and fundamental changes, modification of organizational documents, changes to fiscal periods, making of investments, negative pledge clauses and lines of business and REIT qualification. Master Trust Funding ProgramSCF RC Funding I LLC ,SCF RC Funding II LLC andSCF RC Funding III LLC (collectively, the "Master Trust Issuers"), all of which are indirect wholly-owned subsidiaries of theOperating Partnership , have issued net-lease mortgage notes payable (the "Notes") with an aggregate gross principal balance of$174.2 million as ofSeptember 30, 2020 . The Notes are secured by all assets owned by the Master Trust Issuers. We provide property management services with respect to the mortgaged properties owned by the Master Trust Issuers and service the related leases pursuant to an amended and restated property management and servicing agreement, dated as ofJuly 11, 2017 , among the Master Trust Issuers, theOperating Partnership (as property manager and as special servicer), Midland Loan Services, a division ofPNC Bank, National Association , (as back-up manager) andCitibank, N.A . (as indenture trustee). Beginning in 2016, two series of Notes, each comprised of two classes, were issued under the program: (i) Notes originally issued bySCF RC Funding I LLC andSCF RC Funding II LLC (the "Series 2016-1 Notes"), which were repaid in full inNovember 2019 , and (ii) Notes originally issued bySCF RC Funding I LLC ,SCF RC Funding II LLC andSCF RC Funding III LLC (the "Series 2017-1 Notes"), with an aggregate outstanding principal balance of$174.2 as ofSeptember 30, 2020 . The Notes are the joint obligations of all Master Trust Issuers. Notes issued under our Master Trust Funding Program are secured by a lien on all of the property owned by the Master Trust Issuers and the related leases. A substantial portion of our real estate investment portfolio serves as collateral for borrowings outstanding under our Master Trust Funding Program. As ofSeptember 30, 2020 , we had pledged 252 properties, with a net investment amount of$358.1 million , under the Master Trust Funding Program. The agreement governing our Master Trust Funding Program permits substitution of real estate collateral from time to time, subject to certain conditions. Absent a plan to issue additional long-term debt through theMaster Trust Funding Program, we are not required to add assets to, or substitute collateral in, the existing collateral pool. We can voluntarily elect to substitute assets in the collateral pool, subject to meeting prescribed conditions that are designed to protect the collateral pool by requiring the substitute assets to be of equal or greater measure in attributes such as: the asset's fair value, monthly rent payments, remaining lease term and weighted average coverage ratios. In addition, we can sell underperforming assets and reinvest the proceeds in new properties. Any substitutions and sales are subject to an overall limitation of 35% of the collateral pool which is typically reset at each new issuance unless the substitution or sale is credit- or risk-based, in which case there are no limitations. A significant portion of our cash flows are generated by the special purpose entities comprising our Master Trust Funding Program. For the three months endedSeptember 30, 2020 , excess cash flow from the Master Trust Funding Program, after payment of debt service and servicing and trustee expenses, totaled$4.7 million on cash collections of$8.1 million , which represents a debt service coverage ratio (as defined in the program documents) of 1.9 to 1. If at any time the monthly debt service coverage ratio (as defined in the program documents) generated by the collateral pool is less than or equal to 1.25 to 1, excess cash flow from the Master Trust Funding Program entities will be deposited into a reserve account to be used for payments to be made on the Notes, to the extent there is a shortfall; if at any time the three month average debt service coverage ratio generated by the collateral pool is less than or equal to 1.15 to 1, excess cash flow from the Master Trust Funding Program entities will be applied to an early amortization of the Notes. If cash generated by our properties held in the Master Trust Funding Program is required to be held in a reserve account or applied to an early amortization of the Notes, it would reduce the amount of cash available to us and could limit or eliminate our ability to make distributions to our common stockholders. The Notes require monthly payments of principal and interest. The payment of principal and interest on any ClassB Notes is subordinate to the payment of principal and interest on any Class A Notes. The Series 2017-1 Notes mature inJune 2047 and have a weighted average interest rate of 4.19% as ofSeptember 30, 2020 . 50 -------------------------------------------------------------------------------- Table of Contents However, the anticipated repayment date for the Series 2017-1 Notes isJune 2024 , and if the notes are not repaid in full on or before such anticipated repayment date, additional interest will begin to accrue on the notes. The Series 2017-1 Notes may be voluntarily prepaid, in whole or in part, at any time on or after the date that is 31 months prior to the anticipated repayment date inJune 2024 without the payment of a make whole amount. Voluntary prepayments may be made before 31 months prior to the anticipated repayment date but will be subject to the payment of a make whole amount. An event of default will occur under the Master Trust Funding Program, if, among other things, the Master Trust Issuers fail to pay interest or principal on the Notes when due, materially default in complying with the material covenants contained in the documents evidencing the Notes or the mortgages on the mortgaged property collateral or if a bankruptcy or other insolvency event occurs. Under the master trust indenture, we have a number ofMaster Trust Issuer covenants including requirements to pay any taxes and other charges levied or imposed upon the Master Trust Issuers and to comply with specified insurance requirements. We are also required to ensure that all uses and operations on or of our properties comply in all material respects with all applicable environmental laws. As ofSeptember 30, 2020 , we were in material compliance with all such covenants. As ofSeptember 30, 2020 , scheduled principal repayments on the Notes issued under the Master Trust Funding Program for the remainder of 2020 are$1.0 million . We expect to meet these repayment requirements primarily through our net cash from operating activities. Cash Flows Comparison of the nine months endedSeptember 30, 2020 and 2019 As ofSeptember 30, 2020 , we had$183.8 million of cash and cash equivalents and$5.6 million of restricted cash as compared to$23.4 million and$2.8 million , respectively, as ofSeptember 30, 2019 . Cash Flows for the nine months endedSeptember 30, 2020 During the nine months endedSeptember 30, 2020 , net cash provided by operating activities was$68.8 million . Our cash flows from operating activities are primarily dependent upon the occupancy level of our portfolio, the rental rates specified in our leases, the interest on our loans and direct financing lease receivables, the collectability of rent and interest income and the level of our operating expenses and other general and administrative costs. Cash inflows related to net income adjusted for non-cash items of$78.8 million (net income of$36.8 million adjusted for non-cash items, including depreciation and amortization of tangible, intangible and right-of-use real estate assets, amortization of deferred financing costs and other assets, loss on repurchase of secured borrowings, provision for impairment of real estate, gain on dispositions of real estate, net, straight-line rent receivable, and equity-based compensation expense of$42.0 million ) and the change in accrued liabilities and other payables of$2.6 million . These cash inflows were partially offset by the change in rent receivables, prepaid expenses and other assets of$12.6 million . Net cash used in investing activities during the nine months endedSeptember 30, 2020 was$332.7 million . Our net cash used in investing activities is generally used to fund our investments in real estate, including capital expenditures, the development of our construction in progress and investments in loans receivables and direct financing leases, offset by cash provided from the disposition of real estate and principal collections on our loans and direct financing lease receivables. The cash used in investing activities included$336.7 million to fund investments in real estate, including capital expenditures,$13.1 million to fund construction in progress,$9.7 million of investments in loans receivable,$5.9 million in deposits on prospective real estate investments and$10.2 million paid to tenants as lease incentives. These cash outflows were partially offset by$42.6 million of proceeds from sales of investments, net of disposition costs and$0.2 million of principal collections on our loans and direct financing lease receivables. Net cash provided by financing activities of$432.0 million during the nine months endedSeptember 30, 2020 related to net cash inflows of$426.7 million from the issuance of common stock in a follow-on offering and through our ATM Program,$69.0 million of borrowings under the Revolving Credit Facility and$180.0 million of borrowings under theNovember 2019 Term Loan Facility. These cash inflows were partially offset by$64.9 million of repayments of secured borrowing principal,$115.0 million of repayments on the Revolving Credit 51 -------------------------------------------------------------------------------- Table of Contents Facility, the payment of$62.2 million in dividends and$1.5 million of offering costs related to the follow-on offering and the ATM Program. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as ofSeptember 30, 2020 . Contractual Obligations The following table provides information with respect to our commitments as ofSeptember 30, 2020 : Payment due by period October 1 - December 31, (in thousands) Total 2020 2021 - 2022 2023 - 2024 Thereafter Secured Borrowings-Principal$ 174,182 $ 989
1,821 14,194 10,177 -
Unsecured Term Loans (2) 630,000 - - 200,000 430,000
Revolving Credit Facility (3) - - - - -Tenant Construction Financing and
Reimbursement Obligations (4) 19,452 19,452 - - - Operating Lease Obligations (5) 19,676 350 2,821 2,000 14,505 Total$ 869,502 $ 22,612 $ 25,391 $ 376,994 $ 444,505
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(1)Includes interest payments on outstanding indebtedness issued under our Master Trust Funding Program through the anticipated repayment date. (2)Borrowings under theApril 2019 Term Loan andNovember 2019 Term Loan bear interest at an annual rate of applicable LIBOR plus an applicable margin. (3)Balances on the Revolving Credit Facility bear interest at an annual rate of applicable LIBOR plus an applicable margin. We also pay a facility fee on the total unused commitment amount of 0.15% or 0.25%, depending on our current unused commitment. (4)Includes obligations to reimburse certain of our tenants for construction costs that they incur in connection with construction at our properties in exchange for contractually specified rent that generally increases proportionally with our funding. (5)Includes$16.4 million of rental payments due under ground lease arrangements where our tenants are directly responsible for payment. Additionally, we may enter into commitments to purchase goods and services in connection with the operation of our business. These commitments generally have terms of one-year or less and reflect expenditure levels comparable to our historical expenditures. We have made an election to be taxed as a REIT for federal income tax purposes beginning with our taxable year endedDecember 31, 2018 ; accordingly, we generally will not be subject to federal income tax, provided we distribute all of our REIT taxable income, determined without regard to the dividends paid deduction, to our stockholders. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted inthe United States ("GAAP") requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. Estimates and assumptions include, among other things, subjective judgments regarding the fair values and useful lives of our properties for depreciation and lease classification purposes, the collectability of receivables and asset impairment analysis. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been 52 -------------------------------------------------------------------------------- Table of Contents applied, resulting in a different presentation of our consolidated financial statements. From time to time, we reevaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." We have not made any material changes to these policies during the periods covered by this quarterly report except as follows: Allowance for Loan Losses Prior to the adoption of ASC Topic 326, Financial Instruments - Credit Losses ("ASC 326"), we periodically evaluated the collectability of our loans receivable, including accrued interest, by analyzing the underlying property-level economics and trends, collateral value and quality and other relevant factors in determining the adequacy of its allowance for loan losses. A loan was determined to be impaired when, in management's judgment based on current information and events, it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan agreement. Specific allowances for loan losses were provided for impaired loans on an individual loan basis in the amount by which the carrying value exceeded the estimated fair value of the underlying collateral less disposition costs. As ofDecember 31, 2019 , we had no allowance for loan losses recorded in our consolidated financial statements. OnJanuary 1, 2020 , we adopted ASC 326 on a prospective basis. ASC 326 changed how we account for credit losses for all of our loans receivable and direct financing lease receivables. ASC 326 replaces the current "incurred loss" model with an "expected loss" model that requires consideration of a broader range of information than used under the incurred losses model. Upon adoption of ASC 326, we recorded an initial allowance for loan losses of$0.2 million as ofJanuary 1, 2020 , netted against loans and direct financing receivables on our consolidated balance sheet. Under ASC 326, we are required to re-evaluate the expected loss of our loans and direct financing lease receivable portfolio at each balance sheet date. As ofSeptember 30, 2020 , we recorded an allowance for loan losses of$0.7 million . Changes in our allowance for loan losses are presented within provision for loan losses in our consolidated statements of operations. In connection with our adoption of ASC 326 onJanuary 1, 2020 , we implemented a new process including the use of loan loss forecasting models. We have used the loan loss forecasting model for estimating expected life-time credit losses, at the individual asset level, for our loans and direct financing lease receivable portfolio. The forecasting model used is the probability weighted expected cash flow method, depending on the type of loan and global assumptions. We use a real estate loss estimate model ("RELEM") which estimates losses on our loans and direct financing lease receivable portfolio, for purposes of calculating allowances for loan losses. The RELEM allows us to refine (on an ongoing basis) the expected loss estimate by incorporating loan specific assumptions as necessary, such as anticipated funding, interest payments, estimated extensions and estimated loan repayment/refinancing at maturity to estimate cash flows over the life of the loan. The model also incorporates assumptions related to underlying collateral values, various loss scenarios, and predicted losses to estimate expected losses. Our specific loan-level inputs include loan-to-stabilized-value "LTV" and debt service coverage ratio metrics, as well as principal balances, property type, location, coupon, origination year, term, subordination, expected repayment dates and future funding's. We categorize the results by LTV range, which we consider the most significant indicator of credit quality for our loans and direct financing lease receivables. A lower LTV ratio typically indicates a lower credit loss risk. Real estate lending has several risks that need to be considered. There is the potential for changes in local real estate conditions and subjectivity of real estate valuations. In addition, overall economic conditions may impact the borrowers' financial condition. Adverse economic conditions such as high unemployment levels, interest rates, tax rates and fuel and energy costs may have an impact on the results of operations and financial conditions of borrowers. We also evaluates each loan and direct financing lease receivable measured at amortized cost for credit deterioration at least quarterly. Credit deterioration occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan or direct financing lease receivables. 53 -------------------------------------------------------------------------------- Table of Contents Our allowance for loan losses is adjusted to reflect our estimation of the current and future economic conditions that impact the performance of the real estate assets securing our loans. These estimations include various macroeconomic factors impacting the likelihood and magnitude of potential credit losses for our loans and direct financing leases during their anticipated term. Recent Accounting Developments InFebruary 2016 , the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") establishing ASC 326, as amended by subsequent ASUs on the topic. ASU 2016-13 is effective for interim and annual reporting periods in fiscal years beginning afterDecember 15, 2019 . We adopted this guidance onJanuary 1, 2020 and recorded estimates of expected loss on its loans receivable portfolio beginning on that date. InAugust 2017 , the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The Company adopted ASU 2017-12 while accounting for its interest rate swaps (see Note 5-Derivatives). As the Company did not have other derivatives outstanding at time of adoption, no prior period adjustments were required. Pursuant to the provisions of ASU 2017-12, the Company is no longer required to separately measure and recognize hedge ineffectiveness. Instead, the Company recognizes the entire change in the fair value of cash flow hedges included in the assessment of hedge effectiveness in other comprehensive (loss) income. The amounts recorded in other comprehensive (loss) income will subsequently be reclassified to earnings when the hedged item affects earnings. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements. InAugust 2018 , the FASB issued ASU 2018-13, Fair Value Measurement: Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. ASU 2018-13 is effective for annual periods beginning afterDecember 15, 2019 , with early adoption permitted. We adopted this guidance onJanuary 1, 2020 and the adoption of ASU 2018-13 did not have a material impact on our related disclosures. InMarch 2020 , the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04"). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. DuringApril 2020 , theFinancial Accounting Standards Board ("FASB") staff issued a question and answer document (the "Lease Modification Q&A") focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing lease guidance, the entity would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant, which would be accounted for under the lease modification framework, or if a lease concession was under the enforceable rights and obligations that existed in the original lease, which would be accounted for outside the lease modification framework. The Lease Modification Q&A provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease. This election is only available when total cash flows resulting from the modified lease are substantially similar to the cash flows in the original lease. We made this election and account for rent deferrals by increasing our rent receivables as receivables accrue and continuing to recognize income during the deferral period, resulting in$1.7 million and$11.4 million of deferrals being recognized in rental revenues for the three and nine months endedSeptember 30, 2020 . Lease concessions or amendments other than rent deferrals are evaluated to determine if a substantive change to the consideration in the original lease contract has occurred and should be accounted for as a lease modification. We continue to evaluate any amounts recognized for collectability, regardless of whether accounted for as a lease modification or not, and record an adjustment to rental income for tenant credit for amounts that are not probable of collection. For lease concessions granted in conjunction with the COVID-19 pandemic, we reviewed all amounts recognized on a tenant-by-tenant basis for collectability. 54 -------------------------------------------------------------------------------- Table of Contents InAugust 2020 , the FASB issued Accounting Standards Update ("ASU") 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" ("ASU 2020-06"). The guidance in ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in the ASU 2020-06 also simplify the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity's Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity's ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The amendments in ASU 2020-06 are effective for the Company for fiscal years beginning afterDecember 15, 2021 . Early adoption is permitted, but no earlier than fiscal years beginning afterDecember 15, 2020 . The guidance must be adopted as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new guidance. Our Real Estate Investment Portfolio As ofSeptember 30, 2020 , we had a portfolio of 1,096 properties, including two undeveloped land parcels, four vacant properties and 92 properties that secure our investments in mortgage loans receivable, that was diversified by tenant, concept, industry and geography and had annualized base rent of$167.7 million . Our 214 tenants operate 300 different concepts in 16 industries across 43 states. None of our tenants represented more than 3.0% of our portfolio atSeptember 30, 2020 , and our top ten largest tenants represented 22.6% of our annualized base rent as of that date. Diversification by Tenant As ofSeptember 30, 2020 , our top ten tenants included the following concepts:Captain D's ,Cadence Academy ,Mister Car Wash , EquipmentShare,Circle K , AMC,The Malvern School ,Zaxby's , Driver's Edge, and R-Store. Our 1,087 leased properties are operated by our 214 tenants. The following table details information about our tenants and the related concepts as ofSeptember 30, 2020 (dollars in thousands): % of Number of Annualized Annualized Tenant(1) Concept Properties (2) Base Rent Base Rent Captain D's, LLC Captain D's 74$ 5,094 3.0 % Cadence Education, LLC Cadence Academy 23 4,749 2.8 % Car Wash Partners Inc. Mister Car Wash 13 4,305 2.6 % Equipmentshare.com Inc. EquipmentShare 14 4,100 2.4 % Mac's Convenience Stores, LLC (3) Circle K 34 3,686 2.2 % American Multi-Cinema, Inc (4) AMC 5 3,535 2.1 % Malvern School Properties, LP The Malvern School 13 3,208 1.9 % 1788 Chicken, LLC Zaxby's 20 3,140 1.9 % GB Auto Service, Inc. Driver's Edge 14 3,112 1.9 % GPM Investments, LLC (5) R-Store 26 2,999 1.8 % Top 10 Subtotal 236 37,928 22.6 % Other 851 129,822 77.4 % Total/Weighted Average 1,087$ 167,750 100.0 %
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(1)Represents tenant or guarantor.
(2)Excludes two undeveloped land parcels and seven vacant properties.
(3)Includes properties leased to a subsidiary of Alimentation Couche Tard Inc.
(4)Includes four properties leased to a subsidiary of AMC Entertainment
Holdings, Inc.
(5)Includes one property leased to a subsidiary of GPM investments, LLC.
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As of September 30, 2020 , our five largest tenants, who contributed 13.0% of our
annualized base rent, had a rent coverage ratio of 3.9x and our ten largest
tenants, who contributed 22.6% of our annualized base rent, had a rent coverage
ratio of 3.1x.
As of September 30, 2020 , 94.1% of our leases (based on annualized base rent)
were triple-net, and the tenant is typically responsible for all improvements
and is contractually obligated to pay all operating expenses, such as
maintenance, insurance, utility and tax expense, related to the leased property.
Due to the triple-net structure of our leases, we do not expect to incur
significant capital expenditures relating to our triple-net leased properties,
and the potential impact of inflation on our operating expenses is reduced.
Diversification by Concept
Our tenants operate their businesses across 300 concepts. The following table
details those concepts as of September 30, 2020 (dollars in thousands):
Annualized % of
Base Annualized Number of Building
Concept Type of Business Rent Base Rent Properties (1) (Sq. Ft.)
Captain D's Service $ 5,939 3.5 % 83 215,022
Mister Car Wash Service 4,305 2.6 13 54,621
EquipmentShare Service 4,100 2.4 14 250,153
Circle K Service 4,025 2.4 36 139,799
AMC Experience 3,535 2.1 5 240,672
Zaxby's Service 3,353 2.0 21 72,986
The Malvern School Service 3,208 1.9 13 149,781
Vasa Fitness Experience 2,948 1.8 5 258,085
R-Store Service 2,854 1.7 25 105,703
Ladybird Academy Service 2,833 1.7 7 89,495
Top 10 Subtotal 37,100 22.1 222 1,576,317
Other 130,650 77.9 865 7,221,399
Total $ 167,750 100.0 % 1,087 8,797,716
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(1)Excludes two undeveloped land parcels and seven vacant properties.
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Diversification by Industry
Our tenants' business concepts are diversified across various industries. The
following table summarizes those industries as of September 30, 2020 (dollars in
thousands):
Annualized % of
Type of Base Annualized Number of Building Rent Per
Tenant Industry Business Rent Base Rent Properties (1) (Sq. Ft.) Sq. Ft. (2)
Quick Service Service $ 23,609 14.1 % 313 827,997 $ 28.66
Car Washes Service 22,344 13.3 92 429,125 50.67
Early Childhood Education Service 22,317 13.3 97 1,027,600 21.38
Medical / Dental Service 18,004 10.7 104 664,115 26.23
Convenience Stores Service 16,483 9.8 142 576,428 28.60
Automotive Service Service 12,414 7.4 93 622,326 19.95
Casual Dining Service 8,584 5.1 57 348,219 24.65
Other Services Service 7,042 4.2 33 422,068 16.69
Family Dining Service 5,922 3.5 40 232,723 27.16
Pet Care Services Service 5,459 3.3 33 262,938 20.76
Service Subtotal 142,178 84.8 1,004 5,413,539 26.07
Health and Fitness Experience 8,133 4.8 22 758,714 10.72
Entertainment Experience 6,250 3.7 18 647,483 10.25
Movie Theatres Experience 4,166 2.5 6 293,206 14.21
Experience Subtotal 18,549 11.1 46 1,699,403 11.16
Home Furnishings Retail 2,225 1.3 7 383,415 5.80
Grocery Retail 2,048 1.2 11 404,403 5.06
Retail Subtotal 4,273 2.5 18 787,818 5.42
Building Materials Industrial 2,750 1.6 19 896,956 3.07
Total $ 167,750 100.0 % 1,087 8,797,716 $ 19.01 _____________________________________
(1)Excludes two undeveloped land parcels and seven vacant properties. (2)Excludes properties with no annualized base rent and properties under construction.
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Diversification by Geography
Our 1,096 property locations are spread across 43 states. The following table
details the geographical locations of our properties as of September 30, 2020
(dollars in thousands):
% of
Annualized Annualized Number of Building
State Base Rent Base Rent Properties (Sq. Ft.)
Texas $ 22,053 13.1 % 131 1,117,362
Georgia 16,939 10.1 109 620,463
Florida 10,867 6.5 55 510,359
Arkansas 9,037 5.4 68 335,475
Arizona 7,549 4.5 33 274,159
Ohio 7,224 4.3 57 565,728
Alabama 6,813 4.1 48 450,216
Wisconsin 6,331 3.8 38 258,723
Minnesota 5,331 3.2 31 442,872
Tennessee 5,298 3.2 45 219,027
Michigan 5,083 3.0 43 465,997
Pennsylvania 4,782 2.9 30 249,775
North Carolina 4,678 2.8 22 301,815
Colorado 4,427 2.6 23 216,499
Oklahoma 4,155 2.5 20 302,873
South Carolina 3,724 2.2 27 253,137
New York 3,695 2.2 33 119,031
Illinois 3,504 2.1 21 166,472
Missouri 3,088 1.8 24 329,957
New Mexico 3,015 1.8 19 113,697
Kentucky 2,919 1.7 26 150,592
Iowa 2,857 1.7 21 121,018
Mississippi 2,840 1.7 27 111,712
Indiana 2,542 1.5 22 120,618
Maryland 1,921 1.1 8 68,324
South Dakota 1,702 1.0 7 41,472
New Jersey 1,693 1.0 10 72,923
Kansas 1,687 1.0 7 102,545
Louisiana 1,622 1.0 10 77,040
Washington 1,522 0.9 10 77,293
Massachusetts 1,340 0.8 14 286,831
Virginia 1,187 0.7 7 54,130
Connecticut 1,175 0.7 6 51,551
Oregon 1,076 0.6 6 124,931
Utah 922 0.5 2 67,659
West Virginia 894 0.5 17 73,101
Nebraska 543 0.3 7 17,776
Wyoming 425 0.3 2 14,001
California 391 0.2 3 30,870
Idaho 383 0.2 1 35,433
Nevada 226 0.1 1 34,777
Alaska 150 0.1 2 6,630
New Hampshire 140 0.1 3 9,914
Total $ 167,750 100.0 % 1,096 9,064,778
58-------------------------------------------------------------------------------- Table of Contents Lease Expirations As ofSeptember 30, 2020 , the weighted average remaining term of our leases was 14.6 years (based on annualized base rent), with only 3.6% of our annualized base rent attributable to leases expiring prior toJanuary 1, 2025 . The following table sets forth our lease expirations for leases in place as ofSeptember 30, 2020 (dollars in thousands): Weighted Annualized % of Annualized Number of Average Rent Lease Expiration Year (1) Base Rent Base Rent Properties (2) Coverage Ratio (3) 2020$ 90 0.1 % 1 1.92x 2021 139 0.1 2 3.45x 2022 298 0.2 2 3.84x 2023 746 0.4 9 3.41x 2024 4,648 2.8 46 4.47x 2025 1,648 1.0 14 3.08x 2026 2,355 1.4 14 2.25x 2027 4,649 2.8 30 2.85x 2028 3,962 2.4 14 2.03x 2029 5,026 3.0 70 4.36x 2030 3,927 2.3 46 3.97x 2031 8,530 5.1 47 2.78x 2032 10,891 6.5 55 3.71x 2033 7,123 4.2 27 2.22x 2034 28,906 17.2 211 3.24x 2035 12,438 7.4 84 2.33x 2036 2,403 1.4 20 1.57x 2037 6,953 4.1 42 4.14x 2038 12,908 7.7 85 2.19x 2039 26,246 15.6 155 2.60x Thereafter 23,864 14.3 113 1.93x Total/Weighted Average$ 167,750 100.0 % 1,087 2.80x
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(1)Expiration year of contracts in place as of
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Results of Operations
The following discussion includes the results of our operations for the periods
presented.
Comparison of the three months ended September 30, 2020 and 2019
Three months ended
September 30,
(dollar amounts in thousands) 2020 2019 Change %
Revenues:
Rental revenue$ 40,799 $ 34,958 $ 5,841 16.7 % Interest on loans and direct financing lease receivables 2,054 940 1,114 118.5 % Other revenue, net 56 393 (337) (85.8) % Total revenues 42,909 36,291 6,618 Expenses: Interest 7,651 7,207 444 6.2 % General and administrative 5,917 7,530 (1,613) (21.4) % Property expenses 810 442 368 83.3 % Depreciation and amortization 13,966 11,141 2,825 25.4 % Provision for impairment of real estate 3,221 - 3,221 - Provision for loan losses 14 - 14 - Total expenses 31,579 26,320 5,259 Other operating income: Gain on dispositions of real estate, net 1,003 4,087 (3,084) (75.5) % Income from operations 12,333 14,058 (1,725) Other (expense)/income: Loss on repayment and repurchase of secured borrowings - - - - Interest income 58 114 (56) (49.1) % Income before income tax expense 12,391 14,172 (1,781) Income tax expense 55 66 (11) (16.7) % Net income 12,336 14,106 (1,770) Net income attributable to non-controlling interests (73) (861) (788) (91.5) % Net income attributable to stockholders$ 12,263 $
13,245
Rental revenue. Rental revenue increased by$5.8 million for the three months endedSeptember 30, 2020 , as compared to the three months endedSeptember 30, 2019 . The increase in revenues period over period was driven primarily by the growth in the size of our real estate investment portfolio, which generated additional rental revenues. Our real estate investment portfolio grew from 917 properties, representing$1.7 billion in net investments in real estate, as ofSeptember 30, 2019 to 1,096 properties, representing$2.2 billion in net investments in real estate, as ofSeptember 30, 2020 . Our real estate investments were made throughout the periods presented and were not all outstanding for the entire period; accordingly, a significant portion of the increase in revenues between periods is related to recognizing revenue in 2020 from acquisitions that were made during 2019 and 2020. A smaller component of the increase in revenues between periods is related to rent escalations recognized on our lease contracts; these rent increases can provide a strong source of revenue growth. During the three months endedSeptember 30, 2020 and 2019, the Company recognized$0.2 million of reductions of rental revenue for tenant credit. Interest on loans and direct financing lease receivables. Interest on loans and direct financing lease receivables increased by$1.1 million for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 , primarily due to additional investments in loans receivable during 2019 and 2020, which led to a higher average daily balance of loans receivable outstanding during the three months endedSeptember 30, 2020 . 60 -------------------------------------------------------------------------------- Table of Contents Other revenue. Other revenue decreased by$0.3 million during the three months endedSeptember 30, 2020 as compared to three months endedSeptember 30, 2019 , primarily due to the receipt of lease termination fees from former tenants during the three months endedSeptember 30, 2019 . Interest expense. Interest expense increased by$0.4 million during the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . There was an increase in interest expense of$2.4 million caused by our entering into new interest rate swap agreements and unfavorable changes in the fixed rates paid on these agreements compared to floating rates. Additional interest expense increases were caused by us having$430.0 million outstanding under theNovember 2019 Term Loan during the three months endedSeptember 30, 2020 after entering into this term loan agreement in the fourth quarter of 2019. These increases were partially offset by the repayment of Master Trust Funding notes which resulted in a decrease of$1.5 million in interest expense for the three months endedSeptember 30, 2020 . General and administrative expenses. General and administrative expenses decreased$1.6 million for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . This decrease in general and administrative expenses was primarily related to a decrease in equity-based compensation expense, and a decrease in third party servicing fees, during the three months endedSeptember 30, 2020 . Property expenses. Property expenses increased by approximately$0.4 million for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . The increase in property expenses was primarily due to increases in ground rent expense during the three months endedSeptember 30, 2020 . Depreciation and amortization expense. Depreciation and amortization expense increased by$2.8 million during the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . Depreciation and amortization expense increased in proportion to the increase in the size of our real estate portfolio three months endedSeptember 30, 2020 Provision for impairment of real estate. Impairment charges on real estate investments were$3.2 million for the three months endedSeptember 30, 2020 and no impairment changes were recorded for the three months endedSeptember 30, 2019 . During the three months endedSeptember 30, 2020 , we recorded a provision for impairment of real estate at nine of our real estate investments and no impairment was recorded for the three months endedSeptember 30, 2019 . We strategically seek to identify non-performing properties that we may re-lease or dispose of in an effort to improve our returns and manage risk exposure. An increase in vacancy associated with our disposition or re-leasing strategies may trigger impairment charges when the expected future cash flows from the properties from sale or re-lease are less than their net book value. Provision for loan losses. Provision for loan losses of approximately$14,000 was recorded for the three months endedSeptember 30, 2020 . This provision is related to the changes in our loan loss reserve subsequent to the adoption of ASC Topic 326 - Credit Losses. Under ASC 326, we are required to re-evaluate the expected loss on our portfolio of loans and direct financing lease receivables at each balance sheet date. Gain on dispositions of real estate, net. Gain on dispositions of real estate, net, decreased by$3.1 million for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . We disposed of 14 real estate properties during the three months endedSeptember 30, 2020 , compared to our disposition of 11 real estate properties during the three months endedSeptember 30, 2019 . Loss on repayment and repurchase of secured borrowings. There was no loss on repurchase of secured borrowings recorded during the three months endedSeptember 30, 2020 and 2019. Interest income. Interest income decreased by$0.1 million for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . The decrease in interest income was primarily due to lower interest rates during the three months endedSeptember 30, 2020 . Income tax expense. Income tax expense decreased by approximately$11,000 for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . We are organized and operate as a REIT and are not subject toU.S. federal corporate income taxes on our REIT taxable income that is currently distributed to our stockholders. However, theOperating Partnership is subject to taxation in certain state and local 61 -------------------------------------------------------------------------------- Table of Contents jurisdictions that impose income taxes on a partnership. The changes in income tax expense are primarily due to changes in the proportion of our real estate portfolio located in jurisdictions where we are subject to taxation. Comparison of the nine months endedSeptember 30, 2020 and 2019 Nine months ended September 30, (dollar amounts in thousands) 2020 2019 Change %
Revenues:
Rental revenue$ 116,806 $ 97,842 $ 18,964 19.4 % Interest income on loans and direct financing lease receivables 6,030 1,669 4,361 261.3 % Other revenue, net 64 641 (577) (90.0) % Total revenues 122,900 100,152 22,748 Expenses: Interest 21,887 20,074 1,813 9.0 % General and administrative 19,706 16,455 3,251 19.8 % Property expenses 1,755 2,334 (579) (24.8) % Depreciation and amortization 40,442 30,367 10,075 33.2 % Provision for impairment of real estate 5,080 1,921 3,159 164.4 % Provision for loan losses 531 - 531 - Total expenses 89,401 71,151 18,250 Other operating income: Gain on dispositions of real estate, net 3,971 8,237 (4,266) (51.8) % Income from operations 37,470 37,238 232 Other (Expense)/income: Loss on repayment and repurchase of secured borrowings (924) (4,353) 3,429 78.8 % Interest income 433 723 (290) (40.1) % Income (loss) before income tax expense (benefit) 36,979 33,608 3,371 Income tax expense (benefit) 156 209 (53) (25.4) % Net income 36,823 33,399 3,424 Net income attributable to non-controlling interests (220) (6,076) (5,856) (96.4) % Net income attributable to stockholders$ 36,603 $
27,323
Rental revenue. Rental revenue increased by$19.0 million for the nine months endedSeptember 30, 2020 , as compared to the nine months endedSeptember 30, 2019 . The increase in revenues period over period was driven primarily by the growth in the size of our real estate investment portfolio, which generated additional rental revenues. Our real estate investment portfolio grew from 917 properties, representing$1.7 billion in net investments in real estate, as ofSeptember 30, 2019 to 1,096 properties, representing$2.2 billion in net investments in real estate, as ofSeptember 30, 2020 . Our real estate investments were made throughout the periods presented and were not all outstanding for the entire period; accordingly, a significant portion of the increase in revenues between periods is related to recognizing revenue in 2020 from acquisitions that were made during 2019 and 2020. A smaller component of the increase in revenues between periods is related to rent escalations recognized on our lease contracts; these rent increases can provide a strong source of revenue growth. This revenue growth was partially offset by reductions of rental revenue for tenant credit. During the nine months endedSeptember 30, 2020 and 2019, the Company recognized reductions of$5.7 million and approximately$25,000 in rental revenue for tenant credit, respectively. Interest on loans and direct financing lease receivables. Interest on loans and direct financing lease receivables increased by$4.4 million for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 , primarily due to additional investments in loans receivable during 2019 and 62 -------------------------------------------------------------------------------- Table of Contents 2020, which led to a higher average daily balance of loans receivable outstanding during the nine months endedSeptember 30, 2020 . Other revenue. Other revenue decreased$0.6 million during the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 , primarily due to the receipt of lease termination fees from former tenants during the nine months endedSeptember 30, 2019 . Interest expense. Interest expense increased by$1.8 million during the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . The increase is due to additional borrowings outstanding under theApril 2019 Term Loan andNovember 2019 Term Loan, which resulted in additional cash interest expense of$4.6 million during for the nine months endedSeptember 30, 2020 . Additionally, there was an increase of$4.0 million due to our interest expense related to our interest rate swaps. These increases were partially offset by decreases due to the repayment of Master Trust Funding notes, which resulted in a$6.9 million decrease in cash interest expense during the nine months endedSeptember 30, 2020 . General and administrative expenses. General and administrative expenses increased$3.3 million for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . This increase in general and administrative expenses was primarily related to operating our larger real estate portfolio, including increased equity-based compensation expense, legal fees, and directors' fees, as well as one time severance costs. Property expenses. Property expenses decreased by approximately$0.6 million for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . The decrease in property expenses was primarily due to a decrease in personal property expenses. Depreciation and amortization expense. Depreciation and amortization expense increased by$10.1 million during the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . Depreciation and amortization expense increased in proportion to the increase in the size of our real estate portfolio during the nine months endedSeptember 30, 2020 . Provision for impairment of real estate. Impairment charges on real estate investments were$5.1 million and$1.9 million for the nine months endedSeptember 30, 2020 , and 2019, respectively. During the nine months endedSeptember 30, 2020 and 2019, we recorded a provision for impairment of real estate at fourteen and six of our real estate investments, respectively. We strategically seek to identify non-performing properties that we may re-lease or dispose of in an effort to improve our returns and manage risk exposure. An increase in vacancy associated with our disposition or re-leasing strategies may trigger impairment charges when the expected future cash flows from the properties from sale or re-lease are less than their net book value. Provision for loan losses. Provision for loan losses of$0.5 million was recorded for the nine months endedSeptember 30, 2020 . This provision is related to the changes in our loan loss reserve subsequent to the adoption of ASC 326. Under ASC 326, we are required to re-evaluate the expected loss on our portfolio of loans and direct financing lease receivables at each balance sheet date. Gain on dispositions of real estate, net. Gain on dispositions of real estate, net, decreased by$4.3 million for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . We disposed of 27 and 30 real estate properties during the nine months endedSeptember 30, 2020 and 2019. Loss on repayment and repurchase of secured borrowings. Our loss on repayment and repurchase of secured borrowings during the nine months endedSeptember 30, 2019 of$4.4 million was related to the repurchase of Class A Series 2016-1 Notes during the nine months endedSeptember 30, 2019 , which was accounted for as a debt extinguishment. During the nine months endedSeptember 30, 2020 , we recorded a$0.9 million loss on repayment and repurchase of secured borrowings due to the write-off deferred financing costs related to the partial repayment of the Series 2017-1 Notes inFebruary 2020 . Interest income. Interest income decreased by$0.3 million for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . The decrease in interest income was primarily due to higher average daily cash balances in our interest-bearing bank accounts and higher interest rates during the nine months endedSeptember 30, 2019 63 -------------------------------------------------------------------------------- Table of Contents Income tax expense. Income tax expense decreased by approximately$53,000 for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . We are organized and operate as a REIT and are not subject toU.S. federal corporate income taxes on our REIT taxable income that is currently distributed to our stockholders. However, theOperating Partnership is subject to taxation in certain state and local jurisdictions that impose income taxes on a partnership. The changes in income tax expense are primarily due to changes in the proportion of our real estate portfolio located in jurisdictions where we are subject to taxation. Non-GAAP Financial Measures Our reported results are presented in accordance with GAAP. We also disclose the following non-GAAP financial measures: funds from operations ("FFO"), core funds from operations ("Core FFO"), adjusted funds from operations ("AFFO"), earnings before interest, taxes, depreciation and amortization ("EBITDA"), EBITDA further adjusted to exclude gains (or losses) on sales of depreciable property and real estate impairment losses ("EBITDAre"), adjusted EBITDAre, annualized adjusted EBITDAre, net debt, net operating income ("NOI") and cash NOI ("Cash NOI"). We believe these non-GAAP financial measures are industry measures used by analysts and investors to compare the operating performance of REITs. We compute FFO in accordance with the definition adopted by theBoard of Governors of theNational Association of Real Estate Investment Trusts ("NAREIT"). NAREIT defines FFO as GAAP net income or loss adjusted to exclude extraordinary items (as defined by GAAP), net gain or loss from sales of depreciable real estate assets, impairment write-downs associated with depreciable real estate assets and real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO is used by management, and may be useful to 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 and losses on sales (which are dependent 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 FFO by adjusting FFO, as defined by NAREIT, to exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and/or not related to our core real estate operations. 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. Core FFO is used by management in evaluating the performance of our core business operations. Items included in calculating FFO that may be excluded in calculating Core FFO include certain transaction related gains, losses, income or expense or other non-core amounts as they occur. To derive AFFO, we modify our computation of Core FFO to include other adjustments to GAAP net income related to certain items that we believe are not indicative of our operating performance, including straight-line rental revenue, non-cash interest expense, non-cash compensation expense, other amortization expense, other non-cash charges (including changes to our provision for loan losses following the adoption of ASC 326), capitalized interest expense and transaction costs. Such items may cause short-term fluctuations in net income but have no impact on operating cash flows or long-term operating performance. We believe that AFFO is an additional useful supplemental measure for investors to consider when assessing our operating performance without the distortions created by non-cash items and certain other revenues and expenses. FFO, Core FFO and AFFO do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of FFO, Core FFO and AFFO may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs. 64 -------------------------------------------------------------------------------- Table of Contents The following table reconciles net income (which is the most comparable GAAP measure) to FFO, Core FFO and AFFO attributable to stockholders and non-controlling interests: Three months ended Nine months ended September 30, September 30, (in thousands) 2020 2019 2020 2019 Net income$ 12,336 $ 14,106 $ 36,823 $ 33,399 Depreciation and amortization of real estate 13,903 11,117 40,330 30,295 Provision for impairment of real estate 3,221 - 5,080 1,921 Gain on dispositions of real estate, net (1,003) (4,087) (3,971) (8,237) FFO attributable to stockholders and non-controlling interests 28,457 21,136 78,262 57,378 Other non-recurring expenses (1) 116 2,748 2,252 7,101 Core FFO attributable to stockholders and non-controlling interests 28,573 23,884 80,514 64,479
Adjustments:
Straight-line rental revenue, net (3,960) (2,982) (9,321) (8,879) Non-cash interest 764 610 1,535 2,135 Non-cash compensation expense 1,351 1,051 4,041 3,524 Other amortization expense (335) 294 1,018 735 Other non-cash charges 14 2 530 8 Capitalized interest expense (63) (95) (223) (165) Transaction costs 3 - 112 - AFFO attributable to stockholders and non-controlling interests$ 26,347 $
22,764
_____________________________________
(1)Includes non-recurring expenses of approximately$39,000 related to reimbursement of executive relocation costs during the three and nine months endedSeptember 30, 2020 ,$1.1 million for severance payments and acceleration of non-cash compensation expense in connection with the termination of one of our executive officers during the nine months endedSeptember 30, 2020 ,$0.1 million and$0.2 million , respectively, of non-recurring recruiting costs during the three and nine months endedSeptember 30, 2020 , and our$0.9 million loss on repayment of secured borrowings during the nine months endedSeptember 30, 2020 . We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. In 2017, NAREIT issued a white paper recommending that companies that report EBITDA also report EBITDAre. We compute EBITDAre in accordance with the definition adopted by NAREIT. NAREIT defines EBITDAre as EBITDA (as defined above) excluding gains (or losses) from the sales of depreciable property and real estate impairment losses. We present EBITDA and EBITDAre as they are measures commonly used in our industry. We believe that these measures are useful to investors and analysts because they provide supplemental information concerning our operating performance, exclusive of certain non-cash items and other costs. We use EBITDA and EBITDAre as measures of our operating performance and not as measures of liquidity. EBITDA and EBITDAre do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of EBITDA and EBITDAre may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs. 65 -------------------------------------------------------------------------------- Table of Contents The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA and EBITDAre attributable to stockholders and non-controlling interests: Three months ended Nine months ended September 30, September 30, (in thousands) 2020 2019 2020 2019 Net income$ 12,336 $ 14,106 $ 36,823 $ 33,399 Interest expense 7,651 7,207 21,887 20,074 Depreciation and amortization 13,966 11,141 40,442 30,367 Interest income (58) (114) (433) (723) Income tax expense 55 66 156 209 EBITDA attributable to stockholders and non-controlling interests 33,950 32,406 98,875 83,326 Provision for impairment of real estate 3,221 - 5,080 1,921 Gain on dispositions of real estate, net (1,003) (4,087) (3,971) (8,237) EBITDAre attributable to stockholders and non-controlling interests$ 36,168 $
28,319
We further adjust EBITDAre for the most recently completed quarter i) based on
an estimate calculated as if all investment and disposition activity that took
place during the quarter had been made on the first day of the quarter, ii) to
exclude certain GAAP income and expense amounts that we believe are infrequent
and unusual in nature and iii) to eliminate the impact of lease termination fees
and contingent rental revenue from certain of our tenants, which is subject to
sales thresholds specified in the applicable leases ("Adjusted EBITDAre"). We
then annualize quarterly Adjusted EBITDAre by multiplying it by four
("Annualized Adjusted EBITDAre"), which we believe provides a meaningful
estimate of our current run rate for all of our investments as of the end of the
most recently completed quarter. 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 less than our
current Annualized Adjusted EBITDAre.
The following table reconciles net income (which is the most comparable GAAP
measure) to Annualized Adjusted EBITDAre attributable to stockholders and
non-controlling interests for the three months ended September 30, 2020 :
Three months ended
(in thousands) September 30, 2020
Net income $ 12,336
Interest expense 7,651
Depreciation and amortization 13,966
Interest income (58)
Income tax expense 55EBITDA attributable to stockholders and non-controlling interests
33,950
Provision for impairment of real estate 3,221
Gain on dispositions of real estate, net (1,003)
EBITDAre attributable to stockholders and non-controlling interests
36,168
Adjustment for current quarter investment and disposition activity (1)
2,407
Adjustment to exclude other non-recurring activity (2) (47)
Adjusted EBITDAre attributable to stockholders and non-controlling interests
$ 38,528
Annualized Adjusted EBITDAre attributable to stockholders and non-controlling interests
$ 154,112
_____________________________________
(1)Adjustment assumes all investments in and dispositions of real estate made during the three months endedSeptember 30, 2020 had occurred onJuly 1, 2020 . (2)Adjustment is made to exclude non-core expenses added back to compute Core FFO and our provision for loan losses, offset by rent collected from tenants which had been written off in prior periods. 66 -------------------------------------------------------------------------------- Table of Contents We calculate our net debt as our gross debt (defined as total debt plus net deferred financing costs on our secured borrowings) less cash and cash equivalents and restricted cash deposits held for the benefit of lenders. We believe excluding cash and cash equivalents and restricted cash deposits held for the benefit of lenders from gross debt, all of which could be used to repay debt, provides an estimate of the net contractual amount of borrowed capital to be repaid, which we believe is a beneficial disclosure to investors and analysts. The following table reconciles total debt (which is the most comparable GAAP measure) to net debt as of the dates indicated: September 30, December 31, (in thousands) 2020 2019 Secured borrowings, net of deferred financing costs$ 171,840 $ 235,336 Unsecured term loans, net of deferred financing costs 626,119 445,586 Revolving credit facility - 46,000 Total debt 797,959 726,922 Deferred financing costs, net 6,223 8,181 Gross debt 804,182 735,103 Cash and cash equivalents (183,765) (8,304) Restricted cash deposits held for the benefit of lenders (3,906) (13,015) Net debt$ 616,511 $ 713,784 We compute NOI as total revenues less property expenses. NOI excludes all other items of expense and income included in the financial statements in calculating net income or loss, in accordance with GAAP. Cash NOI further excludes non-cash items included in total revenues and property expenses, such as straight-line rental revenue and other amortization and non-cash charges. We believe NOI and Cash NOI provide useful and relevant information because they reflect only those revenue and expense items that are incurred at the property level and present such items on an unlevered basis. NOI and Cash NOI are not measures of financial performance under GAAP. You should not consider our NOI and Cash NOI as alternatives to net income or cash flows from operating activities determined in accordance with GAAP. Additionally, our computation of NOI and Cash NOI may differ from the methodology for calculating these metrics used by other equity REITs, and, therefore, may not be comparable to similarly titled measures reported by other equity REITs. 67 -------------------------------------------------------------------------------- Table of Contents The following table reconciles net income (which is the most comparable GAAP measure) to NOI and Cash NOI attributable to stockholders and non-controlling interests: Three months ended September 30, Nine months ended September 30,
(in thousands) 2020 2019 2020 2019 Net income$ 12,336 $ 14,106 $ 36,823 $ 33,399 Interest Expense 7,651 7,207 21,887 20,074 General and administrative expense 5,917 7,530 19,706 16,455 Depreciation and amortization 13,966 11,141 40,442 30,367 Provision for impairment of real estate 3,221 - 5,080 1,921 Provision for loan losses 14 - 531 - Gain on dispositions of real estate, net (1,003) (4,087) (3,971) (8,237) Loss on repayment and repurchase of secured borrowings - - 924 4,353 Interest income (58) (114) (433) (723) Income tax expense 55 66 156 209 NOI attributable to stockholders and non-controlling interests 42,099 35,849 121,145 97,818 Straight-line rental revenue, net (3,960) (2,982) (9,321) (8,879) Other amortization expense (335) 292 1,018 736 Cash NOI attributable to stockholders and non-controlling interests$ 37,804 $
33,159
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