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Home›Coverage ratios›ESSENTIAL PROPERTIES REALTY TRUST, INC. Discussion and analysis by management of the financial position and operating results. (form 10-Q)

ESSENTIAL PROPERTIES REALTY TRUST, INC. Discussion and analysis by management of the financial position and operating results. (form 10-Q)

By Jacob Castillo
November 6, 2021
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In this Quarterly Report on Form 10-Q, we refer to Essential Properties Realty
Trust, Inc., a Maryland 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 indicates otherwise.
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:
•the ongoing adverse impact of the COVID-19 pandemic on the Company and its
tenants;
•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 condition of our tenants;
•the availability of suitable properties to invest in and our ability to acquire
and lease those properties on favorable terms;
•our ability to renew leases, lease vacant space or re-lease space as existing
leases expire or are terminated;
•volatility and uncertainty in the credit markets and broader financial markets,
including potential fluctuations in the Consumer Price Index ("CPI");
•the degree and nature of our competition;
•our failure to generate sufficient cash flows to service our outstanding
indebtedness;
•our ability to access debt and equity capital on attractive terms;
•fluctuating interest rates;
•availability of qualified personnel and our ability to retain our key
management personnel;
•changes in, or the failure or inability to comply with, applicable law or
regulation;
•our failure to continue to qualify for taxation as a real estate investment
trust ("REIT");
•changes in the U.S. tax law and other U.S. laws, whether or not specific to
REITs; and
•additional factors discussed in the sections entitled "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 year ended December 31, 2020.
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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 facilities where a tenant services its customers and
conducts activities that are essential to the generation of the tenant's sales
and profits. As of September 30, 2021, 94.5% of our $225.5 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 on September 30, 2021 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 on January 12, 2018 as a Maryland corporation. We have elected
to be taxed as a REIT for federal income tax purposes beginning with the year
ended December 31, 2018, and we believe that our current organization,
operations and intended distributions will allow us to continue to so qualify.
We completed our initial public offering in June 2018. Our common stock is
listed on the New 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. We have grown
significantly since commencing our operations and investment activities in June
2016. As of September 30, 2021, we had a portfolio of 1,397 properties
(inclusive of 158 properties which secure our investments in mortgage loans
receivable) that was diversified by tenant, industry, concept and geography, had
annualized base rent of $225.5 million and was 99.9% occupied. Our portfolio is
built based on the following core investment attributes:
Diversification. As of September 30, 2021, our portfolio was 99.9% occupied by
297 tenants operating 423 different brands, or concepts, in 17 industries across
45 states, with none of our tenants contributing more than 2.7% 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 of September 30, 2021, our leases had a weighted average
remaining lease term of 13.9 years (based on annualized base rent), with 3.8% of
our annualized base rent attributable to leases expiring prior to January 1,
2026. 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.
Significant Use of Master Leases. As of September 30, 2021, 60.8% of our
annualized base rent was attributable to master leases.
Rent Coverage Ratio and Tenant Financial Reporting. As of September 30, 2021,
our portfolio's weighted average rent coverage ratio was 3.5x, and 98.4% of our
leases (based on annualized base rent) obligate the tenant to periodically
provide us with specified unit-level financial reporting.
Contractual Base Rent Escalation. As of September 30, 2021, 98.3% of our leases
(based on annualized base rent) provided for increases in future base rent at a
weighted average rate of 1.6% per year.
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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. During the three months ended
September 30, 2021, approximately 84.4% of our investments were sale-leaseback
transactions.
Smaller, Low Basis Single-Tenant Properties. We generally invest in freestanding
"small-box" single- tenant properties. As of September 30, 2021, our average
investment per property was $2.2 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 increases their
liquidity.
Our Competitive Strengths
We believe the following competitive strengths distinguish us from our
competitors and allow us to compete effectively in the single-tenant, net-lease
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 portfolio. As of September 30, 2021, we had a portfolio of 1,397
properties, with annualized base rent of $225.5 million, which was carefully
selected by our management team in accordance with our focused and disciplined
investment strategy. Our portfolio is diversified with 297 tenants operating 423
different concepts across 45 states and 17 industries. None of our tenants
contributed more than 2.7% of our annualized base rent as of September 30, 2021,
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 of September 30, 2021,
94.5% of our annualized base rent was attributable to tenants operating
service-oriented and experience-based businesses.
•We believe that our portfolio's diversity and rigorous 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 of September 30, 2021, exclusive of our initial
investment in a portfolio of 262 net leased properties, consisting primarily of
restaurants, that we acquired on June 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"), 83.3% of our
portfolio's annualized base rent was attributable to internally originated
sale-leaseback transactions and 86.2% was acquired from parties who 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.
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Differentiated Investment Strategy. We seek to acquire and lease freestanding,
single-tenant commercial real estate facilities where a tenant services its
customers and 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 focus on acquiring net leased real estate, we
believe that we can achieve superior growth through manageable acquisition
volume.
Disciplined Underwriting Leading to Strong Portfolio Characteristics. We
generally seek to execute transactions with an aggregate purchase price of $3
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, negotiate lease
renewals and proactively manage our portfolio to protect stockholder value. As
of September 30, 2021, leases contributing 98.4% of our annualized base rent
required tenants to provide us with specified unit-level financial information,
and leases contributing 98.4% 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 emphasize 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
geographic concentration. 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 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 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 geographic, 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 sale-leaseback transactions and opportunistically making
acquisitions of properties subject to net leases that contribute to our
portfolio's tenant, industry and geographic diversification. As of
September 30, 2021, exclusive of the Initial Portfolio, 83.3% of our portfolio's
annualized base rent was attributable to internally originated sale- leaseback
transactions and 86.2% was acquired from parties who 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 of
September 30, 2021, exclusive of the Initial Portfolio, approximately 41.1% of
our investments were sourced from operators and tenants who 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. 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.
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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 tenant renewal options), triple-net leases that provide
for periodic contractual rent escalations. As of September 30, 2021, our leases
had a weighted average remaining lease term of 13.9 years (based on annualized
base rent), with only 3.8% of our annualized base rent attributable to leases
expiring prior to January 1, 2026, and 98.3% of our leases (based on annualized
base rent) provided for increases in future base rent at a weighted average of
1.6% 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 target a level of net debt that, over time, is generally
less than six times our annualized adjusted EBITDAre (as defined in "Non-GAAP
Financial Measures" below). We have access to multiple sources of debt capital,
including the investment grade-rated, asset-backed bond market, through our
Master Trust Funding Program, the investment grade-rated unsecured bond market
and bank debt, through our revolving credit facility and our unsecured term loan
facilities.
Historical Investment and Disposition Activity
The following table sets forth select information about our quarterly investment
activity for the quarters ended December 31, 2019 through September 30, 2021
(dollars in thousands):
                                                                          Three Months Ended
                                          December 31,                                                          September 30,
                                              2019              March 31, 2020           June 30, 2020              2020
Investment volume                        $   204,709          $       167,490          $       42,369          $    148,877
Number of transactions                               41                       32                      11                    19
Property count                                       94                       63                      13                    50
Avg. investment per unit                 $     2,049          $         2,551          $        2,870          $      2,866
Cash cap rates 1                                   7.3%                     7.1%                    7.4%                  7.1%
GAAP cap rates 2                                   8.0%                     8.0%                    8.1%                  7.9%
Master lease percentage 3,4                         41%                      54%                     68%                   79%
Sale-leaseback percentage 3,5                       81%                      88%                    100%                   92%
Percentage of financial reporting
3,6                                                 99%                     100%                    100%                  100%
Rent coverage ratio                                3.1x                     2.7x                    4.3x                  2.8x
Lease term (in years)                              16.3                     16.1                    16.7                  17.6

                                                                          Three Months Ended
                                          December 31,                                                          September 30,
                                              2020              March 31, 2021           June 30, 2021              2021
Investment volume                        $   244,078          $       197,816          $      223,186          $    230,755
Number of transactions                               33                       22                      34                    31
Property count                                      108                       74                      94                    85
Avg. investment per unit                 $     2,218          $         2,650          $        2,354          $      2,676
Cash cap rates 1                                   7.1%                     7.0%                    7.1%                  7.0%
GAAP cap rates 2                                   7.7%                     7.9%                    7.8%                  7.9%
Master lease percentage 3,4                         89%                      79%                     83%                   80%
Sale-leaseback percentage 3,5                       88%                      85%                     88%                   84%
Percentage of financial reporting
3,6                                                100%                     100%                    100%                  100%
Rent coverage ratio                                3.6x                     3.0x                    2.7x                  2.8x
Lease term (in years)                              16.3                     16.1                    13.5                  16.4

_____________________________________

(1)   Annualized contractually specified cash base rent for the first full month
after the investment divided by the purchase price for the property.
(2)  GAAP rent for the first twelve months after the investment divided by the
purchase price for the property.
(3)  As a percentage of annualized base rent.
(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.
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(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 December 31, 2019 through
September 30, 2021 (dollars in thousands):
                                                                        Three Months Ended
                                       December 31,                                                           September 30,
                                           2019               March 31, 2020           June 30, 2020               2020
Disposition volume1                   $     15,229          $        19,571          $        3,420          $      19,595
Cash cap rate on leased assets
2                                                6.9%                     7.1%                    6.8%                   7.0%
Leased properties sold 3                         7                       10                       3                     11
Vacant properties sold 3                         1                        -                       -                      3

                                                                        Three Months Ended
                                       December 31,                                                           September 30,
                                           2020               March 31, 2021           June 30, 2021               2021
Disposition volume1                   $     39,042          $        25,197          $       19,578          $      10,089
Cash cap rate on leased assets
2                                                7.4%                     7.1%                    7.1%                   6.5%
Leased properties sold 3                        21                       15                       6                     11
Vacant properties sold 3                         2                        1                       1                      -

_____________________________________

(1)   Net of transaction costs.
(2)   Annualized contractually specified cash 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.
COVID-19 Pandemic Update
On March 11, 2020, the World 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 has
appears to have subsided over the course of 2021, primarily due to the
widespread availability of multiple vaccine alternatives that appear to be safe
and effective. However, the continuing impact of the COVID-19 pandemic and its
duration is unclear, and variants of the virus, such as the Delta variant, and
vaccine hesitancy in certain areas could erode the recent progress that has been
made against the virus, or exacerbate or prolong the 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, uncertainty, disruption and
instability in the macro-economic environment could occur and government
restrictions could 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 closely monitor the ongoing developments surrounding 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 related to these agreements as a
component of rental revenue in our consolidated statements of operations for
2020. 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 required 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 would increase if variants of
COVID-19, such as the Delta variant, intensify or persist for a prolonged
period. Additionally, we do not yet know whether COVID-19 has caused a material
secular change in consumer behavior that may reduce patronage of service-based
and/or experience-
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based businesses, but should changes occur that are material, many of our
tenants would be adversely affected and their ability to meet their obligations
to us could be further impaired. During the deferral period, these agreements
have reduced our cash flow from operations, reduced our cash available for
distribution and adversely affected our ability to make cash distributions to
common stockholders. Furthermore, if tenants are unable to repay their deferred
rent, we will not receive cash in the future in accordance with our
expectations.
Liquidity and Capital Resources
As of September 30, 2021, we had $2.9 billion of net investments in our
investment portfolio, consisting of investments in 1,397 properties (inclusive
of 158 properties which secure our investments in mortgage loans receivable),
with annualized base rent of $225.5 million. Substantially all of our cash from
operations is generated by our investment portfolio.
Our liquidity requirements for operating our Company consist primarily of the
funds necessary to pay principal and interest payments on our outstanding
indebtedness, and the general and administrative expenses of operating our
business and managing our portfolio. The occupancy level of our portfolio is
high (99.9% as of September 30, 2021) and, because substantially all of our
leases are triple-net, our tenants are generally responsible for the
maintenance, insurance and property taxes associated with our properties. 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 of September 30, 2021, one of our properties was
vacant, representing less than 1% of our portfolio, and all remaining 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 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 33 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 of September 30, 2021, we agreed to provide construction
financing or reimburse the tenant for certain development, construction and
renovation costs in an aggregate amount of $84.5 million, and, as of such date,
we funded $31.1 million of this commitment. We expect to fund the balance of
such commitments by December 31, 2022.
Additionally, as of October 29, 2021, we were under contract to acquire 19
properties with an aggregate purchase price of $58.2 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 and borrowings
under our Revolving Credit Facility and potentially through proceeds generated
from our 2021 ATM Program, which has $255.0 million remaining.
Our long-term liquidity requirements consist primarily of funds necessary to
invest in 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 financings, sale of common stock under our ATM Program,
proceeds from the sale of the properties in our portfolio and other secured and
unsecured borrowings. 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 investment in
single tenant properties and thereby grow our cash flows.
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An additional liquidity need is funding the required level of distributions that
are among the requirements for us to continue to qualify for taxation as a REIT.
During the nine months ended September 30, 2021, our board of directors declared
total cash distributions of $0.74 per share of common stock. Holders of OP Units
are entitled to distributions per unit equivalent to those paid by us per share
of common stock. During the nine months ended September 30, 2021, we paid $81.8
million of dividends and distributions to common stockholders and OP Unit
holders, and, as of September 30, 2021, we recorded $30.5 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 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 is provided through use of our Revolving
Credit Facility. We manage our long-term leverage position through the issuance
of long-term fixed-rate debt on a secured or unsecured basis. Generally, we will
seek to issue long-term debt on an unsecured basis as we believe this
facilitates greater flexibility in our 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 difference 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 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 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, 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 is prudent for a real estate company like ours.
As of September 30, 2021, 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 6.4 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 in the future.
Future sources of debt capital may include issuances of notes in the public
market, term borrowings from insurance companies, banks and other sources,
mortgage financing of a single-asset or 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 at September 30, 2021, our borrowing availability under our
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 acquire the real estate for which we currently have made
commitments.
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Description of Certain Debt
The following table summarizes our outstanding indebtedness as of
September 30, 2021 and December 31, 2020:
                                                                             Principal Outstanding                           Weighted Average Interest 

Tariff (1)

                                                                     September 30,            December 31,            September 30,                      December 31,
(in thousands)                             Maturity Date                  2021                    2020                    2021                               2020
Unsecured term loans:
April 2019 Term Loan                        April 2024             $       200,000          $     200,000                 3.3%                         

3.3%

November 2019 Term Loan                    November 2026                   430,000                430,000                 3.0%                               3.0%
Senior Unsecured Notes                       July 2031                     400,000                      -                 3.1%                                -%
Revolving Credit Facility                   April 2023                     
     -                 18,000                  -%                                1.4%
Secured borrowings:
Series 2017-1 Notes                              -                               -                173,193                  -%                                4.2%
Total principal outstanding                                        $     1,030,000          $     821,193                 3.1%                       

3.3%

_____________________________________

(1)Interest rates are presented after giving effect to our interest rate swap
and lock agreements, where applicable.
Unsecured Revolving Credit Facility and April 2019 Term Loan
Through our Operating Partnership, we are party to an Amended Credit Agreement
with a group of lenders, which provides for revolving loans of up to $400.0
million (the "Revolving Credit Facility") and up to an additional $200.0 million
in term loans (the "April 2019 Term Loan").
The Revolving Credit Facility matures in April 2023, with an extension option of
up to one year exercisable by the Operating Partnership, subject to certain
conditions, and the April 2019 Term Loan matures on April 12, 2024. The loans
under each of the Revolving Credit Facility and the April 2019 Term Loan
initially bear interest at an annual rate of applicable LIBOR plus the
applicable margin (which applicable margin varies between the Revolving Credit
Facility and the April 2019 Term Loan). The applicable LIBOR is the rate with a
term equivalent to the interest period applicable to the relevant borrowing. The
applicable margin initially is a spread set according to a leverage-based
pricing grid. At the Operating Partnership's election, on and after receipt of
an investment grade corporate credit rating from S&P or Moody's, the applicable
margin will be a spread set according to the credit ratings provided by S&P
and/or Moody's. Each of the Revolving Credit Facility and the April 2019 Term
Loan is freely pre-payable at any time and is mandatorily payable if borrowings
exceed the borrowing base or the revolving facility limit. The Operating
Partnership may re-borrow amounts paid down on the Revolving Credit Facility but
not on the April 2019 Term Loan. The Operating Partnership is required to pay
revolving credit fees throughout the term of the Revolving Credit Agreement
based upon its usage of the Revolving Credit Facility, at a rate which depends
on its usage of such facility during the period before we receive an investment
grade corporate credit rating from S&P or Moody's, and which rate shall be based
on the corporate credit rating from S&P and/or Moody's after the time, if
applicable, we receive such a rating. The Amended 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 $200.0 million.
The Operating Partnership is the borrower under the Amended Credit Agreement,
and we and each of the subsidiaries of the Operating Partnership that owns a
direct or indirect interest in an eligible real property asset are guarantors
under the Amended Credit Agreement.
Under the terms of the Amended Credit Agreement, 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 Amended 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
Amended Credit Agreement contains certain additional covenants that, subject to
exceptions, limit or restrict our incurrence of indebtedness and liens,
disposition of assets, transactions with affiliates, mergers
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and fundamental changes, modification of organizational documents, changes to
fiscal periods, making of investments, negative pledge clauses and lines of
business and REIT qualification.
November 2019 Term Loan
On November 26, 2019, we, through our Operating Partnership, entered into a
$430.0 million term loan credit facility (the "November 2019 Term Loan") with a
group of lenders. The November 2019 Term Loan provides for term loans to be
drawn up to an aggregate amount of $430.0 million with a maturity of November
26, 2026. The loans under the November 2019 Term Loan are available to be drawn
in up to three draws during the six-month period beginning on November 26, 2019.
In December 2019, we made an initial borrowing of $250.0 million available under
the November 2019 Term Loan and, on March 26, 2020, we borrowed the remaining
$180.0 million available under the November 2019 Term Loan.
Borrowings under the November 2019 Term Loan bear interest at an annual rate of
applicable LIBOR plus the applicable margin. The applicable LIBOR will be the
rate with a term equivalent to the interest period applicable to the relevant
borrowing. The applicable margin will initially be a spread set according to a
leverage-based pricing grid. At the Operating Partnership's irrevocable
election, on and after receipt of an investment grade corporate credit rating
from S&P or Moody's, the applicable margin will be a spread set according to our
corporate credit ratings provided by S&P and/or Moody's. The November 2019 Term
Loan is pre-payable at any time by the Operating Partnership, provided, that if
the loans under the November 2019 Term Loan are repaid on or before November 26,
2020, 2021, they are subject to a one percent prepayment premium. After November
26, 2021 the loans may be repaid without penalty. The November 2019 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 November 2019 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 November 2019 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 November 2019 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
November 2019 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
On June 22, 2021, the Operating Partnership issued $400 million aggregate
principal amount of 2031 Senior Notes, resulting in net proceeds of
$396.6 million. The Senior Unsecured Notes were issued by the Operating
Partnership and are guaranteed by the Company. In June 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
issued by the Company. In June 2021, the agreement was settled in accordance
with its terms.
The supplemental indenture governing these public notes contains various
restrictive covenants, including limitations on our ability to incur additional
secured and unsecured indebtedness. As of September 30, 2021, we were in
compliance with these covenants.
Cash Flows
Comparison of the nine months ended September 30, 2021 and 2020
As of September 30, 2021, we had $27.5 million of cash and cash equivalents and
no restricted cash as compared to $183.8 million and $5.6 million, respectively,
as of September 30, 2020.
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Cash Flows for the nine months ended September 30, 2021
During the nine months ended September 30, 2021, net cash provided by operating
activities was $115.5 million. Our cash flows from operating activities 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. Cash inflows
related to net income adjusted for non-cash items of $110.1 million (net income
of $66.4 million adjusted 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 repayment of
secured borrowings, provision for impairment of real estate, gain on
dispositions of real estate, net, straight-line rent receivable, equity-based
compensation expense and adjustment to rental revenue for tenant credit, which
in the aggregate net to an addition of $43.7 million), the change in rent
receivables, prepaid expenses and other assets of $1.5 million and the change in
accrued liabilities and other payables of $8.8 million. These net cash inflows
were partially offset by payments made in settlement of cash flow hedges of $4.8
million.
Net cash used in investing activities during the nine months ended
September 30, 2021 was $604.3 million. Our net cash used in investing activities
is generally used to fund our investments in real estate, including capital
expenditures, the development of our construction in progress and investments in
loans receivables and direct financing leases, offset by cash provided from the
disposition of real estate and principal collections on our loans and direct
financing lease receivables. The cash used in investing activities included
$568.1 million to fund investments in real estate, including capital
expenditures, $3.3 million to fund construction in progress, $86.3 million of
investments in loans receivable, $0.6 million in deposits on prospective real
estate investments and $2.4 million paid to tenants as lease incentives. These
cash outflows were partially offset by $53.9 million of proceeds from sales of
investments, net of disposition costs and $2.5 million of principal collections
on our loans and direct financing lease receivables.
Net cash provided by financing activities of $483.3 million during the nine
months ended September 30, 2021 related to net cash inflows of $365.8 million
from the issuance of common stock through our ATM Program, $179.0 million of
borrowings under the Revolving Credit Facility and $396.6 million in net
proceeds from the issuance of the Senior Unsecured Notes. These cash inflows
were partially offset by $175.8 million of repayments of secured borrowing
principal, repayments of $197.0 million of borrowings under the Revolving Credit
Facility, the payment of $81.8 million in dividends, the payment of $1.1 million
of offering costs related to our ATM Program and our April 2021 follow-on
offering, the payment of $2.1 million of deferred financing costs and $0.3
million of payments for taxes related to the net settlement of equity awards.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2021.
Contractual Obligations
The following table provides information with respect to our commitments as of
September 30, 2021:
                                                                                    Payment due by period
                                                                   October 1 -
                                                                   December 31,
(in thousands)                                   Total                 2021              2022 - 2023           2024 - 2025          Thereafter

Unsecured Term Loans                         $   630,000          $         -          $          -          $    200,000          $  430,000
Senior Unsecured Notes                           400,000                    -                     -                     -             400,000
Revolving Credit Facility                              -                    -                                           -                   -

Financing of construction by the tenant and

  Reimbursement Obligations (1)                   53,476               53,476                     -                     -                   -
Operating Lease Obligations (2)                   19,440                  368                 2,625                 1,885              14,562
Total                                        $ 1,102,916          $    53,844          $      2,625          $    201,885          $  844,562

_____________________________________

(1) Includes obligations to reimburse some of our tenants for construction costs they incur in connection with the construction of our properties in exchange for a contract specified rent which generally increases in proportion to our funding.

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(2)Includes $16.9 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 ended December 31, 2018; accordingly, we
generally will not be subject to federal income tax for the year ended December
31, 2021 if we distribute all of our REIT taxable income, determined without
regard to the dividends paid deduction, to our stockholders.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the 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 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 ended December 31, 2020 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.
Recent Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on
Financial Instruments ("ASU 2016-13") establishing ASC 326, as amended by
subsequent ASUs on the topic. ASU 2016-13 is effective for interim and annual
reporting periods in fiscal years beginning after December 15, 2019. We adopted
this guidance on January 1, 2020 and recorded estimates of expected loss on its
loans receivable portfolio beginning on that date.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for Hedging Activities ("ASU
2017-12"), which amends and simplifies existing guidance in order to allow
companies to more accurately present the economic effects of risk management
activities in the financial statements. We adopted ASU 2017-12 while accounting
for our interest rate swaps. As we did not have other derivatives outstanding at
time of adoption, no prior period adjustments were required. Pursuant to the
provisions of ASU 2017-12, we are no longer required to separately measure and
recognize hedge ineffectiveness. Instead, we recognize the entire change in the
fair value of cash flow hedges included in the assessment of hedge effectiveness
in other comprehensive (loss) income. The amounts recorded in other
comprehensive (loss) income will subsequently be reclassified to earnings when
the hedged item affects earnings. The adoption of ASU 2017-12 did not have a
material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Changes to
the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which
changes the disclosure requirements for fair value measurements by removing,
adding and modifying certain disclosures. ASU 2018-13 is effective for annual
periods beginning after December 15, 2019, with early adoption permitted. We
adopted this guidance on January 1, 2020 and the adoption of ASU 2018-13 did not
have a material impact on our related disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)
("ASU 2020-04"). ASU 2020-04 contains practical expedients for reference rate
reform related activities that impact debt, leases,
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derivatives and other contracts. The guidance in ASU 2020-04 is optional and may
be elected over time as reference rate reform activities occur. During the first
quarter of 2020, we elected to apply the hedge accounting expedients related to
probability and the assessments of effectiveness for future LIBOR-indexed cash
flows to assume that the index upon which future hedged transactions will be
based matches the index on the corresponding derivatives. Application of these
expedients preserves the presentation of derivatives consistent with past
presentation. We continue to evaluate the impact of the guidance and may apply
other elections as applicable as additional changes in the market occur.
In April 2020, the Financial Accounting Standards Board ("FASB") staff issued a
question and answer document (the "Lease Modification Q&A") focused on the
application of lease accounting guidance to lease concessions provided as a
result of the COVID-19 pandemic. Under existing lease guidance, the entity would
have to determine, on a lease by lease basis, if a lease concession was the
result of a new arrangement reached with the tenant, which would be accounted
for under the lease modification framework, or if a lease concession was under
the enforceable rights and obligations that existed in the original lease, which
would be accounted for outside the lease modification framework. The Lease
Modification Q&A provides entities with the option to elect to account for lease
concessions as though the enforceable rights and obligations existed in the
original lease. This election is only available when total cash flows resulting
from the modified lease are substantially similar to the cash flows in the
original lease. We made this election and account for rent deferrals by
increasing our rent receivables as receivables accrue and continuing to
recognize income during the deferral period. Lease concessions or amendments
other than rent deferrals are evaluated to determine if a substantive change to
the consideration in the original lease contract has occurred and should be
accounted for as a lease modification. We continue to evaluate any amounts
recognized for collectability, regardless of whether accounted for as a lease
modification or not, and record an adjustment to rental income for tenant credit
for amounts that are not probable of collection. For lease concessions granted
in conjunction with the COVID-19 pandemic, we reviewed all amounts recognized on
a tenant-by-tenant basis for collectability.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in
Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity's Own Equity ("ASU 2020-06"). The guidance in ASU
2020-06 simplifies the accounting for convertible debt and convertible preferred
stock by removing the requirements to separately present certain conversion
features in equity. In addition, the amendments in the ASU 2020-06 also simplify
the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in
Entity's Own Equity, by removing certain criteria that must be satisfied in
order to classify a contract as equity, which is expected to decrease the number
of freestanding instruments and embedded derivatives accounted for as assets or
liabilities. Finally, the amendments revise the guidance on calculating earnings
per share, requiring use of the if-converted method for all convertible
instruments and rescinding an entity's ability to rebut the presumption of share
settlement for instruments that may be settled in cash or other assets. The
amendments in ASU 2020-06 are effective for us for fiscal years beginning after
December 15, 2021. Early adoption is permitted, but no earlier than fiscal years
beginning after December 15, 2020. We adopted this guidance on January 1, 2021
and the adoption of ASU 2020-06 did not have a material impact on our
consolidated financial statements.
In July 2021, the FASB issued ASU 2021-05, Lease (Topic 842): Lessors - Certain
Leases with Variable Lease Payments ("ASU 2021-05"). The guidance in ASU 2021-05
amends the lease classification requirements for the lessors under certain
leases containing variable payments to align with practice under ASC 840. The
lessor should classify and account for a lease with variable lease payments that
do not depend on a reference index or a rate as an operating lease if both of
the following criteria are met: 1) the lease would have been classified as a
sales-type lease or a direct financing lease in accordance with the
classification criteria in ASC 842-10-25-2 through 25-3; and 2) the lessor would
have otherwise recognized a day-one loss. The amendments in ASU 2021-05 are
effective for fiscal years beginning after December 15, 2021, with early
adoption permitted. The adoption of ASU 2020-05 is not expected to have a
material impact on our consolidated financial statements.
Our Real Estate Investment Portfolio
As of September 30, 2021, we had a portfolio of 1,397 properties, including one
vacant property and 158 properties that secure our investments in mortgage loans
receivable, that was diversified by tenant, concept, industry and geography and
had annualized base rent of $225.5 million. Our 297 tenants operate 423
different concepts in 17 industries across 45 states. None of our tenants
represented more than 2.7% of our portfolio at September 30, 2021, and our top
ten largest tenants represented 19.0% of our annualized base rent as of that
date.
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Diversification by Tenant
As of September 30, 2021, our top ten tenants included the following concepts:
EquipmentShare, Captain D's, Cadence Academy, Mister Car Wash, Spare Time, Le
Chaperon Rouge, Circle K, 10Box Cost-Plus, AMC, and Mavis Discount Tire. Our
1,396 leased properties are operated by our 297 tenants. The following table
details information about our tenants and the related concepts as of
September 30, 2021 (dollars in thousands):
                                                                                                                                                 % of
                                                                                                 Number of             Annualized             Annualized
Tenant(1)                                                         Concept                     Properties (2)            Base Rent              Base Rent
Equipmentshare.com Inc.                                EquipmentShare                                 21              $    5,978                       2.7  %
Captain D's, LLC                                       Captain D's                                    74                   5,176                       2.3  %
Cadence Education, LLC                                 Cadence Academy                                23                   4,844                       2.1  %
Car Wash Partners, Inc.                                Mister Car Wash                                13                   4,389                       1.9  %
Bowl New England, Inc.                                 Spare Time                                      6                   4,367                       1.9  %
The Nest Schools, Inc.                                 Le Chaperon Rouge                              16                   3,837                       1.7  %
Mac's Convenience Stores, LLC (3)                      Circle K                                       34                   3,797                       1.7  %
Harp's Food Stores, Inc.                               10Box Cost-Plus                                19                   3,575                       1.6  %
American Multi-Cinema, Inc. (4)                        AMC                                             5                   3,539                       1.6  %
Mavis Tire Express Services Corp.                      Mavis Discount Tire                            19                   3,395                       1.5  %
Top 10 Subtotal                                                                                      230                  42,897                      19.0  %
Other                                                                                              1,166                 182,565                      81.0  %
Total                                                                                              1,396              $  225,462                     100.0  %

_____________________________________

(1)Represents tenant or guarantor.
(2)Excludes one vacant property.
(3)Includes properties leased to a subsidiary of Alimentation Couche Tard Inc.
(4)Includes four properties leased to a subsidiary of AMC Entertainment
Holdings, Inc.
As of September 30, 2021, our five largest tenants, who contributed 10.9% of our
annualized base rent, had a rent coverage ratio of 6.0x and our ten largest
tenants, who contributed 19.0% of our annualized base rent, had a rent coverage
ratio of 4.5x.
As of September 30, 2021, 94.5% 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.
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Diversification by Concept
Our tenants operate their businesses across 423 concepts. The following table
details those concepts as of September 30, 2021 (dollars in thousands):
                                                                           Annualized                % of
                                                                              Base                Annualized                 Number of                  Building
Concept                                         Type of Business              Rent                 Base Rent              Properties (1)             (Sq. Ft.) (1)
Captain D's                                   Service                     $    6,259                       2.8  %                 86                    222,730
EquipmentShare                                Service                          5,978                       2.7  %                 21                    436,285
Applebee's                                    Service                          5,381                       2.4  %                 37                    183,214
Mister Car Wash                               Service                          4,389                       1.9  %                 13                     54,621
Spare Time                                    Service                          4,367                       1.9  %                  6                    272,979
Circle K                                      Service                          3,875                       1.7  %                 35                    130,975
AMC                                           Experience                       3,539                       1.6  %                  5                    240,672
Zaxby's                                       Service                          3,486                       1.5  %                 19                     72,986
Mavis Discount Tire                           Service                          3,395                       1.5  %                 21                    165,713
The Malvern School                            Service                          3,272                       1.5  %                 13                    149,781
Top 10 Subtotal                                                               43,941                      19.5  %                256                  1,929,956
Other                                                                        181,521                      80.5  %              1,140                 10,418,890
Total                                                                     $  225,462                     100.0  %              1,396                 12,348,846

_____________________________________

(1) Excludes vacant property.

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Diversification by Industry
Our tenants' business concepts are diversified across various industries. The
following table summarizes those industries as of September 30, 2021 (dollars in
thousands):
                                                           Annualized                % of
                                        Type of               Base                Annualized               Number of                 Building                Rent Per
Tenant Industry                        Business               Rent                Base Rent              Properties (1)            (Sq. Ft.) (1)            Sq. Ft. (2)
Early Childhood Education           Service               $   32,631                     14.5  %               142                 1,512,418              $      21.26
Quick Service                       Service                   29,704                     13.2  %               359                   988,827                     30.02
Car Washes                          Service                   29,121                     12.9  %               120                   563,278                     50.81
Medical / Dental                    Service                   26,481                     11.7  %               161                 1,098,234                     24.15
Automotive Service                  Service                   18,403                      8.2  %               137                   920,670                     20.66
Convenience Stores                  Service                   15,390                      6.8  %               135                   529,990                     29.04
Casual Dining                       Service                   14,439                      6.4  %                97                   549,047                     26.82
Equipment Rental and Sales          Service                    7,835                      3.5  %                35                   634,578                     12.10
Family Dining                       Service                    5,581                      2.5  %                37                   220,106                     26.28
Other Services                      Service                    5,306                      2.4  %                24                   292,129                     18.79
Pet Care Services                   Service                    4,031                      1.8  %                40                   300,133                     16.36
Service Subtotal                                             188,922                     83.8  %             1,287                 7,609,410                     25.04
Health and Fitness                  Experience                10,355                      4.6  %                27                 1,087,279                      9.58
Entertainment                       Experience                 9,683                      4.3  %                24                   775,855                     12.47
Movie Theatres                      Experience                 4,170                      1.8  %                 6                   293,206                     14.22
Experience Subtotal                                           24,208                     10.7  %                57                 2,156,340                     11.26
Grocery                             Retail                     6,483                      2.9  %                25                 1,108,740                      5.85
Home Furnishings                    Retail                     2,048                      0.9  %                 4                   217,339                      9.42
Retail Subtotal                                                8,531                      3.8  %                29                 1,326,079                      6.43
Building Materials                  Industrial                 3,801                      1.7  %                23                 1,257,017                      3.02
Total/Weighted Average                                    $  225,462                    100.0  %             1,396                12,348,846              $      18.33

_____________________________________

(1)Excludes one vacant property.
(2)Excludes properties with no annualized base rent and properties under
construction.
Diversification by Geography
Our 1,397 property locations are spread across 45 states. The following table
details the geographical locations of our properties as of September 30, 2021
(dollars in thousands):
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                                        % of
                     Annualized      Annualized       Number of           Building
State                Base Rent       Base Rent        Properties         (Sq. Ft.)
Texas               $   31,579           14.0  %         175            1,450,469
Georgia                 17,604            7.9  %         115              639,213
Ohio                    15,661            7.0  %          98              930,919
Florida                 13,451            6.0  %          62              680,778
Arkansas                 8,548            3.8  %          62              478,398
Wisconsin                8,284            3.7  %          42              494,430
North Carolina           8,267            3.7  %          44              474,296
Alabama                  7,643            3.4  %          52              469,880
Michigan                 7,518            3.3  %          49              881,396
Arizona                  7,209            3.2  %          40              346,410
Tennessee                6,440            2.9  %          50              249,747
Oklahoma                 6,349            2.8  %          40              406,517
Minnesota                6,089            2.7  %          35              464,052
Missouri                 5,709            2.5  %          37              573,738
Massachusetts            5,621            2.5  %          29              406,159
Illinois                 5,390            2.4  %          31              228,968
South Carolina           4,842            2.1  %          31              328,827
Pennsylvania             4,754            2.1  %          29              241,291
Colorado                 4,553            2.0  %          22              199,688
New York                 4,552            2.0  %          39              185,923
Kentucky                 3,699            1.6  %          35              190,330
Mississippi              3,631            1.6  %          36              128,643
California               3,433            1.5  %          21              171,916
Iowa                     3,340            1.5  %          24              144,697
New Mexico               3,028            1.3  %          19              113,697
New Jersey               3,006            1.3  %          18              118,613
Connecticut              2,967            1.3  %          13              217,985
Kansas                   2,884            1.3  %          20              143,692
Indiana                  2,790            1.2  %          23              189,779
Maryland                 1,947            0.9  %           8               68,324
Louisiana                1,882            0.8  %          11               80,537
West Virginia            1,777            0.8  %          25               77,083
South Dakota             1,728            0.8  %           7               41,472
Washington               1,664            0.7  %          11               87,243
Virginia                 1,661            0.7  %          10               74,276
Oregon                   1,099            0.5  %           6              124,931
Nebraska                   955            0.4  %          10               32,985
Utah                       933            0.4  %           2               67,659
Nevada                     661            0.3  %           3               56,420
New Hampshire              587            0.3  %           6               43,876
Maine                      500            0.2  %           1               32,115
Wyoming                    433            0.2  %           2               14,001
Idaho                      393            0.2  %           1               35,433
Alaska                     241            0.1  %           2                6,630
Rhode Island               160            0.1  %           1                5,800
Total               $  225,462          100.0  %       1,397           12,399,236


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Lease Expirations
As of September 30, 2021, the weighted average remaining term of our leases was
13.9 years (based on annualized base rent), with only 3.8% of our annualized
base rent attributable to leases expiring prior to January 1, 2026. The
following table sets forth our lease expirations for leases in place as of
September 30, 2021 (dollars in thousands):
                                                                                                                                              Weighted
                                                         Annualized              % of Annualized                 Number of                  Average Rent
Lease Expiration Year (1)                                 Base Rent                 Base Rent                  Properties (2)            Coverage Ratio (3)
2021                                                    $        -                               -  %                   -                            -
2022                                                           490                             0.2  %                   5                                 3.0x
2023                                                         1,412                             0.6  %                  16                                 3.8x
2024                                                         4,926                             2.2  %                  49                                 4.8x
2025                                                         1,736                             0.8  %                  18                                 2.3x
2026                                                         4,475                             2.0  %                  30                                 3.3x
2027                                                         4,490                             2.0  %                  28                                 3.0x
2028                                                         4,337                             1.9  %                  15                                 1.7x
2029                                                         5,353                             2.4  %                  75                                 4.3x
2030                                                         5,249                             2.3  %                  49                                 4.5x
2031                                                        12,760                             5.7  %                  83                                 2.6x
2032                                                        10,372                             4.6  %                  46                                 4.6x
2033                                                         7,889                             3.5  %                  26                                 3.1x
2034                                                        31,586                            14.0  %                 240                                 5.3x
2035                                                        20,691                             9.2  %                 128                                 2.8x
2036                                                        25,126                            11.1  %                 135                                 3.0x
2037                                                         7,779                             3.5  %                  39                                 8.7x
2038                                                        11,920                             5.3  %                  74                                 2.0x
2039                                                        22,418                             9.9  %                 119                                 3.2x
2040                                                        28,026                            12.4  %                 142                                 2.6x
Thereafter                                                  14,427                             6.4  %                  79                                 2.5x
Total/Weighted Average                                  $  225,462                           100.0  %               1,396                                 3.5x

_____________________________________

(1)Expiration year of contracts in place as of September 30, 2021, excluding any
tenant option renewal periods that have not been exercised.
(2)Excludes one vacant property.
(3)Weighted by annualized base rent.
Unit Level Rent Coverage
Generally, we seek to acquire investments with healthy rent coverage ratios, and
as of September 30, 2021, the weighted average rent coverage ratio of our
portfolio was 3.5x. Our portfolio's unit-level rent coverage ratios (by
annualized base rent and excluding leases that do not report unit-level
financial information) as of September 30, 2021 are displayed below:
Unit Level Coverage Ratio         % of Total
? 2.00x                               64.3  %
1.50x to 1.99x                        17.1  %
1.00x to 1.49x                         6.5  %
< 1.00x                               10.5  %
Not reported                           1.5  %
                                     100.0  %


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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 of September 30, 2021 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+                  0.1  %       4.2  %               -  %             0.2  %       0.8  %
B-                      -  %       0.1  %             0.4  %             1.0  %       3.3  %
B                       -  %       1.4  %             0.6  %             0.1  %       1.6  %
B+                      -  %         -  %             1.3  %             5.3  %       1.4  %
BB-                   0.2  %       1.5  %             0.8  %             1.1  %       8.1  %
BB                      -  %       1.3  %             1.0  %             4.4  %      11.0  %
BB+                     -  %       0.6  %             0.3  %             1.3  %      13.0  %
BBB-                    -  %       0.7  %             0.1  %             1.9  %       6.9  %
BBB                     -  %       0.5  %             0.9  %             0.8  %       8.1  %
BBB+                    -  %       0.1  %             0.3  %             0.3  %       3.3  %
A-                      -  %       0.2  %               -  %             0.5  %       3.1  %
A                       -  %         -  %               -  %               -  %       0.9  %
A+                      -  %         -  %               -  %               -  %       0.9  %
AA-                     -  %         -  %               -  %               -  %         -  %

_____________________________________

NR Not reported

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Results of Operations
The following discussion includes the results of our operations for the periods
presented.
Comparison of the three months ended September 30, 2021 and 2020
                                                            Three months 

ended

                                                              September 30,
(dollar amounts in thousands)                             2021              2020             Change                %

Income:

Rental revenue                                        $  54,929          $ 40,799          $ 14,130                 34.6  %
Interest on loans and direct financing lease
receivables                                               4,574             2,054             2,520                122.7  %
Other revenue, net                                           98                56                42                 75.0  %
Total revenues                                           59,601            42,909            16,692                 38.9  %

Expenses:
General and administrative                                5,596             5,917              (321)                (5.4) %
Property expenses                                         1,358               810               548                 67.7  %
Depreciation and amortization                            17,355            13,966             3,389                 24.3  %
Provision for impairment of real estate                       -             3,221            (3,221)              (100.0) %
Change in provision for loan losses                          16                14                 2                 14.3  %
Total expenses                                           24,325            23,928               397
Other operating income:
Gain on dispositions of real estate, net                  1,343             1,003               340                 33.9  %
Income from operations                                   36,619            19,984            16,635
Other (expense)/income:
Loss on repayment of secured borrowings                       -                 -                 -                    -  %
Interest expense                                         (8,955)           (7,651)            1,304                (17.0) %
Interest income                                              37                58               (21)               (36.2) %
Income before income tax expense                         27,701            12,391            15,310
Income tax expense                                           55                55                 -                    -  %
Net income                                               27,646            12,336            15,310                124.1  %
Net income attributable to non-controlling
interests                                                  (139)              (73)               66                 90.4  %
Net income attributable to stockholders               $  27,507          $ 

12 263 $ 15,244


Rental revenue. Rental revenue increased by $14.1 million for the three months
ended September 30, 2021 as compared to the three months ended
September 30, 2020. The increase in rental revenue was driven primarily by the
growth in the size of our real estate investment portfolio, which generated
additional revenues. Our real estate investment portfolio grew from 1,096 rental
properties, representing $2.2 billion in net investments in real estate, as of
September 30, 2020 to 1,231 rental properties, representing $2.9 billion in net
investments in real estate, as of September 30, 2021. Our real estate
investments were acquired throughout the periods presented and were not all
owned by us for the entirety of periods; accordingly, a significant portion of
the increase in rental revenue between periods is related to recognizing revenue
in 2021 from acquisitions that were made during 2020 and 2021.
Interest on loans and direct financing lease receivables. Interest on loans and
direct financing lease receivables increased by $2.5 million for the three
months ended September 30, 2021 as compared to the three months ended
September 30, 2020, due to an increase in investments of loans receivable during
2021, leading to a higher average daily balance of loans receivable outstanding
during the three months ended September 30, 2021.
Other revenue. Other revenue increased approximately $42,000 during the three
months ended September 30, 2021 as compared to the three months ended
September 30, 2020, primarily due to the receipt of prepayment penalties and
management fees during three months ended September 30, 2021.
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General and administrative expenses. General and administrative expenses
decreased by $0.3 million for the three months ended September 30, 2021 as
compared to the three months ended September 30, 2020. The decrease was
primarily related to a decrease in equity based compensation expense during the
three months ended September 30, 2021.
Property expenses. Property expenses increased by approximately $0.5 million for
the three months ended September 30, 2021 as compared to the three months ended
September 30, 2020. The increase in property expenses was primarily due to
increased reimbursable costs, insurance expenses and property-related
operational costs during the three months ended September 30, 2021.
Depreciation and amortization expense. Depreciation and amortization expense
increased by $3.4 million during the three months ended September 30, 2021 as
compared to the three months ended September 30, 2020. Depreciation and
amortization expense increased in proportion to the increase in the size of our
real estate portfolio during the three months ended September 30, 2021.
Provision for impairment of real estate. There were no impairment charges on
real estate investments for the three months ended September 30, 2021. During
the three months ended September 30, 2020, we recorded a provision for
impairment on nine of our real estate investments. 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.
Provision for loan losses. Provision for loan losses increased by $2,000 for the
three months ended September 30, 2021 as compared to the three months ended
September 30, 2020. This provision is related to the changes in our loan loss
reserve subsequent to the adoption of ASC 326. 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.
Gain on dispositions of real estate, net. Gain on dispositions of real estate,
net, increased by $0.3 million for the three months ended September 30, 2021 as
compared to the three months ended September 30, 2020. We disposed of 11 and 14
real estate properties during the three months ended September 30, 2021 and
2020, respectively.
Interest expense. Interest expense increased by $1.3 million during the three
months ended September 30, 2021 as compared to the three months ended
September 30, 2020. The increase is primarily related to our higher average
outstanding debt balance during the three months ended September 30, 2021.
Interest income. Interest income decreased by approximately $21,000 for the
three months ended September 30, 2021 as compared to the three months ended
September 30, 2020. The decrease in interest income was primarily due to lower
average daily cash balances in our interest-bearing bank accounts and higher
interest rates during the three months ended September 30, 2020
Income tax expense. Income tax expense had no change for the three months ended
September 30, 2021 as compared to the three months ended September 30, 2020. We
are organized and operate as a REIT and are not subject to U.S. federal
corporate income taxes on our REIT taxable income that is currently distributed
to our stockholders. However, the Operating Partnership is subject to taxation
in certain state and local jurisdictions that impose income taxes on a
partnership.
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Comparison of the nine months ended September 30, 2021 and 2020
                                                      Nine months ended September 30,
(dollar amounts in thousands)                             2021                2020             Change                %

Income:

Rental revenue                                        $  153,511          $ 116,806          $ 36,705                 31.4  %
Interest income on loans and direct financing
lease receivables                                         11,558              6,030             5,528                 91.7  %
Other revenue, net                                           150                 64                86                134.4  %
Total revenues                                           165,219            122,900            42,319

Expenses:
General and administrative                                18,497             19,706            (1,209)                (6.1) %
Property expenses                                          3,946              1,755             2,191                124.8  %
Depreciation and amortization                             50,185             40,442             9,743                 24.1  %
Provision for impairment of real estate                    6,120              5,080             1,040                 20.5  %
Change in provision for loan losses                         (112)               531              (643)              (121.1) %
Total expenses                                            78,636             67,514            11,122
Other operating income:
Gain on dispositions of real estate, net                   8,841              3,971             4,870                122.6  %
Income from operations                                    95,424             59,357            36,067
Other (expense)/income:
Loss on repayment of secured borrowings                   (4,461)              (924)            3,537                382.8  %
Interest expense                                         (24,444)           (21,887)            2,557                (17.0) %
Interest income                                               74                433              (359)               (82.9) %
Income (loss) before income tax expense
(benefit)                                                 66,593             36,979            29,614
Income tax expense (benefit)                                 172                156                16                 10.3  %
Net income                                                66,421             36,823            29,598
Net income attributable to non-controlling
interests                                                   (335)              (220)              115                 52.3  %
Net income attributable to stockholders               $   66,086          $ 

36,603 $ 29,483


Rental revenue. Rental revenue increased by $36.7 million for the nine months
ended September 30, 2021 as compared to the nine months ended
September 30, 2020. The increase in rental revenue was driven primarily by the
growth in the size of our real estate investment portfolio, which generated
additional revenues. Our real estate investment portfolio grew from 1,096 rental
properties, representing $2.2 billion in net investments in real estate, as of
September 30, 2020 to 1,231 rental properties, representing $2.9 billion in net
investments in real estate, as of September 30, 2021. Our real estate
investments were acquired throughout the periods presented and were not all
owned by us for the entirety of periods; accordingly, a significant portion of
the increase in rental revenue between periods is related to recognizing revenue
in 2021 from acquisitions that were made during 2020 and 2021.
Interest on loans and direct financing lease receivables. Interest on loans and
direct financing lease receivables increased by $5.5 million for the nine months
ended September 30, 2021 as compared to the nine months ended
September 30, 2020, due to an increase in investments of loans receivable during
2021, leading to a higher average daily balance of loans receivable outstanding
during the nine months ended September 30, 2021.
Other revenue. Other revenue increased $0.1 million during the nine months ended
September 30, 2021 as compared to the nine months ended September 30, 2020,
primarily due to the receipt of prepayment penalties and management fees during
nine months ended September 30, 2021.
General and administrative expenses. General and administrative expenses
decreased $1.2 million for the nine months ended September 30, 2021 as compared
to the nine months ended September 30, 2020. The decrease was primarily related
to a decrease in legal and professional fees incurred during the nine months
ended September 30, 2021, offset by one-time severance costs that occurred
during the nine months ended September 30, 2020.
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Property expenses. Property expenses increased by $2.2 million for the nine
months ended September 30, 2021 as compared to the nine months ended
September 30, 2020. The increase in property expenses was primarily due to
increased reimbursable costs, insurance expenses and property-related
operational costs during the nine months ended September 30, 2021.
Depreciation and amortization expense. Depreciation and amortization expense
increased by $9.7 million during the nine months ended September 30, 2021 as
compared to the nine months ended September 30, 2020. Depreciation and
amortization expense increased in proportion to the increase in the size of our
real estate portfolio during the nine months ended September 30, 2021.
Provision for impairment of real estate. Impairment charges on real estate
investments were $6.1 million and $5.1 million for the nine months ended
September 30, 2021 and 2020, respectively. During the nine months ended
September 30, 2021 and 2020, we recorded a provision for impairment of real
estate on 18 and 14 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. The change in our provision for loan losses
decreased by $0.6 million for the nine months ended September 30, 2021. This
provision is related to the changes in our loan loss reserve subsequent to the
adoption of ASC 326. 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.
Gain on dispositions of real estate, net. Gain on dispositions of real estate,
net, increased by $4.9 million for the nine months ended September 30, 2021 as
compared to the nine months ended September 30, 2020. We disposed of 36 and 27
real estate properties during the nine months ended September 30, 2021 and 2020,
respectively.
Loss on repayment of secured borrowings. During the nine months ended
September 30, 2021 and 2020, we recorded a $4.5 million and $0.9 million loss on
repayment of secured borrowings, respectively, due to the payment of a
make-whole premium and the write-off of deferred financing costs related to the
full repayment of the Series 2017-1 Notes in June 2021 and the partial
prepayment of the Series 2017-1 Notes in February 2020.
Interest expense. Interest expense increased by $2.6 million during the nine
months ended September 30, 2021 as compared to the nine months ended
September 30, 2020. The increase is primarily related to our higher average
outstanding debt balance during the nine months ended September 30, 2021.
Interest income. Interest income decreased by $0.4 million for the nine months
ended September 30, 2021 as compared to the nine months ended
September 30, 2020. The decrease in interest income was primarily due to lower
average daily cash balances in our interest-bearing bank accounts and higher
interest rates during the nine months ended September 30, 2020
Income tax expense. Income tax expense increased by approximately $16,000 for
the nine months ended September 30, 2021 as compared to the nine months ended
September 30, 2020. We are organized and operate as a REIT and are not subject
to U.S. federal corporate income taxes on our REIT taxable income that is
currently distributed to our stockholders. However, the Operating Partnership is
subject to taxation in certain state and local jurisdictions that impose income
taxes on a partnership. The changes in income tax expense are primarily due to
changes in the proportion of our real estate portfolio located in jurisdictions
where we are subject to taxation.
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.
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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) to FFO, Core FFO and AFFO attributable to stockholders and
non-controlling interests:
                                                           Three months 

ended

                                                             September 30,                Nine months ended September 30,
(in thousands)                                           2021              2020               2021               2020
Net income                                           $  27,646          $ 12,336          $   66,421          $ 36,823
Depreciation and amortization of real estate            17,329            13,903              50,108            40,330
Provision for impairment of real estate                      -             3,221               6,120             5,080
Gain on dispositions of real estate, net                (1,343)           (1,003)             (8,841)           (3,971)
FFO attributable to stockholders and
non-controlling interests                               43,632            28,457             113,808            78,262
Other non-recurring expenses (1)                             -               116               4,461             2,252
Core FFO attributable to stockholders and
non-controlling interests                               43,632            28,573             118,269            80,514

Adjustments:

Straight-line rental revenue, net                       (5,086)           (3,960)            (13,950)           (9,321)
Non-cash interest                                          488               764               1,407             1,535
Non-cash compensation expense                            1,103             1,351               4,554             4,041
Other amortization expense                                  68              (335)              2,487             1,018
Other non-cash charges                                      15                14                (118)              530
Capitalized interest expense                               (19)              (63)                (55)             (223)
Transaction costs                                            -                 3                   -               112
AFFO attributable to stockholders and
non-controlling interests                            $  40,201          $ 

26,347 $ 112,594 $ 78,206

_____________________________________

(1)Includes non-recurring expenses of $4.5 million of loss on repayment of
secured borrowings during the nine months ended September 30, 2021,
approximately $39,000 related to reimbursement of executive relocation costs
during the three and nine months ended September 30, 2020, $1.1 million for
severance payments and acceleration of non-cash compensation expense in
connection with the termination of one of our executive officers during the nine
months ended September 30, 2020, $0.1 million and $0.2 million, respectively, of
non-recurring recruiting costs during the three and nine months ended
September 30, 2020 and our $0.9 million loss on a repayment of secured
borrowings during the nine months ended September 30, 2020.
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.
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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
                                                             September 30,                Nine months ended September 30,
(in thousands)                                           2021              2020               2021               2020

Net income                                           $  27,646          $ 12,336          $   66,421          $ 36,823
Depreciation and amortization                           17,355            13,966              50,185            40,442
Interest expense                                         8,955             7,651              24,444            21,887
Interest income                                            (37)              (58)                (74)             (433)
Income tax expense                                          55                55                 172               156
EBITDA attributable to stockholders and
non-controlling interests                               53,974            33,950             141,148            98,875
Provision for impairment of real estate                      -             3,221               6,120             5,080
Gain on dispositions of real estate, net                (1,343)           (1,003)             (8,841)           (3,971)
EBITDAre attributable to stockholders and
non-controlling interests                            $  52,631          $ 

36 168 $ 138,427 $ 99,984


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 EBITDAre attributable to stockholders and
non-controlling interests for the three months ended September 30, 2021:
                                                                                      Three months ended
(in thousands)                                                                        September 30, 2021
Net income                                                                           $           27,646
Depreciation and amortization                                                                    17,355
Interest expense                                                                                  8,955
Interest income                                                                                     (37)
Income tax expense                                                                                   55

EBITDA attributable to shareholders and non-controlling interests

                      53,974
Provision for impairment of real estate                                                               -
Gain on dispositions of real estate, net                                                         (1,343)

EBITDA are attributable to shareholders and non-controlling interests

                      52,631

Adjustment for re-letting, acquisition and disposal activities for the current quarter (1)

                                                                                      2,665
Adjustment to exclude other non-recurring activity (2)                                               16

Adjustment to exclude termination / prepayment charges and certain rent percentages (3)

                                                                                                (125)

Adjusted EBITDA Responsible for shareholders and non-controlling interests $

           55,187

Annualized Adjusted EBITDAre attributable to stockholders and non-controlling
interests                                                                            $          220,748

_____________________________________

(1)Adjustment assumes all re-leasing activity, investments and dispositions of
real estate investments made during the three months ended September 30, 2021
had occurred on July 1, 2021.
(2)Adjustment is made to exclude the change in our provision for loan losses.
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(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.
The following table reconciles total debt (which is the most comparable GAAP
measure) to net debt:
                                                                         September 30,           December 31,
(in thousands)                                                               2021                    2020
Secured borrowings, net of deferred financing costs                    $            -          $     171,007
Unsecured term loan, net of deferred financing costs                          626,805                626,272
Revolving credit facility                                                           -                 18,000
Senior Unsecured Notes                                                        394,632                      -
Total debt                                                                  1,021,437                815,279
Deferred financing costs and original issue discount, net                       8,563                  5,914
Gross debt                                                                  1,030,000                821,193
Cash and cash equivalents                                                     (27,509)               (26,602)
Restricted cash available for future investment                                     -                 (6,388)
Net debt                                                               $    1,002,491          $     788,203


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.
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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
                                                             September 30,                Nine months ended September 30,
(in thousands)                                           2021              2020               2021                2020
Net income                                           $  27,646          $ 12,336          $   66,421          $  36,823
General and administrative expense                       5,596             5,917              18,497             19,706
Depreciation and amortization                           17,355            13,966              50,185             40,442
Provision for impairment of real estate                      -             3,221               6,120              5,080
Change in provision for loan losses                         16                14                (112)               531
Gain on dispositions of real estate, net                (1,343)           (1,003)             (8,841)            (3,971)
Loss on repayment secured borrowings                         -                 -               4,461                924
Interest expense                                         8,955             7,651              24,444             21,887
Interest income                                            (37)              (58)                (74)              (433)
Income tax expense                                          55                55                 172                156
NOI attributable to stockholders and
non-controlling interests                               58,243            42,099             161,273            121,145
Straight-line rental revenue, net                       (5,086)           (3,960)            (13,950)            (9,321)
Other amortization and non-cash charges                     68              (335)              2,487              1,018
Cash NOI attributable to stockholders and
non-controlling interests                            $  53,225          $ 

37,804 $ 149,810 $ 112,842

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