SPIRIT REALTY CAPITAL, INC. 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 ofDecember 31, 2022 , our diverse portfolio consisted of 2,115 owned properties across 49 states, which were leased to 351 tenants operating in 34 industries. As ofDecember 31, 2022 , our properties were approximately 99.9% occupied. Our operations are carried out through theOperating Partnership .OP Holdings , one of our wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of theOperating Partnership . We and one of our wholly-owned subsidiaries are the only limited partners, and together own the remaining 99% of theOperating Partnership . Although theOperating Partnership is wholly-owned by us, in the future, we may issue partnership interests in theOperating Partnership to third parties in exchange for property owned by such third parties. In general, any partnership interests in theOperating Partnership issued to third parties would be exchangeable for cash or, at our election, shares of our common stock at specified ratios set when such partnership interests in theOperating Partnership are issued. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2005 and we intend to continue operating in such a manner. To maintain our REIT status, we are required to annually distribute to our stockholders at least 90% of our REIT taxable income (excluding net capital gains) and meet various other requirements relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided that we qualify for taxation as a REIT, we are generally not subject to corporate level federal income tax on the earnings distributed to our stockholders. We are still subject to state and local income and franchise taxes and to federal income and excise tax on our undistributed income. If we fail to qualify as a REIT in any taxable year and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal corporate tax, including any applicable alternative minimum tax for taxable years beginning beforeJanuary 1, 2018 .
BUSINESS IMPACT OF THE COVID-19 PANDEMIC
During 2022, we had minimal impact from the COVID-19 pandemic and we currently do not anticipate any future rent deferrals or abatements related to the COVID-19 pandemic. For the year endedDecember 31, 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 year endedDecember 31, 2022 . As ofDecember 31, 2022 , we had an accounts receivable balance of$7.9 million related to deferred rent, with 56% 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
Our accounting policies are determined in accordance with GAAP. The preparation
of our financial statements requires us to make estimates and assumptions that
are subjective in nature and, as a result, our actual results could differ
materially from our estimates. Estimates and assumptions include, among other
things, subjective judgments regarding the fair values and useful lives of our
properties for depreciation and lease classification purposes, the
collectability of receivables and asset impairment analysis. A summary of our
accounting policies and procedures is included in Note 2 to our consolidated
financial statements. Set forth below are the more critical accounting policies
that require management judgment and estimates in the preparation of our
consolidated financial statements.
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--------------------------------------------------------------------------------Purchase Accounting and Acquisition of Real Estate; Lease Intangibles
The purchase price (including acquisition and closing costs) of a real estate acquisition is allocated to land, building, improvements, equipment and lease intangibles, if any, based on their relative fair values. Lease intangibles represent the value of in-place leases and above- or below-market leases. We evaluate a number of factors when estimating fair value, including the age, location and condition of the building, rent for comparable properties, and, if any, terms of in-place leases. The value of in-place lease intangibles are based on our estimates of the costs that would be incurred to acquire a tenant if the property were vacant, including carrying costs during the time it would take to locate a tenant, considering market conditions and costs to execute similar leases. Above- and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the in-place lease and our estimate of fair market lease rates for the property, measured over a period equal to the remaining initial term of the lease and, in certain instances, the renewal option period.
Rental Income: Cash and Straight-line Rent
We primarily lease real estate to our tenants under long-term, triple-net leases that are classified as operating leases. To evaluate lease classification, we assess the terms and conditions of the lease to determine the appropriate lease term and do not include options to extend, terminate or purchase in our evaluation for lease classification or for recognizing rental income unless we are reasonably certain the tenant will exercise the option. Evaluation of lease classification also requires an estimate of the residual value of the real estate at the end of the lease term. For acquisitions, we use the tangible fair value of the property at the date of acquisition. For lease modifications, we generally use sales comparables or a direct capitalization approach to determine residual value. Lease concessions related to the COVID-19 pandemic have been accounted for consistent with ASC 842 as though enforceable rights and obligations for those concessions existed (regardless of whether they explicitly exist in the lease). As such, rent deferrals have been recorded as an increase to rent receivables and recognized as income during the deferral period. Lease concessions other than rent deferrals have been evaluated to determine if a substantive change to the consideration in the original lease contract occurred and should be accounted for as a lease modification. Our leases generally provide for rent escalations throughout the term of the lease. For leases with fixed escalators, rental income is recognized on a straight-line basis to produce a constant periodic rent over the term of the lease. For leases with variable escalators, increases in rental revenue are recognized when the changes in the rental rates have occurred. Some of our leases also provide for contingent rent based on a percentage of the tenant's gross sales, which is recognized when the change in the factor on which the contingent lease payment is based actually occurs. Rental income is evaluated for collectability, based on our assessment of the risks inherent in the portfolio, considering historical experience, as well as the tenant's payment history and financial condition. We do not recognize rental income for amounts that are not deemed probable of collection.
Impairment
We review our real estate investments and related lease intangibles periodically for indicators of impairment including, but not limited to: the asset being held for sale, vacant, tenant bankruptcy or delinquency, and leases expiring in 60 days or less. For assets with indicators of impairment, we then evaluate if its carrying amount may not be recoverable. We consider factors such as expected future undiscounted cash flows, estimated residual value, market trends (such as the effects of leasing demand and competition) and other factors in making this assessment. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows. Impairment is calculated as the amount by which the carrying value exceeds the estimated fair value, or for assets held for sale, the amount by which the carrying value exceeds fair value less costs to sell. Estimating fair values is highly subjective and such estimates could differ materially from actual results. The fair values of real estate and intangible assets are determined using the following information, depending on availability, in order of preference: signed purchase and sale agreements or letters of intent; broker opinions of value; recently quoted bid or ask prices, or market prices for comparable properties; estimates of discounted cash flows; and expectations for the use of the real estate.
SUPPLEMENTAL GUARANTOR DISCLOSURES
Subsidiary issuers of obligations guaranteed by the parent are not required to
provide separate financial statements, provided that the parent guarantee is
"full and unconditional," the subsidiary obligor is consolidated into the parent
company's consolidated financial statements and, subject to certain exceptions
as set forth below, the alternative disclosure required by Rule 13-01 is
provided, which includes narrative disclosure and summarized financial
information.
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The Company and the Operating Partnership have filed a registration statement on
Form S-3 with the SEC registering, among other securities, debt securities of
the Operating Partnership , which will be fully and unconditionally guaranteed by
the Company. At December 31, 2022 , the Operating Partnership had issued and
outstanding the Senior Unsecured Notes. The obligations of the Operating
Partnership to pay principal, premiums, if any, and interest on the Senior
Unsecured Notes are guaranteed on a senior, full and unconditional basis by the
Company. The Operating Partnership is a wholly-owned subsidiary of the Company,
and the Company owns all of its assets and conducts all of its operations
through the Operating Partnership and the Operating Partnership is consolidated
into the Company's financial statements.
In accordance with the SEC rules, separate consolidated financial statements of
the Operating Partnership are not presented because the assets, liabilities and
results of operations of the Operating Partnership are not materially different
than the corresponding amounts in the Company's consolidated financial
statements, and management believes such summarized financial information would
be repetitive and would not provide incremental value to investors.
LIQUIDITY AND CAPITAL RESOURCES
ATM Program
InNovember 2021 , the Board of Directors approved a new$500.0 million 2021 ATM program, and we terminated the 2020 ATM Program. Sales of shares of our common stock under the 2021 ATM Program may be made in sales deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act. The 2021 ATM Program contemplates that, in addition to the issuance and sale by us of shares of our common stock to or through the agents, we may enter into separate forward sale agreements with one of the agents or one of their respective affiliates (in such capacity, each, a "forward purchaser"). When we enter into a forward sale agreement, we expect that the forward purchaser will attempt to borrow from third parties and sell, through a forward seller, shares of our common stock to hedge the forward purchaser's exposure under the forward sale agreement. We will not initially receive any proceeds from any sale of shares of our common stock borrowed by a forward purchaser and sold through a forward seller. We currently expect to fully physically settle any forward sale agreement with the respective forward purchaser on one or more dates specified by us on or prior to the maturity date of such forward sale agreement, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward sale agreement multiplied by the relevant forward price per share. However, subject to certain exceptions, we may also elect, in our sole discretion, to cash settle or net share settle all or any portion of our obligations under any forward sale agreement, in which case we may not receive any proceeds (in the case of cash settlement) or will not receive any proceeds (in the case of net share settlement), and we may owe cash (in the case of cash settlement) or shares of our common stock (in the case of net share settlement) to the relevant forward purchaser. As ofDecember 31, 2022 , 6.7 million shares of our common stock have been sold under the 2021 ATM Program, of which 4.7 million of these shares were sold through forward sale agreements. 4.0 million of these shares were sold during the year endedDecember 31, 2022 . There were no open forward contracts and approximately$208.7 million of capacity remaining under the 2021 ATM Program as ofDecember 31, 2022 .
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 2023 Term Loans and, if market conditions warrant, issuances of equity securities, including shares of our common stock under our 2021 ATM program. As ofDecember 31, 2022 , available liquidity was comprised of$8.8 million in cash and cash equivalents,$53.2 million in restricted cash,$1.1 billion of borrowing capacity under the 2019 Credit Facility and$500.0 million of availability under the delayed-draw 2023 Term Loans. 35 --------------------------------------------------------------------------------
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.
Description of certain debt
The following discussion 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 ofDecember 31, 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 ofDecember 31, 2022 , there were no subsidiaries that met this requirement. As ofDecember 31, 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 ofDecember 31, 2022 , there were$55.5 million in borrowings outstanding and no letters of credit outstanding. Amounts available for borrowing under the 2019 Credit Facility are subject to compliance with certain customary restrictive covenants including: • Maximum leverage ratio (defined as consolidated total indebtedness of the Company, net of certain cash and cash equivalents, to total asset value) of 0.60:1.00, with the ability to increase to 0.65:1.00 for one year with a material acquisition; • Minimum fixed charge coverage ratio (defined as EBITDA of the Company, to fixed charges) of 1.50:1.00; • Maximum secured indebtedness leverage ratio (defined as consolidated secured indebtedness of the Company, net of certain cash and cash equivalents, to total asset value) of 0.40:1:00; • Minimum unsecured interest coverage ratio (defined as consolidated net operating income from unencumbered properties, to unsecured interest expense) of 1.75:1.00; and • Maximum unencumbered leverage ratio (defined as consolidated unsecured indebtedness of the Company, net of certain cash and cash equivalents, to total unencumbered asset value) of 0.60:1:00, with the ability to increase to 0.65:1.00 for one year with a material acquisition. In addition to these covenants, the 2019 Revolving Credit and Term Loan Agreement also include other customary affirmative and negative covenants, such as (i) limitation on liens and negative pledges; (ii) transactions with affiliates; (iii) limitation on mergers, consolidations and sales of all or substantially all assets; (iv) maintenance of status as a REIT and listing on any national securities exchange; and (v) material modifications to organizational documents. As ofDecember 31, 2022 , the Corporation and theOperating Partnership were in compliance with these covenants.
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 ofDecember 31, 2022 . 36 -------------------------------------------------------------------------------- Borrowings may be repaid without premium or penalty. As ofDecember 31, 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%. OnNovember 17, 2022 , we entered into the 2023 Term Loan Agreement, which provides for$500.0 million of unsecured term loans with a maturity date ofJune 16, 2025 and allows funds to be drawn up toJuly 2, 2023 . Borrowings may be increased up to$600.0 million by exercising an accordion feature, subject to satisfying certain requirements. The 2023 Term Loans will bear interest at a 1-month adjusted SOFR rate plus an applicable margin of 0.950% per annum, based on theOperating Partnership's credit rating. Borrowings may be repaid without premium or penalty. As ofDecember 31, 2022 , the full$500.0 million of borrowing capacity was available under the 2023 Term Loan Agreement. Amounts available for borrowing under the term loan agreements are subject to compliance with certain customary restrictive covenants including: • Maximum leverage ratio (defined as consolidated total indebtedness of the Company, net of certain cash and cash equivalents, to total asset value) of 0.60:1.00, with the ability to increase to 0.65:1.00 for one year with a material acquisition; • Minimum fixed charge coverage ratio (defined as EBITDA of the Company, to fixed charges) of 1.50:1.00; • Maximum secured indebtedness leverage ratio (defined as consolidated secured indebtedness of the Company, net of certain cash and cash equivalents, to total asset value) of 0.40:1:00; • Minimum unsecured interest coverage ratio (defined as consolidated net operating income from unencumbered properties, to unsecured interest expense) of 1.75:1.00; and • Maximum unencumbered leverage ratio (defined as consolidated unsecured indebtedness of the Company, net of certain cash and cash equivalents, to total unencumbered asset value) of 0.60:1:00, with the ability to increase to 0.65:1.00 for one year with a material acquisition. In addition to these covenants, the term loan agreements also include other customary affirmative and negative covenants, such as (i) limitation on liens and negative pledges; (ii) transactions with affiliates; (iii) limitation on mergers, consolidations and sales of all or substantially all assets; (iv) maintenance of status as a REIT and listing on any national securities exchange; and (v) material modifications to organizational documents. As ofDecember 31, 2022 , the Corporation and theOperating Partnership were in compliance with these covenants.
Senior Unsecured Notes
As ofDecember 31, 2022 , we had the following Senior Unsecured Notes outstanding (dollars in thousands): Stated Interest December 31, Maturity Date Interest Payment Dates Rate 2022 2026 Senior Notes September 15, 2026 March 15 and September 15 4.45%$ 300,000 2027 Senior Notes January 15, 2027 January 15 and July 15 3.20%$ 300,000 2028 Senior Notes March 15, 2028 March 15 and September 15 2.10%$ 450,000 2029 Senior Notes July 15, 2029 January 15 and July 15 4.00%$ 400,000 2030 Senior Notes January 15, 2030 January 15 and July 15 3.40%$ 500,000 2031 Senior Notes February 15, 2031 February 15 and August 15 3.20%$ 450,000 2032 Senior Notes February 15, 2032 February 15 and August 15 2.70%$ 350,000 Total Senior Unsecured Notes 3.25%$ 2,750,000 The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at theOperating Partnership's option, at a redemption price equal to the sum of: an amount equal to 100% of the principal amount of the respective Senior Unsecured Notes to be redeemed plus accrued and unpaid interest and liquidated damages, if any, up to, but not including, the redemption date; and a make-whole premium calculated in accordance with the respective indenture. Notwithstanding the foregoing, if any of the Senior Unsecured Notes are redeemed three months or less (or two months or less in the case of the 2027 Senior Notes and 2028 Senior Notes) prior to their respective maturity dates, the redemption price will not include a make-whole premium. 37 -------------------------------------------------------------------------------- The indentures governing the Senior Unsecured Notes subject the Corporation andOperating Partnership to certain customary restrictive covenants that limit their ability to incur additional indebtedness, including: • Maximum leverage ratio (defined as consolidated total indebtedness, to total consolidated undepreciated real estate assets plus the Company's other assets, excluding accounts receivable and non-real estate intangibles) of 0.60:1.00; • Minimum unencumbered asset coverage ratio (defined as total consolidated undepreciated real estate assets plus the Company's other assets, excluding accounts receivable and non-real estate intangibles, to consolidated total unsecured indebtedness) of 1.50:1:00; • Maximum secured indebtedness leverage ratio (defined as consolidated total secured indebtedness, to total consolidated undepreciated real estate assets plus the Company's other assets, excluding accounts receivable and non-real estate intangibles) of 0.40:1.00; and • Minimum fixed charge coverage ratio (defined as consolidated income available for debt service, to the annual service charge) of 1.50:1.0. The indentures governing the Senior Unsecured Notes also include other customary affirmative and negative covenants, including (i) maintenance of the Corporation's existence; (ii) payment of all taxes, assessments and governmental charges levied against the Corporation; (iii) reporting on financial information; and (iv) maintenance of properties and insurance. As ofDecember 31, 2022 , the Corporation and theOperating Partnership were in compliance with these covenants. 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 ofDecember 31, 2022 , we had two fixed-rate CMBS loans with$4.8 million of aggregate outstanding principal. One of the CMBS loans, with principal outstanding of$4.3 million , matures inAugust 2031 and has a stated interest rate of 5.80%. The other CMBS loan, with principal outstanding of$0.5 million , matures inDecember 2025 and has a stated interest rate of 6.00%. Both CMBS loans are partially amortizing and require a balloon payment at maturity. Contractual Obligations The following table provides information with respect to our commitments, which are primarily composed of our debt obligations, as ofDecember 31, 2022 (in thousands): Total 2023 2024 2025 2026 2027 Thereafter 2019 Credit Facility$ 55,500 $ - $ - $ -$ 55,500 $ - $ - Term loans 800,000 - - 300,000 - 500,000 - Senior Unsecured Notes 2,750,000 - - - 300,000 300,000 2,150,000 Mortgages payable 4,825 556 590 626 469 497 2,087 Debt - Interest (1) 715,652 138,982 129,585 118,088 104,780 78,751 145,466 Acquisitions Under Contract (2) 13,785 13,785 - - - - - Capital Improvements 97,267 21,270 75,997 - - - - Operating Lease Obligations 5,773 1,340 1,355 1,353 1,359 259 107$ 4,442,802 $ 175,933 $ 207,527 $ 420,067 $ 462,108 $ 879,507 $ 2,297,660 (1) Debt - Interest has been calculated based on outstanding balances as ofDecember 31, 2022 through their respective maturity dates and excludes unamortized non-cash deferred financing costs of$25.5 million and unamortized debt discount, net of$9.6 million . (2) Contracts contain standard cancellation clauses contingent on results of due diligence. 38 --------------------------------------------------------------------------------
Cash Flows
The following table presents a summary of our cash flows for the years ended
Years Ended December 31,
2022 2021 Change
Net cash provided by operating activities
(1,214,867 ) (1,169,827 ) (45,040 )
Net cash provided by financing activities 772,571 693,195 79,376
Net increase (decrease) in cash, cash $ 44,154 $ (65,499 ) $ 109,653
equivalents and restricted cash
Substantially all of our operating cash flows are generated by our investment
portfolio and are primarily dependent upon the rental rates specified in our
leases, the collectability of rent and the level of our property and general and
administrative costs. The increase in net cash provided by operating activities
was driven by a $100.3 million net increase in cash rental revenue, largely as a
result of being a net acquiror during 2022. The primary offset to this increase
was an increase in cash interest paid of $18.4 million driven by the increased
interest rates and changes within our debt structure. See Management's
Discussion and Analysis of Financial Condition: Results of Operations for
further discussion on our rental income and interest expenses.
We were a net acquirer in both 2021 and 2022. We acquired 166 properties in 2021
compared to 172 in 2022, driving the increase in investing cash outflows of
$261.2 million . Our investment activity is funded through cash provided by
operations, proceeds from dispositions, proceeds from stock issuances, and
proceeds from long-term debt issuances. In addition to the increase in operating
cash flows as described above, changes related to our sources of funding were as
follows:
•
We sold 23 properties in 2021 compared to 60 in 2022, which resulted in an
increase in investing cash inflows of $216.2 million .
•
We issued 12.6 million shares in 2021 compared to 13.4 million shares in 2022,
resulting in an increase in proceeds of $61.6 million .
•
We had a net increase in cash provided by financing debt activity of $70.3
million , which was driven by less debt repayments in 2022 than 2021.
Finally, there was an increase in dividends paid to equity owners of
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. 39 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
In this section, we discuss the results of our operations for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . For a discussion of the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , please refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Year Ended December 31, Increase / (In Thousands) 2022 2021 (Decrease) Revenues: Rental income$ 703,029 $ 606,099 $ 96,930 Interest income on loans receivable 1,884 29 1,855 Earned income from direct financing leases 525 526 (1 ) Other operating income 4,191 1,736 2,455 Total revenues 709,629 608,390 101,239 Expenses: General and administrative 57,368 52,608 4,760 Property costs (including reimbursable) 29,837 23,232 6,605 Deal pursuit costs 4,655 1,136 3,519 Interest 117,622 103,003 14,619 Depreciation and amortization 292,985 244,624 48,361 Impairments 37,156 23,760 13,396 Total expenses 539,623 448,363 91,260 Other income: Loss on debt extinguishment (172 ) (29,186 ) 29,014 Gain on disposition of assets 110,900 41,468 69,432 Other income 5,679 - 5,679 Total other income 116,407 12,282 104,125 Income before income tax expense 286,413 172,309 114,104 Income tax expense (897 ) (607 ) (290 ) Net income$ 285,516 $ 171,702 $ 113,814
Changes related to operating properties
The components of rental income are summarized below (in thousands):
[[Image Removed: img140702726_12.jpg]]
40
--------------------------------------------------------------------------------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 172 properties during 2022 with a total of$94.8 million of annual in-place rent (monthly fixed rent at date of transaction multiplied by 12). During the same period, we disposed of 60 properties, of which 18 were vacant and the remaining 42 had annual in-place rents of$15.2 million . Our acquisitions and dispositions for the year endedDecember 31, 2022 is summarized below (in thousands): [[Image Removed: img140702726_13.jpg]] 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 recoveries of$5.5 million . 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$0.5 million . Further, rent abatements executed as relief for the COVID-19 pandemic also decreased from$1.5 million in 2021, to zero in 2022.
Variable cash rent (including reimbursable); Property costs (including reimbursable)
Variable cash rent is primarily comprised of tenant reimbursements, where our tenants are obligated under the lease agreement to reimburse us for certain property costs we incur, less reimbursements we deem not probable of collection. The increase in both variable cash rent (including reimbursable) and property costs (including reimbursable) was driven by increase reimbursable costs due to our net acquisition activity.
The components of variable cash rent and property costs are as follows:
Year Ended December 31, Increase /
(In Thousands) 2022 2021 (Decrease)
Tenant reimbursable income, net of uncollectable reserve$ 21,162 $ 14,333 $ 6,829 Other variable cash rent 4,435 2,435 2,000 Total variable cash rent (including reimbursable)$ 25,597 $ 16,768 $ 8,829 Reimbursable property costs$ 21,276 $ 14,119 $ 7,157 Non-reimbursable property costs 8,561 9,113 (552 ) Total property costs (including reimbursable)$ 29,837 $
23,232
Straight-line rent, net of uncollectible reserve; Amortization of above- and below- market lease intangibles, net
Non-cash rental income consists of straight-line rental revenue and amortization of above- and below-market lease intangibles, less amounts we deem not probable of collection. Straight-line rental revenue increased by$3.1 million for the comparative period 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. As such, net recoveries of$10.9 million were recognized in 2021, compared to a deminimus net reserve in 2022. 41 --------------------------------------------------------------------------------
Impairments
The number of impaired properties declined from 2021, driven by tenant performance and continued low vacancy rates, offset by higher impairment charges per property as compared to prior year. We recorded impairment as follows:
(In Thousands) Year Ended December 31, 2022 Year Ended December 31, 2021
Count: Impairment: Count: Impairment:
Underperforming properties 18 $ 36,215 20 $ 20,026
Vacant properties 1 814 5 3,184
Total $ 37,029 $ 23,210
Additionally, in accordance with ASU 2016-13, we recognize an allowance for
credit loss when we issue a loan. As such, we recorded a $0.1 million allowance
in 2022 upon issuing a loan receivable in the first quarter of 2022, compared to
a $0.6 million allowance recorded in 2021 upon issuing a loan receivable in the
fourth quarter of 2021.
Gain on disposition of assets
Gain on disposition of assets increased year-over-year due to an increase in
disposition volume, specifically of occupied properties as a result of an
increased focus on accretive capital recycling in 2022, which we expect to
continue in 2023. We recognized net gains on disposition of assets as follows:
(In Thousands) Year Ended December 31, 2022 Year Ended December 31, 2021
Count: Net Gain / Count: Net Gain /
(Loss): (Loss):
Occupied properties sold 42 $ 94,156 8 $ 38,108
Vacant properties sold 18 16,744 15 1,378
Property substitutions in a
master lease - 1,656
Other - 326
Total $ 110,900 $ 41,468
Changes related to debt
Interest expense; Loss on debt extinguishment
Our debt outstanding is summarized below (in millions):
[[Image Removed: img140702726_14.jpg]]
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. In August 2022 , we entered into the 2022 Term Loan Agreement,
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. In November 2022 , we entered into the 2023 Term
Loan Agreement for $500.0 million of 2.5-year delayed-draw term loans with a six
month draw period, none of which was drawn in 2022.
42
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While our weighted average effective interest rate decreased from 3.52% at
December 31, 2021 to 3.47% at December 31, 2022 due to the timing of borrowings
under the 2019 Credit Facility, our higher level of total debt outstanding
resulted in an increase in total interest expense for the comparative period.
Further, with the rise in market interest rates which began in the back-half of
2022, we expect total interest expense to increase in 2023. The components of
interest expense are summarized below (in thousands):
[[Image Removed: img140702726_15.jpg]]
Changes related to general and administrative expenses
The increase in general and administrative expense was primarily driven by an increase in compensation expenses of$5.4 million year-over-year. 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 were partially offset by a decrease of$0.8 million in expenses related to the COVID-19 pandemic, as these costs were predominantly 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. 43 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
FFO: FFO is calculated in accordance with the standards established by NAREIT as
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. By
excluding amounts which do not relate to or are not indicative of operating
performance, we believe FFO provides a performance measure that captures trends
in occupancy rates, rental rates and operating costs when compared
year-over-year. 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 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 an operating performance measure 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 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 computed in accordance with the standards established by
NAREIT as 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 expense. 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 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 used 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.
44
--------------------------------------------------------------------------------FFO and AFFO
Years Ended December 31,
(Dollars in thousands, except per share
data) 2022 2021 2020
Net income attributable to common stockholders$ 275,166 $ 161,352 $ 16,358 Portfolio depreciation and amortization 292,410 244,053 212,038 Portfolio impairments 37,156 23,760 81,476 Gain on disposition of assets (110,900 ) (41,468 ) (24,156 ) FFO attributable to common stockholders$ 493,832 $ 387,697 $ 285,716 Loss on debt extinguishment 172 29,186 7,227 Deal pursuit costs 4,655 1,136 2,432 Non-cash interest expense, excluding capitalized interest 9,486 8,890 12,428 Straight-line rent, net of uncollectible reserve (36,902 ) (44,758 ) (11,876 ) Other amortization and non-cash charges (2,190 ) (2,847 ) (918 ) Non-cash compensation expense 17,364 14,003 12,640 Costs related to COVID-19 (1) 6 778 1,798 Other income (5,679 ) - -
AFFO attributable to common stockholders
Net income per share of common stock - diluted$ 2.04 $ 1.35 $ 0.15 FFO per share of common stock - diluted (2)$ 3.66 $ 3.26 $ 2.73 AFFO per share of common stock - diluted (2)$ 3.56 $ 3.31 $ 2.95 AFFO per share of common stock, excluding out of period rent COVID-19 recoveries - diluted (2)(3) N/A$ 3.25 N/A Weighted average shares of common stock outstanding - diluted 134,645,651
118,715,838 104,535,384
(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:
Years Ended December 31,
2022 2021 2020
FFO $0.8 million $0.7 million $0.8 million
AFFO $0.8 million $0.8 million $0.9 million (3) AFFO per share of common stock, excluding
45
--------------------------------------------------------------------------------Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre
December 31,
(Dollars in thousands) 2022 2021
2019 Credit Facility $ 55,500 $ 288,400
2022 Term Loans, net 792,309 -
Senior Unsecured Notes, net 2,722,514 2,718,641
Mortgages payable, net 4,986 5,551
Total debt, net 3,575,309 3,012,592
Unamortized debt discount, net 9,556 10,824
Unamortized deferred financing costs 25,460 20,334
Cash and cash equivalents (8,770 ) (17,799 )
Restricted cash (53,183 ) -
Adjusted Debt $ 3,548,372 $ 3,025,951
Three Months
Ended December 31,
(Dollars in thousands) 2022 2021
Net income $ 70,080 $ 44,369
Interest 33,049 25,131
Depreciation and amortization 76,379 64,402
Income tax expense 257
146
Gain on disposition of assets (47,793 ) (1,672 ) Portfolio impairments 26,060 4,795 EBITDAre$ 158,032 $ 137,171 Adjustments to revenue producing acquisitions and dispositions 2,785
5,801
Construction rent collected, not yet recognized in earnings 325 309 Deal pursuit costs 3,165 276 Costs related to COVID-19 (1) - 26 Non-cash compensation expense 4,559 3,507 Adjusted EBITDAre$ 168,866 $ 147,090 Adjustments related to straight-line rent (2) 882 (82 ) Other adjustments for Annualized Adjusted EBITDAre (3) (634 ) 105 Annualized Adjusted EBITDAre$ 676,456 $ 588,452 Total Debt, Net / Annualized Net Income (4) 12.8x
17.0x
Adjusted Debt / Annualized Adjusted EBITDAre (5) 5.2x
5.1x
(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) Adjustment for the three months endedDecember 31, 2022 relates to current period amounts deemed not probable of collection related to straight-line rent recognized in prior periods. For the comparative period in 2021, adjustment relates to prior period straight-line rent recognized in the current period. (3) Adjustments for the three months endedDecember 31, 2022 relates to current period recoveries related to prior period rent deemed not probable of collection, prior period property costs and certain other income where annualization would not be appropriate. For the comparative period in 2021, adjustments are comprised of prior period property costs recognized in the current period. (4) Represents net income for the three months endedDecember 31, 2022 and 2021, respectively, annualized. (5) Adjusted Debt / Annualized Adjusted EBITDAre would be 5.1x if the 56 thousand shares under open forward agreements had been settled as ofDecember 31, 2021 . 46
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