SILA REALTY TRUST, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theU.S. Securities and Exchange Commission , or theSEC , onMarch 29, 2022 , or the 2021 Annual Report on Form 10-K. The terms "we," "our," "us," and the "Company" refer toSila Realty Trust, Inc. ,Sila Realty Operating Partnership, LP , or ourOperating Partnership , and all wholly-owned subsidiaries. Forward-Looking Statements Certain statements contained in this Quarterly Report on Form 10-Q, other than historical facts, include forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. Such statements include, in particular, our liquidity and capital resources, capital expenditures, material cash requirements, debt service requirements, term loan requirements, plans, leases, dividends, distributions, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as "may," "will," "would," "could," "should," "expect," "intend," "anticipate," "estimate," "believe," "continue," or other similar words. Forward-looking statements are subject to various risks and uncertainties, and factors that could cause actual results to differ materially from our expectations, and investors should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, and we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. See Part I, Item 1A. "Risk Factors" of our 2021 Annual Report on Form 10-K, for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements. Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles, or GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on a regular basis. These estimates are based on management's historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We were formed onJanuary 11, 2013 , under the laws ofMaryland to acquire and operate a diversified portfolio of income-producing commercial real estate properties, with a focus on data centers and healthcare properties, generally with long-term net leases to creditworthy tenants, as well as to make real estate-related investments that relate to such property types. OnJuly 28, 2020 , we and ourOperating Partnership entered into a Membership Interest Purchase Agreement to provide for the internalization of the external management functions previously performed for us and ourOperating Partnership by our former advisor and its affiliates, or the Internalization Transaction. During the three months endedJune 30, 2021 , our board of directors, or the Board made a determination to sell our data center properties. OnMay 19, 2021 , we and certain of our wholly-owned subsidiaries entered into a Purchase and Sale Agreement, or the PSA for the sale of up to 29 data center properties owned by us. See Note 4-"Held for Sale and Discontinued Operations" within this Quarterly Report on Form 10-Q for further discussion. The Board's determination to sell the data center properties, as well as the execution of the PSA, represented a strategic shift that had a major effect on our results and operations for the periods presented. OnJuly 22, 2021 , we completed the sale of all 29 of our data center properties, or the Data Center Sale, comprised of approximately 3,298,000 rentable square feet, for an aggregate sale price of$1,320,000,000 , and generated net proceeds of approximately$1,295,367,000 . As ofDecember 31, 2021 , we had no assets or liabilities related to the data center properties. The operations of the data center properties have been classified as income from discontinued 31
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operations on the condensed consolidated statements of comprehensive income for
the three and six months ended
As of
OnJuly 20, 2021 , the Board, at the recommendation of our audit committee, approved the estimated per share net asset value, or Estimated Per Share NAV, calculated as ofMay 31, 2021 , of$9.95 . Upon the declaration of a special cash distribution of$1.75 per share to stockholders of record onJuly 26, 2021 , the Estimated Per Share NAV is$8.20 . We intend to publish an updated Estimated Per Share NAV on an annual basis. The Estimated Per Share NAV was calculated for purposes of assisting broker-dealers participating in public offerings in meeting their customer account statement reporting obligations under theNational Association of Securities Dealers Conduct Rule 2340. The Estimated Per Share NAV was declared by the Board after consultation with management and an independent third-party valuation firm. The Estimated Per Share NAV is not subject to audit by our independent registered public accounting firm. We raised the equity capital for our real estate investments through two public offerings, or our Offerings, fromMay 2014 throughNovember 2018 , and we have offered shares pursuant to our distribution reinvestment plan, or the DRIP, pursuant to two Registration Statements on Form S-3, or each, a DRIP Offering and together the DRIP Offerings, sinceNovember 2017 . As ofJune 30, 2022 , we had accepted investors' subscriptions for and issued approximately 155,980,000 shares of Class A, Class I, Class T and Class T2 common stock in our Offerings, resulting in receipt of gross proceeds of approximately$1,507,542,000 , before share repurchases of approximately$131,090,000 , selling commissions and dealer manager fees of approximately$96,734,000 and other offering costs of approximately$27,627,000 .
Critical Accounting Estimates
Our critical accounting estimates were disclosed in our 2021 Annual Report on Form 10-K. There have been no material changes to our critical accounting estimates as disclosed therein.
Interim Unaudited Financial Data
Our accompanying condensed consolidated financial statements have been prepared by us in accordance with GAAP in conjunction with the rules and regulations of theSEC . Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant toSEC rules and regulations. Accordingly, our accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying condensed consolidated financial statements reflect all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such full year results may be less favorable. Our accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2021 Annual Report on Form 10-K.
Qualification as a REIT
We elected, and qualify, to be taxed as a REIT for federal income tax purposes and we intend to continue to be taxed as a REIT. To maintain our qualification as a REIT, we must continue to meet certain organizational and operational requirements, including a requirement to distribute at least 90.0% of our REIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to maintain our qualification as a REIT in any taxable year, we would then be subject to federal income taxes on our taxable income at regular corporate rates and would not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could have a material adverse effect on our net income and net cash available for distribution to our stockholders.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2-"Summary of Significant Accounting Policies-Recently Adopted Accounting Pronouncements" to our condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q.
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Segment Reporting
See Note 2-"Summary of Significant Accounting Policies" to our condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q for additional information about our healthcare reporting segment. We report our financial performance based on one reporting segment-commercial real estate investments in healthcare. As ofJune 30, 2022 andDecember 31, 2021 , 100% of our consolidated revenues from continuing operations were generated from real estate investments in healthcare properties. Our chief operating decision maker evaluates operating performance of healthcare properties on an individual property level, which are aggregated into one reportable segment due to their similar economic characteristics.
Factors That May Influence Results of Operations
We are not aware at this time of any material trends or uncertainties, other than national economic conditions and those discussed below, affecting our real estate properties, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of our properties other than those set forth in our 2021 Annual Report on Form 10-K. Rental Revenue The amount of rental revenue generated by our healthcare properties depends principally on our ability to maintain the occupancy rates of leased space and to lease available space at the then-existing rental rates. Negative trends in one or more of these factors could adversely affect our rental revenue in future periods. As ofJune 30, 2022 , our operating healthcare real estate properties were 99.4% leased. Results of Operations
The results of operations discussed below reflect the data centers segment presented as discontinued operations.
Our results of operations are influenced by the timing of acquisitions and the operating performance of our operating healthcare real estate properties. The following table shows the property statistics of our operating healthcare real estate properties as ofJune 30, 2022 and 2021:
2022 2021
Number of operating real estate properties (1) 130 124
Leased square feet 5,359,000 5,095,000
Weighted average percentage of rentable square feet leased 99.4 % 96.2 %
(1)As of June 30, 2022 , we owned 130 operating healthcare real estate properties
and two undeveloped land parcels. As of June 30, 2021 , we owned 125 healthcare
real estate properties, one of which was under construction.
The following table summarizes our healthcare real estate activity for the three
and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Operating real estate properties acquired 4 1 5 1
Operating real estate properties disposed - - - (2) -
Operating real estate properties placed into
service - - 1 1
Aggregate purchase price of operating real estate
properties acquired (1) $ 22,896,000 $ 25,048,000 $ 42,450,000 $ 25,048,000 Aggregate cost of operating real estate properties placed into service
$ - $ - $ 15,713,000 $ 22,140,000 Net book value of operating real estate properties disposed
$ - $ - $ - (2) $ - Leased square feet of operating real estate property additions
54,000 54,000 140,000 115,000
Leased square feet of operating real estate
property dispositions - - - (2) -
(1)Includes capitalized acquisition costs associated with transactions determined to be asset acquisitions.
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(2)As of December 31, 2021 , one land parcel that formerly contained a healthcare
property, or the 2021 Land Held for Sale, had a net book value of $22,241,000 .
On August 30, 2021 , we entered into a purchase and sale agreement for the sale
of the property. The purchase and sale agreement required that the structures
located on the property be demolished prior to the sale. The structures located
on the property were demolished and it consisted solely of land as of December
31, 2021 . The land attributable to the property was sold on February 10, 2022 .
This section describes and compares our results of operations for the three and
six months ended June 30, 2022 and 2021. We generate substantially all of our
revenue from property operations. In order to evaluate our overall portfolio,
management analyzes the net operating income of same store properties. We define
"same store properties" as operating properties that were owned and operated for
the entirety of both calendar periods being compared and exclude properties
under development and properties or land classified as held for sale.
By evaluating the revenue and expenses of our same store properties, management
is able to monitor the operations of our existing properties for comparable
periods to measure the performance of our current portfolio and determine the
expected effects of our new acquisitions and dispositions on net income.
Three Months Ended
The following table represents the breakdown of total rental revenue for the three months endedJune 30, 2022 compared to the comparable periods in 2021 (amounts in thousands). Three Months Ended June 30, 2022 2021 $ Change % Change Same store rental revenue$ 40,207 $ 40,235 $ (28) (0.1) % Same store tenant reimbursements 2,380 2,426 (46) (1.9) % Non-same store rental revenue 2,076 929 1,147 123.5 % Non-same store tenant reimbursements 254 155 99 63.9 % Other operating income 1 2 (1) (50.0) % Total rental revenue$ 44,918 $ 43,747 $ 1,171 2.7 % •Non-same store rental and tenant reimbursement revenue increased due to the acquisition of nine operating properties and the placement of one development property in service sinceApril 1, 2021 , partially offset by a decrease in non-same store rental and tenant reimbursement revenue due to the sale of three operating properties sinceApril 1, 2021 . Changes in our expenses are summarized in the following table (amounts in thousands): Three Months Ended June 30, 2022 2021 $ Change % Change Same store rental expenses$ 2,748 $ 2,799 $ (51) (1.8) % Non-same store rental expenses 262 476 (214) (45.0) % General and administrative expenses 7,744 6,639 1,105 16.6 % Depreciation and amortization 17,814 17,615 199 1.1 % Impairment loss on real estate - 6,502 (6,502) (100.0) % Impairment loss on goodwill - 431 (431) (100.0) % Total expenses$ 28,568 $ 34,462 $ (5,894) (17.1) % •Non-same store rental expenses decreased due to the sale of three operating properties sinceApril 1, 2021 , partially offset by the acquisition of nine operating properties and the placement of one development property in service sinceApril 1, 2021 . •General and administrative expenses increased primarily due to a severance payment to our former chief accounting officer and an increase in stock-based compensation, partially offset by a decrease in corporate legal and transfer agent expenses. •Impairment loss on real estate and impairment loss on goodwill were recorded in the amounts of$6,502,000 and$431,000 , respectively, related to two healthcare properties, or the Second Quarter 2021Impaired Properties , during the three months endedJune 30, 2021 . There were no impairments recorded during the three months endedJune 30, 2022 . 34
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Changes in interest and other expense, net, are summarized in the following table (amounts in thousands):
Three Months Ended
June 30,
2022 2021 $ Change % Change
Interest and other expense, net:
Interest on notes payable $ - $ 1,836 $ (1,836) (100.0) %
Interest on credit facility 4,078 7,250 (3,172) (43.8) %
Other expense 251 448 (197) (44.0) %
Total interest and other expense, net
•Interest on notes payable decreased due to the pay-off of all our notes payable
on
•Interest on credit facility decreased due to a decrease in the outstanding principal balance on our credit facility due to the pay-down in connection with the Data Center Sale and lower interest rates as a result of entering into the Unsecured Credit Facility (as defined below).
•There was no income from discontinued operations during the three months ended
Six Months Ended
The following table represents the breakdown of total rental revenue for the six months endedJune 30, 2022 compared to the comparable periods in 2021 (amounts in thousands). Six Months Ended June 30, 2022 2021 $ Change % Change Same store rental revenue$ 79,236 $ 79,235 $ 1 - % Same store tenant reimbursements 4,612 4,385 227 5.2 % Non-same store rental revenue 4,795 1,961 2,834 144.5 % Non-same store tenant reimbursements 555 586 (31) (5.3) % Other operating income 2 2 - - % Total rental revenue$ 89,200 $ 86,169 $ 3,031 3.5 % •Non-same store rental revenue increased due to the acquisition of nine operating properties and the placement of two development properties in service sinceJanuary 1, 2021 , partially offset by a decrease in non-same store rental revenue due to the sale of three operating properties sinceJanuary 1, 2021 . Changes in our expenses are summarized in the following table (amounts in thousands): Six Months Ended June 30, 2022 2021 $ Change % Change Same store rental expenses$ 5,292 $ 5,180 $ 112 2.2 % Non-same store rental expenses 743 1,309
(566) (43.2) %
General and administrative expenses 14,600 13,262 1,338
10.1 %
Depreciation and amortization 35,802 35,839 (37) (0.1) % Impairment loss on real estate 7,109 16,925 (9,816) (58.0) % Impairment loss on goodwill 278 671 (393) (58.6) % Total expenses$ 63,824 $ 73,186 $ (9,362) (12.8) % Gain on real estate dispositions$ 460 $ -$ 460
100.0 %
•Non-same store rental expenses decreased due to the sale of three operating properties sinceJanuary 1, 2021 , partially offset by the acquisition of nine operating properties and the placement of two development properties in service sinceJanuary 1, 2021 . 35
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•General and administrative expenses increased primarily due to a severance payment to our former chief accounting officer and an increase in stock-based compensation, partially offset by a decrease in corporate legal and transfer agent expenses. •Depreciation and amortization decreased primarily due to an impairment of one in-place lease intangible asset during the six months endedJune 30, 2021 , or the First Quarter 2021 Impaired In-Place Lease, in the amount of approximately$1,120,000 , by accelerating the amortization of the acquired intangible asset related to one of our healthcare tenants that was experiencing financial difficulties and vacated the property inMarch 2021 . During the six months endedJune 30, 2022 , we recognized an impairment of one in-place lease intangible asset, or the First Quarter 2022 Impaired In-Place Lease, in the amount of approximately$380,000 , by accelerating the amortization of the acquired intangible asset related to a tenant of the First Quarter 2022 Impaired Property (as defined below). •Impairment loss on real estate and impairment loss on goodwill were recorded in the amounts of$7,109,000 and$278,000 , respectively, related to one healthcare property, or the First Quarter 2022 Impaired Property, during the three months endedMarch 31, 2022 . Impairment loss on real estate and impairment loss on goodwill were recorded in the amounts of$16,925,000 and$671,000 , respectively, related to one healthcare property, or the First Quarter 2021 Impaired Property, during the three months endedMarch 31, 2021 and the Second Quarter 2021Impaired Properties .
Changes in interest and other expense, net, are summarized in the following table (amounts in thousands):
Six Months Ended
June 30,
2022 2021 $ Change % Change
Interest and other expense, net:
Interest on notes payable $ - $ 3,655 $ (3,655) (100.0) %
Interest on credit facility 8,418 14,454 (6,036) (41.8) %
Other expense 4,026 189 3,837 2,030.2 %
Total interest and other expense, net $ 12,444 $ 18,298 $ (5,854) (32.0) %
Income from discontinued operations $ - $ 24,253 $ (24,253) (100.0) %
•Interest on notes payable decreased due to the pay-off of all our notes payable
on
•Interest on credit facility decreased due to a decrease in the outstanding principal balance on our credit facility due to the pay-down in connection with the Data Center Sale and lower interest rates as a result of entering into the Unsecured Credit Facility (as defined below). •Other expense increased primarily due to loss on debt extinguishment related to the repayment of our prior credit facility and consisted of loan costs of$4,000 and accelerated unamortized debt issuance costs of$3,363,000 .
•There was no income from discontinued operations during the six months ended
Liquidity and Capital Resources
Our principal uses of funds are for acquisitions of real estate and real estate-related investments, capital expenditures, operating expenses, distributions to and share repurchases from stockholders and principal and interest on any current and future indebtedness. Generally, cash for these items is generated from operations of our current and future investments. Our sources of funds are primarily operating cash flows, funds equal to amounts reinvested in the DRIP, our credit facility and other potential borrowings. When we acquire a property, we prepare a capital plan that contemplates the estimated capital needs of that investment. In addition to operating expenses, capital needs may also include, by way of example, costs of refurbishment, tenant improvements or other major capital expenditures. The capital plan also sets forth the anticipated sources of the necessary capital, which may include a line of credit, operating cash generated by the investment, additional equity investments from us, and when necessary, capital reserves. The capital plan for each investment will be adjusted through ongoing, regular reviews of our portfolio or, as necessary, to respond to unanticipated additional capital needs.
Short-term Liquidity and Capital Resources
For at least the next twelve months, we expect our principal demands for funds will be for operating expenses, including our general and administrative expenses, as well as the acquisition of real estate and real estate-related investments and funding of capital improvements and tenant improvements, distributions to and repurchases from stockholders, and interest payments on
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our credit facility. We expect to meet our short-term liquidity requirements through net cash flows provided by operations, funds equal to amounts reinvested in the DRIP and borrowings on our credit facility and potential other borrowings.
We believe we will have sufficient liquidity available to meet our obligations in a timely manner, under both normal and stressed conditions, for the next twelve months.
Long-term Liquidity and Capital Resources
Beyond the next twelve months, we expect our principal demands for funds will be for costs to acquire additional real estate properties, interest and principal payments on our credit facility, long-term capital investment demands for our real estate properties and our distributions necessary to maintain our REIT status.
We currently expect to meet our long-term liquidity requirements through proceeds from cash flows from operations and borrowings on our credit facility and potential other borrowings.
We expect to pay distributions to our stockholders from cash flows from operations; however, we have used, and may continue to use, other sources to fund distributions, as necessary, such as funds equal to amounts reinvested in the DRIP and borrowings on our credit facility. To the extent cash flows from operations are lower due to less-than-expected returns on the properties held or the disposition of properties, distributions paid to stockholders may be lower. We currently expect that substantially all net cash flows from our operations will be used to fund acquisitions, certain capital expenditures identified at acquisition, ongoing capital expenditures, interest and principal on outstanding debt and distributions to our stockholders.
Material Cash Requirements
We expect to require approximately
As of
As ofJune 30, 2022 , we had material obligations beyond 12 months in the amount of approximately$642,156,000 , inclusive of$546,601,000 related to principal and estimated interest on our outstanding debt,$12,648,000 related to capital improvement expenditures on our healthcare properties,$418,000 related to contingent consideration from Note 14-"Commitments and Contingencies" that resulted from an earn-out arrangement and$82,489,000 related to our various lease obligations. One of our principal liquidity needs is the payment of principal and interest on outstanding indebtedness. As ofJune 30, 2022 , we had$505,000,000 of principal outstanding under our Unsecured Credit Facility (as defined below). We are required by the terms of certain loan documents to meet certain covenants, such as financial ratios and reporting requirements. As ofJune 30, 2022 , we were in compliance with all such covenants and requirements on our Unsecured Credit Facility (as defined below).
As of
Debt Service Requirements
Credit Facility
As ofJune 30, 2022 , the maximum commitments available under our senior unsecured revolving line of credit withTruist Bank , as Administrative Agent for the lenders, or the Revolving Credit Agreement, were$500,000,000 , which may be increased, subject to lender approval, through incremental term loans and/or revolving loan commitments in an aggregate amount not to exceed$1,000,000,000 . The maturity date for the Revolving Credit Agreement isFebruary 15, 2026 , which, at our election, may be extended for a period of six-months on no more than two occasions, subject to certain conditions, including the payment of an extension fee. The Revolving Credit Agreement was entered into onFebruary 15, 2022 , to replace our prior$500,000,000 revolving line of credit, which had a maturity date ofApril 27, 2022 , with the option to extend for one twelve-month period. We did not exercise the option to extend. Upon closing of the Revolving Credit Agreement, we extinguished all commitments associated with the prior revolving line of credit. 37
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As ofJune 30, 2022 , the maximum commitments available under our senior unsecured term loan withTruist Bank , as Administrative Agent for the lenders, or the 2024 Term Loan Agreement, were$300,000,000 , which may be increased, subject to lender approval, to an aggregate amount not to exceed$600,000,000 . The 2024 Term Loan Agreement has a maturity date ofDecember 31, 2024 , and, at our election, may be extended for a period of six-months on no more than two occasions, subject to the satisfaction of certain conditions, including the payment of an extension fee. The 2024 Term Loan Agreement was entered into simultaneously with the Revolving Credit Agreement's execution, onFebruary 15, 2022 , to replace our prior term loan, which was paid off in its entirety upon closing of the Revolving Credit Agreement and the 2024 Term Loan Agreement. As ofJune 30, 2022 , the maximum commitments available under our senior unsecured term loan withTruist Bank , as Administrative Agent for the lenders, or the 2028 Term Loan Agreement, were$275,000,000 , of which$205,000,000 was drawn at closing to pay down our Revolving Credit Agreement in its entirety. The remainder of the commitments were available for three months following the closing date, or the Availability Period, and were available in no more than three subsequent draws with a minimum of$20,000,000 per draw, or the remaining commitments available. After the Availability Period, the undrawn portion was no longer available. If the committed amount was not fully drawn within 60 days of closing, we were required to pay a fee to the lenders, calculated as 0.25% per annum on the average daily amount of the undrawn portion, payable quarterly in arrears, until the earlier of (i) the date when the commitments have been funded in full, or (ii)August 17, 2022 . The 2028 Term Loan Agreement may be increased, subject to lender approval, to an aggregate amount not to exceed$500,000,000 and has a maturity date ofJanuary 31, 2028 . The 2028 Term Loan Agreement is pari passu with our Revolving Credit Agreement and 2024 Term Loan Agreement. OnJuly 12, 2022 andJuly 20, 2022 , we drew$50,000,000 and$20,000,000 , respectively, on the 2028 Term Loan Agreement. As ofJuly 20, 2022 , the 2028 Term Loan Agreement commitments were fully funded. We refer to the 2028 Term Loan Agreement, the Revolving Credit Agreement and the 2024 Term Loan Agreement, collectively, as the "Unsecured Credit Facility," which has aggregate commitments available of$1,075,000,000 , as ofJune 30, 2022 . Generally, the proceeds of loans made under our Unsecured Credit Facility may be used for the acquisition of real estate investments, tenant improvements and leasing commissions with respect to real estate, repayment of indebtedness, capital expenditures with respect to real estate, and general corporate and working capital purposes. During the six months endedJune 30, 2022 , we drew$35,000,000 on the Revolving Credit Agreement related to five property acquisitions, or the 2022 Acquisitions, we repaid$30,000,000 on the Revolving Credit Agreement, primarily with proceeds from one property disposition, or the 2022 Disposition, and repaid$205,000,000 on the Revolving Credit Agreement in its entirety with the proceeds drawn at closing of the 2028 Term Loan Agreement. As ofJune 30, 2022 , we had a total pool availability under our Unsecured Credit Facility of$1,075,000,000 and an aggregate outstanding principal balance of$505,000,000 ; therefore,$570,000,000 was available to be drawn under our Unsecured Credit Facility. We were in compliance with all financial covenant requirements as ofJune 30, 2022 .
Cash Flows
Six Months Ended
Six Months Ended
June 30,
(in thousands) 2022 2021 Change % Change
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Operating Activities •Net cash provided by operating activities decreased primarily due to the Company owning a smaller portfolio of properties subsequent to the Data Center Sale onJuly 22, 2021 , partially offset by an increase in rental revenues resulting from the acquisition of nine operating properties and placement of two development properties in service sinceJanuary 1, 2021 and a decrease in interest paid as a result of entering into the Unsecured Credit Facility and the pay-off of all our notes payable onJuly 22, 2021 , in connection with the Data Center Sale. Investing Activities •Net cash used in investing activities decreased due to the proceeds from the 2022 Disposition, no consideration paid in 2022 for the Internalization Transaction and a decrease in capital expenditures, partially offset by the 2022 Acquisitions. 38
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Financing Activities
•Net cash used in financing activities increased primarily due to an increase in payments of deferred financing costs as a result of entering into the 2024 Term Loan Agreement and Revolving Credit Agreement onFebruary 15, 2022 and the 2028 Term Loan Agreement onMay 17, 2022 , and an increase in repurchases of our common stock under our share repurchase program, partially offset by a decrease in distributions to our common stockholders, a decrease in proceeds from our credit facility, a decrease in payment of offering costs on issuance of common stock and a decrease in payments on notes payable due to the pay-off of all our notes payable onJuly 22, 2021 .
Distributions to Stockholders
The amount of distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including our funds available for distribution, financial condition, lenders' restrictions and limitations, capital expenditure requirements, corporate law restrictions and the annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended. The Board must authorize each distribution and may, in the future, authorize lower amounts of distributions or not authorize additional distributions and, therefore, distribution payments are not guaranteed. Additionally, our organizational documents permit us to pay distributions from unlimited amounts of any source, and we may use sources other than operating cash flows to fund distributions, including funds equal to amounts reinvested in the DRIP, which may reduce the amount of capital we ultimately invest in properties or other permitted investments. We have funded distributions with operating cash flows from our properties and funds equal to amounts reinvested in the DRIP. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders.
The following table shows the sources of distributions paid during the six
months ended
Six Months Ended
2022 2021
Distributions paid in cash - common stockholders
$ 38,955 Distributions reinvested (shares issued) 12,290 14,833 Total distributions$ 44,691 $ 53,788 Source of distributions: Cash flows provided by operations (1)$ 32,401 73 %$ 38,955 72 % Offering proceeds from issuance of common stock pursuant to the DRIP (1) 12,290 27 % 14,833 28 % Total sources$ 44,691 100 %$ 53,788 100 %
(1)Percentages were calculated by dividing the respective source amount by the total sources of distributions.
Total distributions declared but not paid on Class A shares, Class I shares and Class T shares as ofJune 30, 2022 , were approximately$7,435,000 for common stockholders. These distributions were paid onJuly 8, 2022 . For the six months endedJune 30, 2022 , we declared and paid distributions of approximately$44,691,000 to Class A stockholders, Class I stockholders, Class T stockholders and Class T2 stockholders, collectively, including shares issued pursuant to the DRIP, as compared to FFO and AFFO (which are Non-GAAP measures defined and reconciled below under "Non-GAAP Financial Measures") for the six months endedJune 30, 2022 , of approximately$55,795,000 and$58,293,000 , respectively.
For a discussion of distributions paid subsequent to
Non-GAAP Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use funds from operations, or FFO, and adjusted funds from operations, or AFFO, which are non-GAAP measures defined by management. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies.
A description of FFO and AFFO and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures, are provided below.
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Funds from Operations and Adjusted Funds from Operations
One of our objectives is to provide cash distributions to our stockholders from cash flows generated by our operations. The purchase of real estate assets and real estate-related investments, and the corresponding expenses associated with that process, is a key operational feature of our business plan in order to generate cash flows from operations. Due to certain unique operating characteristics of real estate companies, theNational Association of Real Estate Investment Trusts , or NAREIT, an industry trade group, has promulgated a measure known as FFO, which we believe is an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income as determined under GAAP. We define FFO, consistent with NAREIT's definition, as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property and asset impairment write-downs, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. To date, we have not had any unconsolidated partnerships or joint ventures. We, along with others in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT's operating performance, because it is based on a net income (loss) analysis of property portfolio performance that excludes non-cash items such as depreciation and amortization and asset impairment write-downs, which we believe provides a more complete understanding of our performance to investors and to our management, and when compared year over year, FFO reflects the impact on our operations from trends in occupancy. Historical accounting convention (in accordance with GAAP) for real estate assets requires companies to report their investment in real estate at its carrying value, which consists of capitalizing the cost of acquisitions, development, construction, improvements and significant replacements, less depreciation and amortization and asset impairment write-downs, if any, which is not necessarily equivalent to the fair value of their investment in real estate assets. The historical accounting convention requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which could be the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since the fair value of real estate assets historically rises and falls with market conditions including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation could be less informative. In addition, we believe it is appropriate to disregard asset impairment write-downs as they are non-cash adjustments to recognize losses on prospective sales of real estate assets. Since losses from sales of real estate assets are excluded from FFO, we believe it is appropriate that asset impairment write-downs in advance of realization of losses should be excluded. Impairment write-downs are based on negative market fluctuations and underlying assessments of general market conditions, which are independent of our operating performance, including, but not limited to, a significant adverse change in the financial condition of our tenants, changes in supply and demand for similar or competing properties, and changes in tax, real estate, environmental and zoning laws, which can change over time. When indicators of potential impairment suggest that the carrying value of real estate and related assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the asset through undiscounted future cash flows and eventual disposition (including, but not limited to, net rental and lease revenues, net proceeds on the sale of property and any other ancillary cash flows at a property or group level under GAAP). If based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate asset, we will record an impairment write-down to the extent that the carrying value exceeds the estimated fair value of the real estate asset. Testing for indicators of impairment is a continuous process and is analyzed on a quarterly basis or when indicators of impairment exist. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that identifying impairments is based on estimated future undiscounted cash flows, it could be difficult to recover any impairment charges through the eventual sale of the property. We calculate AFFO, a non-GAAP measure, by further adjusting FFO for the following items included in the determination of GAAP net income: amortization of above- and below-market leases, along with the amortization of operating leases and the finance lease, resulting from above-and below-market leases, straight-line rent adjustments, discount amortization related to the deferred liability in connection with the Internalization Transaction, impairment loss on goodwill, (gain) loss on extinguishment of debt, amortization of deferred financing costs and stock-based compensation. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market 40
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conditions but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe AFFO provides useful supplemental information.
AFFO is a metric used by management to evaluate our dividend policy. Additionally, we consider AFFO to be an appropriate supplemental measure of our operating performance because it provides to investors a more complete understanding of our sustainable performance.
Presentation of this information is intended to assist management and investors in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and AFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and AFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net income as an indication of our performance, as an indication of our liquidity, or indicative of funds available for our cash needs, including our ability to make distributions to our stockholders. FFO and AFFO should be reviewed in conjunction with other measurements as an indication of our performance. FFO and AFFO have limitations as performance measures. However, FFO and AFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods. FFO and AFFO are not useful measures in evaluating net asset value since impairment write-downs are taken into account in determining net asset value but not in determining FFO and AFFO. FFO and AFFO, as described above, should not be considered to be more relevant or accurate than the GAAP methodology in calculating net income or in its applicability in evaluating our operational performance. The method used to evaluate the value and performance of real estate under GAAP should be considered as a more relevant measure of operating performance and considered more prominent than the non-GAAP FFO and AFFO measures and the adjustments to GAAP in calculating FFO and AFFO.
Reconciliation of FFO and AFFO
The following is a reconciliation of net income attributable to common stockholders, which is the most directly comparable GAAP financial measure, to FFO and AFFO for the three and six months endedJune 30, 2022 and 2021 (amounts in thousands): Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net income attributable to common stockholders$ 12,021 $ 16,056 $ 13,392 $ 18,938 Adjustments: Depreciation and amortization (1) 17,788 21,592 35,754 47,554 Gain on real estate disposition from continuing operations - - (460) - Impairment loss on real estate - 6,502 7,109 16,925 FFO attributable to common stockholders$ 29,809 $ 44,150 $ 55,795 $ 83,417 Adjustments: Amortization of intangible assets and liabilities (2) 121 (639) 240 (1,252) Amortization of operating leases and finance lease 272 216 526 485 Straight-line rent adjustments (3) (2,431) (4,452) (4,941) (9,078) Amortization of discount of deferred liability - 55 - 109 Impairment loss on goodwill (4) - 431 278 671 Loss on extinguishment of debt - - 3,367 - Amortization of deferred financing costs 364 1,011 854 2,007 Stock-based compensation 1,278 563 2,174 1,119 AFFO attributable to common stockholders$ 29,413 $ 41,335 $ 58,293 $ 77,478
(1)During the six months ended
(2)Represents the amortization of above-and below-market leases.
(3)Under GAAP, rental revenue is recognized on a straight-line basis over the
terms of the related lease (including rent holidays, if applicable). This may
result in income recognition that is different than the underlying contractual
terms. By adjusting for the change in straight-line rent receivable, AFFO may
provide useful supplemental information on the
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realized economic impact of lease terms, providing insight on the expected contractual cash flows of such lease terms, which aligns with our analysis of operating performance.
(4)During the six months endedJune 30, 2022 , we wrote off goodwill related to one reporting unit in the amount of approximately$278,000 . During the three months endedJune 30, 2021 , we wrote off goodwill related to two reporting units in the amount of approximately$431,000 and during the six months endedJune 30, 2021 , we wrote off goodwill related to three reporting units in the amount of approximately$671,000 . The goodwill was originally recognized as a part of the Internalization Transaction onSeptember 30, 2020 . We believe that adjusting for such non-recurring items provides useful supplemental information because such adjustments may not be reflective of ongoing operations and aligns with our analysis of operating performance.
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