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 and Section 21E of the Exchange Act. 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;
• 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, particularly with respect to challenges being experienced by general
merchandise retailers;
• 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;
• our ability to manage and liquidate the remaining SMTA assets;
• 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 most recent Annual Report
on Form 10-K 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.
36
--------------------------------------------------------------------------------Overview
Spirit Realty Capital, Inc. is aNew York Stock Exchange listed company under the ticker symbol "SRC." We are a self-administered and self-managed REIT with in-house capabilities including acquisition, credit research, asset management, portfolio management, real estate research, legal, finance and accounting functions. We primarily invest in single-tenant real estate assets throughout theU.S. , which are generally acquired through sale-leaseback transactions and subsequently leased on a long-term, triple-net basis to high quality tenants with business operations within retail, industrial, office and other industries. Single tenant, operationally essential real estate consists of properties that are generally free-standing, commercial real estate facilities where our tenants conduct activities that are essential to the generation of their sales and profits. Under a triple-net lease, the tenant is typically responsible for all improvements and is contractually obligated to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs. As ofJune 30, 2020 , our owned real estate represented investments in 1,771 properties. Our properties are leased to 294 tenants across 48 states and 28 retail industries. As ofJune 30, 2020 , our owned properties were approximately 99.2% occupied (based on the number of economically yielding properties). In addition, our investment in real estate includes commercial mortgage and other loans primarily secured by 43 real estate properties or other related assets. Our operations are carried out through theOperating Partnership .OP Holdings , one of our wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of theOperating Partnership . We and one of our wholly-owned subsidiaries are the only limited partners, and together own the remaining 99% of theOperating Partnership . Although theOperating Partnership is wholly-owned by us, in the future, we may issue partnership interests in theOperating Partnership to third parties in exchange for property owned by such third parties. In general, any partnership interests in theOperating Partnership issued to third parties would be exchangeable for cash or, at our election, shares of our common stock at specified ratios set when such partnership interests in theOperating Partnership are issued.
We have elected to be taxed as a REIT for federal income tax purposes 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.
OnMay 31, 2018 , we completed a Spin-Off of all our interests in the assets that collateralizedMaster Trust 2014, our properties leased toShopko , and certain other assets into an independent, publicly traded REIT, SMTA. In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA, pursuant to which the Company acted as external asset manager for SMTA for an annual management fee of$20.0 million . InSeptember 2019 , SMTA sold the assets held inMaster Trust 2014 and approved a plan of liquidation. The Asset Management Agreement was terminated, and the Interim Management Agreement with SMTA became effective. Pursuant to the Interim Management Agreement, we are entitled to receive$1 million during the initial one-year term and$4 million for any renewal one-year term, plus certain cost reimbursements, to manage and liquidate the remaining SMTA assets. OnMarch 18, 2020 , we provided notification that we intend to terminate the Interim Management Agreement, effective as ofSeptember 14, 2020 . Given the timing of the onset in theU.S. , the COVID-19 pandemic had a minimal impact on our first quarter 2020 results. During the second quarter of 2020, business disruption across our tenant base accelerated, as certain of our tenants, especially those in industries considered "non-essential" under varying state "shelter-in-place" and "stay-at-home" orders and other restrictions, experienced occupancy challenges or even closures. As a result, many of our tenants requested rent deferrals (and other forms of relief). Our discussions with tenants requesting relief have substantially focused on industries that are directly disrupted by the COVID-19 pandemic and restrictions intended to prevent its spread, particularly health and fitness, movie theaters, quick service and casual dining restaurants, entertainment, car washes, dealerships, home décor, home furnishings, department stores and education. These and other industries may be further impacted in the future depending on various factors, including the duration of the COVID-19 pandemic and further restrictions intended to prevent its spread. Even after certain of such restrictions are lifted or reduced, the willingness of customers to visit our tenants' businesses may be reduced due to lingering concerns regarding the continued risk of COVID-19 transmission and heightened sensitivity to risks associated with the transmission of other diseases. We are not able to predict the duration of such customer behavior or the COVID-19 pandemic. As ofJuly 27, 2020 , we have collected approximately 75% of second quarter 2020 Base Rent of$117.4 million , deferred or approved deferrals for approximately 19% and abated or approved abatements for approximately 2%. There is currently a lesser impact to the second half of 2020, for which we have$9.7 million of rent deferred (including the maximum impact of arrangements that have a sliding scale based on performance of the underlying property) and$1.3 million of rent abated. For the remaining deferred rent, the deferral periods range generally from one to six months, with an average deferral period of three months and an average repayment period of 12 months. Of the tenants who we have granted rent deferrals, 20% are public companies and the weighted average remaining lease term of leases with deferrals is 7.6 years (based on Base Rent). Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent, as well 37
-------------------------------------------------------------------------------- as working with certain tenants who have requested rent deferrals, we can provide no assurance that such efforts or our efforts in future periods will be successful, particularly in the event that the COVID-19 pandemic and restrictions intended to prevent its spread continue for a prolonged period. Refer to "Part II-Other Information, Item 1A. Risk Factors" for additional information about the potential impact of the COVID-19 pandemic and restrictions intended to prevent its spread on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and make distributions to our stockholders.
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, 2019 . We have not made any material changes to these policies during the periods covered by this quarterly report.
Results of Operations
Comparison of Three Months EndedJune 30, 2020 to Three Months EndedJune 30, 2019 Three Months Ended June 30, (In Thousands) 2020 2019 Change % Change Revenues: Rental income$ 117,190 $ 106,506 $ 10,684 10.0 % Interest income on loans receivable 390 920 (530 ) (57.6 )% Earned income from direct financing leases 131 308 (177 ) (57.5 )% Related party fee income 250 7,249 (6,999 ) (96.6 )% Other income 563 762 (199 ) (26.1 )% Total revenues 118,524 115,745 2,779 2.4 % Expenses: General and administrative 11,975 13,833 (1,858 ) (13.4 )% Property costs (including reimbursable) 7,234 4,407 2,827 64.1 % Deal pursuit costs 14 173 (159 ) (91.9 )% Interest 26,095 25,176 919 3.7 % Depreciation and amortization 53,160 41,342 11,818 28.6 % Impairments 21,049 3,607 17,442 NM Total expenses 119,527 88,538 30,989 35.0 % Other income: Loss on debt extinguishment - (14,676 ) 14,676 (100.0 )% Gain on disposition of assets 658 29,776 (29,118 ) (97.8 )% Preferred dividend income from SMTA - 3,750 (3,750 ) (100.0 )% Total other income 658 18,850 (18,192 ) (96.5 )% (Loss) income before income tax expense (345 ) 46,057 (46,402 ) NM Income tax expense (68 ) (320 ) 252 (78.8 )% Net (loss) income$ (413 ) $ 45,737 $ (46,150 ) NM
NM - Percentages over 100% are not displayed.
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REVENUES
Rental income
Three Months Ended June 30,
(In Thousands) 2020 2019
Base Cash Rent $ 110,166 $ 98,418
Variable cash rent (including reimbursables) 2,404 2,942
Straight-line rent, net of uncollectible reserve 4,392
4,485
Amortization of above- and below- market lease intangibles, net 228 661 Total rental income$ 117,190 $ 106,506 We were a net acquirer of income-producing real estate over the trailing twelve-month period, resulting in an increase in our Base Cash Rent period-over-period. During the trailing twelve months endedJune 30, 2020 , we acquired 237 properties, with a Real Estate Investment Value of$1.06 billion , and disposed of 29 properties, with a Real Estate Investment Value of$115.0 million . The increase was partially offset by an increase in reserves on rental income driven by tenant credit issues from the COVID-19 pandemic from a net recovery of$0.8 million for the three months endedJune 30, 2019 to net reserves of$4.8 million for three months endedJune 30, 2020 . The increase period-over-period was also reduced by$2.4 million of rent abatements for the three months endedJune 30, 2020 , executed as relief due to the COVID-19 pandemic. Finally, included in the Base Cash Rent for the three months endedJune 30, 2020 are rent deferrals related to the effects of the COVID-19 pandemic of$22.3 million . The primary component of variable cash rent is tenant reimbursements, where our tenants are obligated under the lease agreement to reimburse us for certain property costs we incur, and non-cash rental income. Tenant reimbursement income was$2.4 million and$2.8 million for the three months endedJune 30, 2020 and 2019, respectively, and was driven by the tenant reimbursable property costs described below. These amounts represented approximately 2.0% and 2.6% of rental income for the three months endedJune 30, 2020 and 2019, respectively. Non-cash rental income consists of straight-line rental revenue, amortization of above- and below-market lease intangibles and bad debt expense. Non-cash rental income remained relatively flat period-over-period as the increase in straight-line rental revenue related to net acquisitions was almost fully offset by an increase in reserves on straight-line rental revenue period-over-period as a result of increased tenant credit issues.
Related party fee income
In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA pursuant to which we provided a management team responsible for implementing SMTA 's business strategy and performing certain services for SMTA. Under this agreement, we recognized$5.0 million of revenues during the three months endedJune 30, 2019 . Additionally, under the terms of this agreement, we recognized$0.4 million of stock compensation awarded by SMTA to an employee of Spirit for the three months endedJune 30, 2019 , which was fully offset by$0.4 million in general and administrative expenses recognized for other compensation. This agreement was terminated in conjunction with SMTA's sale ofMaster Trust 2014 onSeptember 20, 2019 . We entered into an Interim Management Agreement for an initial annual fee of$1.0 million , under which we agreed to manage and liquidate the remaining SMTA assets. Under this agreement, we recognized$0.2 million of revenues for the three months endedJune 30, 2020 . OnMarch 18, 2020 , we provided notification to SMTA that we intend to terminate the Interim Management Agreement, effective as ofSeptember 14, 2020 . Additionally, we provided property management services and special services forMaster Trust 2014, which was contributed to SMTA as part of the Spin-Off. As a result, for the three months endedJune 30, 2019 , we recognized$1.9 million in revenue under the terms of the Property Management and Servicing Agreement. This agreement was terminated in the third quarter of 2019 in conjunction with SMTA's sale ofMaster Trust 2014. EXPENSES General and administrative Period-over-period general and administrative expenses decreased, driven by a decrease in compensation expenses of$2.1 million , primarily as a result of decreased accruals for market-based and merit-based compensation, as well as a decrease of$0.2 million in travel expenses as a result of the COVID-19 pandemic. This decrease was partially offset by$0.7 million of expenses recognized during the three months endedJune 30, 2020 related to the COVID-19 pandemic, primarily as a result of increased legal fees for executing rent deferral or abatement agreements. 39 --------------------------------------------------------------------------------
Property costs (including reimbursable)
For the three months endedJune 30, 2020 , property costs were$7.2 million (including$3.0 million of tenant reimbursable expenses), compared to$4.4 million (including$3.5 million of tenant reimbursable expenses) for the same period in 2019. As such, reimbursable property costs decreased period-over-period, primarily due to certain property taxes no longer being considered recoverable. The increase in non-reimbursable costs of$3.3 million was driven primarily by an increase in non-reimbursable property taxes of$2.7 million due to bankruptcies and tenant credit issues from the COVID-19 pandemic, as well as an increase in non-reimbursable property-level legal expenses of$0.6 million . Interest The increase in interest expense was driven by the issuance of the 2029 Senior Notes in the second quarter of 2019, the 2027 Senior Notes and 2030 Senior Notes in the third quarter of 2019 and the 2020 Term Loans in the second quarter of 2020. The increase was partially offset by the following:
• the maturity and repayment of the
of 2.875% Convertible 2019 Notes on
• the early repayment of the
• the repayment and termination of the A-1 Term Loans and A-2 Term Loans on
• and lower usage under the revolving credit facilities period-over-period.
The following table summarizes our interest expense on related borrowings:
Three Months Ended
June 30,
(In Thousands) 2020 2019
Interest expense - revolving credit facilities (1)
1,671 5,691
Interest expense - Senior Unsecured Notes 13,987
3,515
Interest expense - mortgages and notes payable 2,998
5,829
Interest expense - Convertible Notes 3,235 4,649 Non-cash interest expense 3,400 3,694 Total interest expense$ 26,095 $ 25,176
(1) Includes facility fees of approximately
three months ended
Depreciation and amortization
We were a net acquirer during the trailing twelve-month period of$949.3 million of Real Estate Investment Value, resulting in an increase period-over-period in depreciation and amortization. The following table summarizes our depreciation and amortization expense: Three Months Ended June 30, (In Thousands) 2020 2019
Depreciation of real estate assets
146 142
Total depreciation and amortization
Impairments
During the three months endedJune 30, 2020 , we recorded impairment losses of$21.0 million . Impairment of$1.0 million was recorded on three Vacant properties held for use. Impairment of$1.6 million was recorded on underperforming properties, comprised of$1.6 million on two underperforming properties held for use and a de minimis amount on one underperforming property held for sale. Impairment of$18.6 million was recorded on lease intangible assets, primarily as a result of a tenant bankruptcy that had credit issues prior to the COVID-19 pandemic that resulted in the termination of the lease for four properties. Finally, we reversed$0.2 million of previously recorded allowance for loan loss as a result of the loan nearing its maturity without changes to the borrower's credit quality indicators. During the three months endedJune 30, 2019 , we recorded impairment losses of$3.6 million . Impairment of$0.1 million was recorded on one Vacant property held for use. Impairment of$3.2 million was recorded on underperforming properties, comprised of$2.5 million recorded on five underperforming properties held for use and$0.7 million recorded on one underperforming property held for sale. The remaining impairment charges of$0.3 million were recorded on lease intangible assets. 40 --------------------------------------------------------------------------------
Loss on debt extinguishment
During the three months endedJune 30, 2020 , we did not extinguish any debt. During the three months endedJune 30, 2019 , we retired the remainingMaster Trust 2013 notes, which had$158.5 million of aggregate principal outstanding and a stated interest rate of 5.27%. This resulted in a loss on debt of extinguishment of$14.7 million , primarily as a result of early repayment penalties.
Gain on disposition of assets
During the three months ended
Preferred dividend income from SMTA
As part of the Spin-Off, SMTA issued to us 10% Series A preferred shares with an aggregate liquidation preference of$150.0 million . For the three months endedJune 30, 2019 , we recognized preferred dividend income of$3.8 million from these shares. InSeptember 2019 , in conjunction with SMTA's sale ofMaster Trust 2014, SMTA repurchased the preferred shares at their aggregate liquidation preference. Comparison of Six Months EndedJune 30, 2020 to Six Months EndedJune 30, 2019 Six Months Ended June 30, (In Thousands) 2020 2019 Change % Change Revenues: Rental income$ 238,553 $ 210,573 $ 27,980 13.3 % Interest income on loans receivable 809 1,906 (1,097 ) (57.6 )% Earned income from direct financing leases 308 704 (396 ) (56.3 )% Related party fee income 500 14,176 (13,676 ) (96.5 )% Other income 1,074 979 95 9.7 % Total revenues 241,244 228,338 12,906 5.7 % Expenses: General and administrative 25,465 27,014 (1,549 ) (5.7 )% Property costs (including reimbursable) 13,170 9,561 3,609 37.7 % Deal pursuit costs 1,033 244 789 NM Interest 51,454 51,787 (333 ) (0.6 )% Depreciation and amortization 105,396 82,691 22,705 27.5 % Impairments 61,823 7,299 54,524 NM Total expenses 258,341 178,596 79,745 44.7 % Other income: Loss on debt extinguishment - (5,893 ) 5,893 (100.0 )% Gain on disposition of assets 1,046 38,506 (37,460 ) (97.3 )% Preferred dividend income from SMTA - 7,500 (7,500 ) (100.0 )% Total other income 1,046 40,113 (39,067 ) (97.4 )% (Loss) income before income tax expense (16,051 ) 89,855 (105,906 ) NM Income tax expense (209 ) (540 ) 331 (61.3 )% Net (loss) income$ (16,260 ) $ 89,315 $ (105,575 ) NM
NM - Percentages over 100% are not displayed.
REVENUES
Rental income
Six Months Ended June 30,
(In Thousands) 2020 2019
Base Cash Rent $ 226,712 $ 195,217
Variable cash rent (including reimbursables) 5,793 6,580
Straight-line rent, net of uncollectible reserve 5,486
7,392
Amortization of above- and below- market lease intangibles, net 562 1,384 Total rental income$ 238,553 $ 210,573 41
-------------------------------------------------------------------------------- We were a net acquirer of income-producing real estate over the trailing twelve-month period, resulting in an increase in our Base Cash Rent period-over-period. During the trailing twelve months endedJune 30, 2020 , we acquired 237 properties, with a Real Estate Investment Value of$1.06 billion , and disposed of 29 properties, with a Real Estate Investment Value of$115.0 million . The increase was partially offset by an increase in reserves on rental income driven by tenant credit issues from the COVID-19 pandemic from a net recovery of$1.0 million for the six months endedJune 30, 2019 to net reserves of$5.6 million for six months endedJune 30, 2020 . The increase period-over-period was also reduced by$2.4 million of rent abatements for the six months endedJune 30, 2020 , executed as relief due to the COVID-19 pandemic. Finally, included in the Base Cash Rent for the six months endedJune 30, 2020 are rent deferrals related to the effects of the COVID-19 pandemic of$22.3 million . The primary component of variable cash rent is tenant reimbursements, where our tenants are obligated under the lease agreement to reimburse us for certain property costs we incur, and non-cash rental income. Tenant reimbursement income was$5.5 million and$6.3 million for the six months endedJune 30, 2020 and 2019, respectively, and was driven by the tenant reimbursable property costs described below. These amounts represented approximately 2.3% and 3.0% of rental income for the six months endedJune 30, 2020 and 2019, respectively. Non-cash rental income consists of straight-line rental revenue, amortization of above- and below-market lease intangibles and bad debt expense. The remaining decrease in non-cash rental income was primarily driven by an increase in reserves on straight-line rental revenue period-over-period as a result of increased tenant credit issues, which was partially offset by an increase in straight-line rental revenue related to net acquisitions.
Related party fee income
In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA pursuant to which we provided a management team responsible for implementing SMTA's business strategy and performing certain services for SMTA. Under this agreement, we recognized$10.0 million of revenues during the six months endedJune 30, 2019 . Additionally, under the terms of this agreement, we recognized$0.4 million of stock compensation awarded by SMTA to an employee of Spirit for the six months endedJune 30, 2019 , which was fully offset by$0.4 million in general and administrative expenses recognized for other compensation. This agreement was terminated in conjunction with SMTA's sale ofMaster Trust 2014 onSeptember 20, 2019 . We entered into an Interim Management Agreement for an initial annual fee of$1.0 million , under which we agreed to manage and liquidate the remaining SMTA assets. Under this agreement, we recognized$0.5 million of revenues for the six months endedJune 30, 2020 . OnMarch 18, 2020 , we provided notification to SMTA that we intend to terminate the Interim Management Agreement, effective as ofSeptember 14, 2020 . Additionally, we provided property management services and special services forMaster Trust 2014, which was contributed to SMTA as part of the Spin-Off. As a result, for the six months endedJune 30, 2019 , we recognized$3.8 million in revenue under the terms of the Property Management and Servicing Agreement. This agreement was terminated in the third quarter of 2019 in conjunction with SMTA's sale ofMaster Trust 2014. EXPENSES General and administrative Period-over-period general and administrative expenses decreased, driven by a decrease in compensation expenses of$2.5 million , primarily as a result of decreased accruals for market-based and merit-based compensation, as well as a decrease of$0.3 million in travel expenses as a result of the COVID-19 pandemic. This decrease was partially offset by$0.7 million of expenses recognized during the three months endedJune 30, 2020 related to the COVID-19 pandemic, primarily as a result of increased legal fees for executing rent deferral or abatement agreements.
Property costs (including reimbursable)
For the six months endedJune 30, 2020 , property costs were$13.2 million (including$6.6 million of tenant reimbursable expenses) compared to$9.6 million (including$7.6 million of tenant reimbursable expenses) for the same period in 2019. As such, reimbursable property costs decreased period-over-period, primarily due to certain property taxes no longer being considered recoverable. The increase in non-reimbursable costs of$4.6 million was driven primarily by an increase in non-reimbursable property taxes of$4.0 million due to bankruptcies and tenant credit issues from the COVID-19 pandemic, as well as an increase in non-reimbursable property-level legal expenses of$0.6 million . Interest
The decrease in interest expense was driven by the following:
• the extinguishment of
indebtedness on one defaulted loan in the first quarter of 2019, which had a
default interest rate of 9.85%,
42
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• the maturity and repayment of the
of 2.875% Convertible 2019 Notes on
• the early repayment of the
• the repayment and termination of the A-1 Term Loans and A-2 Term Loans on
The decrease was partially offset by the issuance of the 2029 Senior Notes in the second quarter of 2019, the 2027 Senior Notes and 2030 Senior Notes in the third quarter of 2019 and the 2020 Term Loans in the second quarter of 2020.
The following table summarizes our interest expense on related borrowings:
Six Months Ended
June 30,
(In Thousands) 2020 2019
Interest expense - revolving credit facilities (1)
1,671 9,669
Interest expense - Senior Unsecured Notes 27,975 6,853
Interest expense - mortgages and notes payable 6,011 12,082 Interest expense - Convertible Notes
6,469 10,776
Non-cash interest expense 6,468 8,431
Total interest expense $ 51,454 $ 51,787 (1) Includes facility fees of approximately
six months ended
Depreciation and amortization
We were a net acquirer during the trailing twelve-month period of$949.3 million of Real Estate Investment Value, resulting in an increase period-over-period in depreciation and amortization. The following table summarizes our depreciation and amortization expense: Six Months Ended June 30, (In Thousands) 2020 2019
Depreciation of real estate assets
17,469 13,201
Other depreciation 291 284
Total depreciation and amortization
Impairments
During the six months endedJune 30, 2020 , we recorded impairment losses of$61.8 million . Impairment of$1.3 million was recorded on five Vacant properties held for use. Impairment of$41.3 million was recorded on underperforming properties, comprised of$41.2 million on 20 underperforming properties held for use and$0.1 on one underperforming property held for sale. Impairment of$18.8 million was recorded on lease intangible assets, primarily as a result of a tenant bankruptcy that had credit issues prior to the COVID-19 pandemic that resulted in the termination of the lease for four properties. Finally, we recorded allowances for credit losses of$0.3 million on our direct financing lease and$0.1 million on our remaining loans receivable. During the six months endedJune 30, 2019 , we recorded impairment losses of$7.3 million . Impairment of$1.2 million was recorded on Vacant properties, comprised of$0.2 million recorded on two Vacant held for use properties and$1.0 million recorded on one Vacant held for sale property. Impairment of$6.3 million was recorded on underperforming properties, comprised of$2.5 million recorded on five underperforming properties held for use and$3.8 million recorded on nine underperforming properties held for sale. These impairment charges were partially offset by$0.2 million of net impairment on lease intangible liabilities.
Loss on debt extinguishment
During the six months endedJune 30, 2020 , we did not extinguish any debt. During the six months endedJune 30, 2019 , we retired the remainingMaster Trust 2013 notes, which had$158.5 million of aggregate principal outstanding and a stated interest rate of 5.27%. This resulted in a loss on debt of extinguishment of$14.7 million , primarily as a result of early repayment penalties. Additionally, we incurred a loss on debt extinguishment of$0.7 million as a result of the termination of the 2015 Credit Agreement and 2015 Term Loan Agreement in conjunction with entering into the 2019 Revolving Credit and Term Loan Agreement. These losses were partially offset by a gain on debt extinguishment of$9.5 million as a result of extinguishing$10.4 million aggregate principal amount of CMBS indebtedness on one defaulted loan, which was secured by one property. 43
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Gain on disposition of assets
During the six months endedJune 30, 2020 , we disposed of ten properties, resulting in net gains totaling$1.0 million . There were$1.4 million in net gains on the sale of six Vacant properties and minimal net gains on the sale of four active properties. These gains were partially offset by a$0.2 million loss recorded on the sale of a notes receivable and$0.2 million in other net losses. For the same period in 2019, we disposed of 25 properties and recorded net gains totaling$38.5 million . There were$37.3 million in net gains on the sale of 12 active properties and$1.2 million in net gains on the sale of ten Vacant properties. One property was returned to the lender in conjunction with CMBS debt extinguishment and two properties were leasehold interests that were surrendered to the lessors, which did not result in a gain/loss on disposition.
Preferred dividend income from SMTA
As part of the Spin-Off, SMTA issued to us 10% Series A preferred shares with an aggregate liquidation preference of$150.0 million . For the six months endedJune 30, 2019 , we recognized preferred dividend income of$7.5 million from these shares. InSeptember 2019 , in conjunction with SMTA's sale ofMaster Trust 2014, SMTA repurchased the preferred shares at their aggregate liquidation preference.
Property Portfolio Information
1,771 99.2% 48 294 28
Diversification By Tenant
The following table sets forth a summary of tenant concentration for our owned
real estate properties as of
Number of Total Square Feet Percent of
Tenant (1) Properties (in thousands) ABR
Cajun Global LLC 167 240 2.8 %
The Home Depot, Inc. 7 848 2.4 %
Walgreen Co. 36 517 2.4 %
Alimentation Couche-Tard, Inc. 76 230 2.3 %
GPM Investments, LLC 113 306 2.1 %
At Home Group Inc. 12 1,487 2.1 %
Dollar Tree, Inc. 106 927 2.1 %
CVS Caremark Corporation 34 422 2.0 %
Life Time Fitness, Inc 5 588 1.9 %
Party City Holdings Inc. 3 1,090 1.8 %
Other 1,198 29,072 78.1 %
Vacant 14 509 -
Total 1,771 36,236 100.0 %
(1) Tenants represent legal entities ultimately responsible for obligations under the lease agreements or affiliated entities. Other tenants may operate the same or similar business concepts or brands set forth above.
44
--------------------------------------------------------------------------------Lease Expirations
The following table sets forth a summary of lease expirations for our owned real estate as ofJune 30, 2020 . As ofJune 30, 2020 , the weighted average remaining non-cancelable initial term of our leases (based on ABR) was 9.9 years. The information set forth in the table assumes that tenants do not exercise renewal options and or any early termination rights: Number of ABR Total Square Feet Percent of Leases Expiring In: Properties (in thousands) (1) (in thousands) ABR Remainder of 2020 11 $ 2,112 285 0.5 % 2021 74 22,564 2,010 4.8 % 2022 44 17,015 1,591 3.6 % 2023 116 34,492 3,079 7.3 % 2024 50 20,411 1,813 4.4 % 2025 49 18,425 1,483 3.9 % 2026 91 29,035 2,112 6.2 % 2027 124 36,807 2,471 7.8 % 2028 108 26,906 1,919 5.7 % 2029 323 42,081 2,752 9.0 % Thereafter 767 219,772 16,212 46.8 % Vacant 14 - 509 - Total owned properties 1,771 $ 469,620 36,236 100.0 % (1) ABR is not adjusted for the impact of abatements provided as relief due to the COVID-19 pandemic. As of the date of this report, SRC has agreed to a total of$1.4 million of abatements for the period fromJuly 1, 2020 -June 30, 2021 . 45 --------------------------------------------------------------------------------
Diversification By Asset Type and Tenant Industry
The following table sets forth a summary of asset types, and for retail assets the tenant industry concentration, for our owned properties as ofJune 30, 2020 : Number of Total Square Feet Percent of Asset Type Tenant Industry Properties (in thousands) ABR Retail 1,659 25,227 80.7 % Convenience Stores 332 1,048 8.4 % Restaurants - Quick Service 367 800 7.0 % Health and Fitness 42 2,185 6.9 % Restaurants - Casual Dining 135 956 6.1 % Movie Theaters 37 1,953 5.7 % Drug Stores / Pharmacies 80 1,034 5.0 % Grocery 39 1,792 3.8 % Entertainment 24 1,022 3.7 % Car Washes 65 308 3.4 % Dealerships 24 796 3.2 % Home Improvement 14 1,595 3.1 % Dollar Stores 162 1,481 3.1 % Home Décor 15 2,049 2.7 % Specialty Retail 53 1,142 2.5 % Warehouse Club and Supercenters 12 1,319 2.4 % Automotive Service 70 592 2.3 % Department Stores 14 1,281 2.0 % Home Furnishings 18 865 1.9 % Sporting Goods 14 739 1.7 % Education 36 427 1.7 % Automotive Parts 55 388 1.2 % Office Supplies 16 351 0.8 % Other 8 251 0.7 % Medical Office 5 65 0.6 % Pet Supplies & Service 4 133 0.5 % Apparel 5 150 0.3 % Vacant 13 505 0.0 % Industrial 69 8,994 11.6 % Office and Other 43 2,015 7.7 % Total 1,771 36,236 100.0 % 46
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Diversification By Geography
The following map and table set forth 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 259 4,275 11.7 % Louisiana 23 368 1.4 %
Florida 121 2,132 7.8 % Utah 18 333 1.3 %
Georgia 122 1,983 6.5 % Pennsylvania 20 488 1.2 %
Ohio 86 2,396 5.5 % Alaska 9 319 1.1 %
California 24 1,236 4.8 % New Hampshire 16 640 1.1 %
Tennessee 105 1,798 4.2 % Idaho 16 273 1.0 %
Illinois 50 1,258 3.8 % Kansas 18 345 0.8 %
Michigan 85 1,511 3.7 % Connecticut 5 686 0.8 %
New York 30 1,895 3.7 % Wisconsin 10 391 0.7 %
Arizona 45 824 3.1 % Washington 8 185 0.6 %
South Carolina 42 677 2.8 % Maine 26 76 0.5 %
Virginia 44 1,335 2.6 % Oregon 4 144 0.4 %
North Carolina 57 1,138 2.6 % West Virginia 13 202 0.4 %
Maryland 9 714 2.5 % Nebraska 9 221 0.4 %
Alabama 93 618 2.5 % Montana 3 152 0.4 %
Missouri 65 966 2.5 % Massachusetts 2 131 0.4 %
Minnesota 25 936 2.3 % Iowa 12 194 0.4 %
Colorado 25 978 2.2 % North Dakota 3 105 0.3 %
New Mexico 28 583 1.8 % Rhode Island 3 95 0.3 %
Indiana 40 830 1.7 % Wyoming 1 35 0.1 %
Oklahoma 51 448 1.6 % U.S. V.I. 1 38 0.1 %
Mississippi 50 421 1.6 % South Dakota 1 20 0.1 %
Kentucky 37 482 1.6 % Delaware 1 5 0.1 %
Arkansas 42 637 1.6 % Vermont 1 2 *
New Jersey 13 717 1.4 %
* Less than 0.1%
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Liquidity and Capital Resources
FORWARD EQUITY OFFERING
InJune 2020 , we entered into forward sale agreements with certain financial institutions acting as forward purchasers in connection with an offering of 9.2 million shares of common stock at an initial public offering price of$37.35 per share, before underwriting discounts and offering expenses. The forward purchasers borrowed and sold an aggregate of 9.2 million shares of common stock in the offering. 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. We intend (subject to our right to elect cash or net share settlement subject to certain conditions) to deliver, upon physical settlement of the forward sale agreements on one or more dates specified by us occurring no later thanDecember 8, 2021 , an aggregate of 9.2 million shares of our common stock to the forward purchasers in exchange for cash proceeds per share equal to the applicable forward sale price. The forward sale price that we will receive upon physical settlement of the agreements, which was initially$35.856 per share, will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers' stock borrowing costs and (iii) scheduled dividends during the term of the forward sale agreements. As ofJune 30, 2020 , none of these shares had been settled.
ATM PROGRAM
InNovember 2016 , the Board of Directors approved a$500.0 million ATM Program. InFebruary 2019 , we updated the ATM Program, pursuant to which we may from time to time offer and sell shares of our common stock having an aggregate gross sales price of up to$500.0 million through the agents, as our sales agents or, if applicable, as forward sellers, or directly to the agents acting as principals. Sales of shares of our common stock under the ATM Program may be made in sales deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act. The 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" and, collectively, the "forward purchasers"). When we enter into a forward sale agreement with any forward purchaser, we expect that such forward purchaser will attempt to borrow from third parties and sell, through the relevant agent, acting as sales agent for such forward purchaser, shares of our common stock to hedge such forward purchaser's exposure under such 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 relevant 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 ofJune 30, 2020 , 5.6 million shares of our common stock have been sold under the ATM Program. 3.8 million of the sales were sold by forward purchasers through agents under the ATM Program and pursuant to forward sales agreements. The forward sale price that we received upon physical settlement of the agreements was 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. 0.4 million of the shares were sold during the six months endedJune 30, 2020 , all under forward sales agreements, for net proceeds of$17.6 million , after giving effect to sales agent commissions and other issuance fees of$0.3 million . As ofJune 30, 2020 , we had physically settled our obligations under our existing forward sales agreements and there were no open forward sales agreements. We had remaining capacity to sell common stock having an aggregate gross sales price of up to$246.3 million under the ATM Program as ofJune 30, 2020 .
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 ATM program. As ofJune 30, 2020 , available liquidity was comprised of$97.2 million in cash and cash equivalents,$800.0 million of borrowing capacity under the 2019 Credit Facility and$12.2 million in restricted cash and restricted cash equivalents. We also have remaining capacity to sell common stock having an aggregate gross sales price of up to$246.3 million under our 48 --------------------------------------------------------------------------------
ATM Program as of
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. Refer to "Part II, Item 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the period endedMarch 31, 2020 for additional information about the potential impact of the COVID-19 pandemic and restrictions intended to prevent its spread on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and make distributions to our stockholders. We expect that our primary uses of capital will be for property and other asset acquisitions, the payment of tenant improvements, operating expenses, debt service payments and distributions to our stockholders. DESCRIPTION OF CERTAIN DEBT
The following descriptions of debt should be read in conjunction with Note 4 to the consolidated financial statements herein.
2019 Credit Facility
As ofJune 30, 2020 , the aggregate gross commitment under the 2019 Credit Facility was$800.0 million , which may be increased up to$1.2 billion by exercising an accordion feature, subject to satisfying certain requirements and obtaining additional lender commitments. The 2019 Credit Facility has a maturity ofMarch 31, 2023 and includes two six-month extensions that can be exercised at our option. We may voluntarily prepay the 2019 Credit Facility, in whole or in part, at any time without premium or penalty. Payment of the 2019 Credit Facility is unconditionally guaranteed by the Company and material subsidiaries that meet certain conditions (as defined in the 2019 Facilities Agreements). As ofJune 30, 2020 , there were no subsidiaries that met this requirement. As ofJune 30, 2020 , the 2019 Credit Facility bore interest at 1-Month LIBOR plus 0.90%, with no borrowings outstanding, and a ratings-based facility fee in the amount of 0.20% per annum. As ofJune 30, 2020 , there were no letters of credit outstanding. Term Loans As ofJune 30, 2020 , the full borrowing capacity of$400.0 million under the 2020 Term Loan Agreement was drawn. The 2020 Term Loans have a maturity ofApril 2, 2022 and bear interest at a rate of LIBOR plus an applicable margin of 1.50% per annum. If any loans are outstanding afterApril 2, 2021 , theOperating Partnership will be required to pay a one-time fee in an amount equal to 0.20% of the outstanding principal amount of loans.
Senior Unsecured Notes
As ofJune 30, 2020 , we had the following Senior Unsecured Notes outstanding (dollars in thousands): Stated June 30, Maturity Date Interest Rate 2020 2026 Senior Notes September 15, 2026 4.45%$ 300,000 2027 Senior Notes January 15, 2027 3.20%$ 300,000 2029 Senior Notes July 15, 2029 4.00%$ 400,000 2030 Senior Notes January 15, 2030 3.40%$ 500,000 Total Senior Unsecured Notes 3.73%$ 1,500,000 The Senior Unsecured Notes are payable onJanuary 15 andJuly 15 of each year, except for the 2026 Senior Notes, which are payable onMarch 15 andSeptember 15 of each year. 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 49 -------------------------------------------------------------------------------- redeemed three months or less (or two months or less in the case of the 2027 Senior Notes) prior to their respective maturity dates, the redemption price will not include a make-whole premium.
CMBS
In general, the obligor of our asset level debt is a special purpose entity that holds the real estate and other collateral securing the indebtedness. Each special purpose entity is a bankruptcy remote separate legal entity and is the sole owner of its assets and solely responsible for its liabilities other than typical non-recurring covenants. As ofJune 30, 2020 , we had five fixed-rate CMBS loans with$216.3 million of aggregate outstanding principal, a weighted-average contractual interest rate of 5.47% and a weighted-average maturity of 3.3 years. Approximately 87.06% of this debt is partially amortizing and requires a balloon payment at maturity. The following table shows the scheduled principal repayments, including amortization, of the CMBS fixed-rate loans as ofJune 30, 2020 (dollars in thousands): Weighted Number of Number of Stated Interest
Average Scheduled Year of Maturity Loans Properties Rate Range Stated Rate Principal Balloon Total Remainder of 2020 - - -% - %$ 2,078 $ -$ 2,078 2021 - - -% - 4,365 - 4,365 2022 - - -% - 4,617 - 4,617 2023 3 86 5.23%-5.50% 5.46 3,074 197,912 200,986 2024 - - -% - 590 - 590 Thereafter 2 2 5.80%-6.00% 5.83 3,610 70 3,680 Total 5 88 5.47 %$ 18,334 $ 197,982 $ 216,316 Convertible Notes
As of
Holders may convert the 2021 Notes prior toNovember 15, 2020 only under specific circumstances: (1) if the closing price of our common stock for each of at last 20 trading days (whether or not consecutive) during the last 30 consecutive trading days in the quarter is greater than or equal to 130% of the conversion price for the Convertible Notes; (2) during the five business day period after any 10 consecutive trading day period in which the trading price per$1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last closing price of our common stock and the conversion rate for the Convertible Notes; (3) if we call any or all of the Convertible Notes for redemption prior to the redemption date; or (4) upon the occurrence of specified corporate events as described in the Convertible Notes prospectus supplement. On or afterNovember 15, 2020 , until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes, holders may convert the 2021 Notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver cash, shares of common stock or a combination of cash and shares of common stock, at our election. The conversion rate is subject to adjustment for some events, including dividends paid in excess of threshold amounts stipulated in the agreement, but will not be adjusted for any accrued and unpaid interest. As ofJune 30, 2020 , the conversion rate was 17.4458 per$1,000 principal note. If we undergo a fundamental change (as defined in the 2021 Notes' supplemental indenture), holders may require us to repurchase all or any portion of their notes at a repurchase price equal to 100% of the principal amount of such notes to be repurchased, plus accrued and unpaid interest.
DEBT MATURITIES
Future principal payments due on our various types of debt outstanding as of
Remainder of
Total 2020 2021 2022 2023 2024 Thereafter
2019 Credit Facility $ - $ - $ - $ - $ - $ - $ -
2020 Term Loans 400,000 - - 400,000 - - -
Senior Unsecured Notes 1,500,000 - - - - - 1,500,000
CMBS 216,316 2,078 4,365 4,617 200,986 590 3,680
Convertible Notes 345,000 - 345,000 - - - -
$ 2,461,316 $ 2,078 $ 349,365 $ 404,617 $ 200,986 $ 590 $ 1,503,680
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CONTRACTUAL OBLIGATIONS
As discussed above, during the six months endedJune 30, 2020 , we entered into the 2020 Term Loan Agreement to reduce the amounts drawn under the 2019 Credit Facility. There were no other material changes outside the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSEC . We may enter into commitments to purchase goods and services in connection with the operations of our properties. Those commitments generally have terms of one-year or less and reflect expenditure levels comparable to our historical expenditures. DISTRIBUTION POLICY Distributions from our current or accumulated earnings are generally classified as ordinary income, whereas distributions in excess of our current and accumulated earnings, to the extent of a stockholder's federal income tax basis in our common stock, are generally characterized as a return of capital. Under the 2017 Tax Legislation,U.S. stockholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified dividend income) received from a REIT for taxable years beginning afterDecember 31, 2017 and beforeJanuary 1, 2026 . Distributions in excess of a stockholder's federal income tax basis in our common stock are generally characterized as capital gain. We are required to distribute 90% of our taxable income (subject to certain adjustments and excluding net capital gains) on an annual basis to maintain qualification as a REIT for federal income tax purposes and are required to pay federal income tax at regular corporate rates to the extent we distribute less than 100% of our taxable income (including capital gains). We intend to make distributions that will enable us to meet the distribution requirements applicable to REITs and to eliminate or minimize our obligation to pay corporate-level federal income and excise taxes. Any distributions will be at the sole discretion of our Board of Directors, and their form, timing and amount, if any, will depend upon a number of factors, including our actual and projected results of operations, FFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable laws and such other factors as our Board of Directors deems relevant. Refer to "Part II, Item 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the period endedMarch 31, 2020 for additional information about the potential impact of the COVID-19 pandemic and restrictions intended to prevent its spread on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and make distributions to our stockholders.
Cash Flows
The following table presents a summary of our cash flows for the six months
ended
Six Months Ended June 30,
2020 2019 Change
Net cash provided by operating activities $ 133,011 $ 144,275 $ (11,264 )
Net cash used in investing activities (206,840 ) (301,934 ) 95,094
Net cash provided by financing activities 157,191 101,227 55,964
Net increase (decrease) in cash, cash
equivalents and restricted cash $ 83,362 $
(56,432 )
As of
Operating Activities
Our cash flows from operating activities are primarily dependent upon the occupancy level of our portfolio, the rental rates specified in our leases, the collectability of rent and the level of our operating expenses and other general and administrative costs.
The decrease in net cash provided by operating activities was primarily attributable to the following:
• a decrease in related party fee income of
termination of the Asset Management Agreement in
replaced by the Interim Management Agreement, and
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• a decrease in preferred dividends received from SMTA of
result of SMTA repurchasing the preferred shares in
The decrease was partially offset by the following:
• a net increase in cash rental revenue of
acquisitions over the trailing twelve month period, but partially offset by
three months ended
• a decrease in cash interest paid of
the retirement of the
Loans which were partially offset by the issuance of the 2027 Senior Notes,
2029 Senior Notes and 2030 Senior Notes.
Investing Activities
Cash used in investing activities is generally used to fund property acquisitions, for investments in loans receivable and for capital expenditures. Cash provided by investing activities generally relates to the disposition of real estate and other assets. Net cash used in investing activities during the six months endedJune 30, 2020 included$218.9 million for the acquisition of 29 properties and$8.3 million of capitalized real estate expenditures. These outflows were partially offset by the$17.7 million in net proceeds from the disposition of 10 properties and the sale of one loan receivable. Additionally, the outflows were further offset by the collection of$2.7 million of principal on loans receivable. During the same period in 2019, net cash used in investing activities included$447.5 million for the acquisition of 126 properties and$25.7 million of capitalized real estate expenditures. These outflows were partially offset by$163.2 million in net proceeds from the disposition of 25 properties and$8.1 million in collections of principal on loans receivable.
Financing Activities
Generally, our net cash provided by or used in financing activities is impacted by our borrowings under our revolving credit facilities and term loans, issuances of net-lease mortgage notes, common stock and debt offerings and repurchases and dividend payments on our common and preferred stock.
Net cash provided by financing activities during the six months endedJune 30, 2020 was primarily attributable to borrowings of$400.0 million under term loans and net proceeds from the issuance of common stock of$17.6 million . These amounts were partially offset by net repayments of$116.5 million on our revolving credit facilities, payment of dividends to equity owners of$135.1 million , deferred financing costs of$2.4 million , repayment of$2.0 million on mortgages and notes payable and common stock repurchases for employee tax withholdings totaling$4.4 million . During the same period in 2019, net cash provided by financing activities was primarily attributable to net borrowings of$400.0 million under term loans, issuance of$399.7 million of Senior Unsecured Notes and net proceeds from the issuance of common stock of$162.3 million . These amounts were partially offset by the payment of dividends to equity owners of$113.0 million , repayment of$171.3 million on mortgages and notes payable, net repayments of$146.3 million on our revolving credit facilities, repayment of$402.5 million on convertible notes, deferred financing costs of$13.9 million , debt extinguishment costs of$12.3 million and common stock share repurchases for employee tax withholdings totaling$1.4 million .
Off-Balance Sheet Arrangements
As of
New Accounting Pronouncements
See Note 2 to the consolidated financial statements herein.
Non-GAAP Financial Measures
FFO: We calculate FFO 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 use FFO as a supplemental performance measure because 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
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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 debt extinguishment gains (losses), costs associated with termination of
interest rate swaps, costs related to the COVID-19 pandemic and certain non-cash
items. These certain non-cash items include non-cash revenues (comprised of
straight-line rents net of bad debt expense and amortization of lease and loan
receivable intangibles), non-cash interest expense (comprised of amortization of
deferred financing costs and debt discounts/premiums) 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 cash
reserves on deposit with lenders as additional security. 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 standards established by NAREIT. EBITDAre is computed as net income (loss) (computed in accordance with GAAP), plus interest expense, income tax expense (if any), depreciation and amortization, impairments of depreciated property and plus/(minus) losses/(gains) on the disposition of depreciated property.
Adjusted EBITDAre: Adjusted EBITDAre represents EBITDAre as adjusted for revenue
producing acquisitions and dispositions for the quarter as if such acquisitions
and dispositions had occurred as of the beginning of the quarter and for certain
items that we believe are not indicative of our core operating performance, such
as debt extinguishment gains (losses) and costs related to the COVID-19
pandemic. We believe that excluding these items, which are not key drivers of
our investment decisions and may cause short-term fluctuations in net income,
provides a useful supplemental measure to investors and analysts in assessing
the net earnings contribution of our real estate portfolio. Because these
measures do not represent net income (loss) that is computed in accordance with
GAAP, they should only be considered a supplement, and not an alternative, to
net income (loss) (computed in accordance with GAAP) as a performance measure.
Annualized Adjusted EBITDAre: Annualized Adjusted EBITDAre is calculated as
Adjusted EBITDAre for the quarter, adjusted for items where annualization would
not be appropriate, multiplied by four. Our computation of Adjusted EBITDAre and
Annualized Adjusted EBITDAre may differ from the methodology used by other
equity REITs to calculate these measures and, therefore, may not be comparable
to such other REITs.
Adjusted Debt to Annualized Adjusted EBITDAre: Adjusted Debt to Annualized
Adjusted EBITDAre is a supplemental non-GAAP financial measure we use to
evaluate the level of borrowed capital being used to increase the potential
return of our real estate investments, and a proxy for a measure we believe is
used by many lenders and ratings agencies to evaluate our ability to repay and
service our debt obligations over time. We believe the ratio is a beneficial
disclosure to investors as a supplemental means of evaluating our ability to
meet obligations senior to those of our equity holders. Our computation of this
ratio may differ from the methodology used by other equity REITs, and,
therefore, may not be comparable to such other REITs.
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FFO and AFFO
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2020 2019 2020 2019
Net (loss) income attributable to
common stockholders $ (3,001 ) $ 43,149 $ (21,436 ) $ 84,139
Portfolio depreciation and amortization 53,014 41,200 105,105 82,407
Portfolio impairments 21,049 3,607 61,823 7,299
Gain on disposition of assets (658 ) (29,776 ) (1,046 ) (38,506 )
FFO attributable to common stockholders $ 70,404 $ 58,180 $ 144,446 $ 135,339
Loss on debt extinguishment - 14,676 - 5,893
Deal pursuit costs 14 173 1,033 244
Non-cash interest expense 3,400 3,694 6,468 8,431
Accrued interest and fees on defaulted
loans - - - 285
Straight-line rent, net of related bad
debt expense (4,392 ) (4,485 ) (5,486 ) (7,392 )
Other amortization and non-cash charges 133 (270 ) 170 (595 )
Non-cash compensation expense 3,308 3,883 6,759 7,461
Costs related to COVID-19(1) 738 - 738 -
AFFO attributable to common
stockholders (2) $ 73,605 $ 75,851 Net (loss) income per share of common stock - Diluted$ (0.03 ) $ 0.49 $ (0.21 ) $ 0.96 FFO per share of common stock - Diluted (3)$ 0.68 $ 0.66 $ 1.39 $ 1.55 AFFO per share of common stock - Diluted (3)$ 0.71 $ 0.86
Weighted average shares of common stock outstanding - Diluted 102,678,967 87,890,699 102,454,557 86,779,297 Weighted average shares of common stock outstanding for non-GAAP measures - Diluted (3) 102,762,592 87,890,699 103,292,730 86,779,297
(1) Costs related to COVID-19 are included in general and administrative expense
and primarily relate to legal fees for executing rent deferral or abatement
agreements.
(2) AFFO for the three and six months ended
of deferred rental income recognized in conjunction with the FASB's relief
for deferral agreements extended as a result of the COVID-19 pandemic.
(3) Weighted average shares of common stock for non-GAAP measures includes
unvested market-based awards for the three and six months ended
and unsettled forward equity contracts for the six months ended
2020, which are dilutive for the non-GAAP calculations. Dividends paid and
undistributed earnings allocated, if any, to unvested restricted stockholders
are deducted from FFO and AFFO for the computation of the per share amounts.
The following amounts were deducted:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
FFO $0.2 million $0.2 million $0.4 million $0.6 million
AFFO $0.2 million $0.3 million $0.5 million $0.7 million
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Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre
June 30,
(Dollars in thousands) 2020 2019
Revolving credit facilities $ - $ -
Term loans 397,824 814,336
Senior Unsecured Notes, net 1,484,884 691,940
Mortgages and notes payable, net 214,338 286,312
Convertible Notes, net 339,462 333,427
Total debt, net 2,436,508 2,126,015
Unamortized debt discount, net 6,804 10,411
Unamortized deferred financing costs 18,004
17,681
Cash and cash equivalents (97,190 ) (9,984 ) Restricted cash balances held for the benefit of lenders (12,195 ) (11,005 ) Adjusted Debt$ 2,351,931 $ 2,133,118 Three Months Ended June 30, (Dollars in thousands) 2020 2019 Net (loss) income $ (413 ) $ 45,737 Interest 26,095 25,176 Depreciation and amortization 53,160
41,342
Income tax expense 68 320 Gain on disposition of assets (658 ) (29,776 ) Portfolio impairments 21,049 3,607 EBITDAre $ 99,301 $ 86,406 Adjustments to revenue producing acquisitions and dispositions 85 4,537 Deal pursuit costs 14 173 Loss on debt extinguishment - 14,676 Costs related to COVID-19(1) 738 - Adjusted EBITDAre$ 100,138 $ 105,792 Adjustments related to straight-line rent (2) 1,112 (659 ) Other adjustments for Annualized EBITDAre (3) 1,493 (947 ) Annualized Adjusted EBITDAre$ 410,972 $
416,744
Adjusted Debt / Annualized Adjusted EBITDAre (4) 5.7 x 5.1 x
(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 ended
of bad debt expense on straight-line rent receivable balances, where only
been recognized during the three months ended June 30, 2020 . As such,
annualization of the $2.7 million of bad debt expense related to
straight-line rental revenue recognized in previous periods would not be
appropriate. The $2.7 million adjustment was partially offset by $1.6 million of straight-line rental revenue recognized during the three months
ended June 30, 2020 for certain leases accounted for as lease
modifications.
Adjustment for the three months ended June 30, 2019 relates to $0.9 million of
bad debt expense on straight-line rent receivable balances, where annualization
would only be appropriate for $0.2 million .
(3) Adjustments for the three months ended
certain other property costs and general and administrative expenses where
annualization would not be appropriate. Adjustments for the three months
ended
annualization would not be appropriate.
(4) Adjusted Debt / Annualized Adjusted EBITDAre would be 4.9x if all 9.2
million shares under open forward sales agreements had been settled on
55
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