VEREIT, INC. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. We make statements in this section that are forward-looking statements. Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see "Risk Factors" in Part I, Item 1A. of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . Capitalized terms used herein, but not otherwise defined, shall have the meaning ascribed to those terms in the "Part I - Financial Information," including the notes to the consolidated financial statements contained therein. Forward-Looking Statements This Quarterly Report on Form 10-Q includes "forward-looking statements" which reflect our expectations and projections regarding future events and plans, future financial condition, results of operations, liquidity and business, including leasing and occupancy, acquisitions, dispositions, rent receipts, rent relief requests, rent relief granted, the payment of future dividends, the impact of the coronavirus (COVID-19) on our business, the Merger, the Spin-Off and the redemption of the Series F Preferred Stock and the Series F Preferred Units. Generally, the words "anticipates," "assumes," "believes," "continues," "could," "estimates," "expects," "goals," "intends," "may," "plans," "projects," "seeks," "should," "targets," "will," and variations of such words and similar expressions identify forward-looking statements. These forward-looking statements are based on information currently available to us and involve a number of known and unknown assumptions and risks, uncertainties and other factors, which may be difficult to predict and beyond the Company's control, that could cause actual events and plans or could cause our business, financial condition, liquidity and results of operations to differ materially from those expressed or implied in the forward-looking statements. These factors include, among other things, those discussed below. Information regarding historical rent collections should not serve as an indication of future rent collection. We disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of changes in underlying assumptions or factors, new information, future events or otherwise, except as may be required by law. The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements: •Our ability to consummate the proposed Merger and the timing of the closing of the proposed Merger. •The potential impact of the announcement of the proposed transactions or consummation of the proposed transactions on business relationships, including with tenants, clients, employees, customers and competitors. •Potential litigation associated with the Merger. •Costs, fees, expenses and charges related to the proposed transactions. •We may be subject to risks as a result of restrictions imposed by operating covenants contained in the Merger Agreement restricting us generally from issuing equity, incurring or pre-paying debt and limitations on the use of our Revolving Credit Facility. •The uncertain duration and extent of the impact of COVID-19 on our business and the businesses of our tenants (including their ability to timely make rental payments) and the economy generally. •Federal, state or local legislation or regulation that could impact the timely payment of rent by tenants in light of COVID-19. •We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all. •We are subject to risks associated with tenant, geographic and industry concentrations with respect to our properties. •We may be subject to risks accompanying the management of our industrial and office partnerships, in each of which we hold a non-controlling ownership interest. •Our properties may be subject to impairment charges. •We could be subject to unexpected costs or liabilities that may arise from potential dispositions, including related to limited partnership, tenant-in-common andDelaware statutory trust real estate programs and our management of such programs. •We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties including that we may be unable to acquire, dispose of, or lease properties on advantageous terms or at all. •We are subject to risks associated with bankruptcies or insolvencies of tenants, from tenant defaults generally or from the unpredictability of the business plans and financial condition of our tenants, which are heightened as a result of the COVID-19 pandemic. 34 -------------------------------------------------------------------------------- Table of Contents •We have substantial indebtedness, which may affect our ability to pay dividends, and expose us to interest rate fluctuation risk and the risk of default under our debt obligations. •We may be subject to increases in our borrowing costs as a result of changes in interest rates and other factors, including the phasing out of theLondon Inter-Bank Offered Rate ("LIBOR") after 2021. •Our overall borrowing and operating flexibility may be adversely affected by the terms and restrictions within the indenture governing the senior unsecured notes (the "Senior Notes"), and the Credit Agreement governing the terms of the Credit Facility (as both terms are defined in Liquidity and Capital Resources), and compliance with such covenants and/or our ability to access capital markets (including on attractive terms) may be more difficult as a result of the impact of COVID-19. •Our access to capital and terms of future financings may be affected by adverse changes to our credit rating. •We may not generate cash flows sufficient to pay our dividends to stockholders or meet our debt service obligations. •We may be affected by risks resulting from losses in excess of insured limits. •We may fail to remain qualified as a real estate investment trust ("REIT") forU.S. federal income tax purposes. •Compliance with the REIT annual distribution requirements may limit our operating flexibility. •We may be unable to retain or hire key personnel. •We may be impacted by the continuation or deterioration of current market conditions. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A. Risk Factors within our Annual Report on Form 10-K for the year endedDecember 31, 2020 and Part II, Item 1A. Risk Factors within this Quarterly Report on Form 10-Q. We use certain defined terms throughout this Quarterly Report on Form 10-Q that have the following meanings: When we refer to "annualized rental income," we mean the rental revenue under our leases on operating properties on a straight-line basis, which includes the effect of rent escalations and any tenant concessions, such as free rent, and our pro rata share of such revenues from properties owned by unconsolidated joint ventures. Annualized rental income excludes any adjustments to rental income due to changes in the collectability assessment, contingent rent, such as percentage rent, and operating expense reimbursements. Management uses annualized rental income as a basis for tenant, industry and geographic concentrations and other metrics within the portfolio. Annualized rental income is not indicative of future performance. When we refer to a "creditworthy tenant," we mean a tenant that has entered into a lease that we determine is creditworthy and may include tenants with an investment grade or below investment grade credit rating, as determined by major credit rating agencies, or unrated tenants. To the extent we determine that a tenant is a "creditworthy tenant" even though it does not have an investment grade credit rating, we do so based on our management's determination that a tenant should have the financial wherewithal to honor its obligations under its lease with us. As explained further below, this determination is based on our management's substantial experience performing credit analysis and is made after evaluating a tenant's due diligence materials that are made available to us, including financial statements and operating data. When we refer to a "direct financing lease," we mean a lease that requires specific treatment due to the significance of the lease payments from the inception of the lease compared to the fair value of the property, term of the lease, a transfer of ownership, or a bargain purchase option. These leases are recorded as a net asset on the balance sheet. The amount recorded is calculated as the fair value of the remaining lease payments on the leases and the estimated fair value of any expected residual property value at the end of the lease term. When we refer to properties that are net leased on a "long term basis," we mean properties with remaining primary lease terms of generally seven to 10 years or longer on average, depending on property type. Under a "net lease," the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. There are various forms of net leases, most typically classified as triple net or double net. Triple net leases typically require that the tenant pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs). Double net leases typically require that the tenant pay all operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance), but excludes some or all major repairs (e.g., roof, structure and parking lot). Accordingly, the owner receives the rent "net" of these expenses, rendering the cash flow associated with the lease predictable for the term of the lease. Under a net lease, the tenant generally agrees to lease the property for a significant term and agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior 35 -------------------------------------------------------------------------------- Table of Contents to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. The real estate portfolio and economic metrics of our operating properties omits the square feet of one redevelopment property and includes the Company's pro rata share of square feet and annualized rental income from the Company's unconsolidated joint ventures, based upon the Company's legal ownership percentage, which may, at times, not equal the Company's economic interest because of various provisions in certain joint venture agreements regarding distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns. OverviewVEREIT is a full-service real estate operating company which owns and manages one of the largest portfolios of single-tenant commercial properties in theU.S. As ofMarch 31, 2021 , our portfolio was comprised of 3,855 retail, restaurant, office and industrial real estate properties with an aggregate 89.0 million square feet, of which 97.8% was leased, with a weighted-average remaining lease term of 8.4 years. Omitting the square feet of one redevelopment property and including the pro rata share of square feet and annualized rental income from the Company's unconsolidated joint ventures, we owned an aggregate of 88.7 million square feet, of which 98.0% was leased, with a weighted-average remaining lease term of 8.4 years as ofMarch 31, 2021 . Merger with Realty Income Corporation OnApril 29, 2021 , the Company and the OP entered into a Merger Agreement with Realty Income, Merger Sub 1, and Merger Sub 2 whereby Merger Sub 2 will be merged with and into the OP, with the OP continuing as the surviving entity and, immediately thereafter,VEREIT will be merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation. Pursuant to the terms and subject to the conditions of the Merger Agreement, each share of Common Stock and Limited Partner OP Unit will be converted into 0.705 of a newly issued share of Realty Income Common Stock. The Merger Agreement contains customary representations, warranties and covenants by each party. The Merger is subject to certain conditions set forth in the Merger Agreement, including the approval of both companies' shareholders. The boards of directors of the Company and Realty Income have unanimously approved the Merger Agreement. The Merger is expected to close during the fourth quarter of 2021. 36 -------------------------------------------------------------------------------- Table of Contents Operating Highlights and Key Performance Indicators Activity throughMarch 31, 2021 Operations •Acquired controlling financial interests in 54 commercial properties for an aggregate purchase price of$140.1 million , which includes$1.6 million of external acquisition-related expenses that were capitalized. •Disposed of 30 properties, for an aggregate gross sales price of$261.0 million , of which 10 were office properties disposed of for an aggregate sales price of$235.5 million . The Company recorded a gain of$76.1 million related to the sales. Debt •As ofMarch 31, 2021 , no amounts were outstanding under the Revolving Credit Facility. •Total secured debt decreased by$292.8 million , from$1.3 billion to$1.0 billion , which includes prepayment of$213.1 million of mortgage notes during the first quarter of 2021. Equity •Issued an aggregate of 35,710 shares under the Prior ATM Program (as defined in Liquidity and Capital Resources), at a weighted average price per share of$37.90 , for gross proceeds of$1.4 million . The weighted average price per share, net of commissions, was$37.42 , for net proceeds of$1.3 million . •Redeemed a total of 4.0 million shares of Series F Preferred Stock, representing approximately 21.20% of the issued and outstanding preferred shares as of the beginning of the year. The shares of Series F Preferred Stock were redeemed at a redemption price of$25.00 per share plus all accrued and unpaid dividends. •Declared a quarterly dividend of$0.462 per share of Common Stock for the first quarter of 2021. 37 -------------------------------------------------------------------------------- Table of Contents Real Estate Portfolio Metrics In managing our portfolio, we are committed to diversification by property type, tenant, geography and industry. Below is a summary of our operating property type diversification and our top ten concentrations as ofMarch 31, 2021 , based on annualized rental income of$1.1 billion . [[Image Removed: ver-20210331_g1.jpg]]
(1)Includes redevelopment property, billboards, construction in progress, land and parking lots.
[[Image Removed: ver-20210331_g2.jpg]][[Image Removed: ver-20210331_g3.jpg]]
[[Image Removed: ver-20210331_g4.jpg]][[Image Removed: ver-20210331_g5.jpg]]
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Our financial performance is influenced by the timing of acquisitions and
dispositions and the operating performance of our operating properties. The
following table shows the property statistics of our operating properties as of
March 31, 2021 and 2020:
March 31, 2021 March 31, 2020
Portfolio Metrics
Operating properties 3,855 3,853
Rentable square feet (in millions) 88.7 89.5
Economic occupancy rate (1) 98.0% 99.1%
Investment-grade tenants (2) 37.8% 36.7%
Weighted-average lease term (in years) 8.4 8.3
Lease rollover: (3)
Annual average 6.5% 6.6%
Maximum for a single year 11.1% 10.9%
____________________________________
(1)Economic occupancy rate equals the sum of square feet leased (including space subject to month-to-month agreements) divided by rentable square feet. (2)Based on annualized rental income of our real estate portfolio as ofMarch 31, 2021 and 2020, respectively. Investment-grade tenants are those with a credit rating of BBB- or higher byStandard & Poor's Financial Services LLC or a credit rating of Baa3 or higher byMoody's Investor Service, Inc. The ratings may reflect those assigned byStandard & Poor's Financial Services LLC orMoody's Investor Service, Inc. to the lease guarantor or the parent company, as applicable. (3)Through the end of the next five years as of the respective reporting date. Operating Performance In addition, management uses the following financial metrics to assess our operating performance (dollar amounts in thousands, except per share amounts).
Three Months Ended
2021 2020
Financial Metrics
Total revenues $ 290,809 $ 299,182
Net income $
120,723
$
0.50
$
178,988
$
183,047
$
0.80
____________________________________
(1)See the Non-GAAP Measures section below for descriptions of our non-GAAP measures and reconciliations to the most comparable measure in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"). 39 -------------------------------------------------------------------------------- Table of Contents Results of Operations Our business was not materially impacted during the three months endedMarch 31, 2021 or 2020 by the COVID-19 pandemic. During the three months endedMarch 31, 2021 our rent collection was 99% of rental revenue and as ofApril 22, 2021 , we collected$9.8 million of deferred rent, representing approximately 100% of amounts due throughMarch 31, 2021 . The full extent of the future impact of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations remains uncertain. The table below sets forth, for the periods presented, revenue information and the dollar amount change year over year (in thousands): Three Months Ended March 31, 2021 vs 2020 2021 2020 Increase/(Decrease) Revenues: Rental$ 290,309 $ 298,586 $ (8,277) Fees from managed partnerships 500 596 (96) Total revenues$ 290,809 $ 299,182 $ (8,373) Rental The decrease in rental revenue of$8.3 million during the three months endedMarch 31, 2021 as compared to the same period in 2020 was primarily due to real estate dispositions and lease amendments, expirations and terminations, partially offset by real estate acquisitions. Subsequent toJanuary 1, 2020 , the Company acquired 105 occupied properties for an aggregate purchase price of$0.5 billion and disposed of 107 consolidated properties for an aggregate sales price of$0.7 billion . Fees from Managed Partnerships Fees from managed partnerships consist of fees earned for providing various services to the Company's unconsolidated joint venture entities. Fees from managed partnerships remained relatively constant during the three months endedMarch 31, 2021 , as compared to the same period in 2020. Operating Expenses The table below sets forth, for the periods presented, certain operating expense information and the dollar amount change year over year (in thousands): Three Months Ended March 31, 2021 vs 2020 2021 2020 Increase/(Decrease) Acquisition-related$ 1,354 $ 1,523 $ (169) Litigation and non-routine costs, net 68 (8,564) 8,632 Property operating 30,605 30,490 115 General and administrative 14,526 15,056 (530) Depreciation and amortization 108,075 124,080 (16,005) Impairments 31,849 8,380 23,469 Total operating expenses$ 186,477 $ 170,965 $ 15,512 Acquisition-Related Expenses Acquisition-related expenses consist of allocated internal salaries related to time spent on acquiring commercial properties and costs associated with unconsummated deals. Acquisition-related expenses remained relatively constant during the three months endedMarch 31, 2021 , as compared to the same period in 2020. Litigation and Non-Routine Costs, Net Litigation and non-routine costs, net increased$8.6 million during the three months endedMarch 31, 2021 , as compared to the same period in 2020. During the three months endedMarch 31, 2020 , the Company reversed$6.7 million of prior period estimated costs recorded in 2019 which exceeded actual expenses incurred and recorded$2.5 million of insurance recoveries and$0.6 million of litigation costs. During the same period in 2021, the Company recorded$0.1 million of fees and costs associated with litigations. 40 -------------------------------------------------------------------------------- Table of Contents Property Operating Expenses Property operating expenses such as taxes, insurance, ground rent and maintenance include both reimbursable and non-reimbursable property expenses. Property operating expenses remained relatively constant during the three months endedMarch 31, 2021 , as compared to the same period in 2020. General and Administrative Expenses General and administrative expenses remained relatively constant during the three months endedMarch 31, 2021 , as compared to the same period in 2020. Depreciation and Amortization Expenses The decrease in depreciation and amortization expenses of$16.0 million during the three months endedMarch 31, 2021 as compared to the same period in 2020 was primarily due to the write off of intangible lease assets related to certain properties whose tenants filed for Chapter 11 bankruptcy during the three months endedMarch 31, 2020 . Impairments Impairments of$31.8 million and$8.4 million were recorded during the three months endedMarch 31, 2021 and 2020, respectively. During the three months endedMarch 31, 2021 , the impairment charges primarily related to certain office, retail and restaurant properties which were identified by management for potential sale or were determined would not be re-leased by the tenant. Other (Expense) Income and Provision for Income Taxes The table below sets forth, for the periods presented, certain financial information and the dollar amount change year over year (in thousands): Three Months Ended March 31, 2021 vs 2020 2021 2020 Increase/(Decrease) Interest expense$ (60,736) $ (64,696) $ (3,960) Loss on extinguishment and forgiveness of debt, net$ (2,132) $ (1,280) $ 852 Other income, net$ 3,666 $ 175 $ 3,491 Equity in income of unconsolidated entities$ 447 $ 246 $ 201 Gain on disposition of real estate and real estate assets held for sale, net$ 76,074 $ 25,249 $ 50,825 Provision for income taxes$ (928) $ (1,048) $ (120) Interest Expense The decrease in interest expense of$4.0 million during the three months endedMarch 31, 2021 as compared to the same period in 2020 was primarily due to a decrease in average debt outstanding and weighted average interest rates. AtMarch 31, 2021 , the Company had$5.6 billion of debt outstanding with a weighted average interest rate of 3.90%, as compared to$6.3 billion of debt outstanding with a weighted average interest rate of 3.96% atMarch 31, 2020 . Loss on Extinguishment and Forgiveness of Debt,Net During the three months endedMarch 31, 2021 and 2020, the Company recognized losses on extinguishment of debt related to the prepayments of mortgage notes payable. Other Income, Net The increase of$3.5 million in other income, net during the three months endedMarch 31, 2021 as compared to the same period in 2020 was primarily due to a gain of$2.0 million recorded for real estate investments received from lease related transactions in 2021, with no comparable payments received during the same period in 2020. Equity in Income of Unconsolidated Entities The increase in equity in income was primarily due to the acquisition of one property in each of the industrial and office partnerships subsequent toMarch 31, 2020 . 41 -------------------------------------------------------------------------------- Table of Contents Gain on Disposition of Real Estate and Real Estate Assets Held for Sale, Net The increase in gain on disposition of real estate and real estate assets held for sale, net of$50.8 million during the three months endedMarch 31, 2021 , as compared to the same period in 2020 was due to the Company's disposition of 30 properties for an aggregate sales price of$261.0 million which resulted in a gain of$76.1 million during the three months endedMarch 31, 2021 , as compared to the disposition of 30 properties for an aggregate sales price of$152.2 million during the same period in 2020, which resulted in a gain of$25.2 million . Provision for Income Taxes The provision for income taxes consists of certain state and local income and franchise taxes. The provision for income taxes remained relatively constant during the three months endedMarch 31, 2021 , as compared to the same period in 2020. 42 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Measures Our results are presented in accordance withU.S. GAAP. We also disclose certain non-GAAP measures, as discussed further below. Management uses these non-GAAP financial measures in our internal analysis of results and believes these measures are useful to investors for the reasons explained below. These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance withU.S. GAAP. Funds from Operations and Adjusted Funds from Operations Due to certain unique operating characteristics of real estate companies, as discussed below, theNational Association of Real Estate Investment Trusts, Inc. ("Nareit"), an industry trade group, has promulgated a supplemental performance measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental performance measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income or loss as determined underU.S. GAAP. Nareit defines FFO as net income or loss computed in accordance withU.S. GAAP adjusted for gains or losses from disposition of property, depreciation and amortization of real estate assets, impairment write-downs on real estate, and our pro rata share of FFO adjustments related to unconsolidated partnerships and joint ventures. We calculate FFO in accordance with Nareit's definition described above. In addition to FFO, we use adjusted funds from operations ("AFFO") as a non-GAAP supplemental financial performance measure to evaluate the operating performance of the Company. AFFO, as defined by the Company, excludes from FFO non-routine items such as acquisition-related expenses, litigation and non-routine costs, net and gains or losses on sale of investment securities or mortgage notes receivable. We also exclude certain non-cash items such as impairments of goodwill, intangible and right of use assets, straight-line rent, net direct financing lease adjustments, gains or losses on derivatives, gains or losses on the extinguishment or forgiveness of debt, equity-based compensation and amortization of intangible assets, deferred financing costs, premiums and discounts on debt and investments, above-market lease assets and below-market lease liabilities. Management believes that excluding these items from FFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of our portfolio over time. AFFO allows for a comparison of the performance of our operations with other publicly-traded REITs, as AFFO, or an equivalent measure, is routinely reported by publicly-traded REITs, and we believe often used by analysts and investors for comparison purposes. For all of these reasons, we believe FFO and AFFO, in addition to net income (loss), as defined byU.S. GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of the Company over time. However, not all REITs calculate FFO and AFFO the same way, so comparisons with other REITs may not be meaningful. FFO and AFFO should not be considered as alternatives to net income (loss) and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. Neither theU.S. Securities and Exchange Commission (the "SEC"), Nareit, nor any other regulatory body has evaluated the acceptability of the exclusions used to adjust FFO in order to calculate AFFO and its use as a non-GAAP financial performance measure. 43
-------------------------------------------------------------------------------- Table of Contents The table below presents FFO and AFFO for the three months endedMarch 31, 2021 and 2020 (in thousands, except share and per share data):
Three Months Ended
2021 2020
Net income $ 120,723 $ 86,863
Dividends on Series F Preferred Stock (6,525) (12,948)
Gain on disposition of real estate assets and interests in unconsolidated joint ventures, net
(76,074) (25,249)
Depreciation and amortization of real estate assets 107,700 123,645
Impairment of real estate 31,849 8,380
Proportionate share of adjustments for unconsolidated entities 1,315 1,131
FFO attributable to common stockholders and limited partners 178,988 181,822
Acquisition-related expenses 1,354 1,523
Litigation and non-routine costs, net 68 (8,564)
(Gain) loss on investments (695) 541
Amortization of premiums (discounts) on debt and investments, net
87 (689)
Amortization of above-market lease assets and deferred lease incentives, net of amortization of below-market lease liabilities
1,547 748
Net direct financing lease adjustments 366 365
Amortization and write-off of deferred financing costs 2,555 2,841
Loss on extinguishment and forgiveness of debt, net 2,132 1,280
Straight-line rent (4,219) (2,054)
Equity-based compensation 2,669 2,602
Other adjustments, net (1,661) 228
Proportionate share of adjustments for unconsolidated entities (144) 331
AFFO attributable to common stockholders and limited partners $
183,047
Weighted-average shares of Common Stock outstanding - basic 229,159,472 215,587,560
Effect of weighted-average Limited Partner OP Units and dilutive securities (1)
270,395 362,688
Weighted-average shares of Common Stock outstanding - diluted (2)
229,429,867 215,950,248
AFFO attributable to common stockholders and limited partners per diluted share
$
0.80
____________________________________
(1)Dilutive securities include unvested restricted stock units ("Restricted
Stock Units") and stock options ("Stock Options").
(2)Weighted-average shares for all periods presented exclude the effect of the
convertible debt, which was fully repaid in cash as of December 31, 2020 and the
underlying Restricted Stock Units that would not have met the vesting criteria
based on certain performance targets as of the end of the respective reporting
period.
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Liquidity and Capital Resources
General
Our principal liquidity needs for the next twelve months and beyond are to:
•fund normal operating expenses;
•fund potential capital expenditures, tenant improvements and leasing costs;
•meet debt service and principal repayment obligations, including balloon
payments on maturing debt;
•pay dividends; and
•fund property acquisitions.
We expect to be able to satisfy these obligations using one or more of the
following sources:
•cash flow from operations;
•proceeds from real estate dispositions;
•utilization of the existing Revolving Credit Facility; and
•cash and cash equivalents balance.
COVID-19
We do not currently expect liquidity constraints. However, COVID-19 and related
impacts on our financial performance and the financial performance of our
tenants could still have a material and adverse effect on our results of
operations, liquidity and cash flows, in particular due to the potential
inability of our tenants to satisfy their rent obligations and inability of the
Company to renew leases, lease vacant space or re-let space as leases expire on
favorable terms, or at all. Impacts related to COVID-19 may also negatively
impact our future compliance with financial covenants in our Credit Facility,
indentures governing our Senior Notes and other debt agreements and result in a
default and acceleration of indebtedness which could negatively impact our
ability to make additional borrowings under our Credit Facility. The financial
impact of COVID-19 could also negatively affect our ability to pay dividends or
fund acquisitions in the future.
Disposition Activity
As part of our effort to optimize our real estate portfolio by focusing on
holding core assets, during the three months ended March 31, 2021 , the Company
disposed of 30 properties for an aggregate gross sales price of $261.0 million .
We expect to continue to explore opportunities to sell additional properties to
provide further financial flexibility, however, due to current economic
circumstances, we may not be able to dispose of properties on advantageous terms
or at all.
Credit Facility
Summary and Obligations
On May 23, 2018 , the General Partner, as guarantor, and the OP, as borrower,
entered into a credit agreement with Wells Fargo Bank, National Association as
administrative agent and other lenders party thereto (the "Credit Agreement").
The Credit Agreement provided for maximum borrowings of $2.9 billion , originally
consisting of a $2.0 billion unsecured revolving credit facility (the "Revolving
Credit Facility") and a $900.0 million unsecured term loan facility (the "Credit
Facility Term Loan," together with the Revolving Credit Facility, the "Credit
Facility"). Effective December 27, 2019 , the Company reduced the amount
available under its Revolving Credit Facility from $2.0 billion to $1.5 billion .
On May 27, 2020 , the Operating Partnership and the Company, entered into
Amendment No. 1 to the Credit Agreement (the "Amendment") which, among other
things, modified the measurement period for certain financial covenants (and
relevant associated definitions) from either the prior quarterly period
annualized or the prior six month period to the four consecutive fiscal quarter
period most recently ending. During the fourth quarter of 2020, the Company
repaid the outstanding balance of $900.0 million on the Credit Facility Term
Loan in connection with the termination of the related interest rate swap
agreements discussed in Note 7 - Derivatives and Hedging Activities.
As of March 31, 2021 , no amounts were outstanding under the Revolving Credit
Facility. The maximum aggregate dollar amount of letters of credit that may be
outstanding at any one time under the Credit Facility is $50.0 million . As of
March 31, 2021 , there were $2.6 million of letters of credit outstanding.
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The Revolving Credit Facility generally bears interest at an annual rate of
LIBOR plus 0.775% to 1.55% or Base Rate plus 0.00% to 0.55% (based upon the
General Partner's then current credit rating). "Base Rate" is defined as the
highest of the prime rate, the federal funds rate plus 0.50% or a floating rate
based on one month LIBOR plus 1.0%, determined on a daily basis. The Credit
Facility Term Loan generally bore interest at an annual rate of LIBOR plus 0.85%
to 1.75%, or Base Rate plus 0.00% to 0.75% (based upon the General Partner's
then current credit rating). In addition, the Credit Agreement provides the
flexibility for interest rate auctions, pursuant to which, at the Company's
election, the Company may request that lenders make competitive bids to provide
revolving loans, which competitive bids may be at pricing levels that differ
from the foregoing interest rates.
Credit Facility Covenants
The Credit Facility requires restrictions on corporate guarantees, as well as
the maintenance of certain financial covenants. The key financial covenants in
the Credit Facility, as defined and calculated per the terms of the Credit
Agreement include maintaining the following:
Unsecured Credit Facility Key Covenants Required
Ratio of total indebtedness to total asset value ?
60%
Ratio of adjusted EBITDA to fixed charges ?
1.5x
Ratio of secured indebtedness to total asset value ?
45%
Ratio of unsecured indebtedness to unencumbered asset value ?
60%
Ratio of unencumbered adjusted NOI to unsecured interest expense ? 1.75x
The Company believes that it was in compliance with the financial covenants pursuant to the Credit Agreement and is not restricted from accessing any borrowing availability under the Credit Facility as ofMarch 31, 2021 . Corporate Bonds Summary and Obligations As ofMarch 31, 2021 , theOperating Partnership had$4.65 billion aggregate principal amount of Senior Notes outstanding. The indenture governing the Senior Notes requires that the Company be in compliance with certain key financial covenants, including maintaining the following: Corporate Bond Key Covenants Required Limitation on incurrence of total debt ? 65%
Limitation on incurrence of secured debt ? 40% Debt service coverage ratio
? 1.5x
Maintenance of total unencumbered assets ? 150%
As ofMarch 31, 2021 , the Company believes that it was in compliance with these financial covenants based on the covenant limits and calculations in place at that time. Mortgage Notes Payable Summary and Obligations As ofMarch 31, 2021 , the Company had mortgage notes payable of$1.0 billion , which was collateralized by 219 properties, reflecting a decrease fromDecember 31, 2020 of$292.8 million during the three months endedMarch 31, 2021 , primarily related to prepayments of mortgage notes payable. Our mortgage indebtedness bore interest at the weighted-average rate of 4.87% per annum and had a weighted-average maturity of 2.3 years. We may in the future incur additional mortgage debt on the properties we currently own or use long-term non-recourse financing to acquire additional properties. The payment terms of our loan obligations vary. In general, only interest amounts are payable monthly with all unpaid principal and interest due at maturity. Some of our loan agreements require that we comply with specific reporting and financial covenants mainly related to debt coverage ratios and loan-to-value ratios. Each loan that has these requirements has specific ratio thresholds that must be met. 46 -------------------------------------------------------------------------------- Table of Contents Restrictions on Loan Covenants Our mortgage loan obligations generally restrict corporate guarantees and require the maintenance of financial covenants, including maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios), as well as the maintenance of a minimum net worth. The mortgage loan agreements contain no dividend restrictions except in the event of default or when a distribution would drive liquidity below the applicable thresholds. The Company believes that it was in compliance with the financial covenants under the mortgage loan agreements and had no restrictions on the payment of dividends as ofMarch 31, 2021 . Dividends OnFebruary 23, 2021 , the Company's Board of Directors declared a quarterly cash dividend for the first quarter of 2021 of$0.462 per share of Common Stock to stockholders of record as ofMarch 31, 2021 , which was paid onApril 15, 2021 . An equivalent distribution by theOperating Partnership is applicable per OP Unit. Our Series F Preferred Stock, as discussed in Note 12 - Equity to our consolidated financial statements, will pay cumulative cash dividends at the rate of 6.70% per annum on their liquidation preference of$25.00 per share (equivalent to$1.675 per share on an annual basis). OnMay 4, 2021 , the Company's Board of Directors declared a quarterly cash dividend for the second quarter of 2021 of$0.462 per share of Common Stock consistent with last quarter's dividend. The dividend will be paid onJuly 15, 2021 to Common Stock stockholders of record as ofJune 30, 2021 . An equivalent distribution by theOperating Partnership is applicable per OP Unit. Partial Redemptions of Series F Preferred Stock and Series F Preferred OP Units During the three months endedMarch 31, 2021 , the Company redeemed a total of 4.0 million shares of Series F Preferred Stock, representing approximately 21.20% of the issued and outstanding shares of Series F Preferred Stock as of the beginning of 2021. The shares of Series F Preferred Stock were redeemed at a redemption price of$25.00 per share. As ofMarch 31, 2021 , there were approximately 14.9 million shares of Series F Preferred Stock, approximately 14.9 million corresponding General Partner Series F Preferred Units and 49,766 Limited Partner Series F Preferred Units issued and outstanding. Common Stock Continuous Offering Program OnFebruary 25, 2021 , the Company established a new continuous equity offering program pursuant to which the Company can sell shares of Common Stock having an aggregate offering price of up to$1.5 billion in "at-the-market" offerings or certain other transactions (the "New ATM Program"). Under the New ATM Program, the Company may also enter into one or more forward transactions under separate master forward sale confirmations and related supplemental confirmations for the sale of shares of its common stock on a forward basis. The New ATM Program replaced the Company's prior continuous equity offering program, which was effectiveApril 15, 2019 (the "Prior ATM Program" and collectively with the New ATM Program, the "ATM Program"). The proceeds from any sale of shares under the ATM Program have been and will be used for general corporate purposes, which may include funding potential acquisitions and repurchasing or repaying outstanding indebtedness. During the three months endedMarch 31, 2021 , the Company issued an aggregate of 35,710 shares under the Prior ATM Program, at a weighted average price per share of$37.90 , for gross proceeds of$1.4 million . The weighted average price per share, net of commissions, was$37.42 , for net proceeds of$1.3 million . As ofMarch 31, 2021 , the Company sold an aggregate of$572.2 million under the Prior ATM Program, which had an initial capacity of$750.0 million . No shares have been issued under the New ATM Program as ofMarch 31, 2021 . Share Repurchase Program The Company has a share repurchase program (the "Share Repurchase Program") that permits the Company to repurchase up to$200.0 million of its outstanding Common Stock throughMay 6, 2022 . Under the Share Repurchase Program, repurchases can be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated stock repurchase transactions, or other methods of acquiring shares in accordance with applicable securities laws and other legal requirements. The Share Repurchase Program does not obligate the Company to make any repurchases at a specific time or in a specific situation and repurchases are influenced by prevailing market conditions, the trading price of the Common Stock, the Company's financial performance and other conditions. Shares of Common Stock repurchased by the Company under the Share Repurchase Program, if any, will be returned to the status of authorized but unissued shares of Common Stock. As ofMarch 31, 2021 , there were no share repurchases under the Share Repurchase Program. 47 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following is a summary of our contractual obligations as ofMarch 31, 2021 (in thousands): Payments due by period Less than 1 More than 5 Total year 1-3 years 4-5 years years Principal payments - mortgage notes$ 1,040,389 $ 48,985
114,468 37,219 76,122 640 487
Principal payments - corporate
bonds 4,650,000 - 500,000 1,150,000 3,000,000
Interest payments - corporate
bonds 1,097,662 128,503 493,250 249,936 225,973
Operating and ground lease
commitments 302,807 16,140 61,590 37,888 187,189
Other commitments (2) 10,426 10,426 - - -
Total $ 7,215,752 $ 241,273 $ 2,115,401 $ 1,440,680 $ 3,418,398 ____________________________________
(1)Interest payments due in future periods on the$15.0 million of variable rate debt were calculated using a forward LIBOR curve. (2)Includes the Company's build-to-suit development project and letters of credit outstanding. 48 -------------------------------------------------------------------------------- Table of Contents Cash Flow Analysis for the three months endedMarch 31, 2021 Operating Activities - During the three months endedMarch 31, 2021 , net cash provided by operating activities, remained relatively constant, increasing$8.1 million to$180.1 million from$172.0 million during the same period in 2020. Investing Activities - Net cash provided by investing activities for the three months endedMarch 31, 2021 increased$126.3 million to$106.6 million from$19.7 million net cash used in investing activities during the same period in 2020. The increase was primarily related to an increase in cash proceeds from dispositions of real estate and joint ventures of$113.1 million and a decrease in cash used for investments in real estate assets of$7.2 million . Financing Activities - Net cash used in financing activities of$492.8 million increased$926.2 million during the three months endedMarch 31, 2021 from$433.4 million net cash provided by financing activities during the same period in 2020. During the three months endedMarch 31, 2021 , the Company repaid$295.9 million of mortgage notes payable, redeemed$100.0 million of Series F Preferred Stock and paid$96.6 million of distributions. During the three months endedMarch 31, 2020 , the Company received$721.3 million net proceeds from the Credit Facility, repaid$123.6 million of mortgage notes payable and paid$162.7 million of distributions. Election as a REIT The General Partner elected to be taxed as a REIT forU.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the taxable year endedDecember 31, 2011 . As a REIT, except as discussed below, the General Partner generally is not subject to federal income tax on taxable income that it distributes to its stockholders so long as it distributes at least 90% of its annual taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if the General Partner maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, federal income taxes on certain income and excise taxes on its undistributed income. We believe we are organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year endedDecember 31, 2021 .The Operating Partnership is classified as a partnership forU.S. federal income tax purposes. As a partnership, theOperating Partnership is not a taxable entity forU.S. federal income tax purposes. Instead, each partner in theOperating Partnership is required to take into account its allocable share of theOperating Partnership's income, gains, losses, deductions and credits for each taxable year. However, theOperating Partnership may be subject to certain state and local taxes on its income and property. Under the limited partnership agreement of the OP, as amended (the "LPA"), theOperating Partnership is required to conduct business in such a manner as to permit the General Partner at all times to qualify as a REIT.The Company conducts all of its business inthe United States andPuerto Rico and, as a result, it files income tax returns in theU.S. federal jurisdiction,Puerto Rico , and various state and local jurisdictions. Certain of the Company's inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation. Inflation We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. However, net leases that require the tenant to pay its allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance, may reduce our exposure to increases in costs and operating expenses resulting from inflation. Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 49 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Significant Accounting Estimates Our accounting policies have been established to conform withU.S. GAAP. The preparation of financial statements in conformity withU.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different assumptions or estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 : •Goodwill Impairment; •Real Estate Investment Impairment; and •Allocation of Purchase Price of Real Estate Assets Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market Risk The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our market risk arises primarily from interest rate risk relating to variable-rate borrowings. To meet our short and long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to manage our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, caps, collars, treasury locks, options and forwards in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. Interest Rate Risk As ofMarch 31, 2021 , our debt included fixed-rate debt, with a fair value and carrying value of$6.0 billion and$5.6 billion , respectively. Changes in market interest rates on our fixed rate debt impact the fair value of the debt, but they have no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points, and the fixed rate debt balance remains constant, we expect the fair value of our debt to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from theirMarch 31, 2021 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed rate debt of$305.4 million . A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt of$329.0 million . As ofMarch 31, 2021 , our debt included variable-rate debt with a fair value and carrying value of$15.1 million and$15.0 million , respectively. The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from theirMarch 31, 2021 levels, with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate debt would increase or decrease our interest expense by$0.2 million annually. See Note 6 - Debt to our consolidated financial statements. As the information presented above includes only those exposures that existed as ofMarch 31, 2021 , it does not consider exposures or positions arising after that date. The information presented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations. These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs and assume no other changes in our capital structure. 50 -------------------------------------------------------------------------------- Table of Contents InJuly 2017 , theFinancial Conduct Authority ("FCA") announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Company is not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the Secured Overnight Financing Rate ("SOFR") markets. The Company has contracts that are indexed to LIBOR and is monitoring and evaluating the related risks, which include interest amounts on our variable rate debt as discussed in Note 6 - Debt. See Item 1A. Risk Factors included in the Company's Annual Report on Form 10-K for further discussion on risks related to changes in LIBOR reporting practices, the method in which LIBOR is determined, or the use of alternative reference rates. Credit Risk Concentrations of credit risk arise when a number of tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company is subject to tenant, geographic and industry concentrations. Any downturn of the economic conditions in one or more of these tenants, geographies or industries could result in a material reduction of our cash flows or material losses to us. The factors considered in determining the credit risk of our tenants include, but are not limited to: payment history; credit status and change in status (credit ratings for public companies are used as a primary metric); change in tenant space needs (i.e., expansion/downsize); tenant financial performance; economic conditions in a specific geographic region; and industry specific credit considerations. We believe that the credit risk of our portfolio is reduced by the high quality and diversity of our existing tenant base, reviews of prospective tenants' risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants. However, we continue to monitor the credit risk of our portfolio. 51
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