SPIRIT REALTY CAPITAL, INC. OVERVIEW
Spirit Realty Capital, Inc. is aNew York Stock Exchange listed company under the ticker symbol "SRC." We are a self-administered and self-managed REIT with in-house capabilities including acquisition, credit research, asset management, portfolio management, real estate research, legal, finance and accounting functions. We primarily invest in single-tenant real estate assets throughoutthe United States , which are generally acquired through sale-leaseback transactions and subsequently leased on a long-term, triple-net basis to high quality tenants operating in retail, industrial, and other property types. Single-tenant, operationally essential real estate consists of properties that are free-standing, commercial real estate facilities where our tenants conduct activities that are essential to the generation of their sales and profits. Under a triple-net lease, the tenant is typically responsible for all improvements and is contractually obligated to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs. As ofDecember 31, 2021 , our diverse portfolio consisted of 2,003 owned properties across 49 states, which were leased to 321 tenants operating in 35 industries. As ofDecember 31, 2021 , our owned properties were approximately 99.8% occupied. Our operations are carried out through theOperating Partnership .OP Holdings , one of our wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of theOperating Partnership . We and one of our wholly-owned subsidiaries are the only limited partners, and together own the remaining 99% of theOperating Partnership . Although theOperating Partnership is wholly-owned by us, in the future, we may issue partnership interests in theOperating Partnership to third parties in exchange for property owned by such third parties. In general, any partnership interests in theOperating Partnership issued to third parties would be exchangeable for cash or, at our election, shares of our common stock at specified ratios set when such partnership interests in theOperating Partnership are issued. We have elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year endedDecember 31, 2005 . We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes commencing with such taxable year, and we intend to continue operating in such a manner. OnMay 31, 2018 , we completed a Spin-Off of certain assets into an independent, publicly traded REIT, SMTA. In conjunction with the Spin-Off, we entered into the Asset Management Agreement, pursuant to which we served as the external asset manager for SMTA for an annual management fee of$20.0 million . InSeptember 2019 , SMTA approved a plan of liquidation, the Asset Management Agreement was terminated and the Interim Management Agreement with SMTA became effective. Pursuant to the Interim Management Agreement, we were entitled to receive$1 million during the initial one-year term and$4 million for any renewal one-year term to manage and liquidate the remaining SMTA assets. The Interim Management Agreement was terminated effectiveSeptember 4, 2020 and we have no further continuing involvement with SMTA.
COVID-19 PANDEMIC IMPACT
At the onset of the COVID-19 pandemic in 2020, many of our tenants requested rent deferrals or other forms of relief. Our discussions with tenants requesting relief substantially focused on industries that were directly disrupted by the COVID-19 pandemic and restrictions intended to prevent its spread, particularly movie theaters, casual dining restaurants, entertainment, health and fitness and hotels. Since the beginning of 2021, we have seen a reduction in the impact of the COVID-19 pandemic and we expect that trend to continue. For the year endedDecember 31, 2020 , we deferred$31.9 million of rent and abated$6.3 million of rent. For the year endedDecember 31, 2021 , we deferred$8.4 million of rent and had net reversals of previous reserves against deferred rent of$5.0 million , resulting in$13.4 million recognized in rental income, and we abated$1.5 million of rent. As ofDecember 31, 2021 , we had an accounts receivable balance related to deferred rent of$15.3 million , compared to$20.2 million as ofDecember 31, 2020 . The deferral periods range generally from one to six months, with an average deferral period of three months and an average repayment period of 12 months. As ofFebruary 10, 2022 , we have not granted any additional deferrals or abatements beyond 2021. Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent, we can provide no assurance that such efforts or our efforts in future periods will be successful, particularly in the event that the COVID-19 pandemic and restrictions intended to prevent its spread continue for a prolonged period. Refer to Part I, Item 1A. "Risk Factors" for additional information about the potential impact of the COVID-19 pandemic and restrictions intended to prevent its spread on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and make distributions to our stockholders. 32
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are determined in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that are subjective in nature and, as a result, our actual results could differ materially from our estimates. 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. Set forth below are the more critical accounting policies that require management judgment and estimates in the preparation of our consolidated financial statements. See Notes 2 and 8 to the consolidated financial statements for additional details.
Purchase Accounting and Acquisition of Real Estate; Lease Intangibles
We evaluate a number of factors in estimating fair value of real estate acquisitions, including building age, building location, building condition, rent comparables from similar properties, and terms of in-place leases, if any. Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of in-place leases and above or below-market leases. In-place lease intangibles are valued based on our estimates of costs related to tenant acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. We then allocate the purchase price (including acquisition and closing costs) to land, building, improvements and equipment based on their relative fair values. For properties acquired with in-place leases, we allocate the purchase price of real estate to the tangible and intangible assets and liabilities acquired based on their estimated fair values. Above and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and our estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease and, in certain instances, over the renewal period.
Rental Income: Cash and Straight-line Rent
We primarily lease real estate to our tenants under long-term, triple-net leases that are classified as operating leases. To evaluate lease classification, we assess the terms and conditions of the lease to determine the appropriate lease term and do not include options to extend, terminate or purchase in our evaluation for lease classification or for recognizing rental income unless we are reasonably certain the tenant will exercise the option. Evaluation of lease classification also requires an estimate of the residual value of the real estate at the end of the lease term. For acquisitions, we use the tangible fair value of the property at the date of acquisition. For lease modifications, we generally use sales comparables or a direct capitalization approach to determine residual value. In conjunction with the FASB Staff Q&A released inApril 2020 , we elected to account for lease concessions related to the COVID-19 pandemic consistent with ASC 842 as though enforceable rights and obligations for those concessions existed (regardless of whether they explicitly exist in the lease). As such, rent deferrals are recorded as an increase to rent receivables and recognized as income during the deferral period. Lease concessions other than rent deferrals have been evaluated to determine if a substantive change to the consideration in the original lease contract occurred and should be accounted for as a lease modification. Our leases generally provide for rent escalations throughout the term of the lease. For leases with fixed escalators, rental income is recognized on a straight-line basis to produce a constant periodic rent over the term of the lease. For leases with variable escalators, increases in rental revenue are recognized when the changes in the rental rates have occurred. Some of our leases also provide for contingent rent based on a percentage of the tenant's gross sales, which is recognized when the change in the factor on which the contingent lease payment is based actually occurs. Rental income is subject to an evaluation for collectability, which includes our estimates of amounts that will not be realized based on an assessment of the risks inherent in the portfolio, considering historical experience, as well as the tenant's payment history and financial condition. We do not recognize rental income for amounts that are not probable of collection.
Impairment
We review our real estate investments and related lease intangibles periodically
for indicators of impairment including, but not limited to: the asset being held
for sale, vacant, tenant bankruptcy or delinquency, and leases expiring in 60
days or less. For assets with indicators of impairment, we then evaluate if its
carrying amount may not be recoverable. We consider factors such as expected
future undiscounted cash flows, estimated residual value, market trends (such as
the effects of leasing demand and competition) and other factors in making this
assessment. An asset is considered impaired if its carrying value exceeds its
estimated undiscounted cash flows.
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Impairment is calculated as the amount by which the carrying value exceeds the
estimated fair value, or for assets held for sale, the amount by which the
carrying value exceeds fair value less costs to sell. Estimating fair values is
highly subjective and such estimates could differ materially from actual
results. The fair values of real estate and intangible assets are determined
using the following information, depending on availability, in order of
preference: signed purchase and sale agreements or letters of intent; broker
opinions of value; recently quoted bid or ask prices, or market prices for
comparable properties; estimates of discounted cash flows; and expectations for
the use of the real estate.
REIT Status
We elected to be taxed as a REIT for federal income tax purposes commencing with
our taxable year ended December 31, 2005 . We believe that we have been organized
and have operated in a manner that has allowed us to qualify as a REIT
commencing with such taxable year, and we intend to continue operating in such a
manner. To maintain our REIT status, we are required to annually distribute to
our stockholders at least 90% of our REIT taxable income, determined without
regard to the dividends paid deduction and excluding any net capital gain, and
meet the various other requirements imposed by the Code relating to such matters
as operating results, asset holdings, distribution levels and diversity of stock
ownership. Provided that we qualify for taxation as a REIT, we are generally not
subject to corporate level federal income tax on the earnings distributed to our
stockholders that we derive from our REIT qualifying activities. We are still
subject to state and local income and franchise taxes and to federal income and
excise tax on our undistributed income. If we fail to qualify as a REIT in any
taxable year and are unable to avail ourselves of certain savings provisions set
forth in the Code, all of our taxable income would be subject to federal
corporate tax, including any applicable alternative minimum tax for taxable
years beginning before January 1, 2018 . Unless entitled to relief under specific
statutory provisions, we would be ineligible to elect to be treated as a REIT
for the four taxable years following the year for which we lose our
qualification. It is not possible to state whether in all circumstances we would
be entitled to this statutory relief.
SUPPLEMENTAL GUARANTOR DISCLOSURES
InMarch 2020 , theSEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered guaranteed securities. As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are no longer required to provide separate financial statements, provided that the parent guarantee is "full and unconditional," the subsidiary obligor is consolidated into the parent company's consolidated financial statements and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 is provided, which includes narrative disclosure and summarized financial information. Prior to the amendment, a parent company was required to provide certain financial information about the subsidiary on an ongoing basis until the guaranteed debt was no longer outstanding. The Company and theOperating Partnership have filed a registration statement on Form S-3 with theSEC registering, among other securities, debt securities of theOperating Partnership , which will be fully and unconditionally guaranteed by the Company. AtDecember 31, 2021 , theOperating Partnership had issued and outstanding the Senior Unsecured Notes. The obligations of theOperating Partnership to pay principal, premiums, if any, and interest on the Senior Unsecured Notes are guaranteed on a senior, full and unconditional basis by the Company.The Operating Partnership is a wholly-owned subsidiary of the Company, and the Company owns all of its assets and conducts all of its operations through theOperating Partnership and theOperating Partnership is consolidated into the Company's financial statements. In accordance with theSEC rules, separate consolidated financial statements of theOperating Partnership are not presented because the assets, liabilities and results of operations of theOperating Partnership are not materially different than the corresponding amounts in the Company's consolidated financial statements, and management believes such summarized financial information would be repetitive and would not provide incremental value to investors. 34 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
In this section, we discuss the results of our operations for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . For a discussion of the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , please refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Year Ended December 31, Increase / (In Thousands) 2021 2020 (Decrease) Revenues: Rental income$ 606,099 $ 479,901 $ 126,198 Interest income on loans receivable 29 998 (969 ) Earned income from direct financing leases 526 571 (45 ) Related party fee income - 678 (678 ) Other income 1,736 1,469 267 Total revenues 608,390 483,617 124,773 Expenses: General and administrative 52,608 48,380 4,228 Property costs (including reimbursable) 23,232 24,492 (1,260 ) Deal pursuit costs 1,136 2,432 (1,296 ) Interest 103,003 104,165 (1,162 ) Depreciation and amortization 244,624 212,620 32,004 Impairments 23,760 81,476 (57,716 ) Total expenses 448,363 473,565 (25,202 ) Other income: Loss on debt extinguishment (29,186 ) (7,227 ) (21,959 ) Gain on disposition of assets 41,468 24,156 17,312 Total other income 12,282 16,929 (4,647 ) Income before income tax expense 172,309 26,981 145,328 Income tax expense (607 ) (273 ) 334 Net income$ 171,702 $ 26,708 $ 144,994 35
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Changes related to operating properties
The components of rental income are summarized below (in thousands):
[[Image Removed]]Base Cash Rent; Depreciation and amortization
The increase in Base Cash Rent, the largest component of rental income, year-over-year was driven by our net acquisitions, which also was the driver for the increase in depreciation and amortization. We acquired 166 properties during 2021 with a total of$84.4 million of annual in-place rent (monthly fixed rent at date of transaction multiplied by 12). During the same period, we disposed of 23 properties, 15 of which were vacant and the remaining 8 had annual in-place rents of$3.2 million . Our acquisition and disposition activity for the year endedDecember 31, 2021 is summarized below (in thousands): [[Image Removed]] In addition, we observed recovery in 2021 from the impact of the COVID-19 pandemic and related tenant credit issues we experienced in 2020 and had minimal new tenant credit issues in 2021. We reserved$10.9 million of Base Cash Rent for the year endedDecember 31, 2020 for amounts deemed not probable of collection. For the year endedDecember 31, 2021 , we reversed a significant amount of those reserves and had minimal new reserves unrelated to the COVID-19 pandemic, resulting in a net recovery of$5.5 million . Rent abatements executed as relief for the COVID-19 pandemic also decreased from$6.3 million for the year endedDecember 31, 2020 to$1.5 million for the year endedDecember 31, 2021 .
Variable cash rent (including reimbursable); Property costs (including reimbursable)
Variable cash rent is primarily comprised of tenant reimbursements, where our tenants are obligated under the lease agreement to reimburse us for certain property costs we incur, less reimbursements we deem not probable of collection. For the years endedDecember 31, 2021 and 2020, tenant reimbursement income was$14.3 million and$12.3 million , respectively, while reimbursable property expenses were$14.1 million and$14.5 million , respectively. The increase in tenant reimbursement income was due to fewer tenant credit issues, while reimbursable property expenses remained relatively flat year-over-year. Other variable cash income increased from$0.9 million for the year endedDecember 31, 2020 to$2.5 million for the year endedDecember 31, 2021 , primarily due to a lease converting to a contingent rent arrangement based on tenant sales during 2021. Non-reimbursable property expenses decreased year-over-year. For the years endedDecember 31, 2021 and 2020, non-reimbursable property costs were$9.1 million and$10.0 million , respectively, with the change driven by fewer tenant credit issues in 2021. 36
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Straight-line rent, net of uncollectible reserve; Amortization of above- and below- market lease intangibles, net
Non-cash rental income consists of straight-line rental revenue, amortization of above- and below- market lease intangibles and bad debt expense. In conjunction with the reduction in tenant credit issues, in the second quarter of 2021 we reversed a significant amount of reserves for straight-line rent previously deemed not probable of collection and had minimal reserves for straight-line rent in 2021, resulting in an increase in non-cash rental income of$25.8 million year-over-year. The remaining increase in non-cash rental income was due to increases in straight-line rent as a result of our net acquisitions described above and certain lease modifications.
Impairments
The decrease in impairments year-over-year was driven by a recovery in the commercial real estate market and tenant performance in 2021, after the downturn in early 2020 at the onset of the COVID-19 pandemic. For the year endedDecember 31, 2021 , we recorded$20.0 million of impairment on 20 underperforming properties, compared to$49.0 million recorded on 28 underperforming properties for the year endedDecember 31, 2020 . Additionally, impairment of$18.2 million was recorded on lease intangible assets for the year endedDecember 31, 2020 , primarily as a result of a tenant bankruptcy during the second quarter of 2020 which resulted in the termination of a four-property master lease, with no significant tenant bankruptcies in 2021. The slight decrease in vacancy rates also resulted in a decrease in impairment on vacant properties year-over-year. For the year endedDecember 31, 2021 , we recorded$3.2 million of impairment on five vacant properties, compared to$14.2 million recorded on eight vacant properties for the year endedDecember 31, 2020 . Finally, we recorded an allowance for credit loss of$0.1 million during the year endedDecember 31, 2020 on our direct financing lease as a result of adopting ASU 2016-13 in 2020, compared to recording an allowance for credit loss of$0.6 million during the year endedDecember 31, 2021 as a result of entering into a new loan receivable.
Gain on disposition of assets
Gain on disposition of assets increased year-over-year. During the year endedDecember 31, 2021 , we recognized net gains of$38.0 million on the sales of eight occupied properties, net gains of$1.4 million on the sales of 15 vacant properties, net gains of$1.7 million on asset substitutions, a$0.3 million gain related to a property reconstructed by a tenant after previous fire damage and other net gains of$0.1 million . During the year endedDecember 31, 2020 , we recognized net gains of$23.2 million on the sales of 18 occupied properties and net gains of$1.3 million on the sales of 20 vacant properties. These net gains were partially offset by a$0.2 million loss recorded on the sale of a note receivable and other net losses of$0.1 million . Changes related to debt
Interest expense; Loss on debt extinguishment
Our debt is summarized below (in thousands):
[[Image Removed]]
During the first quarter of 2020, we did not issue or extinguish any debt.
During the second quarter of 2020, we entered into the 2020 Term Loans. During
the third quarter of 2020, we issued $450.0 million of 2031 Senior Notes, which
triggered a mandatory repayment of $222.0 million of the 2020 Term Loans that
resulted in a loss on debt extinguishment of $1.0 million . Remaining proceeds
from the 2031 Senior Notes issuance were primarily utilized to repurchase $154.6
million of 2021 Convertible Notes, resulting in a loss on debt extinguishment of
$6.2 million .
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-------------------------------------------------------------------------------- InJanuary 2021 , we repaid the 2020 Term Loan in full, resulting in a loss on debt extinguishment of$0.7 million primarily due to the write-off of unamortized deferred financing costs. InMarch 2021 , we issued$800.0 million aggregate principal amount of the 2028 and 2032 Senior Notes. Proceeds from these issuances were used to extinguish$207.4 million of CMBS loans, resulting in a loss on debt extinguishment of$28.5 million primarily due to pre-payment penalties. The Convertible Notes matured inMay 2021 , at which time they were settled in cash and the remaining discount and deferred financing costs were fully amortized. While these changes in our debt structure resulted in an overall increase in our total debt outstanding, the issuance of new debt at lower interest rates reduced our weighted average interest rate from 3.64% atDecember 31, 2020 to 3.04% atDecember 31, 2021 . The components of interest expense are summarized below (in thousands): [[Image Removed]]
Changes related to general and administrative expenses
General and administrative expenses increased, driven by an increase in compensation expenses of$4.2 million year-over-year. The increase in compensation expenses primarily resulted from lower executive bonuses in 2020 due to the impact of the COVID-19 pandemic on performance metrics, and the improvement of those performance metrics in 2021 as our tenants and our results have recovered from the impact of the COVID-19 pandemic. Additionally, IT software and licensing expenses increased by$0.5 million year-over-year due to the implementation of additional technology. These increases were partially offset by a decrease year-over-year of$1.0 million in expenses recognized related to the COVID-19 pandemic, including legal fees for executing rent deferral or abatement agreements.
LIQUIDITY AND CAPITAL RESOURCES
ATM Program
InNovember 2021 , the Board of Directors approved a new$500.0 million 2021 ATM program, and we terminated the 2020 ATM Program. Sales of shares of our common stock under the 2021 ATM Program may be made in sales deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act. The 2021 ATM Program contemplates that, in addition to the issuance and sale by us of shares of our common stock to or through the agents, we may enter into separate forward sale agreements with one of the agents or one of their respective affiliates (in such capacity, each, a "forward purchaser"). When we enter into a forward sale agreement, we expect that the forward purchaser will attempt to borrow from third parties and sell, through a forward seller, shares of our common stock to hedge the forward purchaser's exposure under the forward sale agreement. We will not initially receive any proceeds from any sale of shares of our common stock borrowed by a forward purchaser and sold through a forward seller. We currently expect to fully physically settle any forward sale agreement with the respective forward purchaser on one or more dates specified by us on or prior to the maturity date of such forward sale agreement, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward sale agreement multiplied by the relevant forward price per share. However, subject to certain exceptions, we may also elect, in our sole discretion, to cash settle or net share settle all or any portion of our obligations under any forward sale agreement, in which case we may not receive any proceeds (in the case of cash settlement) or will not receive any proceeds (in the case of net share settlement), and we may owe cash (in the case of cash settlement) or shares of our common stock (in the case of net share settlement) to the relevant forward purchaser. 38 -------------------------------------------------------------------------------- During the year endedDecember 31, 2021 , 8.5 million shares of our common stock were sold under the ATM Programs, comprised of 5.8 million shares sold under the 2020 ATM Program and 2.7 million shares sold under the 2021 ATM Program. All of these sales were through forward sales agreements, except for 0.4 million of the shares sold under the 2021 ATM Program. The forward sale price that we receive upon physical settlement of the agreements is subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers' stock borrowing costs and (iii) scheduled dividends during the term of the forward sale agreements. As ofDecember 31, 2021 , there were 0.1 million shares remaining under open forward sales agreements with a weighted average forward price of$47.45 . Assuming the full physical settlement of those open forward sales agreements, we have$375.9 million remaining under the 2021 ATM Program as ofDecember 31, 2021 .
Short-term liquidity and capital resources
On a short-term basis, our principal demands for funds will be for operating expenses, acquisitions, distributions to stockholders and payment of interest and principal on current and any future debt financings. We expect to fund these demands primarily through cash provided by operating activities, borrowings under the 2019 Credit Facility and, when market conditions warrant, issuances of equity securities, including shares of our common stock under our 2021 ATM program. As ofDecember 31, 2021 , available liquidity was comprised of$17.8 million in cash and cash equivalents and$511.6 million of borrowing capacity under the 2019 Credit Facility. Also, as ofDecember 31, 2021 , we had$2.6 million of expected proceeds available assuming the full physical settlement of our open forward sale agreements under our 2021 ATM Program, with remaining capacity of$375.9 million . Subsequent to year end, we entered into forward sale agreements with certain financial institutions acting as forward purchasers in connection with an offering of 9.4 million shares of common stock at an initial public offering price of$47.60 per share, before underwriting discounts and offering expenses. We did not receive any proceeds from the sale of our shares of common stock by the forward purchasers at the time of the offering. The forward sale price that we will receive upon physical settlement of the forward sale agreements is subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers' stock borrowing costs and (iii) scheduled dividends during the term of the forward sale agreements. As ofFebruary 10, 2022 , the forward sale agreements for all 9.4 million shares remained open, with expected proceeds of$430.8 million assuming full physical settlement.
Long-term liquidity and capital resources
We plan to meet our long-term capital needs, including long-term financing of property acquisitions, by issuing registered debt or equity securities, by obtaining asset level financing and by issuing fixed-rate secured or unsecured notes and bonds. In the future, some of our property acquisitions could be made by issuing partnership interests of ourOperating Partnership in exchange for property owned by third parties. These partnership interests would be exchangeable for cash or, at our election, shares of our common stock. We continually evaluate financing alternatives and believe that we can obtain financing on reasonable terms. However, we cannot be sure that we will have access to the capital markets at times and on terms that are acceptable to us. We expect that our primary uses of capital will be for property and other asset acquisitions, the payment of tenant improvements, operating expenses, debt service payments and distributions to our stockholders.
Description of certain debt
The following descriptions of debt should be read in conjunction with Note 4 to the consolidated financial statements herein.
2019 Credit Facility
As ofDecember 31, 2021 , the aggregate gross commitment under the 2019 Credit Facility was$800.0 million , which may be increased up to$1.2 billion by exercising an accordion feature, subject to satisfying certain requirements and obtaining additional lender commitments. The 2019 Credit Facility has a maturity ofMarch 31, 2023 and includes two six-month extensions that can be exercised at our option. We may voluntarily prepay the 2019 Credit Facility, in whole or in part, at any time without premium or penalty. Payment of the 2019 Credit Facility is unconditionally guaranteed by the Company and material subsidiaries that meet certain conditions. As ofDecember 31, 2021 , there were no subsidiaries that met this requirement. As ofDecember 31, 2021 , the 2019 Credit Facility bore interest at 1-Month LIBOR plus 0.90%, with$288.4 million in borrowings outstanding, and a ratings-based facility fee in the amount of 0.20% per annum. As ofDecember 31, 2021 , there were no letters of credit outstanding. 39 --------------------------------------------------------------------------------
Amounts available for borrowing under the 2019 Credit Facility remained subject to compliance with certain customary restrictive covenants including:
• Maximum leverage ratio (defined as consolidated total indebtedness of the
Company, net of certain cash and cash equivalents, to total asset value) of
0.60:1.00;
• Minimum fixed charge coverage ratio (defined as EBITDA of the Company, to
fixed charges) of 1.50:1.00;
• Maximum secured indebtedness leverage ratio (defined as consolidated secured
indebtedness of the Company, net of certain cash and cash equivalents, to
total asset value) of 0.50:1:00;
• Minimum unsecured interest coverage ratio (defined as consolidated net
operating income from unencumbered properties, to unsecured interest
expense) of 1.75:1.00; and
• Maximum unencumbered leverage ratio (defined as consolidated unsecured
indebtedness of the Company, net of certain cash and cash equivalents, to
total unencumbered asset value) of 0.60:1:00.
In addition to these covenants, the 2019 Revolving Credit and Term Loan Agreement also included other customary affirmative and negative covenants, such as (i) limitation on liens and negative pledges; (ii) transactions with affiliates; (iii) limitation on mergers, consolidations and sales of all or substantially all assets; (iv) maintenance of status as a REIT and listing on any national securities exchange; and (v) material modifications to organizational documents. As ofDecember 31, 2021 , the Corporation and theOperating Partnership were in compliance with these covenants.
Senior Unsecured Notes
As ofDecember 31, 2021 , we had the following Senior Unsecured Notes outstanding (dollars in thousands): Stated Interest December 31, Maturity Date Interest Payment Dates Rate 2021
2026 Senior Notes September 15, 2026 March 15 and September 15 4.45%$ 300,000 2027 Senior Notes January 15, 2027 January 15 and July 15 3.20%$ 300,000 2028 Senior Notes March 15, 2028 March 15 and September 15 2.10%$ 450,000 2029 Senior Notes July 15, 2029 January 15 and July 15 4.00%$ 400,000 2030 Senior Notes January 15, 2030 January 15 and July 15 3.40%$ 500,000 2031 Senior Notes February 15, 2031 February 15 and August 15 3.20%$ 450,000 2032 Senior Notes February 15, 2032 February 15 and August 15 2.70%$ 350,000 Total Senior Unsecured Notes 3.25%$ 2,750,000 The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at theOperating Partnership's option, at a redemption price equal to the sum of: an amount equal to 100% of the principal amount of the respective Senior Unsecured Notes to be redeemed plus accrued and unpaid interest and liquidated damages, if any, up to, but not including, the redemption date; and a make-whole premium calculated in accordance with the respective indenture. Notwithstanding the foregoing, if any of the Senior Unsecured Notes are redeemed three months or less (or two months or less in the case of the 2027 Senior Notes and 2028 Senior Notes) prior to their respective maturity dates, the redemption price will not include a make-whole premium.
The indentures governing the Senior Unsecured Notes subject the Corporation and
• Maximum leverage ratio (defined as consolidated total indebtedness, to total
consolidated undepreciated real estate assets plus the Company's other
assets, excluding accounts receivable and non-real estate intangibles) of
0.60:1.00;
• Minimum unencumbered asset coverage ratio (defined as total consolidated
undepreciated real estate assets plus the Company's other assets, excluding
accounts receivable and non-real estate intangibles, to consolidated total
unsecured indebtedness) of 1.50:1:00;
• Maximum secured indebtedness leverage ratio (defined as consolidated total
secured indebtedness, to total consolidated undepreciated real estate assets
plus the Company's other assets, excluding accounts receivable and non-real
estate intangibles) of 0.40:1.00; and
• Minimum fixed charge coverage ratio (defined as consolidated incomeavailable for debt service, to the annual service charge) of 1.50:1.0.
The indentures governing the Senior Unsecured Notes also include other customary affirmative and negative covenants, including (i) maintenance of the Corporation's existence; (ii) payment of all taxes, assessments and governmental charges levied against the Corporation; (iii) reporting on financial information; and (iv) maintenance of properties and insurance. As ofDecember 31, 2021 , the Corporation and theOperating Partnership were in compliance with these covenants. 40 --------------------------------------------------------------------------------
Mortgages payable
In general, the obligor of our asset level debt is a special purpose entity that holds the real estate and other collateral securing the indebtedness. Each special purpose entity is a bankruptcy remote separate legal entity and is the sole owner of its assets and solely responsible for its liabilities other than typical non-recurring covenants. As ofDecember 31, 2021 , we had two fixed-rate CMBS loans with$5.4 million of aggregate outstanding principal. One of the CMBS loans, with principal outstanding of$4.7 million , matures inAugust 2031 and has a stated interest rate of 5.80%. The other CMBS loan, with principal outstanding of$0.7 million , matures inDecember 2025 and has a stated interest rate of 6.00%. Both CMBS loans are partially amortizing and require a balloon payment at maturity. Debt Maturities
Future principal payments due on our various types of debt outstanding as of
Total 2022 2023 2024 2025 2026 Thereafter
2019 Credit Facility $ 288,400 $ - $ 288,400 $ - $ - $ - $ -
Senior Unsecured Notes 2,750,000 - - - - 300,000 2,450,000
Mortgages payable 5,350 525 556 590 626 469 2,584
$ 3,043,750 $ 525 $ 288,956 $ 590 $ 626 $ 300,469 $ 2,452,584
Contractual Obligations
The following table provides information with respect to our commitments, which
are primarily composed of our debt obligations as discussed above, as of
Contractual Obligations Payment due by period
Total Less than 1 year 1-3 years 3-5 years More than 5 years
Debt - Principal $ 3,043,750 $ 525 $ 289,546 $ 301,095 $ 2,452,584
Debt - Interest (1) 661,018 93,467 180,350 174,927 212,274
Acquisitions Under Contract (2) 165,288 165,288 - - -
Capital Improvements 67,370 59,449 7,921 - -
Operating Lease Obligations 6,527 1,243 2,463 2,480 341
Total $ 3,943,953 $ 319,972 $ 480,280 $ 478,502 $ 2,665,199
(1) Debt - Interest has been calculated based on outstanding balances as of
December 31, 2021 through their respective maturity dates and excludes unamortized non-cash deferred financing costs of$20.3 million and unamortized debt discount, net of$10.8 million .
(2) Contracts contain standard cancellation clauses contingent on results of due
diligence.
Distribution Policy
Distributions from our current or accumulated earnings are generally classified
as ordinary income, whereas distributions in excess of our current and
accumulated earnings, to the extent of a stockholder's federal income tax basis
in our common stock, are generally characterized as a return of capital. Under
the 2017 Tax Legislation, U.S. stockholders that are individuals, trusts and
estates generally may deduct up to 20% of the ordinary dividends (e.g.,
dividends not designated as capital gain dividends or qualified dividend income)
received from a REIT for taxable years beginning after December 31, 2017 and
before January 1, 2026 . Distributions in excess of a stockholder's federal
income tax basis in our common stock are generally characterized as capital
gain.
We are required to distribute 90% of our taxable income (subject to certain
adjustments and excluding net capital gains) on an annual basis to maintain
qualification as a REIT for federal income tax purposes and are required to pay
federal income tax at regular corporate rates to the extent we distribute less
than 100% of our taxable income (including capital gains).
We intend to make distributions that will enable us to meet the distribution
requirements applicable to REITs and to eliminate or minimize our obligation to
pay corporate-level federal income and excise taxes.
Any distributions will be at the sole discretion of our Board of Directors, and
their form, timing and amount, if any, will depend upon a number of factors,
including our actual and projected results of operations, FFO, liquidity, cash
flows and financial condition, the revenue we actually receive from our
properties, our operating expenses, our debt service requirements, our capital
expenditures, prohibitions and other limitations under our financing
arrangements, our REIT taxable income, the annual REIT distribution
requirements, applicable laws and such other factors as our Board of Directors
deems relevant.
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CASH FLOWS
In this section, we discuss our cash flows for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . For a discussion of the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The following table presents a summary of our cash flows for the years endedDecember 31, 2021 and 2020 (in thousands): Years EndedDecember 31, 2021 2020
Change
Net cash provided by operating activities
(1,169,827 ) (747,750 ) (422,077 )
Net cash provided by financing activities 693,195 490,713 202,482
Net (decrease) increase in cash, cash $ (65,499 ) $ 57,275 $ (122,774 )
equivalents and restricted cash
As of
Operating Activities
Cash flows from operating activities are primarily dependent upon the occupancy level of our portfolio, the rental rates specified in our leases, the collectability of rent and the level of our operating expenses and other general and administrative costs. The increase in net cash provided by operating activities was driven by the net increase in cash rental revenue of$114.6 million , driven by net acquisitions over the trailing twelve month period, as well as cash collections of previously reserved rents as our tenants recovered from the COVID-19 pandemic.
The increase in net cash provided by operating activities was partially offset by the following:
• an increase in cash interest paid of
the 2027 Senior Notes, 2029 Senior Notes, 2030 Senior Notes, and 2031 Senior
Notes, all of which pay interest semi-annually,
• a decrease of interest income of
of principal on all loans receivable during 2020, and
• a decrease in related party fee income of
termination of the Interim Management Agreement effective
Investing Activities
Cash used in investing activities is primarily relates to acquisitions of real estate and capitalized real estate expenditures. Cash provided by investing activities primarily relates to dispositions of real estate.
Net cash used in investing activities during the year endedDecember 31, 2021 included$1.2 billion for the acquisition of 166 properties,$22.0 million of capitalized real estate expenditures and$11.0 million for investments in loans receivable. These outflows were partially offset by$99.0 million in net proceeds from dispositions, comprised of$97.0 million for 23 properties sold in 2021 and$2.0 million that was collected from a disposal that occurred in 2020. During the same period in 2020, net cash used in investing activities included$867.5 million for the acquisition of 146 properties and$12.7 million of capitalized real estate expenditures. These outflows were partially offset by$100.6 million in net proceeds from the disposition of 38 properties and the sale of one loan receivable. Additionally, the outflows were further offset by the collection of$31.8 million of principal on loans receivable, which includes$28.7 million for the paydown of the outstanding loan balances.
Financing Activities
Cash provided by or used in financing activities primarily relates to borrowings under our revolving credit facilities and term loans, issuances of common stock and Senior Unsecured Notes, and dividends paid on our common and preferred stock. Net cash provided by financing activities during the year endedDecember 31, 2021 was primarily attributable to borrowings of$794.8 million under Senior Unsecured Notes, net proceeds from the issuance of common stock of$533.9 million and net borrowings of$288.4 million under our revolving credit facilities. These amounts were partially offset by payment of dividends to equity owners of$308.4 million , repayments of$208.9 million on mortgages payable, repayments of$190.4 million on convertible notes, repayments of$178.0 million on term loans, debt extinguishment costs of$26.7 million , deferred financing costs of$7.1 million and common stock repurchases for employee tax withholdings totaling$4.4 million . 42 -------------------------------------------------------------------------------- During the same period in 2020, net cash provided by financing activities was primarily attributable to borrowings of$445.5 million under Senior Unsecured Notes, net proceeds from the issuance of common stock of$428.3 million and net borrowings of$178.0 million under term loans. These amounts were partially offset by payment of dividends to equity owners of$270.8 million , repayment of$154.6 million on convertible notes, net repayments of$116.5 million on our revolving credit facilities, deferred financing costs of$6.6 million , common stock repurchases for employee tax withholdings totaling$4.4 million , repayment of$4.1 million on mortgages and notes payable and debt extinguishment costs of$4.0 million .
Non-GAAP Financial Measures
FFO AND AFFO
FFO is a supplemental non-GAAP financial measure calculated in accordance with the standards established by NAREIT. FFO represents net income (loss) attributable to common stockholders (computed in accordance with GAAP), excluding real estate-related depreciation and amortization, impairment charges and net (gains) losses from property dispositions. We believe that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate-related depreciation and amortization, gains and losses from property dispositions and impairment charges, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year-over-year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of equity REITs, FFO will be used by investors as a basis to compare our operating performance with that of other equity REITs. However, because FFO excludes depreciation and amortization and does not capture the changes in the value of our properties that result from use or market conditions, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. AFFO is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. We adjust FFO to eliminate the impact of certain items that we believe are not indicative of our core operating performance, such as net gains (losses) on debt extinguishment, deal pursuit costs, default interest and fees on non-recourse mortgage indebtedness, costs associated with termination of interest rate swaps, costs related to the COVID-19 pandemic, and certain non-cash items. These certain non-cash items include non-cash interest expense (comprised of amortization of deferred financing costs and amortization of net debt discount/premium), non-cash revenues (comprised of straight-line rents net of bad debt expense, amortization of lease intangibles, and amortization of net premium/discount on loans receivable), and non-cash compensation expense. Other equity REITs may not calculate FFO and AFFO as we do, and, accordingly, our FFO and AFFO may not be comparable to such other equity REITs' FFO and AFFO. FFO and AFFO do not represent cash generated from operating activities determined in accordance with GAAP, are not necessarily indicative of cash available to fund cash needs and should only be considered a supplement, and not an alternative, to net income (loss) attributable to common stockholders (computed in accordance with GAAP) as a performance measure.
Adjusted Debt
Adjusted Debt represents interest bearing debt (reported in accordance with GAAP) adjusted to exclude unamortized debt discount/premium and deferred financing costs and reduced by cash and cash equivalents and restricted cash. By excluding these amounts, the result provides an estimate of the contractual amount of borrowed capital to be repaid, net of cash available to repay it. We believe this calculation constitutes a beneficial supplemental non-GAAP financial disclosure to investors in understanding our financial condition.
EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre
EBITDAre is a non-GAAP financial measure computed in accordance with standards
established by NAREIT. EBITDAre represents net income (loss) (computed in
accordance with GAAP), excluding interest expense, income tax expense,
depreciation and amortization, net (gains) losses from property dispositions,
and impairment charges.
Adjusted EBITDAre represents EBITDAre as adjusted for revenue producing
acquisitions and dispositions for the quarter (as if such acquisitions and
dispositions had occurred as of the beginning of the quarter), construction rent
collected, not yet recognized in earnings, and for other certain items that we
believe are not indicative of our core operating performance. These other
certain other items include deal pursuit costs, net (gains) losses on debt
extinguishment, costs related to the COVID-19 pandemic, and non-cash
compensation expense. We focus our business plans to enable us to sustain
increasing shareholder value. Accordingly, we believe that excluding these
items, which are not key drivers of our investment decisions and may cause
short-term fluctuations in net income, provides a useful supplemental measure to
investors and analysts in assessing the net earnings contribution of our real
estate portfolio. Because these measures do not represent net income (loss) that
is computed in accordance with GAAP, they should only be considered a
supplement, and not an alternative, to net income (loss) (computed in accordance
with GAAP) as a performance measure.
Annualized Adjusted EBITDAre is calculated as Adjusted EBITDAre for the quarter,
adjusted for straight-line rent related to prior periods, including amounts
deemed not probable of collection (recoveries), and items where annualization
would not be appropriate, multiplied by four. Our computation of Adjusted
EBITDAre and Annualized Adjusted EBITDAre may differ from the methodology used
by other equity REITs to calculate these measures and, therefore, may not be
comparable to such other REITs.
43
--------------------------------------------------------------------------------Adjusted Debt to Annualized Adjusted EBITDAre
Adjusted Debt to Annualized Adjusted EBITDAre is a supplemental non-GAAP
financial measure we use to evaluate the level of borrowed capital being used to
increase the potential return of our real estate investments, and a proxy for a
measure we believe is used by many lenders and ratings agencies to evaluate our
ability to repay and service our debt obligations over time. We believe the
ratio is a beneficial disclosure to investors as a supplemental means of
evaluating our ability to meet obligations senior to those of our equity
holders. Our computation of this ratio may differ from the methodology used by
other equity REITs, and, therefore, may not be comparable to such other REITs.
FFO and AFFO
Years Ended December 31,
(Dollars in thousands, except per share data) 2021 2020 2019
Net income attributable to common stockholders
244,053 212,038 174,895
Portfolio impairments 23,760 81,476 24,091
Gain on disposition of assets (41,468 ) (24,156 ) (58,850 )
FFO attributable to common stockholders $ 387,697 $ 285,716 $ 305,052
Loss on debt extinguishment 29,186 7,227 14,330
Deal pursuit costs 1,136 2,432 844
Non-cash interest expense 8,890 12,428 14,175
Accrued interest and fees on defaulted loans - - 285
Straight-line rent, net of uncollectible reserve (44,758 ) (11,876 ) (16,924 ) Other amortization and non-cash charges
(2,847 ) (918 ) (2,769 )
Swap termination costs - - 12,461
Non-cash compensation expense 14,003 12,640 14,277
Costs related to COVID-19 (1) 778 1,798 -
AFFO attributable to common stockholders (2)
Net income per share of common stock - diluted
0.15$ 1.81 FFO per share of common stock - diluted (3)$ 3.26 $ 2.73 $ 3.34 AFFO per share of common stock - diluted (3)$ 3.31 $ 2.95 $ 3.75 AFFO per share of common stock, excluding AM termination fee - diluted (3)(4) N/A N/A$ 3.34 AFFO per share of common stock, excluding out of period rent COVID-19 recoveries - diluted (3)(5)$ 3.25 N/A N/A Weighted average shares of common stock outstanding - diluted 118,715,838 104,535,384 90,869,312
(1) Costs related to COVID-19 are included in general and administrative expense
and primarily relate to legal fees for executing rent deferral or abatement
agreements.
(2) AFFO includes
31, 2021 and 2020, respectively, of deferred rental income recognized in
conjunction with the FASB's relief for deferral agreements extended as a
result of the COVID-19 pandemic.
(3) Dividends paid and undistributed earnings allocated, if any, to unvested
restricted stockholders are deducted from FFO and AFFO for the computation of
the per share amounts. The following amounts were deducted:
Years Ended December 31,
2021 2020 2019
FFO $0.7 million $0.8 million $1.2 million
AFFO $0.8 million $0.9 million $1.4 million (4) AFFO per share of common stock, excluding
income, net of
termination fee was received in conjunction with SMTA's sale of
2014 in
adjusted to exclude the following amounts for the year ended
2019: (i) asset management fees of
and servicing fees of
million and an early repayment premium of
expense on related party loans payable of
(5) AFFO per share of common stock, excluding
recognized in 2021 for amounts deemed not probable of collection in 2020 as a
result of the COVID-19 pandemic.
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Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre
December 31,
(Dollars in thousands) 2021 2020
Revolving credit facilities $ 288,400 $ -
Term loans - 177,309
Senior Unsecured Notes, net 2,718,641 1,927,348
Mortgages payable, net 5,551 212,582
Convertible Notes, net - 189,102
Total debt, net 3,012,592 2,506,341
Unamortized debt discount, net 10,824 7,807
Unamortized deferred financing costs 20,334 18,515
Cash and cash equivalents (17,799 ) (70,303 )
Restricted cash - (12,995 )
Adjusted Debt $ 3,025,951 $ 2,449,365
Three Months
Ended December 31,
(Dollars in thousands) 2021 2020
Net income $ 44,369 $ 29,170
Interest 25,131 26,307
Depreciation and amortization 64,402 55,054
Income tax expense (benefit) 146 (133 ) Gain on disposition of assets (1,672 ) (12,347 ) Portfolio impairments 4,795 11,547 EBITDAre$ 137,171 $ 109,598 Adjustments to revenue producing acquisitions and dispositions 5,801
4,596
Construction rent collected, not yet recognized in earnings (1)
309 -
Deal pursuit costs 276
802
Gain on debt extinguishment - (25 ) Costs related to COVID-19 (2) 26
358
Non-cash compensation expense (1) 3,507
-
Adjusted EBITDAre$ 147,090 $
115,329
Adjustments related to straight-line rent (3) (82 ) (506 ) Other adjustments for Annualized Adjusted EBITDAre (4) 105
397
Annualized Adjusted EBITDAre$ 588,452 $
460,880
Adjusted Debt / Annualized Adjusted EBITDAre (5) 5.1x
5.3x
(1) Construction rent collected, not yet recognized in earnings and non-cash
compensation expense were not included as an adjustment to EBITDAre during
the three months ended
(2) Costs related to COVID-19 are included in general and administrative expense
and primarily relate to legal fees for executing rent deferral or abatement
agreements.
(3) Adjustment for the three months ended
period straight-line rent recognized in the current period and adjustment for
the three months ended
straight-line rent receivable balances deemed not probable of collection in
previous periods.
(4) Adjustments for the three months ended
prior period property costs recognized in the current period. For the same
period in 2020, adjustments are certain recoveries related to prior period
amounts (rent deemed not probable of collection, abatements, property costs
and tax expenses) and certain general and administrative expenses.
(5) Adjusted Debt / Annualized Adjusted EBITDAre would be 5.1x if all 56 thousand
shares under open forward sales agreements had been settled as of December
31, 2021 and 5.0x if the 4.1 million shares under open forward agreements had
been settled as of December 31, 2020 .
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