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.
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--------------------------------------------------------------------------------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 ofSeptember 30, 2022 , our diverse portfolio consisted of 2,118 owned properties across 49 states, which were leased to 346 tenants operating in 34 industries. As ofSeptember 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 ofSeptember 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 nine months endedSeptember 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 nine months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , we had an accounts receivable balance of$9.2 million related to deferred rent, with 62% of the balance expected to be repaid by the end of 2023. Although we are actively engaged in rent collection efforts related to uncollected rent, we can provide no assurance that such efforts will be successful.
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. 27 --------------------------------------------------------------------------------
Results of Operations
Comparison of the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30, Increase / (Decrease)
(In Thousands) 2022 2021 2022 2021 Three Months Nine Months
Revenues:
Rental income $ 180,296 $ 151,376 $ 520,930 $ 450,483 $ 28,920 $ 70,447
Interest income on loans
receivable 521 - 1,362 - 521 1,362
Earned income from
direct financing leases 131 131 393 394 - (1 )
Other operating income 1,956 1,061 3,550 1,458 895 2,092
Total revenues 182,904 152,568 526,235 452,335 30,336 73,900
Expenses:
General and
administrative 14,313 13,103 42,408 39,599 1,210 2,809
Property costs (including reimbursable) 7,395 5,862 22,600 17,633
1,533 4,967
Deal pursuit costs 470 361 1,490 860 109 630
Interest 30,956 25,078 84,573 77,872 5,878 6,701
Depreciation and
amortization 74,600 63,061 216,606 180,222 11,539 36,384
Impairments 1,571 4,435 11,096 18,965 (2,864 ) (7,869 )
Total expenses 129,305 111,900 378,773 335,151 17,405 43,622
Other income:
Gain (loss) on debt
extinguishment - 1 (172 ) (29,186 ) (1 ) 29,014
Gain on disposition of
assets 23,302 453 63,107 39,796 22,849 23,311
Other income - - 5,679 - - 5,679
Total other income 23,302 454 68,614 10,610 22,848 58,004
Income before income tax
expense 76,901 41,122 216,076 127,794 35,779 88,282
Income tax expense (261 ) (244 ) (640 ) (461 ) (17 ) (179 )
Net income $ 76,640 $ 40,878 $ 215,436 $ 127,333 $ 35,762 $ 88,103 Changes related to operating properties
The components of rental income are summarized below (in thousands):
[[Image Removed]]
28
--------------------------------------------------------------------------------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 240 properties during the trailing twelve months endedSeptember 30, 2022 , with a total of$101.2 million of annual in-place rent. During the same period, we disposed of 37 properties, of which 16 were vacant and the remaining 21 had annual in-place rents of$8.4 million . Our acquisitions and dispositions for the trailing twelve months endedSeptember 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. In 2021, we recognized recoveries of Base Cash Rent previously reserved due to the COVID-19 pandemic and had minimal new reserves, resulting in net reserves of$0.1 million and net recoveries of$5.6 million for the three and nine months endedSeptember 30, 2021 , 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 net reserves of$0.6 million and$0.5 million for the three and nine months endedSeptember 30, 2022 , respectively. Further, rent abatements executed as relief for the COVID-19 pandemic also decreased from$0.4 million and$1.5 million for the three and nine months endedSeptember 30, 2021 , respectively, to zero for both the three and nine months endedSeptember 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 nine months endedSeptember 30, 2022 , we recognized reimbursable property costs of$5.2 million and$17.1 million , respectively, compared to$3.9 million and$10.4 million , respectively, for the three and nine months endedSeptember 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 nine months endedSeptember 30, 2022 , we recognized non-reimbursable property costs of$2.2 million and$5.5 million , respectively, compared to$2.0 million and$7.2 million , respectively, for the three and nine months endedSeptember 30, 2021 . The three-month comparative period was relatively flat, while the decrease for nine-month comparative period 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$1.3 million and$2.6 million , respectively, for the three and nine months endedSeptember 30, 2022 , compared to$0.8 million and$1.7 million for the three and nine months endedSeptember 30, 2021 . This increase was primarily due to a lease converting to a contingent rent arrangement based on tenant sales in the third quarter of 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 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 smaller recoveries with minimal new reserves in 2022. For the three and nine months endedSeptember 30, 2021 , net reserves of$0.1 million and net recoveries of$11.0 million were recognized, compared to net recoveries of$1.2 million and$1.1 million for the three and nine months endedSeptember 30, 2022 . 29 --------------------------------------------------------------------------------
Impairments
The number of impaired properties declined from 2021, driven by tenant performance and continued low vacancy rates. We recorded impairment as follows (impairment in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Count Impairment Count
Impairment Count Impairment Count Impairment
Underperforming properties 6
4 $ 4,325 8 $ 10,155 17 $ 16,109
Vacant properties - - 1 110 1 814 5 2,856
Total $ 1,571 $ 4,435 $ 10,969 $ 18,965
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 increased for both comparative periods. During the three months endedSeptember 30, 2022 , we disposed of ten active properties, resulting in net gains of$23.0 million , and disposed of one vacant property, resulting in a gain of$0.4 million . During the nine months endedSeptember 30, 2022 , we disposed of 21 active properties, resulting in net gains of$60.4 million , and disposed of 12 vacant properties, resulting in net gains of$2.4 million . Additionally, we recognized other losses of$0.1 million and gains of$0.3 million , respectively, for the three and nine months endedSeptember 30, 2022 . During the three months endedSeptember 30, 2021 , we recognized net gains of$0.1 million on the sale of three vacant properties, a$0.3 million gain related to a property reconstructed after previous fire damage and other net gains of$0.1 million . During the nine months endedSeptember 30, 2021 , we recognized net gains of$38.0 million on the sales of eight occupied properties, net gains of$0.7 million on the sale of 11 vacant properties, a$0.6 million gain on an asset substitution, a$0.3 million gain related to a property reconstructed after previous fire damage and other net gains of$0.2 million .
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.
30
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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. In August 2022 , we entered into the 2022 Term Loans, comprised
of a $300.0 million tranche which matures in 2025 and a $500.0 million tranche
which matures in 2027. In conjunction with the 2022 Term Loans, we entered into
interest rate swaps beginning in September 2022 to swap the variable rate for a
fixed rate.
Our weighted average effective interest rate decreased from 3.57% at September
30, 2021 to 3.31% at September 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
The increase in general and administrative expense was primarily driven by an increase in compensation expenses of$1.1 million for the three months endedSeptember 30, 2022 and$3.7 million for the nine months endedSeptember 30, 2022 , compared to their respective prior year periods. The increase in compensation expenses was due to increases in cash compensation primarily due to internal promotions and new hires and increases in non-cash compensation 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. The increases in general and administrative expenses for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 were partially offset by a decrease of$0.8 million in expenses related to the COVID-19 pandemic, as these costs were predominately incurred in the first half of 2021.
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. 31 --------------------------------------------------------------------------------
Property Portfolio Information
2,118 99.8% 49 346 34Properties 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 4.1 %
Invited Clubs 21 1,005 2.8 %
BJ's Wholesale Club 11 1,233 2.4 %
At Home 16 1,861 2.1 %
Dave & Buster's / Main Event 15 807 2.1 %
Church's Chicken 160 231 2.0 %
Dollar Tree / Family Dollar 128 1,167 1.8 %
Home Depot 8 946 1.8 %
Circle K 76 230 1.7 %
GPM 108 303 1.6 %
Other(2) 1,559 46,005 77.6 %
Vacant 4 551 -
Total 2,118 55,738 100.0 %
(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 ofSeptember 30, 2022 , the weighted average remaining non-cancelable initial term of our leases (based on ABR) was 10.4 years. The following is a summary of lease expirations for our owned real estate as ofSeptember 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 7 27 $ 598 0.1 % 2023 75 1,675 20,903 3.2 % 2024 48 1,571 17,756 2.7 % 2025 56 2,437 22,319 3.4 % 2026 132 5,022 46,818 7.1 % 2027 168 4,469 58,710 8.9 % 2028 137 2,867 38,319 5.8 % 2029 318 2,922 43,731 6.6 % 2030 82 2,536 25,225 3.8 % 2031 76 4,725 39,953 6.0 % Thereafter 1,015 26,936 346,706 52.4 % Vacant 4 551 - - Total owned properties 2,118 55,738$ 661,038 100.0 % 32
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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 301 6,709 14.1 % Massachusetts 8 750 1.3 %
Florida 160 2,838 7.9 % Arkansas 47 690 1.2 %
Georgia 148 2,864 6.0 % Louisiana 28 490 1.1 %
Ohio 101 4,139 5.5 % Kansas 20 829 0.9 %
Michigan 100 2,916 4.5 % Wisconsin 15 850 0.9 %
Tennessee 119 2,469 4.0 % New Jersey 14 471 0.8 %
California 30 1,602 3.8 % Alaska 9 319 0.8 %
Illinois 57 1,558 3.4 % New Hampshire 17 645 0.8 %
North Carolina 91 1,874 3.1 % Connecticut 7 910 0.7 %
South Carolina 72 1,095 2.9 % Idaho 16 273 0.7 %
Alabama 107 1,476 2.8 % Iowa 12 1,304 0.6 %
Arizona 48 968 2.7 % Washington 9 160 0.5 %
New York 37 1,943 2.6 % West Virginia 13 206 0.4 %
Missouri 66 1,541 2.5 % Maine 28 103 0.4 %
Colorado 33 1,264 2.5 % Nebraska 10 262 0.4 %
Maryland 12 1,413 2.5 % Delaware 2 128 0.3 %
Virginia 47 1,348 2.1 % Montana 3 152 0.3 %
Indiana 42 2,157 2.0 % North Dakota 4 110 0.3 %
Minnesota 29 1,064 2.0 % Rhode Island 3 94 0.2 %
New Mexico 35 863 1.8 % Oregon 3 104 0.2 %
Pennsylvania 33 1,073 1.7 % South Dakota 2 30 0.2 %
Oklahoma 58 1,068 1.7 % Wyoming 1 35 0.1 %
Mississippi 51 992 1.7 % U.S. Virgin Islands 1 38 0.1 %
Utah 19 966 1.6 % Nevada 1 12 *
Kentucky 48 571 1.4 % Vermont 1 2 *
* Less than 0.1%
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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 1,824 29,891 70.4 %
Health & Fitness 53 3,176 8.1 %
Convenience Stores 318 1,012 5.9 %
Quick Service Restaurants 354 771 5.0 %
Casual Dining 131 936 4.7 %
Car Washes 115 542 4.6 %
Movie Theaters 37 1,953 4.0 %
Dealerships 34 1,122 3.6 %
Drug Stores 77 990 3.3 %
Entertainment 28 1,220 3.3 %
Automotive Service 128 1,046 3.2 %
Home Improvement 35 2,114 3.1 %
Dollar Stores 212 1,995 3.0 %
Supercenters & Clubs 17 1,864 2.8 %
Home Décor 19 2,459 2.5 %
Home Furnishings 28 1,277 2.2 %
Sporting Goods 20 1,154 1.9 %
Department Stores 18 1,619 1.8 %
Grocery 32 1,465 1.8 %
Other 29 900 1.6 %
Early Education 41 450 1.5 %
Specialty Retail 32 669 1.1 %
Automotive Parts 55 388 0.8 %
Pet Supplies & Service 4 133 0.3 %
Discount Retail 4 273 0.3 %
Vacant 3 363 -
Non-Retail 294 25,847 29.6 %
Distribution 138 12,157 10.4 %
Manufacturing 67 9,568 8.3 %
Country Club 21 1,005 2.8 %
Office 9 1,079 2.6 %
Medical 31 543 2.2 %
Industrial Outdoor Storage 10 423 1.2 %
Data Center 3 309 0.8 %
Flex 13 453 0.8 %
Hotel 1 122 0.5 %
Vacant 1 188 -
Total 2,118 55,738 100.0 %
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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 ofSeptember 30, 2022 , 5.1 million shares of our common stock have been sold under the 2021 ATM Program, of which 3.5 million of these shares were sold through forward sale agreements. 2.4 million of these shares were sold during the nine months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , there were no open forward contracts and approximately$273.2 million of capacity remained available under the 2021 ATM Program as ofSeptember 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. All of these shares were settled during the nine months endedSeptember 30, 2022 , generating net proceeds of$427.7 million .
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 ofSeptember 30, 2022 , available liquidity was comprised of$109.8 million in cash and cash equivalents and$1.2 billion of borrowing capacity under the 2019 Credit Facility.
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. 35 --------------------------------------------------------------------------------
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 ofSeptember 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 ofSeptember 30, 2022 , there were no subsidiaries that met this requirement. As ofSeptember 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 ofSeptember 30, 2022 , there were no borrowings or letters of credit outstanding.
2022 Term Loans
OnAugust 22, 2022 , we entered into the 2022 Term Loan Agreement which provides for borrowings in an aggregate amount of$800.0 million comprised of a$300.0 million tranche with a maturity date ofAugust 22, 2025 and a$500.0 million tranche with a maturity date ofAugust 20, 2027 . Borrowings may be increased up to$1.0 billion by exercising an accordion feature, subject to satisfying certain requirements. The full borrowing capacity of$800.0 million under the term loans was fully drawn as ofSeptember 30, 2022 . Borrowings may be repaid without premium or penalty. As ofSeptember 30, 2022 , the 2022 Term Loans bore interest at a 1-month adjusted SOFR rate plus 0.850% per annum, based on theOperating Partnership's credit rating. In conjunction with entering into the 2022 Term Loans, we entered into interest rate swaps to swap 1-month SOFR for a weighted average fixed rate of 2.55%.
Senior Unsecured Notes
As of
Stated
Interest September 30,
Maturity Date Interest Payment Dates Rate 20222026 Senior Notes September 15, 2026 March 15 and September 15 4.45%$ 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%
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 ofSeptember 30, 2022 , we had two fixed-rate CMBS loans with$5.0 million of aggregate outstanding principal. One of the CMBS loans, with principal outstanding of$4.4 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. 36 --------------------------------------------------------------------------------
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 $ - $ - $ - $ - $ - $ -
Term loans 800,000 - - - 300,000 - 500,000
Senior Unsecured Notes 2,750,000 - -
- - 300,000 2,450,000
Mortgages payable 4,959 134 556 590 626 468 2,585
$ 3,554,959 $ 134 $ 556 $ 590 $ 300,626 $ 300,468 $ 2,952,585
CONTRACTUAL OBLIGATIONS
During the three months ended March 31, 2022 , we amended and restated the 2019
Revolving Credit and Term Loan Agreement, which increased our borrowing capacity
under the 2019 Credit Facility. Additionally, we entered into the 2022 Term Loan
Agreement during the three months ended September 30, 2022 . There were no other
material changes during the nine months ended September 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 ended
December 31, 2021 , as filed with the SEC .
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 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.
Cash Flows
The following table presents a summary of our cash flows for the nine months
ended
Nine Months Ended
2022 2021 Change
Net cash provided by operating activities $ 338,885 $
275,383$ 63,502 Net cash used in investing activities (1,002,541 ) (681,338 ) (321,203 ) Net cash provided by financing activities 755,686 338,221 417,465 Net increase (decrease) in cash, cash equivalents and restricted cash $ 92,030 $
(67,734 )
37
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As of September 30, 2022 , we had $109.8 million of cash, cash equivalents and
restricted cash as compared to $17.8 million as of December 31, 2021 and $15.6
million as of September 30, 2021 .
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$75.1 million , largely as a result of our net acquisitions over the trailing twelve month period. This increase was partially offset by an increase in cash interest paid of$10.5 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.
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 property dispositions.
Net cash used in investing activities during the nine months endedSeptember 30, 2022 was comprised of$1.1 billion for the acquisition of 148 properties,$55.3 million of capitalized real estate expenditures and$12.7 million for investment in one loan receivable. These outflows were partially offset by$183.8 million in net proceeds from the disposition of 33 properties. During the same period in 2021, net cash used in investing activities was comprised of$769.0 million for the acquisition of 74 properties and$6.7 million of capitalized real estate expenditures. These outflows were partially offset by$94.5 million in net proceeds from the disposition of 19 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 and repayments under our revolving credit facilities and term loans, debt offerings, issuances of common stock and dividend payments on our common and preferred stock. Net cash provided by financing activities during the nine months endedSeptember 30, 2022 was primarily attributable to borrowings of$800.0 million on term loans and net proceeds from the issuance of common stock of$531.6 million . These amounts were partially offset by net repayments of$288.4 million under our revolving credit facilities, payment of dividends to equity owners of$263.6 million , deferred financing costs of$17.0 million , common stock repurchases for employee tax withholdings totaling$6.4 million and repayments of$0.4 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$336.6 million and net borrowings of$49.3 million under our revolving credit facilities. These amounts were partially offset by payment of dividends to equity owners of$227.2 million , repayments of$208.8 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 .
Off-Balance Sheet Arrangements
As of
New Accounting Pronouncements
See Note 2 to the consolidated financial statements herein.
38
--------------------------------------------------------------------------------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. 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, amortization of net debt discount/premium, and amortization of interest rate swap losses), 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, capital expenditures 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.
39
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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.
FFO and AFFO
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2022 2021 2022 2021
Net income attributable to common
stockholders $ 74,053 $ 38,291 $ 207,673 $ 119,570
Portfolio depreciation and amortization 74,455 62,919 216,175 179,794
Portfolio impairments 1,571 4,435 11,096 18,965
Gain on disposition of assets (23,302 ) (453 ) (63,107 ) (39,796 )
FFO attributable to common stockholders $ 126,777 $ 105,192 $ 371,837 $ 278,533
(Gain) loss on debt extinguishment - (1 ) 172 29,186
Deal pursuit costs 470 361 1,490 860
Non-cash interest expense, excluding
capitalized interest 2,495 1,919 6,690 6,962
Straight-line rent, net of uncollectible
reserve (10,875 ) (8,840 ) (28,465 ) (35,941 )
Other amortization and non-cash charges (475 ) (714 ) (1,700 ) (2,249 )
Non-cash compensation expense 4,393 3,504 12,805 10,496
Costs related to COVID-19 (1) - 46 6 752
Other income - - (5,679 ) -
AFFO attributable to common stockholders
Net income per share of common stock - Diluted$ 0.54 $ 0.32 $ 1.56 $ 1.02 FFO per share of common stock - Diluted (2)$ 0.93 $ 0.87 $ 2.79 $ 2.38 AFFO per share of common stock - Diluted (2)$ 0.90 $
0.84
Weighted average shares of common stock outstanding - Diluted 136,314,369
120,302,158 132,965,297 116,870,429
(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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
FFO $0.2 million $0.2 million $0.6 million $0.5 million
AFFO $0.2 million $0.2 million $0.6 million $0.6 million
40--------------------------------------------------------------------------------
Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre
September 30,
(Dollars in thousands) 2022 2021
2019 Credit Facility $ - $ 49,300
2022 Term Loans, net 791,791 -
Senior Unsecured Notes, net 2,721,534 2,717,693
Mortgages payable, net 5,130 5,687
Total debt, net 3,518,455 2,772,680
Unamortized debt discount, net 9,877 11,134
Unamortized deferred financing costs 26,627 20,962
Cash and cash equivalents (109,829 ) (15,564 )
Adjusted Debt $ 3,445,130 $ 2,789,212
Three Months Ended September 30,
(Dollars in thousands) 2022 2021
Net income $ 76,640 $ 40,878
Interest 30,956 25,078
Depreciation and amortization 74,600 63,061
Income tax expense 261 244 Gain on disposition of assets (23,302 ) (453 ) Portfolio impairments 1,571 4,435 EBITDAre$ 160,726 $ 133,243 Adjustments to revenue producing acquisitions and dispositions 2,657
1,820
Construction rent collected, not yet recognized in earnings (1) 193 - Deal pursuit costs 470 361 Gain on debt extinguishment - (1 ) Costs related to COVID-19 (2) - 46 Non-cash compensation expense 4,393 3,504 Adjusted EBITDAre$ 168,439 $ 138,973 Adjustments related to straight-line rent (3) (1,058 ) (233 ) Other adjustments for Annualized EBITDAre (4) (1,120 ) (164 ) Annualized Adjusted EBITDAre$ 665,044 $
554,304
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
2021.
(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 net recoveries related to prior period straight-line rent deemed not
probable of collection. Adjustment for the three months ended
2021 relates to prior period straight-line rent recognized in the current
period.
(4) Adjustment for the three months ended
period recoveries related to prior period rent deemed not probable of
collection, prior period rent and rent deemed not probable of collection,
prior period property costs and certain other income where annualization
would not be appropriate. For the same period in 2021, the adjustment is
comprised of certain other property costs, general and administrative
expenses and non-recurring revenue recognized in other income.
(5) Adjusted Debt / Annualized Adjusted EBITDAre would be 4.9x if the 1.6
million shares under open forward sales agreements had been settled as of
September 30, 2021 . 41
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