ESSENTIAL PROPERTIES REALTY TRUST, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)
In this Quarterly Report on Form 10-Q, we refer toEssential Properties Realty Trust, Inc. , aMaryland corporation, together with its consolidated subsidiaries, including its operating partnership,Essential Properties, L.P. , as "we," "us," "our" or the "Company," unless we specifically state otherwise or the context otherwise requires.
Special note regarding forward-looking statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In particular, many statements pertaining to our business and growth strategies, investment, financing and leasing activities, and trends in our business, including trends in the market for long-term, net leases of freestanding, single-tenant properties, contain forward-looking statements. When used in this quarterly report, the words "estimate," "anticipate," "expect," "believe," "intend," "may," "will," "should," "seek," "approximately," and "plan," and variations of such words, and similar words or phrases, that are predictions of future events or trends and that 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, beliefs or intentions of management. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements; accordingly, you should not rely on forward-looking statements as predictions of future events. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise, and may not be realized. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
• general business and economic conditions;
•risks inherent in the real estate business, including tenant defaults or bankruptcies, illiquidity of real estate investments, fluctuations in real estate values and the general economic climate in local markets, competition for tenants in such markets, potential liability relating to environmental matters and potential damages from natural disasters;
•the performance and financial situation of our tenants;
•the availability of suitable properties in which to invest and our ability to acquire and lease such properties on favorable terms;
• our ability to renew leases, lease vacant space or re-let space as existing leases expire or are terminated;
•volatility and uncertainty in credit and broader financial markets, including potential fluctuations in the consumer price index (“CPI”);
•the degree and nature of our competition;
• our inability to generate sufficient cash flow to service our outstanding debt;
•our ability to access debt and equity capital on attractive terms;
•fluctuating interest rates;
•the availability of qualified personnel and our ability to retain our key executives;
• changes in, or the failure or inability to comply with, applicable law or regulation;
• our inability to continue to qualify for tax as a real estate investment trust (“REIT”);
• changes in the
•any negative impact of the COVID-19 pandemic or other similar epidemics on the Company and its tenants; and
• the additional factors discussed in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report and in our Annual Report on Form 10-K for the financial year closed
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You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future events or of our performance. 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. Because we operate in a highly competitive and rapidly changing environment, new risks emerge from time to time, and it is not possible for management to predict all such risks, nor can management assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual events or results. -Overview We are an internally managed real estate company that acquires, owns and manages primarily single-tenant properties that are net leased on a long-term basis to middle-market companies operating service-oriented or experience-based businesses. We generally invest in and lease freestanding, single-tenant commercial real estate properties where a tenant conducts activities that are essential to the generation of the tenant's sales and profits. As ofMarch 31, 2022 , 92.9% of our$257.9 million of annualized base rent was attributable to properties operated by tenants in service-oriented and experience-based businesses. "Annualized base rent" means annualized contractually specified cash base rent in effect onMarch 31, 2022 for all of our leases (including those accounted for as loans or direct financing leases) commenced as of that date and annualized cash interest on our mortgage loans receivable as of that date. We were organized onJanuary 12, 2018 as aMaryland corporation. We have elected to be taxed as a REIT for federal income tax purposes beginning with the year endedDecember 31, 2018 , and we believe that our current organization, operations and intended distributions will allow us to continue to so qualify. Our common stock is listed on theNew York Stock Exchange under the symbol "EPRT". Our primary business objective is to maximize stockholder value by generating attractive risk-adjusted returns through owning, managing and growing a diversified portfolio of commercially desirable properties. As ofMarch 31, 2022 , we had a portfolio of 1,545 properties (inclusive of 174 properties which secure our investments in mortgage loans receivable) that was diversified by tenant, industry, concept and geography, had annualized base rent of$257.9 million and was 100.0% occupied. Our portfolio is built based on the following core investment attributes: Diversification. As ofMarch 31, 2022 , our portfolio was 100.0% occupied by 323 tenants operating 461 different brands, or concepts, in 16 industries across 46 states, with none of our tenants contributing more than 3.3% of our annualized base rent. Our goal is that, over time, no more than 5% of our annualized base rent will be derived from any single tenant or more than 1% from any single property. Long Lease Term. As ofMarch 31, 2022 , our leases had a weighted average remaining lease term of 13.9 years (based on annualized base rent), with 4.9% of our annualized base rent attributable to leases expiring prior toJanuary 1, 2027 . Our properties generally are subject to long-term net leases that we believe provide us a stable base of revenue from which to grow our portfolio.
Extensive use of master leases. From
Rent coverage ratio and tenant financial reports. From
Contractual increase in base rent. From
Significant Use of Sale-Leaseback Investments. We seek to acquire properties
owned and operated by middle-market businesses and lease the properties back to
the operators pursuant to our standard lease form.
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In the three months ended
Smaller,Low Basis Single-Tenant Properties . We generally invest in freestanding "small-box" single- tenant properties. As ofMarch 31, 2022 , our average investment per property was$2.3 million (which equals our aggregate investment in our properties (including transaction costs, lease incentives and amounts funded for construction in progress) divided by the number of properties owned at such date), and we believe investments of similar size allow us to grow our portfolio without concentrating a large amount of capital in individual properties and limit our exposure to events that may adversely affect a particular property. Additionally, we believe that many of our properties are generally fungible and appropriate for multiple commercial uses, which reduces the risk that a particular property may become obsolete and enhances our ability to sell a property if we choose to do so.
Our competitive strengths
We believe the following competitive strengths set us apart from our competitors and enable us to compete in the single-tenant net rental market:
Carefully Constructed Portfolio of Recently Acquired Properties Leased to Service-Oriented or Experience-Based Tenants. We have strategically constructed a portfolio that is diversified by tenant, industry and geography and generally avoids exposure to businesses that we believe are subject to pressure from e-commerce businesses. Our properties are generally subject to long-term net leases that we believe provide us with a stable base of revenue from which to grow our business. As ofMarch 31, 2022 , we had a portfolio of 1,545 properties, with annualized base rent of$257.9 million . These properties were carefully selected by our management team in accordance with our focused and disciplined investment strategy. Our portfolio is diversified with 323 tenants operating 461 different concepts across 46 states and 16 industries. None of our tenants contributed more than 3.3% of our annualized base rent as ofMarch 31, 2022 , and our strategy targets a scaled portfolio that, over time, derives no more than 5% of its annualized base rent from any single tenant or more than 1% from any single property. •We focus on investing in properties leased to tenants operating in service-oriented or experience-based businesses such as car washes, restaurants (primarily quick service restaurants), early childhood education, medical and dental services, convenience stores, automotive services, equipment rental, entertainment and health and fitness, which we believe are generally more insulated from e-commerce pressure than many others. As ofMarch 31, 2022 , 92.9% of our annualized base rent was attributable to tenants operating service-oriented and experience-based businesses. •We believe that our portfolio's diversity and our rigorous and disciplined underwriting decrease the impact on us of an adverse event affecting a specific tenant, industry or region, and our focus on leasing to tenants in industries that we believe are well-positioned to withstand competition from e-commerce businesses increases the stability and predictability of our rental revenue. Experienced and Proven Management Team. Our senior management has significant experience in the net-lease industry and a track record of growing net-lease businesses to significant scale. •Our senior management team has been responsible for our focused and disciplined investment strategy and for developing and implementing our investment sourcing, underwriting, closing and asset management infrastructure, which we believe can support significant investment growth without a proportionate increase in our operating expenses. As ofMarch 31, 2022 , exclusive of our initial investment in a portfolio of 262 net leased properties, consisting primarily of restaurants, that we acquired onJune 16, 2016 as part of the liquidation of General Electric Capital Corporation for an aggregate purchase price of$279.8 million (including transaction costs) (the "Initial Portfolio"), 84.6% of our portfolio's annualized base rent was attributable to internally originated sale-leaseback transactions and 85.7% was acquired from partieswho had previously engaged in one or more transactions that involved a member of our senior management team (including operators and tenants and other participants in the net lease industry, such as brokers, intermediaries and financing sources). The substantial experience, knowledge and relationships of our senior leadership team provide us with an extensive network of contacts that we believe allows us to originate attractive investment opportunities and effectively grow our business. 42 --------------------------------------------------------------------------------
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Differentiated Investment Strategy. We seek to acquire and lease freestanding, single-tenant commercial real estate facilities where a tenant conducts activities at the property that are essential to the generation of its sales and profits. We primarily seek to invest in properties leased to unrated middle- market companies that we determine have attractive credit characteristics and stable operating histories. We believe middle-market companies are underserved from a capital perspective and that we can offer them attractive real estate financing solutions while allowing us to enter into lease agreements that provide us with attractive risk-adjusted returns. Furthermore, many net-lease transactions with middle- market companies involve properties that are individually relatively small, which allows us to avoid concentrating a large amount of capital in individual properties. We maintain close relationships with our tenants, which we believe allows us to source additional investments and become the capital provider of choice as our tenants' businesses grow and their real estate needs increase. Asset Base Allows for Significant Growth. Building on our senior leadership team's experience of more than 20 years in net-lease real estate investing, we have developed leading origination, underwriting, financing and property management capabilities. Our platform is scalable, and we seek to leverage our capabilities to improve our efficiency and processes to continue to seek attractive risk- adjusted growth. While we expect that our general and administrative expenses could increase as our portfolio grows, we expect that such expenses as a percentage of our portfolio and our revenues will decrease over time due to efficiencies and economies of scale. With our smaller asset base relative to other peers that also focus on acquiring net leased real estate, we believe that we can achieve superior growth through manageable investment volume. Disciplined Underwriting Leading to Strong Portfolio Characteristics. We generally seek to invest in single assets or portfolios of assets through transactions which range in an aggregate purchase price from$2 million to$50 million . Our size allows us to focus on investing in a segment of the market that we believe is underserved from a capital perspective and where we can originate or acquire relatively smaller assets on attractive terms that provide meaningful growth to our portfolio. In addition, we seek to invest in commercially desirable properties that are suitable for use by different tenants, offer attractive risk-adjusted returns and possess characteristics that reduce our real estate investment risks. Extensive Tenant Financial Reporting Supports Active Asset Management. We seek to enter into lease agreements that obligate our tenants to periodically provide us with corporate and/or unit-level financial reporting, which we believe enhances our ability to actively monitor our investments, manage credit risk, negotiate lease renewals and proactively manage our portfolio to protect stockholder value. As ofMarch 31, 2022 , leases contributing 98.6% of our annualized base rent required tenants to provide us with specified unit-level financial information, and leases contributing 98.8% of our annualized base rent required tenants to provide us with corporate-level financial reporting.
Our business and growth strategies
Our primary business objective is to maximize stockholder value by generating
attractive risk-adjusted returns through owning, managing and growing a
diversified portfolio of commercially desirable properties. We intend to pursue
our objective through the following business and growth strategies.
Structure and Manage Our Diverse Portfolio with Focused and Disciplined
Underwriting and Risk Management. We seek to maintain the stability of our
rental revenue and maximize the long-term return on our investments while
continuing our growth by using our focused and disciplined underwriting and risk
management expertise. When underwriting assets, we focus on commercially
desirable properties, with strong operating performance, healthy rent coverage
ratios and tenants with attractive credit characteristics.
•Leasing. In general, we seek to enter into leases with (i) relatively long
terms (typically with initial terms of 15 years or more and tenant renewal
options); (ii) attractive rent escalation provisions; (iii) healthy rent
coverage ratios; and (iv) tenant obligations to periodically provide us with
financial information, which provides us with information about the operating
performance of the leased property and/or tenant and allows us to actively
monitor the security of payments under the lease on an ongoing basis. We
strongly prefer to use master lease structures, pursuant to which we lease
multiple properties to a single tenant on a unitary (i.e., "all or none") basis.
In addition, in the context of our sale-leaseback investments, we generally seek
to establish contract rents that are at or below prevailing market rents, which
we believe enhances tenant retention and reduces our releasing risk if a lease
is rejected in a bankruptcy proceeding or expires.
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•Diversification. We monitor and manage the diversification of our portfolio in order to reduce the risks associated with adverse developments affecting a particular tenant, property, industry or region. Our strategy targets a scaled portfolio that, over time, will (1) derive no more than 5% of its annualized base rent from any single tenant or more than 1% of its annualized base rent from any single property, (2) be primarily leased to tenants operating in service-oriented or experience- based businesses and (3) avoid significant credit concentrations. While we consider these criteria when making investments, we may be opportunistic in managing our business and make investments that do not meet one or more of these criteria if we believe the opportunity presents an attractive risk-adjusted return. •Asset Management. We are an active asset manager and regularly review each of our properties to evaluate various factors, including, but not limited to, changes in the business performance of the operator at the property, credit of the tenant and local real estate market conditions. Among other things, we use Moody's Analytics RiskCalc, which is a model for predicting private company defaults based on Moody's Analytics Credit Research Database, to proactively detect credit deterioration. Additionally, we monitor market rents relative to in-place rents and the amount of tenant capital expenditures in order to refine our tenant retention and alternative use assumptions. Our management team utilizes our internal credit diligence to monitor the credit profile of each of our tenants on an ongoing basis. We believe that this proactive approach enables us to identify and address credit issues in a timely manner and to determine whether there are properties in our portfolio that are appropriate for disposition. •In addition, as part of our active portfolio management, we may selectively dispose of assets that we conclude do not offer a return commensurate with the investment risk, contribute to unwanted credit, industry or tenant concentrations, or may be sold at a price we determine is attractive. We believe that our underwriting processes and active asset management enhance the stability of our rental revenue by reducing default losses and increasing the likelihood of lease renewals. Focus on Relationship-Based Sourcing to Grow Our Portfolio by Originating Sale-Leaseback Transactions. We plan to continue our disciplined growth by originating primarily sale-leaseback transactions and opportunistically making acquisitions of properties subject to net leases that contribute to our portfolio's tenant and industry diversification. As ofMarch 31, 2022 , exclusive of the Initial Portfolio, 84.6% of our portfolio's annualized base rent was attributable to internally originated sale- leaseback transactions and 85.7% was acquired from partieswho had previously engaged in transactions that involved a member of our senior management team (including operators and tenants and other participants in the net lease industry, such as brokers, intermediaries and financing sources). In addition, we seek to leverage our relationships with our tenants to facilitate investment opportunities, including selectively agreeing to reimburse certain of our tenants for development costs at our properties in exchange for contractually specified rent that generally increases proportionally with our funding. As ofMarch 31, 2022 , exclusive of the Initial Portfolio, approximately 45.0% of our investments were sourced from operators and tenantswho had previously consummated a transaction involving a member of our management team. We believe our senior management team's reputation, in-depth market knowledge and extensive network of longstanding relationships in the net lease industry provide us access to an ongoing pipeline of attractive investment opportunities. Focus on Middle-Market Companies in Service-Oriented or Experience-Based Businesses. We primarily focus on investing in properties that we lease on a long-term, triple-net basis to middle-market companies that we determine have attractive credit characteristics and stable operating histories. We beleive properties leased to middle-market companies may offer us the opportunity to achieve superior risk-adjusted returns as a result of our extensive and disciplined credit and real estate analysis, lease structuring and portfolio composition. We believe our capital solutions are attractive to middle- market companies, as such companies often have limited financing options as compared to larger, credit rated organizations. We also believe that, in many cases, smaller transactions with middle- market companies will allow us to maintain and grow our portfolio's diversification. Middle-market companies are often willing to enter into leases with structures and terms that we consider attractive (such as master leases and leases that require ongoing tenant financial reporting) and believe contribute to the stability of our rental revenue. •In addition, we emphasize investments in properties leased to tenants engaged in service-oriented or experience-based businesses, such as, car washes, restaurants (primarily quick service restaurants), early childhood education, medical and dental services, convenience stores, automotive services, equipment rental, entertainment and health and fitness, as we believe these businesses are generally more insulated from e-commerce pressure than many others. 44 --------------------------------------------------------------------------------
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Internal Growth Through Long-Term Triple-Net Leases That Provide for Periodic Rent Escalations. We seek to enter into long-term (typically with initial terms of 15 years or more and with tenant renewal options), triple-net leases that provide for periodic contractual rent escalations. As ofMarch 31, 2022 , our leases had a weighted average remaining lease term of 13.9 years (based on annualized base rent), with only 4.9% of which provide for annal rent increases of our annualized base rent attributable to leases expiring prior toJanuary 1, 2027 . In addition, 97.5% of our leases (based on annualized base rent) provided for increases in future base rent at a weighted average of 1.5% per year. Actively Manage Our Balance Sheet to Maximize Capital Efficiency. We seek to maintain a prudent balance between debt and equity financing and to maintain funding sources that lock in long-term investment spreads and limit interest rate sensitivity. We have access to multiple sources of debt capital, including, but not limited to, the public unsecured debt market, asset-backed bond market, through our Master Trust Funding Program, and bank debt, such as through our revolving credit facility and unsecured term loan facilities. We believe that our level of net debt, over time, should generally always be less than six times our annualized adjusted EBITDAre (as defined in "Non-GAAP Financial Measures" below) on a quarterly and annual basis. Since our initial public offering in 2018, our quarterly net debt to annualized adjusted EBITDAre has averaged 4.6x.
The following table sets forth select information about our quarterly investment activity for the quarters endedJune 30, 2020 throughMarch 31, 2022 (dollars in thousands): Three Months Ended September 30, December 31, June 30, 2021 2021 2021 March 31, 2022 Investment volume$ 223,186 $ 230,755 $ 322,203 $ 237,795 Number of transactions 34 31 55 23 Property count 94 85 96 105 Avg. investment per unit$ 2,354 $ 2,676 $ 3,230 $ 2,187 Cash cap rates 1 7.1 % 7.0 % 6.9% 7.0% GAAP cap rates 2 7.8 % 7.9 % 7.8% 7.8% Master lease percentage 3,4 83% 80% 59% 83% Sale-leaseback percentage 3,5 88% 84% 96% 100% Percentage of financial reporting 3,6 100% 100% 98% 100% Rent coverage ratio 2.7x 2.8x 3.0x 3.3x Lease term (in years) 13.5 16.4 16.3 15.0 Three Months Ended September 30, December 31, June 30, 2020 2020 2020 March 31, 2021 Investment volume$ 42,369 $ 148,877 $ 244,078 $ 197,816 Number of transactions 11 19 33 22 Property count 13 50 108 74 Avg. investment per unit$ 2,870 $ 2,866 $ 2,218 $ 2,650 Cash cap rates 1 7.4 % 7.1 % 7.1 % 7.0 % GAAP cap rates 2 8.1 % 7.9 % 7.7 % 7.9 % Master lease percentage 3,4 68 % 79 % 89 % 79% Sale-leaseback percentage 3,5 100 % 92 % 88 % 85% Percentage of financial reporting 3,6 100 % 100 % 100 % 100% Rent coverage ratio 4.3x 2.8x 3.6x 3.0x Lease term (in years) 16.7 17.6 16.3 16.1
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(1) Annualized cash base rent for the first full month after the investment
divided by the gross investment in the property plus transaction costs.
(2) GAAP rent for the first twelve months after the investment divided by the
gross investment in the property plus transaction costs.
(3) As a percentage of annualized base rent.
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(4) Includes investments in mortgage loans receivable collateralized by more
than one property.
(5) Includes investments in mortgage loans receivable made in support of
sale-leaseback transactions.
(6) Tenants party to leases that obligate them to periodically provide us with
corporate and/or unit-level financial reporting, as a percentage of our
annualized base rent.
The following table sets forth select information about our quarterly
disposition activity for the quarters ended June 30, 2020 through March 31, 2022
(dollars in thousands):
Three Months Ended
September 30,
June 30, 2021 2021 December 31, 2021 March 31, 2022
Disposition volume1 $ 19,578 $ 10,089 $ 4,466 $ 18,443
Cash cap rate on leased assets
2 7.1 % 6.5 % 6.0% 7.1%
Leased properties sold 3 6 11 2 6
Vacant properties sold 3 1 - - -
Three Months Ended
September 30,
June 30, 2020 2020 December 31, 2020 March 31, 2021
Disposition volume1 $ 3,420 $ 19,595 $ 39,042 $ 25,197
Cash cap rate on leased assets
2 6.8 % 7.0 % 7.4 % 7.1 %
Leased properties sold 3 3 11 21 15
Vacant properties sold 3 - 3 2 1
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(1) Net of transaction costs. (2) Annualized base rent at time of sale divided by the gross sale price (excluding transaction costs) for the property. (3) Property count excludes dispositions of undeveloped land parcels or dispositions where only a portion of the owned parcel was sold.
Update on the COVID-19 pandemic
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. For much of 2020, the global spread of COVID-19 created significant uncertainty and economic disruption, which largely began to subside over the course of 2021 and generally has significantly diminished in early 2022. However, the continuing impact of the COVID-19 pandemic and its duration are unclear, and variants of the virus, such as Delta and Omicron, and vaccine hesitancy in certain areas could erode the progress that has been made against the virus, or exacerbate or prolong the remaining impact of the pandemic. Conditions similar to those experienced in 2020, at the height of the pandemic, could return should the vaccinations prove ineffective against future variants of the virus. Should the impact of a variant of the virus cause conditions to occur that are similar to those experienced in 2020, increased uncertainty, disruption and instability in the macro-economic environment could occur and government restrictions could again force our tenants' businesses to shut-down or limit their operations, which would adversely impact our operations, our financial condition, our liquidity and our prospects. Further, the extent and duration of any such conditions cannot be predicted with any reasonable certainty. We continue to monitor the impact of COVID-19 on all aspects of our business, including our portfolio and the creditworthiness of our tenants. In 2020, we entered into deferral agreements with certain of our tenants and recognized contractual base rent pursuant to these agreements as a component of rental revenue. These rent deferrals were negotiated on a tenant-by-tenant basis, and, in general, allowed a tenant to defer all or a portion of their rent for a portion of 2020, with all of the deferred rent to be paid to us pursuant to a schedule that generally extends up to 24 months from the original due date of the deferred rent. While our tenants' businesses and operations have largely returned to pre-pandemic levels, any new developments that cause a deterioration, or further deterioration, in our tenants' ability to operate their businesses, or delays in the supply of products or services to our tenants from vendors they require to operate their businesses, could cause our tenants to be unable or unwilling to meet their contractual obligations to us, including the payment of rent (including deferred rent), or to request further rent deferrals or other concessions. The likelihood of this circumstance would increase if variants of COVID-19, such as Delta and Omicron, intensify or persist for a prolonged period. Additionally, whether the pandemic has caused a material secular change in consumer behavior is not yet known as it pertains to the patronage of service-based and/or experience-based businesses, but should changes occur that are material, many 46 --------------------------------------------------------------------------------
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of our tenants would be adversely affected and their ability to meet their obligations to us could be further impaired. During the deferral period, the deferral agreements reduced our cash flow from operations, reduced our cash available for distribution and adversely affected our ability to make cash distributions to common stockholders. If tenants are unable to repay their deferred rent, we will not receive cash in the future in accordance with our expectations.
Cash and capital resources
As ofMarch 31, 2022 , we had$3.3 billion of net investments in our income property portfolio, consisting of investments in 1,545 properties (inclusive of 174 properties which secure our investments in mortgage loans receivable), with annualized base rent of$257.9 million . Substantially all of our cash from operations is generated by our investment portfolio. The liquidity requirements for operating our business consist primarily of funding our investment activities, servicing our outstanding indebtedness and paying our general and administrative expenses. The occupancy level of our portfolio is 100.0% as ofMarch 31, 2022 and, because substantially all of our leases are triple-net (with our tenants generally responsible for the maintenance, insurance and property taxes associated with the leased properties), our liquidity requirements are not significantly impacted by the occurrence of property costs. When a property becomes vacant because the tenant has vacated the property due to default or at the expiration of the lease term without a renewal or new lease being executed, we incur the property costs not paid by the tenant, as well as those property costs accruing during the time it takes to locate a new tenant or to sell the property. As ofMarch 31, 2022 , none of our properties were vacant, and all properties were subject to a lease. We expect to incur some property costs from time to time in periods during which properties that become vacant are being marketed for lease or sale. In addition, we may recognize an expense for certain property costs, such as real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations. The amount of such property costs can vary quarter-to-quarter based on the timing of property vacancies and the level of underperforming properties; however, we do not expect that such costs will be significant to our operations. We intend to continue to grow through additional investments in stand-alone single tenant commercial properties. To accomplish this objective, we seek to invest in real estate with a combination of debt and equity capital and with cash from operations that we do not distribute to our stockholders. When we sell properties, we generally reinvest the cash proceeds from our sales in new property acquisitions. Our short-term liquidity requirements also include the funding needs associated with 45 properties where we have agreed to provide construction financing or reimburse the tenant for certain development, construction and renovation costs in exchange for contractual payments of interest or increased rent that generally increases in proportion with our level of funding. As ofMarch 31, 2022 , we agreed to provide construction financing or reimburse a tenant for certain development, construction and renovation costs in an aggregate amount of$140.3 million , and, as of such date, we funded$68.8 million of this commitment. We expect to fund the remainder of this commitment byMarch 31, 2023 . Additionally, as ofApril 26, 2022 , we were under contract to acquire 12 properties with an aggregate purchase price of$24.7 million , subject to completion of our due diligence procedures and satisfaction of customary closing conditions. We expect to meet our short-term liquidity requirements, including our investment in potential future single tenant properties, primarily with our cash and cash equivalents, net cash from operating activities, borrowings, primarily under our Revolving Credit Facility, and through proceeds generated from our ATM Program. Our long-term liquidity requirements consist primarily of the funds necessary to acquire additional properties and repay indebtedness. We expect to meet our long-term liquidity requirements through various sources of capital, including net cash from operating activities, borrowings under our Revolving Credit Facility, future debt financings, sales of common stock under our ATM Program, and proceeds from the selective sale of properties in our portfolio. However, at any point in time, there may be a number of factors that could have a material and adverse effect on our ability to access these capital sources, including unfavorable conditions in the overall equity and credit markets, our level of leverage, the portion of our portfolio that is unencumbered, borrowing restrictions imposed by our existing debt agreements, general market conditions for real estate and potentially REITs specifically, our operating performance, our liquidity and general market perceptions about us. The success of our business strategy will depend, to a significant degree, on our ability to access these various capital sources to fund our future investments in single tenant properties and thereby grow our cash flows.
An additional liquidity requirement is to fund the required level of distributions, typically 90% of our REIT’s taxable income (determined without taking into account the deduction of dividends paid and excluding any net capital gains), which are
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among the requirements for us to continue to qualify for taxation as a REIT. During the three months endedMarch 31, 2022 , our board of directors declared total cash distributions of$0.26 per share of common stock. Holders of OP Units and RSU's are entitled to distributions per unit equivalent to those paid by us per share of common stock. During the three months endedMarch 31, 2022 , we paid$32.6 million of dividends and distributions to common stockholders and OP Unit holders, and as ofMarch 31, 2022 , we recorded$34.3 million of dividends and distributions payable to common stockholders and OP Unit holders. To continue to qualify for taxation as a REIT, we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. As a result of this requirement, we cannot rely on retained earnings to fund our business needs to the same extent as other entities that are not structured as REITs. If we do not have sufficient funds available to us from our operations to fund our business needs, we will need to find alternative ways to fund those needs. Such alternatives may include, among other things, selling properties (whether or not the sales price is optimal or otherwise meets our strategic long-term objectives), incurring additional indebtedness or issuing equity securities in public or private transactions. The availability and attractiveness of the terms of these potential sources of financing cannot be assured. Generally, our short-term debt capital needs are provided through our use of our Revolving Credit Facility. We manage our long-term leverage position through the issuance of long-term fixed-rate debt on an unsecured or secured basis. Generally, we will seek to issue long-term debt on an unsecured basis as we believe this facilitates greater flexibility in the management of our existing portfolio and our ability to retain optionality in our overall financing and growth strategy. By seeking to match the expected cash inflows from our long-term leases with the expected cash outflows for our long-term debt, we seek to "lock in," for as long as is economically feasible, the expected positive spread between our scheduled cash inflows on our leases and the cash outflows on our debt obligations. In this way, we seek to reduce the risk that increases in interest rates would adversely impact our cash flows and results of operations. Our ability to execute leases that contain annual rent escalations also contributes to our ability to manage the risk of a rising interest rate environment. We have and may continue to use various financial instruments designed to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies such as interest rate swaps and caps, depending on our analysis of the interest rate environment and the costs and risks of such strategies. Although we are not required to maintain a particular leverage ratio and may not be able to do so, we generally consider that, over time it is prudent for a real estate company like ours, to maintain a level of net debt (which includes recourse and non-recourse borrowings and any outstanding preferred stock less cash and cash equivalents and restricted cash available for future investment) that is less than six times our annualized adjusted EBITDAre. As ofMarch 31, 2022 , all of our long-term debt was fixed-rate debt or was effectively converted to a fixed-rate for the term of the debt through hedging strategies and our weighted average debt maturity was 5.8 years. As we continue to invest in real estate properties and grow our real estate portfolio, we intend to manage our long-term debt maturities to reduce the risk that a significant amount of our debt will mature in any single year. Future sources of debt capital may include public issuances of senior unsecured notes, term borrowings from insurance companies, banks and other sources, mortgage financing of a single-asset or a portfolio of assets and CMBS borrowings. These sources of debt capital may offer us the opportunity to lower our cost of funding and further diversify our sources of debt capital. Over time, we may choose to issue preferred equity as a part of our overall strategy for funding our investment objectives and growth goals. As our outstanding debt matures, we may refinance it as it comes due or choose to repay it using cash and cash equivalents or borrowings under our Revolving Credit Facility. We believe that the cash generated by our operations, together with our cash and cash equivalents atMarch 31, 2022 , our borrowing availability under the Revolving Credit Facility and our potential access to additional sources of capital, will be sufficient to fund our operations for the foreseeable future and allow us to invest in the real estate for which we currently have made commitments.
Additional Guarantor Information
As permitted under Rule 13-01(a)(4)(vi), the Company has excluded the summarized financial information for theOperating Partnership as the assets, liabilities and results of operations of the Company and theOperating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of the Company, and management believes such summarized financial information would be repetitive and not provide incremental value to investors. 48 --------------------------------------------------------------------------------
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Description of certain debts
The following table summarizes our outstanding indebtedness as ofMarch 31, 2022 andDecember 31, 2021 : Principal Outstanding Weighted Average Interest Rate (1) March 31, December 31, March 31, December 31, (in thousands) Maturity Date 2022 2021 2022 2021 Unsecured term loans: 2024 Term Loan April 2024$ 200,000 $ 200,000 3.3% 3.3% 2027 Term Loan February 2027 430,000 430,000 2.7%
3.0%
Senior unsecured notes July 2031 400,000 400,000 3.1%
3.1%
Revolving Credit Facility February 2026 147,000 144,000 1.4%
1.3%
Total principal outstanding$ 1,177,000 $ 1,174,000 2.8%
2.9%
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(1)Interest rates are shown taking into account our interest rate swap and lock-in agreements, where applicable.
2024 Unsecured Revolving Credit Facility and Term Loan
Through ourOperating Partnership , we are party to an Amended and Restated Credit Agreement with a group of lenders, which was amended onFebruary 10, 2022 (the "Credit Agreement"), and which, as amended, provides for revolving loans of up to$600.0 million (the "Revolving Credit Facility") and an additional$200.0 million term loan (the "2024 Term Loan"). As amended, the Revolving Credit Facility is scheduled to mature onFebruary 10, 2026 , with two extension options of six-month periods each, exercisable by theOperating Partnership subject to the satisfaction of certain conditions. The 2024 Term Loan matures onApril 12, 2024 . The loans under each of the Revolving Credit Facility and the 2024 Term Loan initially bear interest at an annual rate of applicable Adjusted Term SOFR (as defined in the Credit Agreement) plus an applicable margin (which applicable margin varies between the Revolving Credit Facility and the 2024 Term Loan). The Adjusted Term SOFR is a rate with a term equivalent to the interest period applicable to the relevant borrowing. In addition, theOperating Partnership is required to pay a revolving facility fee throughout the term of the Revolving Credit Facility. The applicable margin and the revolving facility fee rate are initially a spread and rate, as applicable, set according to a leverage-based pricing grid. At theOperating Partnership's election, on and after receipt of an investment grade corporate credit rating from S&P, Moody's or Fitch, the applicable margin and the revolving facility fee rate will be a spread and rate, as applicable, set according to the credit ratings provided by S&P, Moody's and/or Fitch. Each of the Revolving Credit Facility and the 2024 Term Loan is freely pre-payable at any time. Outstanding credit extensions under the Revolving Credit Facility are mandatorily payable if the amount of such credit extensions the revolving facility limit.The Operating Partnership may re-borrow amounts paid down on the Revolving Credit Facility prior to its maturity. Loans repaid under the 2024 Term Loan cannot be reborrowed. The Credit Agreement has an accordion feature to increase, subject to certain conditions, the maximum availability of credit (either through increased revolving commitments or additional term loans) by up to$600.0 million .The Operating Partnership is the borrower under the Credit Agreement, and we and each of the subsidiaries of theOperating Partnership that owns a direct or indirect interest in an eligible real property asset are guarantors under the Credit Agreement. Under the terms of the Credit Agreement, we are subject to various restrictive financial and nonfinancial covenants which, among other things, require us to maintain certain secured and unsecured leverage ratios and fixed charge and debt service coverage ratios. The Credit Agreement restricts our ability to pay distributions to our stockholders under certain circumstances. However, we may make distributions to the extent necessary to maintain our qualification as a REIT under the Code. The Credit Agreement contains customary affirmative and negative covenants that, among other things and subject to exceptions, limit or restrict our ability to incur indebtedness and liens, consummate mergers or other fundamental changes, dispose of assets, make certain restricted payments, make certain investments, modify our organizational documents, transact with affiliates, change our fiscal periods, provide negative pledge clauses, make subsidiary distributions, enter into certain new lines of business or engage in certain activities, and fail to meet the requirements for taxation as a REIT. 49 --------------------------------------------------------------------------------
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Term Loan 2027
OnFebruary 18, 2022 , we, through ourOperating Partnership , amended our existing$430.0 million term loan credit facility (the "2027 Term Loan") to, among other things, reduce the Applicable Margin, extend the Maturity toFebruary 18, 2027 and make certain other changes consistent with market terms and conditions. The 2027 Term Loan was available to be drawn in up to three draws during the six-month period beginning onNovember 26, 2019 and, as ofMarch 31, 2022 , we have borrowed the full$430.0 million available. The borrowings under the 2027 Term Loan, as amended, bear interest at an annual rate of applicable Adjusted Term SOFR (as defined in the Credit Agreement) plus an applicable margin. The Adjusted Term SOFR is a rate with a term equivalent to the interest period applicable to the relevant borrowing. The applicable margin is initially a spread set according to a leverage-based pricing grid. At theOperating Partnership's election, on and after receipt of an investment grade corporate credit rating from S&P, Moody's or Fitch, the applicable margin will be a spread set according to the credit ratings provided by S&P, Moody's and/or Fitch. The 2027 Term Loan is pre-payable at any time by theOperating Partnership without penalty. The 2027 Term Loan has an accordion feature to increase, subject to certain conditions, the maximum availability of the facility up to an aggregate of$500 million .The Operating Partnership is the borrower under the 2027 Term Loan, and our Company and each of its subsidiaries that owns a direct or indirect interest in an eligible real property asset are guarantors under the facility. Under the terms of the 2027 Term Loan, we are subject to various restrictive financial and nonfinancial covenants which, among other things, require us to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth. The 2027 Term Loan restricts our ability to pay distributions to our stockholders under certain circumstances. However, we may make distributions to the extent necessary to maintain our qualification as a REIT under the Code. The 2027 Term Loan contains certain additional covenants that, subject to exceptions, limit or restrict our incurrence of indebtedness and liens, disposition of assets, transactions with affiliates, mergers and fundamental changes, modification of organizational documents, changes to fiscal periods, making of investments, negative pledge clauses and lines of business and REIT qualification. Senior Unsecured Notes OnJune 22, 2021 , theOperating Partnership issued$400 million aggregate principal amount of 2031 Notes, resulting in net proceeds of$396.6 million . The 2031 Notes were issued by theOperating Partnership and the obligations of theOperating Partnership under the 2031 Notes are fully and unconditionally guaranteed on a senior basis by the Company. InMay 2021 , the Company entered into a treasury-lock agreement which was designated as a cash flow hedge associated with the expected public offering of the senior unsecured notes. InJune 2021 , the agreement was settled in accordance with its terms. The indenture and supplemental indenture creating the 2031 Notes contain various restrictive covenants, including limitations on our ability to incur additional secured and unsecured indebtedness. As ofMarch 31, 2022 , we were in compliance with these covenants. Cash Flows
Comparison of the three months ended
As ofMarch 31, 2022 , we had$14.3 million of cash and cash equivalents and no restricted cash as compared to$42.8 million and$2.0 million , respectively, as ofMarch 31, 2021 .
Cash flow for the three months ended
During the three months endedMarch 31, 2022 , net cash provided by operating activities was$44.1 million . Our cash flows from operating activities, related to our$26.8 million of net income, are primarily dependent upon the occupancy level of our portfolio, the rental rates specified in our leases, the interest on our loans and direct financing lease receivables, the collectability of rent and interest income and the level of our operating expenses and other general and administrative costs. In addition, our cash inflows from operating activities reflect adjustments for non-cash items including depreciation and amortization of tangible, intangible and right-of-use real estate assets, amortization of deferred financing costs and other assets, loss on debt extinguishment of$2.1 million , the provision for impairment of real estate of$3.9 million , offset by$1.7 million of gains on dispositions of real estate, net, and 50 --------------------------------------------------------------------------------
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$6.2 million related to the recognition of straight-line rent receivables. In addition, our cash provided by operating activities reflects the adjustment to add back the non-cash impact of$2.8 million of equity-based compensation expense. Net cash used in investing activities during the three months endedMarch 31, 2022 was$211.6 million . Our net cash used in investing activities generally reflects the funds deployed in our investments in real estate, including capital expenditures and the development of our construction in progress, and in loans receivable, which totaled$240.6 million in the aggregate for the quarter. These cash outflows were partially offset by$18.5 million of proceeds from sales of investments, net of disposition costs, and$10.7 million of principal collections on our loans and direct financing lease receivables. Net cash provided by financing activities of$122.0 million during the three months endedMarch 31, 2022 reflected net cash inflows of$158.3 million from the issuance of common stock and$148.0 million of borrowings under the Revolving Credit Facility. These cash inflows were partially offset primarily by repayments of$145.0 million of borrowings under the Revolving Credit Facility and the payment of$32.6 million in dividends.
Off-balance sheet arrangements
We had no off-balance sheet arrangements
Contractual obligations
The following table provides information about our contractual obligations at
Payment due by period
April 1 -
December 31,
(in thousands) Total 2022 2023 - 2024 2025 - 2026 Thereafter
Unsecured term loans $ 630,000 $ - $ 200,000 $ - $ 430,000
Senior unsecured notes 400,000 - - - 400,000
Revolving Credit Facility 147,000 - - 147,000 -
Financing the construction of tenants and
Reimbursement Obligations (1) 71,482 71,482 - - - Operating Lease Obligations (2) 18,700 1,112 2,132 1,250 14,206 Total$ 1,267,182 $ 72,594 $ 202,132 $ 148,250 $ 844,206
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(1)Includes obligations to reimburse certain of our tenants for construction costs that they incur in connection with construction at our properties in exchange for contractually specified rent that generally increases proportionally with our funding. (2)Includes$16.4 million of rental payments due under ground lease arrangements where our tenants are directly responsible for payment. Additionally, we may enter into commitments to purchase goods and services in connection with the operation of our business. These commitments generally have terms of one-year or less and reflect expenditure levels comparable to our historical expenditures as adjusted for growth. We have made an election to be taxed as a REIT for federal income tax purposes beginning with our taxable year endedDecember 31, 2018 ; accordingly, we generally will not be subject to federal income tax for the year endedDecember 31, 2022 if we distribute all of our REIT taxable income, determined without regard to the dividends paid deduction, to our stockholders.
Significant Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States ("GAAP") requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. Estimates and assumptions include, among other things, subjective judgments regarding the fair values and useful lives of our properties for depreciation and lease classification purposes, the collectability of receivables and asset impairment analysis. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable 51 --------------------------------------------------------------------------------
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under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we reevaluate 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 our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." We have not made any material changes to these policies during the periods covered by this quarterly report.
Our real estate investment portfolio
As ofMarch 31, 2022 , we had a portfolio of 1,545 properties, including 174 properties that secure our investments in mortgage loans receivable, that was diversified by tenant, concept, industry and geography and had annualized base rent of$257.9 million . Our 323 tenants operate 461 different concepts in 16 industries across 46 states. None of our tenants represented more than 3.3% of our portfolio atMarch 31, 2022 , and our top ten largest tenants represented 19.2% of our annualized base rent as of that date.
Diversification by tenant
As ofMarch 31, 2022 , our top ten tenants included the following concepts: EquipmentShare,Captain D's , WhiteWater Express Car Wash, Cadence Education,Festival Foods ,Mammoth Holdings , Mister Car Wash, Spare Time,Track Holdings , and The Nest Schools. Our 1,545 leased properties are operated by our 323 tenants. The following table details information about our tenants and the related concepts as ofMarch 31, 2022 (dollars in thousands): % of Number of Annualized Annualized Tenant(1) Concept Properties Base Rent Base Rent Equipmentshare.com Inc. EquipmentShare 28$ 8,525 3.3 % Captain D's, LLC Captain D's 75 5,269 2.0 % Whitewater Holding Company, LLC WhiteWater Express Car Wash 16 4,892 1.9 % Cadence Education, LLC Various 23 4,884 1.9 % MDSFest, Inc. Festival Foods 5 4,644 1.8 % Mammoth Holdings, LLC. Various 17 4,485 1.8 % Car Wash Partners, Inc. Mister Car Wash 13 4,443 1.7 % Bowl New England, Inc. Spare Time 6 4,367 1.7 % The Track Holdings, LLC Various 9 4,142 1.6 % The Nest Schools, Inc. The Nest Schools 17 3,952 1.5 % Top 10 Subtotal 209 49,603 19.2 % Other 1,336 208,260 80.8 % Total 1,545$ 257,863 100.0 %
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(1)Represents tenant or guarantor.
As ofMarch 31, 2022 , our five largest tenants,who contributed 10.9% of our annualized base rent, had a rent coverage ratio of 6.1x and our ten largest tenants,who contributed 19.2% of our annualized base rent, had a rent coverage ratio of 4.6x. As ofMarch 31, 2022 , 94.6% of our leases (based on annualized base rent) were triple-net, and the tenant is typically responsible for all improvements and is contractually obligated to pay all operating expenses, such as maintenance, insurance, utility and tax expense, related to the leased property. Due to the triple-net structure of our leases, we do not expect to incur significant capital expenditures relating to our triple-net leased properties, and the potential impact of inflation on our operating expenses is reduced. 52 --------------------------------------------------------------------------------
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Diversification by concept
Our tenants operate their businesses through 461 concepts. The following table details these concepts in
Annualized % of
Base Annualized Number of Building
Concept Type of Business Rent Base Rent Properties (Sq. Ft.)
EquipmentShare Service $ 8,525 3.3 % 28 531,031
Captain D's Service 6,494 2.5 % 88 228,470
Applebee's Service 5,028 1.9 % 34 168,186
WhiteWater Express Car Wash Service 4,892 1.9 % 16 77,746
Festival Foods Retail 4,644 1.8 % 5 379,640
Mister Car Wash Service 4,443 1.7 % 13 54,621
Spare Time Experience 4,367 1.7 % 6 272,979
Pizza Hut Service 4,183 1.6 % 75 202,564
The Nest Schools Service 3,952 1.5 % 17 217,282
Circle K Service 3,875 1.5 % 35 130,975
Top 10 Subtotal 50,403 19.4 % 317 2,263,494
Other 207,460 80.6 % 1,228 11,997,294
Total $ 257,863 100.0 % 1,545 14,260,788
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Diversification by industry
Our tenants' business concepts are diversified across various industries. The following table summarizes those industries as ofMarch 31, 2022 (dollars in thousands): Annualized % of Type of Base Annualized Number of Building Rent Per Tenant Industry Business Rent Base Rent Properties (Sq. Ft.) Sq. Ft. (1) Early Childhood Education Service$ 36,232 14.1 % 164 1,740,517$ 20.69 Quick Service Service 33,210 12.9 % 415 1,142,206 29.38 Car Washes Service 29,530 11.5 % 100 528,299 55.90 Medical / Dental Service 29,512 11.4 % 176 1,212,184 24.38 Automotive Service Service 22,619 8.8 % 173 1,109,172 20.24 Casual Dining Service 15,792 6.1 % 99 574,989 26.81 Convenience Stores Service 15,045 5.8 % 134 524,676 28.82 Equipment Rental and Sales Service 11,109 4.3 % 45 812,666 13.20 Family Dining Service 5,700 2.2 % 37 244,706 23.29 Pet Care Services Service 5,405 2.1 % 48 395,905 14.99 Other Services Service 5,312 2.1 % 24 292,129 18.81 Service Subtotal 209,466 81.3 % 1,415 8,577,449 24.48 Entertainment Experience 14,337 5.6 % 33 900,786 16.86 Health and Fitness Experience 11,401 4.4 % 28 1,045,772 10.19 Movie Theatres Experience 4,175 1.6 % 6 293,206 14.24 Experience Subtotal 29,913 11.6 % 67 2,239,764 13.34 Grocery Retail 9,610 3.7 % 28 1,341,200 7.17 Home Furnishings Retail 2,048 0.8 % 4 217,339 9.42 Retail Subtotal 11,658 4.5 % 32 1,558,539 7.48 Building Materials Industrial 3,801 1.5 % 23 1,257,017 3.02 Other Industrial Industrial$ 3,025 1.1 % 8 628,019 4.82 Industrial Subtotal 6,826 2.6 % 31 1,885,036 3.62 Total/Weighted Average 257,863 100.0 % 1,545 14,260,788$ 18.10
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(1)Excluding buildings without annualized base rent and buildings under construction.
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Geographical diversification
Our 1,545 properties are spread across 46 states. The following table details the geographic locations of our properties at
(dollars in thousands):
Annualized % of Annualized Number of Building State Base Rent Base Rent Properties (Sq. Ft.) Texas$ 33,903 13.1 % 180 1,737,171 Ohio 20,268 7.9 % 155 1,151,496 Georgia 17,697 6.9 % 111 645,396 Florida 17,614 6.8 % 72 711,975 Wisconsin 12,512 4.9 % 55 761,929 North Carolina 10,332 4.0 % 54 624,883 Michigan 8,438 3.3 % 53 910,268 Arkansas 8,169 3.2 % 58 463,873 Arizona 7,825 3.0 % 45 388,342 Missouri 7,798 3.0 % 49 678,452 Alabama 7,436 2.9 % 50 458,898 Tennessee 6,939 2.7 % 45 243,105 Minnesota 6,363 2.5 % 36 467,895 Oklahoma 6,349 2.5 % 42 402,981 Massachusetts 6,245 2.4 % 29 406,159 Illinois 6,202 2.4 % 37 261,414 Colorado 5,412 2.1 % 26 236,068 Pennsylvania 5,347 2.1 % 32 320,634 South Carolina 4,856 1.9 % 32 337,299 New York 4,725 1.8 % 39 185,923 Mississippi 4,717 1.7 % 41 271,991 Iowa 4,062 1.6 % 25 206,904 New Jersey 4,013 1.6 % 19 121,198 Kentucky 3,991 1.5 % 36 193,546 California 3,351 1.3 % 19 180,090 New Mexico 3,307 1.3 % 22 130,210 Connecticut 3,127 1.2 % 13 217,984 Kansas 3,103 1.2 % 21 154,069 Indiana 2,886 1.1 % 24 190,863 Nevada 2,409 0.9 % 8 80,358 South Dakota 2,384 0.9 % 9 124,912 Virginia 2,279 0.9 % 11 198,245 Maryland 2,245 0.9 % 9 79,028 Louisiana 2,106 0.8 % 12 89,033 West Virginia 1,864 0.7 % 29 88,802 Washington 1,673 0.6 % 11 87,243 Oregon 1,258 0.5 % 8 127,673 Utah 933 0.4 % 2 67,659 New Hampshire 892 0.3 % 8 99,384 Nebraska 863 0.3 % 9 32,948 Maine 500 0.2 % 1 32,115 Wyoming 442 0.2 % 2 14,001 Idaho 403 0.2 % 1 35,433 Alaska 246 0.1 % 2 6,630 Vermont 217 0.1 % 2 30,508 Rhode Island 164 0.1 % 1 5,800 Total$ 257,863 100.0 % 1,545 14,260,788 55
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Expiration of leases
As ofMarch 31, 2022 , the weighted average remaining term of our leases was 13.9 years (based on annualized base rent), with only 4.9% of our annualized base rent attributable to leases expiring prior toJanuary 1, 2027 . The following table sets forth our lease expirations for leases in place as ofMarch 31, 2022 (dollars in thousands): Weighted Annualized % of Annualized Number of Average Rent Lease Expiration Year (1) Base Rent Base Rent Properties Coverage Ratio (2) 2022$ 492 0.2 % 5 3.0x 2023 1,490 0.6 % 16 2.9x 2024 4,815 1.9 % 47 5.4x 2025 2,346 0.9 % 20 2.1x 2026 3,303 1.3 % 22 2.3x 2027 7,762 3.0 % 83 2.6x 2028 4,088 1.6 % 13 1.7x 2029 5,703 2.2 % 78 4.3x 2030 4,388 1.7 % 48 6.7x 2031 14,886 5.8 % 88 2.9x 2032 9,310 3.6 % 38 5.4x 2033 8,249 3.2 % 27 3.4x 2034 26,801 10.4 % 207 5.9x 2035 14,391 5.6 % 98 3.2x 2036 39,762 15.4 % 181 3.5x 2037 12,939 5.0 % 76 9.3x 2038 13,148 5.1 % 81 2.2x 2039 21,446 8.3 % 111 3.8x 2040 32,403 12.6 % 161 2.8x 2041 20,972 8.1 % 112 2.5x Thereafter 9,169 3.5 % 33 2.6x Total/Weighted Average$ 257,863 100.0 % 1,545 3.8x
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(1)Year of expiration of contracts in place at
Coverage of rents at the unit level
Generally, we seek to acquire investments with healthy rent coverage ratios, and as ofMarch 31, 2022 , the weighted average rent coverage ratio of our portfolio was 3.8x. Our portfolio's unit-level rent coverage ratios (by annualized base rent and excluding leases that do not report unit-level financial information) as ofMarch 31, 2022 are displayed below: Unit Level Coverage Ratio % of Total ? 2.00x 73.8 % 1.50x to 1.99x 10.2 % 1.00x to 1.49x 6.7 % < 1.00x 8.0 % Not reported 1.3 % 100.0 % 56
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Credit ratings
Tenant financial distress is typically caused by consistently poor or deteriorating operating performance, near-term liquidity issues or unexpected liabilities. To assess the probability of tenant insolvency, we utilize Moody's Analytics RiskCalc, which is a model for predicting private company defaults based on Moody's Analytics Credit Research Database, which incorporates both market and company-specific risk factors. The following table illustrates the portions of our annualized base rent as ofMarch 31, 2022 attributable to leases with tenants having specified implied credit ratings based on their Moody's RiskCalc scores: Credit Rating NR < 1.00x 1.00 to 1.49x 1.50 to 1.99x ? 2.00x CCC+ - % 0.8 % - % - % 0.4 % B- - % 1.0 % 0.6 % 0.1 % 2.0 % B - % 2.4 % 0.3 % 0.1 % 1.1 % B+ 0.1 % 0.4 % 0.6 % 1.6 % 2.1 % BB- - % 0.9 % 0.3 % 2.1 % 9.4 % BB - % 0.9 % 0.7 % 0.5 % 12.3 % BB+ - % 1.0 % 0.7 % 1.2 % 9.2 % BBB- - % 0.2 % 2.0 % 0.1 % 10.6 % BBB - % 0.4 % 0.8 % 2.4 % 15.4 % BBB+ - % 0.2 % 0.2 % 1.5 % 3.6 % A- - % - % 0.3 % - % 4.8 % A - % - % - % - % 1.0 % A+ - % - % - % - % 0.8 % AA- - % - % - % - % - %
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NR Not reported
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Operating results
The following analysis includes the results of our operations for the periods presented.
Comparison of the three months ended
Three months ended March 31,
(dollar amounts in thousands) 2022 2021 Change %
Income:
Rental revenue$ 66,112 $ 45,432 $ 20,680 45.5 % Interest on loans and direct financing lease receivables 3,822 3,105 717 23.1 % Other revenue, net 187 15 172 1146.7 % Total revenues 70,121 48,552 21,569 Expenses: General and administrative 8,063 6,431 1,632 25.4 % Property expenses 1,009 1,414 (405) (28.6) % Depreciation and amortization 20,313 15,646 4,667 29.8 % Provision for impairment of real estate 3,935 5,722 (1,787) (31.2) % Change in provision for loan losses 60 38 22 57.9 % Total expenses 33,380 29,251 4,129 Other operating income: Gain on dispositions of real estate, net 1,658 3,788 (2,130) (56.2) % Income from operations 38,399 23,089 15,310 Other (expense)/income: Loss on debt extinguishment (2,138) - (2,138) 100.0 % Interest expense (9,160) (7,678) (1,482) 19.3 % Interest income 18 20 (2) (10.0) % Income before income tax expense 27,119 15,431 11,688 Income tax expense 301 56 245 437.5 % Net income 26,818 15,375 11,443 Net income attributable to non-controlling interests (119) (80) 39 48.8 % Net income attributable to stockholders$ 26,699 $ 15,295 $ 11,404 Revenues: Rental revenue. Rental revenue increased by$20.7 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . The increase in rental revenue was driven primarily by the growth in our real estate investment portfolio. Our real estate investment portfolio grew from 1,240 rental properties, representing$2.5 billion in net investments in real estate, as ofMarch 31, 2021 to 1,363 rental properties, representing$3.3 billion in net investments in real estate, as ofMarch 31, 2022 . Our real estate investments were acquired throughout the periods presented and were not all owned by us for the entirety of the applicable periods; accordingly, a significant portion of the increase in rental revenue between periods is related to recognizing revenue in 2022 from acquisitions that were made during 2021 and early 2022. Another component of the increase in rental revenues between periods relates to rent escalations recognized on our leases. Interest on loans and direct financing lease receivables. Interest on loans and direct financing lease receivables increased by$0.7 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 , primarily due to the net growth of our mortgage loans receivable portfolio during 2021 and continuing into 2022, which led to a higher average daily balance of loans receivable outstanding during the three months endedMarch 31, 2022 .
Other income. Other income increased
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Expenses:
General and administrative. General and administrative expense increased by$1.6 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . The increase was primarily related to an increase in non-cash share-based compensation of$1.2 million , salary expense and professional fees during the three months endedMarch 31, 2022 . Property expenses. Property expenses decreased by$0.4 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . The decrease in property expenses was primarily due to decreased insurance expenses, property taxes and property-related operational costs during the three months endedMarch 31, 2022 related to vacant properties and tenants accounted for on a non-accrual basis. Depreciation and amortization. Depreciation and amortization expense increased by$4.7 million during the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . Depreciation and amortization expense increased in proportion to the increase in the size of our real estate portfolio during the three months endedMarch 31, 2022 . Provision for impairment of real estate. Impairment charges on real estate investments were$3.9 million and$5.7 million for the three months endedMarch 31, 2022 and 2021, respectively. During the three months endedMarch 31, 2022 and 2021, we recorded a provision for impairment on four and nine of our real estate investments, respectively. We strategically seek to identify non-performing properties that we may re-lease or dispose of in an effort to improve our returns and manage risk exposure. An increase in vacancy associated with our disposition or re-leasing strategies may trigger impairment charges when the expected future cash flows from the properties from sale or re-lease are less than their net book value. Change in provision for loan losses. Provision for loan losses increased by approximately$22,000 for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . Under ASC 326, we are required to re-evaluate the expected loss on our portfolio of loans and direct financing lease receivables at each balance sheet date. Changes in our provision for loan losses are driven by revisions to global and loan-specific assumptions in our loan loss model and by changes in the size of our loan and direct financing lease portfolio.
Other exploitation products:
Gain on dispositions of real estate, net. Gain on dispositions of real estate, net, decreased by$2.1 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . We disposed of six and 16 real estate properties during the three months endedMarch 31, 2022 and 2021, respectively. Other (expense)/income:
Loss on extinguishment of debt. In the three months ended
Interest charges. Interest expense increased by
Interest income. Interest income decreased by approximately$2,000 for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . The decrease in interest income was primarily due to lower average daily cash balances in our interest-bearing bank accounts, partially offset by higher interest rates during the three months endedMarch 31, 2022 Income tax expense. Income tax expense increased by$0.2 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . This increase was primarily due to the accrual of income taxes for a transaction consummated through our taxable REIT subsidiary. We are organized and operate as a REIT and are generally not subject toU.S. federal corporate income taxes on our REIT taxable income that is currently distributed to our stockholders. However, theOperating Partnership is subject to taxation in certain state and local jurisdictions that impose income taxes on a partnership. 59 --------------------------------------------------------------------------------
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Non-GAAP Financial Measures
Our reported results are presented in accordance with GAAP. We also disclose the
following non-GAAP financial measures: funds from operations ("FFO"), core funds
from operations ("Core FFO"), adjusted funds from operations ("AFFO"), earnings
before interest, taxes, depreciation and amortization ("EBITDA"), EBITDA further
adjusted to exclude gains (or losses) on sales of depreciable property and real
estate impairment losses ("EBITDAre"), adjusted EBITDAre, annualized adjusted
EBITDAre, net debt, net operating income ("NOI") and cash NOI ("Cash NOI"). We
believe these non-GAAP financial measures are industry measures used by analysts
and investors to compare the operating performance of REITs.
We compute FFO in accordance with the definition adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT"). NAREIT defines FFO as GAAP net income or loss adjusted to exclude
extraordinary items (as defined by GAAP), net gain or loss from sales of
depreciable real estate assets, impairment write-downs associated with
depreciable real estate assets and real estate-related depreciation and
amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets), including the pro rata share of such
adjustments of unconsolidated subsidiaries. FFO is used by management, and may
be useful to investors and analysts, to facilitate meaningful comparisons of
operating performance between periods and among our peers primarily because it
excludes the effect of real estate depreciation and amortization and net gains
and losses on sales (which are dependent on historical costs and implicitly
assume that the value of real estate diminishes predictably over time, rather
than fluctuating based on existing market conditions).
We compute Core FFO by adjusting FFO, as defined by NAREIT, to exclude certain
GAAP income and expense amounts that we believe are infrequent and unusual in
nature and/or not related to our core real estate operations. Exclusion of these
items from similar FFO-type metrics is common within the equity REIT industry,
and management believes that presentation of Core FFO provides investors with a
metric to assist in their evaluation of our operating performance across
multiple periods and in comparison to the operating performance of our peers,
because it removes the effect of unusual items that are not expected to impact
our operating performance on an ongoing basis. Core FFO is used by management in
evaluating the performance of our core business operations. Items included in
calculating FFO that may be excluded in calculating Core FFO include certain
transaction related gains, losses, income or expense or other non-core amounts
as they occur.
To derive AFFO, we modify our computation of Core FFO to include other
adjustments to GAAP net income related to certain items that we believe are not
indicative of our operating performance, including straight-line rental revenue,
non-cash interest expense, non-cash compensation expense, other amortization and
non-cash charges, capitalized interest expense and transaction costs. Such items
may cause short-term fluctuations in net income but have no impact on operating
cash flows or long-term operating performance. We believe that AFFO is an
additional useful supplemental measure for investors to consider when assessing
our operating performance without the distortions created by non-cash items and
certain other revenues and expenses.
FFO, Core FFO and AFFO do not include all items of revenue and expense included
in net income, they do not represent cash generated from operating activities
and they are not necessarily indicative of cash available to fund cash
requirements; accordingly, they should not be considered alternatives to net
income as a performance measure or cash flows from operations as a liquidity
measure and should be considered in addition to, and not in lieu of, GAAP
financial measures. Additionally, our computation of FFO, Core FFO and AFFO may
differ from the methodology for calculating these metrics used by other equity
REITs and, therefore, may not be comparable to similarly titled measures
reported by other equity REITs.
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The following table reconciles net income (which is the most comparable GAAP measure) with FFO, Basic FFO and AFFO attributable to shareholders and non-controlling interests:
Three months ended March 31,
(in thousands) 2022 2021
Net income $ 26,818 $ 15,375
Depreciation and amortization of real estate 20,287 15,621
Provision for impairment of real estate 3,935 5,722
Gain on dispositions of real estate, net (1,658) (3,788)
FFO attributable to stockholders and non-controlling interests 49,382 32,930
Other non-recurring expenses (1) 2,138 -
Basic FFO attributable to shareholders and non-controlling interests
51,520 32,930
Adjustments:
Straight-line rental revenue, net (6,265) (3,644) Non-cash interest 661 479 Non-cash compensation expense 2,836 1,595 Other amortization expense 194 1,105 Other non-cash charges 56 36 Capitalized interest expense (66) (20)
AFFO attributable to shareholders and non-controlling interests
$
48,936
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(1)Includes our
We compute EBITDA as earnings before interest, income taxes and depreciation and
amortization. In 2017, NAREIT issued a white paper recommending that companies
that report EBITDA also report EBITDAre. We compute EBITDAre in accordance with
the definition adopted by NAREIT. NAREIT defines EBITDAre as EBITDA (as defined
above) excluding gains (or losses) from the sales of depreciable property and
real estate impairment losses. We present EBITDA and EBITDAre as they are
measures commonly used in our industry. We believe that these measures are
useful to investors and analysts because they provide supplemental information
concerning our operating performance, exclusive of certain non-cash items and
other costs. We use EBITDA and EBITDAre as measures of our operating performance
and not as measures of liquidity.
EBITDA and EBITDAre do not include all items of revenue and expense included in
net income, they do not represent cash generated from operating activities and
they are not necessarily indicative of cash available to fund cash requirements;
accordingly, they should not be considered alternatives to net income as a
performance measure or cash flows from operations as a liquidity measure and
should be considered in addition to, and not in lieu of, GAAP financial
measures. Additionally, our computation of EBITDA and EBITDAre may differ from
the methodology for calculating these metrics used by other equity REITs and,
therefore, may not be comparable to similarly titled measures reported by other
equity REITs.
The following table reconciles net income (which is the most comparable GAAP
measure) to EBITDA and EBITDAre attributable to stockholders and non-controlling
interests:
Three months ended March 31,
(in thousands) 2022 2021
Net income $ 26,818 $ 15,375
Depreciation and amortization 20,313 15,646
Interest expense 9,160 7,678
Interest income (18) (20)
Income tax expense 301 56
EBITDA attributable to shareholders and non-controlling interests
56,574 38,735 Provision for impairment of real estate 3,935 5,722 Gain on dispositions of real estate, net (1,658) (3,788) EBITDAre attributable to stockholders and non-controlling interests$ 58,851 $ 40,669 61
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We further adjust EBITDAre for the most recently completed quarter i) based on
an estimate calculated as if all re-leasing, investment and disposition activity
that took place during the quarter had been made on the first day of the
quarter, ii) to exclude certain GAAP income and expense amounts that we believe
are infrequent and unusual in nature and iii) to eliminate the impact of lease
termination or loan prepayment fees and contingent rental revenue from certain
of our tenants, which is subject to sales thresholds specified in the applicable
leases ("Adjusted EBITDAre"). We then annualize quarterly Adjusted EBITDAre by
multiplying it by four ("Annualized Adjusted EBITDAre"), which we believe
provides a meaningful estimate of our current run rate for all of our
investments as of the end of the most recently completed quarter. You should not
unduly rely on this measure, as it is based on assumptions and estimates that
may prove to be inaccurate. Our actual reported EBITDAre for future periods may
be significantly less than our current Annualized Adjusted EBITDAre.
The following table reconciles net income (which is the most comparable GAAP measure) to annualized adjusted EBITDA attributable to shareholders and non-controlling interests for the three months ended
Three months ended
(in thousands) March 31, 2022
Net income $ 26,818
Depreciation and amortization 20,313
Interest expense 9,160
Interest income (18)
Income tax expense 301
EBITDA attributable to shareholders and non-controlling interests
56,574 Provision for impairment of real estate 3,935 Gain on dispositions of real estate, net (1,658)
EBITDA is attributable to shareholders and non-controlling interests
58,851
Adjustment for current quarter reletting, acquisition and disposal activities (1)
1,781
Adjustment to exclude other non-strategic or non-recurring activities (2)
3,003
Adjustment to exclude termination/prepayment fees and certain rent percentages (3)
-
Adjusted EBITDA attributable to shareholders and non-controlling interests $63,635
Annualized Adjusted EBITDAre attributable to stockholders and non-controlling interests $ 254,540
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(1)Adjustment assumes all re-leasing activity, investments in and dispositions of real estate and loan repayments made during the three months endedMarch 31, 2022 had occurred onJanuary 1, 2022 . (2)Adjustment is made to exclude non-core expenses added back to compute Core FFO, our provision for loan losses and to eliminate the impact of seasonal fluctuation in certain non-cash compensation expense recorded in the period. (3)Adjustment excludes contingent rent (based on a percentage of the tenant's gross sales at the leased property) where payment is subject to exceeding a sales threshold specified in the lease and lease termination or loan prepayment fees. We calculate our net debt as our gross debt (defined as total debt plus net deferred financing costs on our secured borrowings) less cash and cash equivalents and restricted cash available for future investment. We believe excluding cash and cash equivalents and restricted cash available for future investment from gross debt, all of which could be used to repay debt, provides an estimate of the net contractual amount of borrowed capital to be repaid, which we believe is a beneficial disclosure to investors and analysts. 62 --------------------------------------------------------------------------------
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The following table reconciles total debt (which is the most comparable GAAP measure) to net debt:
March 31, December 31, (in thousands) 2022 2021 Unsecured term loans, net of deferred financing costs$ 628,055 $ 626,983 Revolving credit facility 147,000 144,000 Senior unsecured notes, net 394,864 394,723 Total debt 1,169,919 1,165,706 Deferred financing costs and original issue discount, net 7,081 8,294 Gross debt 1,177,000 1,174,000 Cash and cash equivalents (14,255) (59,758) Restricted cash available for future investment - - Net debt$ 1,162,745 $ 1,114,242 We compute NOI as total revenues less property expenses. NOI excludes all other items of expense and income included in the financial statements in calculating net income or loss, in accordance with GAAP. Cash NOI further excludes non-cash items included in total revenues and property expenses, such as straight-line rental revenue and other amortization and non-cash charges. We believe NOI and Cash NOI provide useful and relevant information because they reflect only those revenue and expense items that are incurred at the property level and present such items on an unlevered basis. NOI and Cash NOI are not measures of financial performance under GAAP. You should not consider our NOI and Cash NOI as alternatives to net income or cash flows from operating activities determined in accordance with GAAP. Additionally, our computation of NOI and Cash NOI may differ from the methodology for calculating these metrics used by other equity REITs, and, therefore, may not be comparable to similarly titled measures reported by other equity REITs. The following table reconciles net income (which is the most comparable GAAP measure) to NOI and Cash NOI attributable to stockholders and non-controlling interests: Three months ended March 31, (in thousands) 2022 2021 Net income$ 26,818 $ 15,375 General and administrative expense 8,063 6,431 Depreciation and amortization 20,313 15,646 Provision for impairment of real estate 3,935 5,722 Change in provision for loan losses 60 38 Gain on dispositions of real estate, net (1,658) (3,788) Loss on debt extinguishment 2,138 - Interest expense 9,160 7,678 Interest income (18) (20) Income tax expense 301 56 NOI attributable to stockholders and non-controlling interests 69,112 47,138 Straight-line rental revenue, net (6,265) (3,644) Other amortization and non-cash charges 194 1,105
Cash NOI attributable to shareholders and non-controlling interests
$
63,041
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