SPIRIT REALTY CAPITAL, INC. Special Note Regarding Forward-looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act, the Private Securities Litigation Reform Act of 1995 and other federal securities laws. When used in this quarterly report, the words "estimate," "anticipate," "expect," "believe," "intend," "may," "will," "should," "seek," "approximately" or "plan," or the negative of these words or similar words or phrases that are predictions of or indicate future events or trends and which do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following risks and uncertainties, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
• industry and economic conditions;
• volatility and uncertainty in the financial markets, including potential
fluctuations in the CPI and interest rates;
• our success in implementing our business strategy and our ability to
identify, underwrite, finance, consummate, integrate and manage diversifying
acquisitions or investments;
• the financial performance of our retail tenants and the demand for retail
space;
• our ability to diversify our tenant base;
• the nature and extent of future competition;
• increases in our costs of borrowing as a result of changes in interest rates
and other factors;
• our ability to access debt and equity capital markets;
• our ability to pay down, refinance, restructure and/or extend our
indebtedness as it becomes due;
• our ability and willingness to renew our leases upon expiration and to
reposition our properties on the same or better terms upon expiration in the
event such properties are not renewed by tenants or we exercise our rights
to replace existing tenants upon default;
• the impact of any financial, accounting, legal or regulatory issues or
litigation that may affect us or our major tenants;
• our ability to manage our expanded operations;
• our ability and willingness to maintain our qualification as a REIT;
• the impact on our business and those of our tenants from epidemics,
pandemics or other outbreaks of illness, disease or virus (such as the
strain of coronavirus known as COVID-19); and
• other risks inherent in the real estate business, including tenant defaults,
potential liability relating to environmental matters, illiquidity of real
estate investments and potential damages from natural disasters.
The factors included in this quarterly report, including the documents
incorporated by reference, and documents we subsequently file with the SEC and
incorporate by reference, are not exhaustive and additional factors could
adversely affect our business and financial performance. Additional factors that
may cause risks and uncertainties include those discussed in the sections
entitled "Business", "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K
for the year ended December 31, 2021 and this report and subsequent filings with
the SEC . All forward-looking statements are based on information that was
available, and speak only, to the date on which they were made. We disclaim any
obligation to publicly update or revise any forward-looking statement to reflect
changes in underlying assumptions or factors, new information, data or methods,
future events or other changes, except as required by law.
25
--------------------------------------------------------------------------------Overview
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, operationally essential real estate assets throughoutthe United States , which are subsequently leased on a long-term, triple-net basis to high quality tenants with operations in retail, industrial and certain other industries. 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 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 ofJune 30, 2022 , our diverse portfolio consisted of 2,078 owned properties across 49 states, which were leased to 342 tenants operating in 35 industries. As ofJune 30, 2022 , our 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 . As ofJune 30, 2022 , our assets, liabilities, and results of operations are materially the same as those of theOperating Partnership .
We have elected to be taxed as a REIT for federal income tax purposes and believe we have been organized and have operated in a manner that allows us to qualify as a REIT for federal income tax purposes.
Business Impact of the COVID-19 Pandemic
At the onset of the COVID-19 pandemic in 2020, many of our tenants, particularly those in the movie theater, casual dining restaurant, entertainment, health and fitness and hotel industries, requested rent deferrals or other forms of relief. Since the beginning of 2021, we have seen a significant reduction in the impact of the COVID-19 pandemic and we expect that trend to continue. For the six months endedJune 30, 2022 , we deferred$0.2 million of rent and reversed previous reserves against deferred rent of$0.2 million , both of which were recognized in rental income. Additionally, we did not recognize any rent abatements for the six months endedJune 30, 2022 . As ofJune 30, 2022 , we had an accounts receivable balance of$11.5 million related to deferred rent, with 61% of the balance expected to be repaid by the end of 2023. 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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and various other assumptions deemed reasonable under the circumstances. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We have not made any material changes to these policies during the periods covered by this quarterly report. 26 --------------------------------------------------------------------------------
Results of Operations
Comparison of the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30, Increase / (Decrease)
(In Thousands) 2022 2021 2022 2021 Three Months Six Months
Revenues:
Rental income $ 173,559 $ 164,449 $ 340,634 $ 299,107 $ 9,110 $ 41,527
Interest income on loans
receivable 522 - 841 - 522 841
Earned income from
direct financing leases 131 132 262 263 (1 ) (1 )
Other operating income 723 45 1,594 397 678 1,197
Total revenues 174,935 164,626 343,331 299,767 10,309 43,564
Expenses:
General and
administrative 13,421 13,450 28,095 26,496 (29 ) 1,599Property costs (including reimbursable) 6,950 6,319 15,205 11,771
631 3,434
Deal pursuit costs 655 257 1,020 499 398 521
Interest 27,594 26,170 53,617 52,794 1,424 823
Depreciation and
amortization 72,898 60,074 142,006 117,161 12,824 24,845
Impairments 9,398 7,800 9,525 14,530 1,598 (5,005 )
Total expenses 130,916 114,070 249,468 223,251 16,846 26,217
Other income:
Loss on debt
extinguishment - (10 ) (172 ) (29,187 ) 10 29,015
Gain on disposition of
assets 38,928 37,507 39,805 39,343 1,421 462
Other income - - 5,679 - - 5,679
Total other income 38,928 37,497 45,312 10,156 1,431 35,156
Income before income tax
expense 82,947 88,053 139,175 86,672 (5,106 ) 52,503
Income tax expense (207 ) (129 ) (379 ) (217 ) (78 ) (162 )
Net income $ 82,740 $ 87,924 $ 138,796 $ 86,455 $ (5,184 ) $ 52,341 Changes related to operating properties
The components of rental income are summarized below (in thousands):
[[Image Removed]]
27
--------------------------------------------------------------------------------Base Cash Rent; Depreciation and amortization
The increase in Base Cash Rent, the largest component of rental income, was driven by our net acquisitions, which also was the driver for the increase in depreciation and amortization. We acquired 220 properties during the trailing twelve months endedJune 30, 2022 , with a total of$105.5 million of annual in-place rent. During the same period, we disposed of 29 properties, 18 of which were vacant and the remaining 11 had annual in-place rents of$4.2 million . Our acquisitions and dispositions for the trailing twelve months endedJune 30, 2022 is summarized below (in thousands): [[Image Removed]] We have had minimal tenant credit issues sinceMarch 31, 2021 and have seen continued recovery from the COVID-19 pandemic. For the three and six months endedJune 30, 2021 , we recognized recoveries of Base Cash Rent previously reserved due to the COVID-19 pandemic and had minimal new reserves, resulting in net recoveries of$6.8 million and$5.7 million , respectively. The trend for minimal new reserves has continued in 2022, along with minor recoveries from amounts previously reserved due to the COVID-19 pandemic, resulting in zero and$0.1 million net recoveries for the three and six months endedJune 30, 2022 . Further, rent abatements executed as relief for the COVID-19 pandemic also decreased from$0.2 million and$1.1 million for the three and six months endedJune 30, 2021 , respectively, to zero for both the three and six months endedJune 30, 2022 .
Variable cash rent; Property costs (including reimbursable)
Variable cash rent income 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. As such, the change in variable cash rent is driven by the change in reimbursable property costs. For the three and six months endedJune 30, 2022 , we recognized reimbursable property costs of$5.0 million and$11.2 million , respectively, compared to$3.8 million and$6.5 million , respectively, for the three and six months endedJune 30, 2021 . The increase for both comparative periods was primarily due to increased reimbursable property taxes due to our net acquisitions. For the three and six months endedJune 30, 2022 , we recognized non-reimbursable property costs of$1.9 million and$4.0 million , respectively, compared to$2.5 million and$5.3 million , respectively, for the three and six months endedJune 30, 2021 . The decrease for both comparative periods was primarily due to a reduction in non-reimbursable property taxes driven by fewer tenant credit issues in 2022. Other variable cash income increased to$1.1 million and$2.2 million , respectively, for the three and six months endedJune 30, 2022 , compared to$0.4 million and$0.6 million for the three and six months endedJune 30, 2021 . This increase was primarily due to a lease converting to a contingent rent arrangement based on tenant sales during 2021.
Non-cash rental income
Non-cash rental income consists of straight-line rental revenue and amortization of above- and below- market lease intangibles, less amounts we deem not probable of collection. Straight-line rental revenue and amortization of lease intangibles increased minimally for both comparative periods due to net acquisitions and certain lease modifications. Due to the reduction in tenant credit issues, we recognized significant recoveries for straight-line rent previously deemed not probable of collection in the second quarter of 2021 and had minimal reserves during 2022. For the three months and six months endedJune 30, 2021 , net recoveries of$13.2 million and$11.0 million were recognized, compared to net reserves of$0.1 million for both the three and six months endedJune 30, 2022 . 28 --------------------------------------------------------------------------------
Impairments
The number of impaired properties declined from 2021, driven by tenant performance and continued low vacancy rates. We recorded$8.6 million of impairments on two underperforming properties for the three and six months endedJune 30, 2022 , compared to$6.1 million recorded on six properties for the three months endedJune 30, 2021 and$11.8 million recorded on 15 properties for the six months endedJune 30, 2021 . We recorded$0.8 million of impairment on one vacant property for the three and six months endedJune 30, 2022 , compared to$1.7 million recorded on three vacant properties for the three months endedJune 30, 2021 and$2.7 million recorded on five vacant properties for the six months endedJune 30, 2021 . Additionally, an allowance for credit loss of$0.1 million was recorded in 2022 as a result of entering into a new loan receivable in the first quarter of 2022, with no allowance for credit loss in the comparative period.
Gain on disposition of assets
Gain on disposition of assets remained relatively flat for both comparative periods. During the three months endedJune 30, 2022 , we disposed of 10 active properties, resulting in net gains of$37.3 million , and disposed of seven vacant properties, resulting in net gains of$1.4 million . During the six months endedJune 30, 2022 , we disposed of 11 active properties, resulting in net gains of$37.4 million , and disposed of 11 vacant properties, resulting in net gains of$2.0 million . Additionally, we recognized other gains of$0.2 million and$0.4 million , respectively, for the three and six months endedJune 30, 2022 . During the three months endedJune 30, 2021 , we disposed of four active properties, resulting in net gains of$36.2 million , and disposed of seven vacant properties, resulting in net gains of$0.7 million . During the six months endedJune 30, 2021 , we disposed of eight active properties, resulting in net gains of$38.1 million , and disposed of eight vacant properties, resulting in net gains of$0.6 million . Additionally, we recognized a$0.6 million gain on an asset substitution during the three and six months endedJune 30, 2021 .
Changes related to debt
Interest expense; Loss on debt extinguishment
Our debt is summarized below (in thousands):
[[Image Removed]]
In January 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. In March 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 in May 2021 , at which time they were
settled in cash and the remaining discount and deferred financing costs were
fully amortized. In March 2022 , we amended and restated the 2019 Revolving
Credit and Term Loan Agreement, resulting in a loss of $0.2 million on the
partial debt extinguishment.
29
--------------------------------------------------------------------------------
Our weighted average effective interest rate decreased from 3.64% at June 30,
2021 to 3.19% at June 30, 2022 primarily as a result of these changes in our
debt structure. However, the higher level of borrowings outstanding under the
2019 Credit Facility paired with the increased effective interest rate on those
borrowings due to rising market rates have resulted in increased interest
expense. The components of interest expense are summarized below (in thousands):
[[Image Removed]]Changes related to general and administrative expenses
General and administrative expenses remained relatively flat for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . For the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 , the increase was primarily driven by an increase of$2.6 million in compensation expenses. The increase in compensation expenses was comprised of an increase in cash compensation of$1.1 million , primarily due to internal promotions and new hires, and an increase in non-cash compensation of$1.5 million , primarily due to a higher grant date fair value for the 2022 market-based awards due to a high expected volatility and the maximum potential pay-out percentage. These increases were partially offset by a decrease of$0.7 million in expenses related to the COVID-19 pandemic.
Changes related to other income
We were contingently liable for$5.7 million of debt owed by one of our former tenants, which we fully reserved in 2018 due to the tenant filing for bankruptcy. No payments were made in relation to this contingent liability and, as the underlying debt had a maturity ofMarch 15, 2022 , we reversed our reserve in the first quarter of 2022. 30 --------------------------------------------------------------------------------
Property Portfolio Information
2,078 99.8% 49 342 35Properties Occupancy States Tenants Tenant Industries
Diversification By Tenant
The following is a summary of tenant concentration for our owned real estate
properties as of
Number of Total Square Feet Percent of
Tenant Concept (1) Properties (in thousands) ABR
Life Time Fitness 12 1,399 4.2 %
ClubCorp 20 962 2.6 %
BJ's Wholesale Club 10 1,130 2.2 %
At Home 16 1,861 2.2 %
Dave & Buster's / Main Event 15 807 2.2 %
Church's Chicken 160 231 2.0 %
Home Depot 8 946 1.8 %
Circle K 76 230 1.7 %
Dollar Tree / Family Dollar 117 1,045 1.7 %
GPM 108 303 1.6 %
Other(2) 1,532 45,035 77.8 %
Vacant 4 355 -
Total 2,078 54,304 100.0 %
(1) Tenant concentration represents concentration by the legal entities
ultimately responsible for obligations under the lease agreements or affiliated
entities. Concentration is shown by tenant concept, which represents the brand
or trade name under which the tenant operates. Other tenants may operate under
the same or similar brand or trade name.
(2) No tenants within other individually account for greater than 1.6% of ABR.
Lease Expirations
As ofJune 30, 2022 , the weighted average remaining non-cancelable initial term of our leases (based on ABR) was 10.3 years. The following is a summary of lease expirations for our owned real estate as ofJune 30, 2022 , assuming that tenants do not exercise any renewal options or early termination rights: Number of Total Square Feet ABR Percent of Leases Expiring In: Properties (in thousands) (in thousands) ABR Remainder of 2022 11 244 $ 3,255 0.5 % 2023 80 1,920 23,452 3.6 % 2024 48 1,571 17,670 2.7 % 2025 56 2,437 22,315 3.5 % 2026 130 4,969 45,587 7.0 % 2027 163 4,456 57,842 8.9 % 2028 130 2,637 36,072 5.6 % 2029 317 2,905 43,604 6.8 % 2030 80 2,496 24,775 3.8 % 2031 75 4,718 39,690 6.1 % Thereafter 984 25,596 332,906 51.5 % Vacant 4 355 - - Total owned properties 2,078 54,304$ 647,168 100.0 % 31
--------------------------------------------------------------------------------
Diversification By Geography
The following is a summary of geographic concentration for our owned real estate
properties as of
[[Image Removed]]
Number of Total Square Feet Percent of Location Number of Total Square Feet Percent of
Location Properties (in thousands) ABR (continued) Properties (in thousands) ABR
Texas 288 6,512 13.8 % Massachusetts 7 707 1.2 %
Florida 160 2,739 7.8 % Arkansas 42 637 1.1 %
Georgia 148 2,864 6.2 % Utah 18 405 1.1 %
Ohio 99 4,117 5.5 % Wisconsin 15 850 0.9 %
Michigan 94 2,522 4.3 % Kansas 18 805 0.9 %
California 32 1,717 4.2 % New Jersey 14 471 0.8 %
Tennessee 118 2,432 4.0 % Alaska 9 319 0.8 %
Illinois 56 1,553 3.4 % New Hampshire 17 645 0.8 %
North Carolina 93 2,013 3.3 % Connecticut 7 910 0.7 %
New York 37 1,943 3.0 % Idaho 16 273 0.7 %
South Carolina 73 1,100 2.9 % Iowa 12 1,304 0.7 %
Arizona 48 968 2.7 % Washington 9 160 0.5 %
Colorado 33 1,264 2.6 % Maine 28 103 0.4 %
Missouri 65 1,536 2.6 % Nebraska 9 247 0.4 %
Alabama 102 1,341 2.5 % West Virginia 12 191 0.3 %
Maryland 11 1,401 2.5 % Delaware 2 128 0.3 %
Virginia 47 1,348 2.1 % Montana 3 152 0.3 %
Indiana 45 2,163 2.0 % North Dakota 4 110 0.3 %
Minnesota 29 1,065 2.0 % Rhode Island 3 94 0.3 %
Pennsylvania 33 1,073 1.8 % Oregon 3 104 0.2 %
New Mexico 32 814 1.8 % South Dakota 2 30 0.2 %
Oklahoma 56 1,053 1.7 % Wyoming 1 35 0.1 %
Mississippi 52 1,003 1.7 % U.S. Virgin Islands 1 38 0.1 %
Kentucky 45 541 1.3 % Nevada 1 12 *
Louisiana 28 490 1.2 % Vermont 1 2 *
* Less than 0.1%
32--------------------------------------------------------------------------------
Diversification By Asset Type and Tenant Industry
The following is a summary of asset type concentration, the industry of the
underlying tenant operations for our retail properties and the underlying
property use for our non-retail properties as of
Number of Total Square Feet Percent of
Asset Type Tenant Industry / Underlying Use Properties (in thousands) ABR
Retail 1,802 29,492 70.9 %
Health and Fitness 51 3,166 8.2 %
Convenience Stores 318 1,012 6.0 %
Restaurants - Quick Service 358 782 5.1 %
Restaurants - Casual Dining 132 940 4.8 %
Car Washes 111 527 4.5 %
Movie Theaters 37 1,953 3.9 %
Dealerships 29 1,048 3.5 %
Entertainment 28 1,220 3.4 %
Drug Stores / Pharmacies 75 961 3.3 %
Automotive Service 128 1,046 3.2 %
Home Improvement 35 2,114 3.1 %
Dollar Stores 201 1,873 2.9 %
Warehouse Club and Supercenters 16 1,761 2.7 %
Home Décor 19 2,459 2.6 %
Grocery 34 1,579 2.3 %
Sporting Goods 20 1,154 2.0 %
Department Stores 18 1,619 1.9 %
Home Furnishings 22 1,100 1.8 %
Other 29 900 1.7 %
Early Education 42 461 1.5 %
Specialty Retail 32 668 1.1 %
Automotive Parts 55 388 0.8 %
Pet Supplies & Service 4 133 0.3 %
Discount Retail 4 273 0.3 %
Vacant 4 355 -
Non-Retail 276 24,812 29.1 %
Distribution 136 12,217 10.5 %
Manufacturing 61 8,621 7.5 %
Office 9 1,097 2.7 %
Country Club 20 962 2.6 %
Medical 31 543 2.2 %
Industrial Outdoor Storage 10 423 1.3 %
Data Center 4 497 1.2 %
Flex 4 330 0.6 %
Hotel 1 122 0.5 %
Total 2,078 54,304 100.0 %
33--------------------------------------------------------------------------------
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. 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. 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. As ofJune 30, 2022 , 2.9 million shares of our common stock have been sold under the 2021 ATM Program, of which 2.5 million of these shares were sold through forward sale agreements. 0.2 million of these shares were sold during the six months endedJune 30, 2022 . As ofJune 30, 2022 , there were no open forward contracts and approximately$364.9 million of capacity remained available under the 2021 ATM Program as ofJune 30, 2022 .
FORWARD EQUITY OFFERING
InJanuary 2022 , 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, and an initial forward sales price of$45.696 per share. 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. As ofJune 30, 2022 , we had settled 8.3 million of these shares for net proceeds of$376.4 million and 1.1 million shares remained open, with a final settlement date ofJuly 19, 2023 .
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 ofJune 30, 2022 , available liquidity was comprised of$5.4 million in cash and cash equivalents,$31.5 million in restricted cash,$505.5 million of borrowing capacity under the 2019 Credit Facility and$51.8 million of expected proceeds available assuming the full physical settlement of our open forward equity contracts.
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, particularly as uncertainty related to rising interest rates, rising inflation rates, economic outlook, geopolitical events (including the military conflict betweenRussia andUkraine ) and other factors have contributed and may continue to contribute to significant volatility and negative pressure in financial markets. 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. 34 --------------------------------------------------------------------------------
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
OnMarch 30, 2022 , we amended and restated the 2019 Revolving Credit and Term Loan Agreement. As ofJune 30, 2022 , the aggregate gross commitment under the 2019 Credit Facility was$1.2 billion , which may be increased up to$1.7 billion by exercising an accordion feature, subject to satisfying certain requirements. The 2019 Credit Facility has a maturity ofMarch 31, 2026 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 ofJune 30, 2022 , there were no subsidiaries that met this requirement. As ofJune 30, 2022 , the 2019 Credit Facility bore interest at a 1-Month adjusted SOFR rate plus 0.775% and incurred a facility fee of 0.150% per annum, in each case, based on theOperating Partnership's credit rating and leverage ratio (as defined in the agreement). As ofJune 30, 2022 ,$694.5 million in borrowings were outstanding and there were no letters of credit outstanding.
Senior Unsecured Notes
As ofJune 30, 2022 , we had the following Senior Unsecured Notes outstanding (dollars in thousands): Stated Interest June 30, Maturity Date Interest Payment Dates Rate 2022
2026 Senior Notes
300,000
2028 Senior Notes
450,000
2029 Senior Notes
400,000
2030 Senior Notes
500,000
2031 Senior Notes
450,000
2032 Senior Notes
350,000
Total Senior Unsecured Notes
3.25%
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.
Mortgages payable
The obligors of our property level debt are special purpose entities that hold 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 ofJune 30, 2022 , we had two fixed-rate CMBS loans with$5.1 million of aggregate outstanding principal. One of the CMBS loans, with principal outstanding of$4.5 million , matures inAugust 2031 and has a stated interest rate of 5.80%. The other CMBS loan, with principal outstanding of$0.6 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
Remainder of
Total 2022 2023 2024 2025 2026 Thereafter
2019 Credit Facility $ 694,500 $ - $ - $ - $ - $ 694,500 $ -
Senior Unsecured Notes 2,750,000 - - - - 300,000 2,450,000
Mortgages payable 5,091 266 556 590 626 468 2,585
$ 3,449,591 $ 266 $ 556 $ 590 $ 626 $ 994,968 $ 2,452,585
35--------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
During the three months endedMarch 31, 2022 , we amended and restated the 2019 Revolving Credit and Term Loan Agreement, which increased our borrowing capacity under the 2019 Credit Facility. There were no other material changes during the six months endedJune 30, 2022 outside the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theSEC . We may enter into commitments to purchase goods and services in connection with the operations of our properties. Those commitments generally have terms of one-year or less and reflect expenditure levels comparable to our historical expenditures. 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 afterDecember 31, 2017 and beforeJanuary 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. Cash Flows
The following table presents a summary of our cash flows for the six months
ended
Six Months Ended June 30,
2022 2021 Change
Net cash provided by operating activities $ 224,342 $ 191,493 $ 32,849
Net cash used in investing activities (811,517 ) (395,368 ) (416,149 )
Net cash provided by financing activities 606,337 188,134 418,203
Net increase in cash, cash equivalents and
restricted cash $ 19,162 $
(15,741 )
As of
Operating Activities
Our 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$53.2 million , driven by net acquisitions over the trailing twelve month period. The increase in net cash provided by operating activities was partially offset by an increase in cash interest paid of$5.8 million driven by the issuance of the 2028 Senior Notes and 2032 Senior Notes during 2021 and other changes within our debt structure (see Management's Discussion and Analysis of Financial Condition: Results of Operations), an increase of$5.7 million in lease incentives paid and an increase of approximately$2.9 million in cash bonus payments. 36 --------------------------------------------------------------------------------
Investing Activities
Cash used in investing activities is generally used to fund property acquisitions, for investments in loans receivable and for capital expenditures. Cash provided by investing activities generally relates to the disposition of real estate and other assets. Net cash used in investing activities during the six months endedJune 30, 2022 included$872.7 million for the acquisition of 97 properties,$37.3 million of capitalized real estate expenditures and$12.7 million for investment in one loan receivable. These outflows were partially offset by$111.2 million in net proceeds from the disposition of 22 properties. During the same period in 2021, net cash used in investing activities included$480.2 million for the acquisition of 43 properties and$2.6 million of capitalized real estate expenditures. These outflows were partially offset by$87.4 million in net proceeds from the disposition of 16 properties and$2.0 million that was collected from a disposal that occurred in 2020.
Financing Activities
Generally, our net cash provided by or used in financing activities is impacted by our borrowings under our revolving credit facilities and term loans, issuances of net-lease mortgage notes, common stock and debt offerings and repurchases and dividend payments on our common and preferred stock.
Net cash provided by financing activities during the six months endedJune 30, 2022 was primarily attributable to net borrowings of$406.1 million under our revolving credit facilities and net proceeds from the issuance of common stock of$389.7 million . These amounts were partially offset by payment of dividends to equity owners of$174.1 million , deferred financing costs of$8.7 million , common stock repurchases for employee tax withholdings totaling$6.4 million and repayments of$0.3 million on mortgages payable During the same period in 2021, net cash provided by financing activities was primarily attributable to borrowings of$794.8 million under Senior Unsecured Notes, net proceeds from the issuance of common stock of$145.7 million and net borrowings of$13.0 million under our revolving credit facilities. These amounts were partially offset by repayments of$208.6 million on mortgages payable, repayments of$190.4 million on convertible notes, repayments of$178.0 million on term loans, payment of dividends to equity owners of$150.2 million , 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 .
Off-Balance Sheet Arrangements
As of
New Accounting Pronouncements
See Note 2 to the consolidated financial statements herein.
Non-GAAP Financial Measures
FFO: FFO is a 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,
impairment charges and net (gains) losses from property dispositions, 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.
37
--------------------------------------------------------------------------------
AFFO: 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, costs related
to the COVID-19 pandemic, income associated with expiration of a contingent
liability related to a guarantee of a former tenant's debt and certain non-cash
items. These certain non-cash items include certain non-cash interest expenses
(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: EBITDAre is a non-GAAP financial measure computed in accordance with the 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: 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 items include deal pursuit costs, net (gains) losses on debt
extinguishment, costs related to the COVID-19 pandemic, and non-cash
compensation. We believe that excluding these items, which are not key drivers
of our investment decisions and may cause short-term fluctuations in net income
(loss), 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: Annualized Adjusted EBITDAre is calculated as
Adjusted EBITDAre, 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.
Adjusted Debt to Annualized Adjusted EBITDAre: Adjusted Debt to Annualized
Adjusted EBITDAre is a 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. 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.
38
--------------------------------------------------------------------------------
FFO and AFFO
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2022 2021 2022 2021
Net income attributable to common
stockholders $ 80,152 $ 85,336 $ 133,620 $ 81,279
Portfolio depreciation and amortization 72,755 59,933 141,720 116,875
Portfolio impairments 9,398 7,800 9,525 14,530
Gain on disposition of assets (38,928 ) (37,507 ) (39,805 ) (39,343 )
FFO attributable to common stockholders $ 123,377 $ 115,562 $ 245,060 $ 173,341
Loss on debt extinguishment - 10 172 29,187
Deal pursuit costs 655 257 1,020 499
Non-cash interest expense, excluding
capitalized interest 2,258 2,344 4,195 5,043
Straight-line rent, net of uncollectible
reserve (9,015 ) (21,428 ) (17,590 ) (27,101 )
Other amortization and non-cash charges (578 ) (761 ) (1,225 ) (1,535 )
Non-cash compensation expense 4,387 3,614 8,412 6,992
Costs related to COVID-19 (1) - 274 6 706
Other income - - (5,679 ) -
AFFO attributable to common stockholders
Net income per share of common stock - Diluted$ 0.60 $ 0.74 $ 1.02 $ 0.70 FFO per share of common stock - Diluted (2)$ 0.92 $ 1.00 $ 1.86 $ 1.50 AFFO per share of common stock - Diluted (2)$ 0.90 $
0.86
Weighted average shares of common stock outstanding - Diluted 134,219,450
115,557,555 131,307,057 115,212,294
(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) 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:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
FFO $0.2 million $0.2 million $0.4 million $0.3 million
AFFO $0.2 million $0.2 million $0.4 million $0.4 million
39--------------------------------------------------------------------------------
Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre
June 30,
(Dollars in thousands) 2022 2021
2019 Credit Facility $ 694,500 $ 13,000
Senior Unsecured Notes, net 2,720,562 2,716,752
Mortgages payable, net 5,271 5,823
Total debt, net 3,420,333 2,735,575
Unamortized debt discount, net 10,196 11,441
Unamortized deferred financing costs 19,062 21,585
Cash and cash equivalents (5,444 ) (9,403 )
Restricted cash (31,517 ) (58,154 )
Adjusted Debt $ 3,412,630 $ 2,701,044
Three Months Ended June 30,
(Dollars in thousands) 2022 2021
Net income $ 82,740 $ 87,924
Interest 27,594 26,170
Depreciation and amortization 72,898 60,074
Income tax expense 207 129 Gain on disposition of assets (38,928 ) (37,507 ) Portfolio impairments 9,398 7,800 EBITDAre$ 153,909 $ 144,590 Adjustments to revenue producing acquisitions and dispositions 3,408
1,564
Construction rent collected, not yet recognized in earnings (1) 640 - Deal pursuit costs 655 257 Loss on debt extinguishment - 10 Costs related to COVID-19 (2) - 274 Non-cash compensation expense 4,387 3,614 Adjusted EBITDAre$ 162,999 $ 150,309 Adjustments related to straight-line rent (3) - (9,981 ) Other adjustments for Annualized EBITDAre (4) (157 ) (5,272 ) Annualized Adjusted EBITDAre$ 651,368 $
540,224
Adjusted Debt / Annualized Adjusted EBITDAre (5) 5.2 x 5.0 x
(1) Construction rent collected, not yet recognized in earnings was 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
recoveries related to prior period straight-line rent deemed not probable of
collection.
(4) Adjustment for the three months ended
period recoveries related to prior period rent deemed not probable of
collection, prior period rental income, and prior period property costs. For
the same period in 2021, the adjustment is comprised of net recoveries
related to prior period rent deemed not probable of collection and prior
period property costs.
(5) Adjusted Debt / Annualized Adjusted EBITDAre would be 5.2x if the 1.1
million shares under open forward sales agreements had been settled as of
the 1.9 million shares under open forward sales agreements had been settled
as of June 30, 2021 .
40--------------------------------------------------------------------------------
© Edgar Online, source
