ESSENTIAL PROPERTIES REALTY TRUST, INC. Discussion and analysis by management of the financial position and operating results. (form 10-Q)
In this Quarterly Report on Form 10-Q, we refer toEssential Properties Realty Trust, Inc. , aMaryland corporation, together with its consolidated subsidiaries, including its operating partnership,Essential Properties, L.P. , as "we," "us," "our" or the "Company," unless we specifically state otherwise or the context 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 theU.S. tax law and otherU.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 endedDecember 31, 2020 . 41 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 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 onSeptember 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 onJanuary 12, 2018 as aMaryland corporation. We have elected to be taxed as a REIT for federal income tax purposes beginning with the year endedDecember 31, 2018 , and we believe that our current organization, operations and intended distributions will allow us to continue to so qualify. We completed our initial public offering inJune 2018 . Our common stock is listed on theNew York Stock Exchange under the symbol "EPRT". Our primary business objective is to maximize stockholder value by generating attractive risk-adjusted returns through owning, managing and growing a diversified portfolio of commercially desirable properties. We have grown significantly since commencing our operations and investment activities inJune 2016 . As ofSeptember 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 ofSeptember 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 ofSeptember 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 toJanuary 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 ofSeptember 30, 2021 , 60.8% of our annualized base rent was attributable to master leases. Rent Coverage Ratio and Tenant Financial Reporting. As ofSeptember 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 ofSeptember 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. 42 -------------------------------------------------------------------------------- Table of Contents 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 endedSeptember 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 ofSeptember 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 ofSeptember 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 ofSeptember 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 ofSeptember 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 ofSeptember 30, 2021 , exclusive of our initial investment in a portfolio of 262 net leased properties, consisting primarily of restaurants, that we acquired onJune 16, 2016 as part of the liquidation of General Electric Capital Corporation for an aggregate purchase price of$279.8 million (including transaction costs) (the "Initial Portfolio"), 83.3% of our portfolio's annualized base rent was attributable to internally originated sale-leaseback transactions and 86.2% was acquired from partieswho had previously engaged in one or more transactions that involved a member of our senior management team (including operators and tenants and other participants in the net lease industry, such as brokers, intermediaries and financing sources). The substantial experience, knowledge and relationships of our senior leadership team provide us with an extensive network of contacts that we believe allows us to originate attractive investment opportunities and effectively grow our business. 43 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 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. 44 -------------------------------------------------------------------------------- Table of Contents •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 ofSeptember 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 partieswho had previously engaged in transactions that involved a member of our senior management team (including operators and tenants and other participants in the net lease industry, such as brokers, intermediaries and financing sources). In addition, we seek to leverage our relationships with our tenants to facilitate investment opportunities, including selectively agreeing to reimburse certain of our tenants for development costs at our properties in exchange for contractually specified rent that generally increases proportionally with our funding. As ofSeptember 30, 2021 , exclusive of the Initial Portfolio, approximately 41.1% of our investments were sourced from operators and tenantswho had previously consummated a transaction involving a member of our management team. We believe our senior management team's reputation, in-depth market knowledge and extensive network of longstanding relationships in the net lease industry provide us access to an ongoing pipeline of attractive investment opportunities. Focus on Middle-Market Companies in Service-Oriented or Experience-Based Businesses. We primarily focus on investing in properties that we lease on a long-term, triple-net basis to middle- market companies that we determine have attractive credit characteristics and stable operating histories. 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. 45 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 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 toJanuary 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 endedDecember 31, 2019 throughSeptember 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
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(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.
46
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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 -
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(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 OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. For much of 2020, the global spread of COVID-19 created significant uncertainty and economic disruption, which 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- 47 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 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 ofSeptember 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 ofSeptember 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 ofSeptember 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 byDecember 31, 2022 . Additionally, as ofOctober 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. 48 -------------------------------------------------------------------------------- Table of Contents 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 endedSeptember 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 endedSeptember 30, 2021 , we paid$81.8 million of dividends and distributions to common stockholders and OP Unit holders, and, as ofSeptember 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 ofSeptember 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 atSeptember 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. 49 -------------------------------------------------------------------------------- Table of Contents Description of Certain Debt The following table summarizes our outstanding indebtedness as ofSeptember 30, 2021 andDecember 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%
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(1)Interest rates are presented after giving effect to our interest rate swap and lock agreements, where applicable. Unsecured Revolving Credit Facility andApril 2019 Term Loan Through ourOperating 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 inApril 2023 , with an extension option of up to one year exercisable by theOperating Partnership , subject to certain conditions, and theApril 2019 Term Loan matures onApril 12, 2024 . The loans under each of the Revolving Credit Facility and theApril 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 theApril 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 theOperating 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 theApril 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 theApril 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 theOperating 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 50 -------------------------------------------------------------------------------- Table of Contents 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 OnNovember 26, 2019 , we, through ourOperating Partnership , entered into a$430.0 million term loan credit facility (the "November 2019 Term Loan") with a group of lenders. TheNovember 2019 Term Loan provides for term loans to be drawn up to an aggregate amount of$430.0 million with a maturity ofNovember 26, 2026 . The loans under theNovember 2019 Term Loan are available to be drawn in up to three draws during the six-month period beginning onNovember 26, 2019 . InDecember 2019 , we made an initial borrowing of$250.0 million available under theNovember 2019 Term Loan and, onMarch 26, 2020 , we borrowed the remaining$180.0 million available under theNovember 2019 Term Loan. Borrowings under theNovember 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 theOperating 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. TheNovember 2019 Term Loan is pre-payable at any time by theOperating Partnership , provided, that if the loans under theNovember 2019 Term Loan are repaid on or beforeNovember 26, 2020 , 2021, they are subject to a one percent prepayment premium. AfterNovember 26, 2021 the loans may be repaid without penalty. TheNovember 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 theNovember 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 theNovember 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. TheNovember 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. TheNovember 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 OnJune 22, 2021 , theOperating 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 theOperating Partnership and are guaranteed by the Company. InJune 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. InJune 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 ofSeptember 30, 2021 , we were in compliance with these covenants. Cash Flows Comparison of the nine months endedSeptember 30, 2021 and 2020 As ofSeptember 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 ofSeptember 30, 2020 . 51 -------------------------------------------------------------------------------- Table of Contents Cash Flows for the nine months endedSeptember 30, 2021 During the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 ourApril 2021 follow-on offering, the payment of$2.1 million of deferred financing costs and$0.3 million of payments for taxes related to the net settlement of equity awards. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as ofSeptember 30, 2021 . Contractual Obligations The following table provides information with respect to our commitments as ofSeptember 30, 2021 : Payment due by period October 1 - December 31, (in thousands) Total 2021 2022 - 2023 2024 - 2025 Thereafter Unsecured Term Loans$ 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
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(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.
52 -------------------------------------------------------------------------------- Table of Contents (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 endedDecember 31, 2018 ; accordingly, we generally will not be subject to federal income tax for the year endedDecember 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 inthe United States ("GAAP") requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. Estimates and assumptions include, among other things, subjective judgments regarding the fair values and useful lives of our properties for depreciation and lease classification purposes, the collectability of receivables and asset impairment analysis. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we reevaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 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 InFebruary 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 afterDecember 15, 2019 . We adopted this guidance onJanuary 1, 2020 and recorded estimates of expected loss on its loans receivable portfolio beginning on that date. InAugust 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. InAugust 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 afterDecember 15, 2019 , with early adoption permitted. We adopted this guidance onJanuary 1, 2020 and the adoption of ASU 2018-13 did not have a material impact on our related disclosures. InMarch 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, 53 -------------------------------------------------------------------------------- Table of Contents 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. InApril 2020 , theFinancial 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. InAugust 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 afterDecember 15, 2021 . Early adoption is permitted, but no earlier than fiscal years beginning afterDecember 15, 2020 . We adopted this guidance onJanuary 1, 2021 and the adoption of ASU 2020-06 did not have a material impact on our consolidated financial statements. InJuly 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 afterDecember 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 ofSeptember 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$225.5 million . Our 297 tenants operate 423 different concepts in 17 industries across 45 states. None of our tenants represented more than 2.7% of our portfolio atSeptember 30, 2021 , and our top ten largest tenants represented 19.0% of our annualized base rent as of that date. 54 -------------------------------------------------------------------------------- Table of Contents Diversification by Tenant As ofSeptember 30, 2021 , our top ten tenants included the following concepts: EquipmentShare,Captain D's ,Cadence Academy , Mister Car Wash, Spare Time, Le Chaperon Rouge,Circle K , 10Box Cost-Plus, AMC, andMavis Discount Tire . Our 1,396 leased properties are operated by our 297 tenants. The following table details information about our tenants and the related concepts as ofSeptember 30, 2021 (dollars in thousands): % of Number of Annualized Annualized Tenant(1) Concept Properties (2) Base Rent Base Rent Equipmentshare.com Inc. EquipmentShare 21$ 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 %
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(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 ofSeptember 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 ofSeptember 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. 55 -------------------------------------------------------------------------------- Table of Contents Diversification by Concept Our tenants operate their businesses across 423 concepts. The following table details those concepts as ofSeptember 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
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(1) Excludes vacant property.
56 -------------------------------------------------------------------------------- Table of Contents Diversification by Industry Our tenants' business concepts are diversified across various industries. The following table summarizes those industries as ofSeptember 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
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(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 ofSeptember 30, 2021 (dollars in thousands): 57 --------------------------------------------------------------------------------
Contents
% 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
58
-------------------------------------------------------------------------------- Table of Contents Lease Expirations As ofSeptember 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 toJanuary 1, 2026 . The following table sets forth our lease expirations for leases in place as ofSeptember 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
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(1)Expiration year of contracts in place as ofSeptember 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 ofSeptember 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 ofSeptember 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 % 59
-------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 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
60 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following discussion includes the results of our operations for the periods presented. Comparison of the three months endedSeptember 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
Rental revenue. Rental revenue increased by$14.1 million for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 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 ofSeptember 30, 2020 to 1,231 rental properties, representing$2.9 billion in net investments in real estate, as ofSeptember 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 endedSeptember 30, 2021 as compared to the three months endedSeptember 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 endedSeptember 30, 2021 . Other revenue. Other revenue increased approximately$42,000 during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 , primarily due to the receipt of prepayment penalties and management fees during three months endedSeptember 30, 2021 . 61 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses. General and administrative expenses decreased by$0.3 million for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . The decrease was primarily related to a decrease in equity based compensation expense during the three months endedSeptember 30, 2021 . Property expenses. Property expenses increased by approximately$0.5 million for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 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 endedSeptember 30, 2021 . Depreciation and amortization expense. Depreciation and amortization expense increased by$3.4 million during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . Depreciation and amortization expense increased in proportion to the increase in the size of our real estate portfolio during the three months endedSeptember 30, 2021 . Provision for impairment of real estate. There were no impairment charges on real estate investments for the three months endedSeptember 30, 2021 . During the three months endedSeptember 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 endedSeptember 30, 2021 as compared to the three months endedSeptember 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 endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . We disposed of 11 and 14 real estate properties during the three months endedSeptember 30, 2021 and 2020, respectively. Interest expense. Interest expense increased by$1.3 million during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . The increase is primarily related to our higher average outstanding debt balance during the three months endedSeptember 30, 2021 . Interest income. Interest income decreased by approximately$21,000 for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . The decrease in interest income was primarily due to lower average daily cash balances in our interest-bearing bank accounts and higher interest rates during the three months endedSeptember 30, 2020 Income tax expense. Income tax expense had no change for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . We are organized and operate as a REIT and are not subject toU.S. federal corporate income taxes on our REIT taxable income that is currently distributed to our stockholders. However, theOperating Partnership is subject to taxation in certain state and local jurisdictions that impose income taxes on a partnership. 62 -------------------------------------------------------------------------------- Table of Contents Comparison of the nine months endedSeptember 30, 2021 and 2020 Nine months ended September 30, (dollar amounts in thousands) 2021 2020 Change %
Income:
Rental revenue$ 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
Rental revenue. Rental revenue increased by$36.7 million for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 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 ofSeptember 30, 2020 to 1,231 rental properties, representing$2.9 billion in net investments in real estate, as ofSeptember 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 endedSeptember 30, 2021 as compared to the nine months endedSeptember 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 endedSeptember 30, 2021 . Other revenue. Other revenue increased$0.1 million during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 , primarily due to the receipt of prepayment penalties and management fees during nine months endedSeptember 30, 2021 . General and administrative expenses. General and administrative expenses decreased$1.2 million for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . The decrease was primarily related to a decrease in legal and professional fees incurred during the nine months endedSeptember 30, 2021 , offset by one-time severance costs that occurred during the nine months endedSeptember 30, 2020 . 63 -------------------------------------------------------------------------------- Table of Contents Property expenses. Property expenses increased by$2.2 million for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 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 endedSeptember 30, 2021 . Depreciation and amortization expense. Depreciation and amortization expense increased by$9.7 million during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . Depreciation and amortization expense increased in proportion to the increase in the size of our real estate portfolio during the nine months endedSeptember 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 endedSeptember 30, 2021 and 2020, respectively. During the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . We disposed of 36 and 27 real estate properties during the nine months endedSeptember 30, 2021 and 2020, respectively. Loss on repayment of secured borrowings. During the nine months endedSeptember 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 inJune 2021 and the partial prepayment of the Series 2017-1 Notes inFebruary 2020 . Interest expense. Interest expense increased by$2.6 million during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . The increase is primarily related to our higher average outstanding debt balance during the nine months endedSeptember 30, 2021 . Interest income. Interest income decreased by$0.4 million for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 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 endedSeptember 30, 2020 Income tax expense. Income tax expense increased by approximately$16,000 for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . We are organized and operate as a REIT and are not subject toU.S. federal corporate income taxes on our REIT taxable income that is currently distributed to our stockholders. However, theOperating Partnership is subject to taxation in certain state and local jurisdictions that impose income taxes on a partnership. 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. 64 -------------------------------------------------------------------------------- Table of Contents We compute FFO in accordance with the definition adopted by theBoard of Governors of theNational 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. 65 -------------------------------------------------------------------------------- Table of Contents 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
_____________________________________
(1)Includes non-recurring expenses of$4.5 million of loss on repayment of secured borrowings during the nine months endedSeptember 30, 2021 , approximately$39,000 related to reimbursement of executive relocation costs during the three and nine months endedSeptember 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 endedSeptember 30, 2020 ,$0.1 million and$0.2 million , respectively, of non-recurring recruiting costs during the three and nine months endedSeptember 30, 2020 and our$0.9 million loss on a repayment of secured borrowings during the nine months endedSeptember 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. 66 -------------------------------------------------------------------------------- Table of Contents 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 endedSeptember 30 , Nine months endedSeptember 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
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 endedSeptember 30, 2021 had occurred onJuly 1, 2021 . (2)Adjustment is made to exclude the change in our provision for loan losses. 67 -------------------------------------------------------------------------------- Table of Contents (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. 68 -------------------------------------------------------------------------------- Table of Contents 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
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