BROADSTONE NET LEASE, INC. Except where the context suggests otherwise, as used in this Quarterly Report on Form 10-Q, the terms "BNL," "we," "us," "our," and "our company" refer toBroadstone Net Lease, Inc. , aMaryland corporation incorporated onOctober 18, 2007 , and, as required by context,Broadstone Net Lease, LLC , aNew York limited liability company, which we refer to as the or our "OP," and to their respective subsidiaries. The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends, that are intended to be made pursuant to the safe harbor provisions 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"). Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "approximately," "projects," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of these words or other comparable words. All of the forward-looking statements included in this Quarterly Report on Form 10-Q are subject to various risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results, performance, and achievements could differ materially from those expressed in or by the forward-looking statements and may be affected by a variety of risks and other factors. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from such forward-looking statements. Important factors that could cause results to differ materially from the forward-looking statements are described in Item 1. "Business," Item 1A. "Risk Factors," and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Annual Report on Form 10-K, as filed with theSEC onFebruary 23, 2023 . The "Risk Factors" of our 2022 Annual Report should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this Quarterly Report on Form 10-Q. You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report on Form 10-Q. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this Quarterly Report on Form 10-Q will increase with the passage of time. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
Regulation FD Disclosures
We use any of the following to comply with our disclosure obligations under Regulation FD:U.S. Securities and Exchange Commission ("SEC") filings, press releases, public conference calls, or our website. We routinely post important information on our website at www.broadstone.com, including information that may be deemed material. We encourage our shareholders and others interested in our company to monitor these distribution channels for material disclosures. Our website address is included in this Quarterly Report as a textual reference only and the information on the website is not incorporated by reference in this Quarterly Report. 21 --------------------------------------------------------------------------------
Explanatory Note and Certain Defined Terms
Unless the context otherwise requires, the following terms and phrases are used throughout this MD&A as described below:
•
"annualized base rent" or "ABR" means the annualized contractual cash rent due for the last month of the reporting period, excluding the impacts of short-term rent deferrals, abatements, or free rent, and adjusted to remove rent from properties sold during the month and to include a full month of contractual cash rent for investments made during the month;
•
"Investments" or amounts "invested" include real estate investments in new property acquisitions and as well as revenue generating capital expenditures, whereby we agree to fund certain expenditures in exchange for increased rents that often include rent escalations and terms consistent with that of the underlying lease, and excludes capitalized acquisition costs.
•
"cash capitalization rate" represents the estimated first year cash yield to be generated on a real estate investment, which was estimated at the time of investment based on the contractually specified cash base rent for the first full year after the date of the investment, divided by the purchase price for the property;
•
"CPI" means the Consumer Price Index for All Urban Consumers (CPI-U):U.S. City Average, All Items, as published by theU.S. Bureau of Labor Statistics , or other similar index which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services;
•
"occupancy" or a specified percentage of our portfolio that is "occupied" or "leased" means as of a specified date the quotient of (1) the total rentable square footage of our properties minus the square footage of our properties that are vacant and from which we are not receiving any rental payment, and (2) the total square footage of our properties; and
•
"Revolving Credit Facility" means our
Overview
We are an internally-managed real estate investment trust ("REIT") that
acquires, owns, and manages primarily single-tenant commercial real estate
properties that are net leased on a long-term basis to a diversified group of
tenants. Since our inception in 2007, we have selectively invested in net leased
assets in the industrial, healthcare, restaurant, retail, and office property
types. As of March 31, 2023 , our portfolio includes 801 properties, with 794
properties located in 44 U.S. states and seven properties located in four
Canadian provinces.
We focus on investing in real estate that is operated by creditworthy single
tenants in industries characterized by positive business drivers and trends. We
target properties that are an integral part of the tenants' businesses and are
therefore opportunities to secure long-term net leases. Through long-term net
leases, our tenants are able to retain operational control of their
strategically important locations, while allocating their debt and equity
capital to fund core business operations rather than real estate ownership.
-
Diversified Portfolio. As of March 31, 2023 , our portfolio comprised
approximately 39.1 million rentable square feet of operational space, and was
highly diversified based on property type, geography, tenant, and industry, and
is cross-diversified within each (e.g., property-type diversification within a
geographic concentration):
•
Property Type: We are focused primarily on industrial, healthcare, restaurant, and retail property types based on our extensive experience in and conviction around these sectors. Within these sectors, we have meaningful concentrations in manufacturing, distribution and warehouse, food processing, casual dining, clinical, quick service restaurants, general merchandise, and flex/research and development.
•
Geographic Diversification: Our properties are located in 44 U.S. states and four Canadian provinces, with no single geographic concentration exceeding 9.8% of our ABR.
•
Tenant and Industry Diversification: Our properties are occupied by approximately 221 different commercial tenants who operate 209 different brands that are diversified across 54 differing industries, with no single tenant accounting for more than 4% of our ABR.
- Strong In-Place Leases with Significant Remaining Lease Term. As ofMarch 31, 2023 , our portfolio was approximately 99.4% leased with an ABR weighted average remaining lease term of approximately 10.8 years, excluding renewal options. - Standard Contractual Base Rent Escalation. Approximately 97.3% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.0%. - Extensive Tenant Financial Reporting. Approximately 94.3% of our tenants, based on ABR, provide financial reporting, of which 86.4% are required to provide us with specified financial information on a periodic basis, and an additional 7.9% of our tenants report financial statements publicly, either throughSEC filings or otherwise. 22 --------------------------------------------------------------------------------
Real Estate Portfolio Information
The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as ofMarch 31, 2023 . The percentages below are calculated based on our ABR of$389.5 million as ofMarch 31, 2023 .
Diversification by Property Type
[[Image Removed: img145149613_0.jpg]]
23
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SF as a %
of
ABR ABR as a % of Square Feet Total
Property Type # Properties ($'000s) Total Portfolio ('000s) Portfolio
Industrial
Manufacturing 79 $64,375 16.5% 12,142 31.1%
Distribution & Warehouse 47 51,610 13.3% 9,459 24.2%
Food Processing 33 44,215 11.4% 5,442 13.9%
Flex and R&D 7 17,666 4.5% 1,457 3.7%
Cold Storage 4 12,827 3.3% 933 2.4%
Industrial Services 22 10,891 2.8% 587 1.5%
Untenanted 1 - - 122 0.3%
Industrial Total 193 201,584 51.8% 30,142 77.1%
Healthcare
Clinical 52 27,181 7.0% 1,091 2.8%
Healthcare Services 30 11,118 2.9% 496 1.3%
Animal Health Services 27 10,846 2.8% 405 1.0%
Surgical 12 10,475 2.7% 329 0.9%
Life Science 9 7,901 2.0% 549 1.4%
Healthcare Total 130 67,521 17.4% 2,870 7.4%
Restaurant
Casual Dining 101 27,341 7.0% 673 1.7%
Quick Service Restaurants 146 25,027 6.4% 499 1.3%
Restaurant Total 247 52,368 13.4% 1,172 3.0%
Retail
General Merchandise 132 24,714 6.3% 1,865 4.8%
Automotive 68 12,628 3.2% 777 2.0%
Home Furnishings 13 7,147 1.8% 797 2.0%
Child Care 2 731 0.3% 20 0.1%
Retail Total 215 45,220 11.6% 3,459 8.9%
Office
Strategic Operations 5 9,912 2.5% 615 1.6%
Corporate Headquarters 7 8,389 2.2% 408 0.9%
Call Center 3 4,478 1.1% 346 0.8%
Untenanted 1 - - 46 0.3%
Office Total 16 22,779 5.8% 1,415 3.6%
Total 801 $389,472 100.0% 39,058 100.0%
24--------------------------------------------------------------------------------
Diversification by Tenant
ABR as a % SF as a %
ABR of Total Square Feet of Total
Tenant Property Type # Properties ($'000s) Portfolio ('000s) Portfolio
Roskam Baking Company, Food Processing
LLC* 7 $15,605 4.0% 2,250 5.8%
AHF, LLC* Distribution &
Warehouse/Manufacturing 8 9,377 2.4% 2,284 5.8%
Jack's Family Quick Service
Restaurants LP* Restaurants 43 7,309 1.9% 147 0.4%
Joseph T. Ryerson & Distribution & Warehouse
Son, Inc 11 6,491 1.7% 1,537 3.9%
Red Lobster Casual Dining
Hospitality & Red
Lobster Restaurants
LLC * 19 6,178 1.6% 157 0.4%
Axcelis Technologies, Flex and R&D
Inc. 1 6,126 1.6% 417 1.1%
J. Alexander's, LLC* Casual Dining 16 6,115 1.6% 131 0.3%
Hensley & Company* Distribution & Warehouse 3 5,989 1.5% 577 1.5%
Dollar General General Merchandise
Corporation 60 5,962 1.5% 562 1.4%
BluePearl Holdings, Animal Health Services
LLC** 13 5,591 1.4% 166 0.5%
Total Top 10 Tenants 181 74,743 19.2% 8,228 21.1%
Outback Steakhouse of Casual Dining
Florida LLC*1 22 5,365 1.4% 140 0.4%
Tractor Supply Company General Merchandise 21 5,349 1.4% 417 1.1%
Big Tex Trailer Automotive/Distribution
Manufacturing Inc.* &
Warehouse/Manufacturing/
Corporate Headquarters 17 5,056 1.3% 1,302 3.3%
Krispy Kreme Doughnut Quick Service
Corporation Restaurants/
Food Processing 27 5,034 1.3% 156 0.4%
Salm Partners, LLC* Food Processing 2 4,592 1.2% 368 0.9%
Nestle' Dreyer's Ice Cold Storage
Cream Company2 1 4,543 1.2% 309 0.8%
Carvana, LLC* Industrial Services 2 4,510 1.2% 230 0.6%
Klosterman Bakery* Food Processing 11 4,500 1.2% 549 1.4%
Arkansas Surgical Surgical
Hospital 1 4,476 1.0% 129 0.3%
American Signature, Home Furnishings
Inc. 6 4,309 1.0% 474 1.2%
Total Top 20 Tenants 291 $122,477 31.4% 12,302 31.5%
1 Tenant's properties include 20 Outback Steakhouse restaurants and two
Carrabba's Italian Grill restaurants.
2 Nestle's ABR excludes $1.6 million of rent paid under a sub-lease for an
additional property, which will convert to a prime lease no later than August
2024 .
* Subject to a master lease.
** Includes properties leased by multiple tenants, some, not all, of which are
subject to master leases.
25
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Diversification by Brand
ABR as a % SF as a %
ABR of Total Square Feet of Total
Brand Property Type # Properties ($'000s) Portfolio ('000s) Portfolio
Roskam Baking Food Processing
Company, LLC* 7 $15,605 4.0% 2,250 5.8%
AHF Products* Distribution & Warehouse/
Manufacturing 8 9,377 2.4% 2,284 5.8%
Jack's Family Quick Service Restaurants
Restaurants* 43 7,309 1.9% 147 0.4%
Ryerson Distribution & Warehouse 11 6,491 1.7% 1,537 3.9%
Red Lobster* Casual Dining 19 6,178 1.6% 157 0.4%
Axcelis Flex and R&D 1 6,126 1.6% 417 1.1%
Hensley* Distribution & Warehouse 3 5,989 1.5% 577 1.5%
Dollar General General Merchandise 60 5,962 1.5% 562 1.4%
BluePearl Animal Health Services
Veterinary
Partners** 13 5,591 1.5% 165 0.4%
Bob Evans Farms*1 Casual Dining/Food Processing 21 5,391 1.5% 281 0.7%
Total Top 10
Brands 186 74,019 19.0% 8,377 21.4%
Tractor Supply Co. General Merchandise 21 5,349 1.4% 417 1.1%
Big Tex Trailers* Automotive/Distribution &
Warehouse/Manufacturing/
Corporate Headquarters 17 5,056 1.3% 1,302 3.3%
Krispy Kreme Quick Service Restaurants/
Food Processing 27 5,034 1.3% 156 0.4%
Outback Casual Dining
Steakhouse* 20 4,641 1.2% 126 0.3%
Salm Partners, Food Processing
LLC* 2 4,592 1.2% 368 0.9%
Nestle' Cold Storage 1 4,543 1.2% 309 0.8%
Carvana* Industrial Services 2 4,510 1.2% 230 0.6%
Klosterman Baking Food Processing
Company* 11 4,500 1.2% 549 1.4%
Arkansas Surgical Surgical
Hospital 1 4,476 1.1% 129 0.3%
Wendy's Quick Service Restaurants 29 4,325 1.1% 84 0.2%
Total Top 20
Brands 317 $121,045 31.1% 12,047 30.7%
1 Brand includes one BEF Foods, Inc. property and 20 Bob Evans Restaurants, LLC
properties.
* Subject to a master lease.
** Includes properties leased by multiple tenants, some, not all, of which are
subject to master leases.
Diversification by Industry
ABR as a % Square SF as a %
ABR of Total Feet of Total
Industry # Properties ($'000s) Portfolio ('000s) Portfolio
Healthcare Facilities 104 $53,183 13.7% 2,062 5.3%
Restaurants 250 53,141 13.6% 1,214 3.1%
Packaged Foods & Meats 29 38,843 10.0% 4,713 12.1%
Distributors 27 15,962 4.1% 2,695 6.9%
Auto Parts & Equipment 43 15,623 4.0% 2,676 6.9%
Specialty Stores 31 14,078 3.6% 1,338 3.4%
Food Distributors 7 13,799 3.5% 1,712 4.4%
Home Furnishing Retail 18 12,684 3.3% 1,858 4.8%
Specialized Consumer Services 49 12,672 3.3% 728 1.9%
Metal & Glass Containers 8 10,114 2.6% 2,206 5.6%
General Merchandise Stores 96 9,640 2.5% 880 2.3%
Industrial Machinery 20 9,408 2.4% 1,949 5.0%
Forest Products 8 9,377 2.4% 2,284 5.8%
Healthcare Services 18 9,299 2.4% 515 1.3%
Aerospace & Defense 6 7,565 1.9% 746 1.9%
Other (39 industries) 85 104,084 26.7% 11,258 28.7%
Untenanted properties 2 - - 224 0.6%
Total 801 $389,472 100.0% 39,058 100.0%
26--------------------------------------------------------------------------------
Diversification by Geographic Location
[[Image Removed: img145149613_1.jpg]]
ABR as a Square SF as a % ABR as a Square SF as a %
State / # ABR % of Total Feet of Total State / # ABR % of Total Feet of Total
Province Properties ($'000s) Portfolio ('000s) Portfolio Province Properties ($'000s) Portfolio ('000s) Portfolio
TX 72 $38,037 9.8% 3,621 9.3% WA 15 4,330 1.1% 150 0.4%
MI 55 32,555 8.4% 3,811 9.8% LA 4 3,407 0.9% 194 0.5%
IL 32 24,165 6.2% 2,424 6.2% MS 11 3,320 0.9% 430 1.1%
WI 35 21,792 5.6% 2,163 5.5% NE 6 3,175 0.8% 509 1.3%
CA 13 18,827 4.8% 1,718 4.4% MD 4 3,052 0.8% 293 0.7%
OH 47 18,680 4.8% 1,728 4.4% SC 13 2,937 0.8% 308 0.8%
FL 42 16,411 4.2% 844 2.2% IA 4 2,804 0.7% 622 1.6%
IN 32 15,843 4.1% 1,906 4.9% NM 9 2,734 0.7% 107 0.3%
MN 21 15,396 4.0% 2,500 6.4% CO 4 2,501 0.6% 126 0.3%
TN 50 15,150 3.9% 1,103 2.8% UT 3 2,432 0.6% 280 0.7%
NC 37 14,023 3.6% 1,435 3.7% CT 2 1,767 0.5% 55 0.1%
AL 53 12,151 3.1% 873 2.2% MT 7 1,582 0.4% 43 0.1%
GA 33 11,535 3.0% 1,576 4.0% DE 4 1,167 0.3% 133 0.3%
AZ 9 10,876 2.8% 909 2.3% ND 2 954 0.2% 28 0.1%
PA 22 9,677 2.5% 1,836 4.7% VT 2 420 0.1% 24 0.1%
NY 26 9,268 2.4% 680 1.7% WY 1 307 0.1% 21 0.1%
KY 24 8,465 2.2% 900 2.3% NV 1 268 0.1% 6 0.0%
MA 4 8,232 2.1% 744 1.9% OR 1 136 0.0% 9 0.0%
OK 22 8,107 2.1% 987 2.5% SD 1 81 0.0% 9 0.0%
AR 11 7,722 2.0% 283 0.7% Total U.S. 794 $381,406 97.9% 38,628 98.9%
MO 12 6,119 1.6% 1,138 2.9% BC 2 4,584 1.2% 253 0.6%
KS 11 5,638 1.4% 648 1.7% ON 3 2,126 0.5% 101 0.3%
VA 17 5,479 1.4% 204 0.5% AB 1 999 0.3% 51 0.1%
WV 17 4,975 1.3% 884 2.3% MB 1 357 0.1% 25 0.1%
NJ 3 4,909 1.3% 366 1.1% Total Canada 7 $8,066 2.1% 430 1.1%
Grand Total 801 $389,472 100.0% 39,058 100.0%
27--------------------------------------------------------------------------------
Our Leases
We typically lease our properties pursuant to long-term net leases with initial terms of 10 years or more that often have renewal options. Substantially all of our leases are net, meaning our tenants are generally obligated to pay all expenses associated with the leased property (such as real estate taxes, insurance, maintenance, repairs, and capital costs). In scenarios where we lease multiple properties to a single tenant (multi-site tenants), we seek to use master lease structures on an all-or-none basis. When we acquire properties associated with a tenant that has an existing master lease structure with us, we seek to add the new properties to the existing master lease structure to strengthen the existing lease with such tenant. As ofMarch 31, 2023 , master leases contributed to 69.3% of the ABR associated with multi-site tenants (409 of our 676 properties) and 41.2% of our overall ABR (409 of our 801 properties). As ofMarch 31, 2023 , approximately 99.4% of our portfolio, representing all but two of our properties, was subject to a lease. Because substantially all of our properties are leased under long-term leases, we are not currently required to perform significant ongoing leasing activities on our properties. As ofMarch 31, 2023 , the ABR weighted average remaining term of our leases was approximately 10.8 years. Approximately 3% of the properties in our portfolio are subject to leases without at least one renewal option. The following chart sets forth our lease expirations based upon the terms of the leases in place as ofMarch 31, 2023 . [[Image Removed: img145149613_2.jpg]] 28
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The following table presents certain information based on lease expirations by year. Amounts are in thousands, except for number of properties.
SF as a %
of
Expiration ABR ABR as a % of Square Feet Total
Year # Properties # Leases ($'000s) Total Portfolio ('000s) Portfolio
2023 5 7 $4,497 1.2% 504 1.3%
2024 9 9 10,640 2.7% 1,239 3.2%
2025 19 22 6,905 1.8% 385 1.0%
2026 34 35 17,235 4.4% 1,150 2.9%
2027 29 30 24,166 6.2% 2,079 5.3%
2028 36 36 24,220 6.2% 2,262 5.8%
2029 72 73 22,541 5.8% 2,724 7.0%
2030 101 101 54,479 14.0% 5,110 13.1%
2031 33 33 8,640 2.2% 805 2.1%
2032 62 63 31,896 8.2% 3,469 8.9%
2033 50 50 18,888 4.8% 1,593 4.1%
2034 33 33 6,305 1.6% 409 1.0%
2035 19 19 13,966 3.6% 2,021 5.2%
2036 87 87 26,485 6.8% 2,931 7.5%
2037 23 23 17,111 4.4% 1,124 2.9%
2038 36 36 9,573 2.5% 725 1.9%
2039 10 10 6,858 1.8% 798 2.0%
2040 31 31 5,784 1.5% 312 0.8%
2041 40 40 20,875 5.4% 1,731 4.4%
2042 59 59 43,758 11.2% 4,813 12.3%
Thereafter 11 11 14,650 3.7% 2,650 6.7%
Untenanted
properties 2 - - - 224 0.6%
Total 801 808 $389,472 100.0% 39,058 100.0%
Substantially all of our leases provide for periodic contractual rent
escalations. As of March 31, 2023 , leases contributing 97.3% of our ABR provided
for increases in future ABR, generally ranging from 1.5% to 3.0% annually, with
an ABR weighted average annual minimum increase equal to 2.0% of base rent.
Generally, our rent escalators increase rent on specified dates by a fixed
percentage. Our escalations provide us with a source of organic revenue growth
and a measure of inflation protection. Additional information on lease
escalation frequency and weighted average annual escalation rates as of March
31, 2023 is displayed below:
Weighted
Average
Annual
Minimum
Increase
Lease Escalation Frequency % of ABR (a)
Annually 80.3% 2.2%
Every 2 years 0.1% 1.8%
Every 3 years 2.2% 3.1%
Every 4 years 1.0% 2.4%
Every 5 years 7.2% 1.7%
Other escalation frequencies 6.5% 1.6%
Flat 2.7% -
Total/Weighted Average (b) 100.0% 2.0%
(a)
Represents the ABR weighted average annual minimum increase of the entire
portfolio as if all escalations occurred annually. For leases where rent
escalates by the greater of a stated fixed percentage or the change in CPI, we
have assumed an escalation equal to the stated fixed percentage in the lease. As
of March 31, 2023 , leases contributing 5.2% of our ABR provide for rent
increases equal to the lesser of a stated fixed percentage or the change in CPI.
As any future increase in CPI is unknowable at this time, we have not included
an increase in the rent pursuant to these leases in the weighted average annual
minimum increase presented.
(b)
Weighted by ABR.
29--------------------------------------------------------------------------------
The escalation provisions of our leases (by percentage of ABR) as of
[[Image Removed: img145149613_3.jpg]]Results of Operations
The following discussion includes the results of our operations for the periods presented.
Three Months EndedMarch 31, 2023 Compared to Three Months EndedDecember 31, 2022 Lease Revenues, net For the Three Months Ended March 31, December 31, Increase/(Decrease) (in thousands) 2023 2022 $ % Contractual rental amounts billed for operating leases$ 98,102 $ 96,208 $ 1,894 2.0 % Adjustment to recognize contractual operating lease billings on a straight-line basis 7,370 6,897 473 6.9 % Net write-offs of accrued rental income (105 ) - (105 ) (100.0) % Variable rental amounts earned 341 721 (380 ) (52.7) % Earned income from direct financing leases 691 693 (2 ) (0.3) % Interest income from sales-type leases 14 14 - 0.0 % Operating expenses billed to tenants 5,075 5,720 (645 ) (11.3) % Other income from real estate transactions 7,392 2,019 5,373 > 100.0 % Adjustment to revenue recognized for uncollectible rental amounts billed, net 112 (138 ) 250 > (100.0) % Total Lease revenues, net$ 118,992 $ 112,134 $ 6,858 6.1 % The increase in Lease revenues, net was primarily attributable to$7.5 million of lease termination income recognized in the first quarter of 2023 as Other income from real estate transactions, associated with the early lease termination and sale of an office property for total proceeds of$39.5 million . The timing and amount of lease termination income varies from period to period. The increase was also attributable to full revenue from property investments made during the fourth quarter of 2022, as well as the partial revenue from property investments made during the first quarter of 2023. As we acquire properties throughout the period, the full benefit of lease revenues from newly acquired properties will not be realized in the quarter of acquisition. During the fourth quarter of 2022, we invested$310.3 million , excluding capitalized acquisition costs, in 18 properties at a weighted average initial cash capitalization rate of 6.7%, the full benefit of which we realized during the first quarter of 2023. During the first quarter of 2023, we invested$20.0 million , excluding capitalized acquisition costs, in three properties at a weighted average initial cash capitalization rate of 7.0%, the full benefit of which we anticipate will be realized during the second quarter of 2023. 30 --------------------------------------------------------------------------------
Operating Expenses
For the Three Months Ended
March 31, December 31, Increase/(Decrease)
(in thousands) 2023 2022 $ %
Operating expenses
Depreciation and amortization $41,784 $45,605 $(3,821) (8.4) %
Property and operating expense 5,886 6,397 (511) (8.0) %
General and administrative 10,416 9,318 1,098 11.8 %
Provision for impairment of investment
in rental properties 1,473 - 1,473 > 100.0 %
Total operating expenses $59,559 $61,320 $(1,761) (2.9) %
Depreciation and amortization
The decrease in depreciation and amortization for the three months ended March
31, 2023 was primarily due to accelerated amortization of in-place lease
intangibles associated with an early lease termination and simultaneous sale of
an office property during the quarter, partially offset by growth in our real
estate portfolio.
Provision for impairment of investment in rental properties
During the three months endedMarch 31, 2023 we recognized$1.5 million of impairment on our investments in rental properties due to change in our long-term hold strategy for one property. During the three months endedDecember 31, 2022 , we did not recognize any impairment on our investments in rental properties. The following table presents the impairment charges for the three months endedMarch 31, 2023 : (in thousands, except number of properties) Number of properties 1
Carrying value prior to impairment charge
2,763
Impairment charge $1,473 The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.
Other income (expenses)
For the Three Months Ended
March 31, December 31, Increase/(Decrease)
(in thousands) 2023 2022 $ %
Other income (expenses)
Interest income $ 162 $ 40 $ 122 > 100 %
Interest expense (21,139) (23,773) (2,634) (11.1) %
Cost of debt extinguishment - (77) (77) (100.0) %
Gain on sale of real estate 3,415 10,625 (7,210) (67.9) %
Income taxes (479) (105) 374 > 100 %
Other expenses (18) (751) (733) (97.6) %
Interest expense
The decrease in interest expense reflects a decrease in our weighted average
outstanding borrowings during the three months ended March 31, 2023 compared to
during the three months ended December 31, 2022 .
Gain on sale of real estate
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months endedMarch 31, 2023 , we recognized a gain of$3.4 million on the sale of three properties, compared to a gain of$10.6 million on the sale of three properties during the three months endedDecember 31, 2022 . Our proactive asset management strategy includes selectively selling properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives.
Net income and Net earnings per diluted share
For the Three Months Ended
March 31 ,December 31 ,
Increase/(Decrease)
(in thousands, except per share data) 2023 2022 $ % Net income$41,374 $36,773 $4,601 12.5% Net earnings per diluted share 0.21 0.20 0.01 5.0% 31
-------------------------------------------------------------------------------- The increase in net income is primarily attributable to a$6.9 million increase in lease revenue associated with incremental lease termination fees and growth in our real estate portfolio, a$3.8 million decrease in depreciation and amortization, and a$2.6 million decrease in interest expense, partially offset by a$7.2 million decrease in gain on sale of real estate and a$1.5 million increase in impairment of investment in rental properties. GAAP net income includes items such as gain or loss on sale of real estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons. Three Months EndedMarch 31, 2023 Compared to Three Months EndedMarch 31, 2022 Lease Revenues, net For the Three Months Ended March 31, Increase/(Decrease) (in thousands) 2023 2022 $ % Contractual rental amounts billed for operating leases$ 98,102 $ 84,396 $ 13,706 16.2 % Adjustment to recognize contractual operating lease billings on a straight-line basis 7,370 5,021 2,349 46.8 % Net write-offs of accrued rental income (105 ) (1,326 ) 1,221 92.1 % Variable rental amounts earned 341 186 155 83.3 % Earned income from direct financing leases 691 723 (32 ) (4.4) % Interest income from sales-type leases 14 14 - 0.0 % Operating expenses billed to tenants 5,075 4,735 340 7.2 % Other income from real estate transactions 7,392 42 7,350 > 100.0 % Adjustment to revenue recognized for uncollectible rental amounts billed, net 112 50 62 > 100.0 % Total Lease revenues, net$ 118,992 $ 93,841 $ 25,151 26.8 % The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through property acquisitions closed sinceMarch 31, 2022 . During the twelve months endedMarch 31, 2023 , we invested$716.6 million , excluding capitalized acquisition costs, in 63 properties at a weighted average initial cash capitalization rate of 6.6%. The increase is also attributable to an increase in lease termination income. Operating Expenses For the Three Months Ended March 31, Increase/(Decrease) (in thousands) 2023 2022 $ % Operating expenses Depreciation and amortization$41,784 $34,290 $7,494 21.9 % Property and operating expense 5,886 5,044 842 16.7 % General and administrative 10,416 8,828 1,588 18.0 % Provision for impairment of investment in rental properties 1,473 - 1,473 > 100.0 % Total operating expenses$59,559 $48,162 $11,397 23.7 % Depreciation and amortization
The increase in depreciation and amortization for the three months ended
General and administrative
The increase in general and administrative expense for the three months endedMarch 31, 2023 was primarily due to increased stock-based compensation expense associated with an additional grant to employees inFebruary 2022 , a change in director compensation to include grants of restricted stock awards beginning in 2022, and accelerated amortization of stock-based compensation in connection with the departure of our previous chief executive officer during the first quarter of 2023. 32 --------------------------------------------------------------------------------
Provision for impairment of investment in rental properties
During the three months ended
(in thousands, except number of properties) Number of properties 1
Carrying value prior to impairment charge
2,763
Impairment charge $1,473 The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.
Other income (expenses)
For the Three Months Ended
March 31, Increase/(Decrease)
(in thousands) 2023 2022 $ %
Other income (expenses)
Interest income $ 162 $ - $ 162 100.0 %
Interest expense (21,139) (16,896) 4,243 25.1 %
Gain on sale of real estate 3,415 1,196 2,219 > 100.0 %
Income taxes (479) (412) 67 16.3 %
Other income (expenses) (18) (1,126) (1,108) (98.4) %
Interest expense
The increase in interest expense reflects an increase in our weighted average
cost of borrowings combined with increased average outstanding borrowings during
the three months ended March 31, 2023 compared to the three months ended March
31, 2022 . Since March 31, 2022 , we increased total outstanding borrowings by
$141.8 million to partially fund our acquisitions. Of our $1.9 billion of total
outstanding indebtedness, approximately $34.4 million , or 1.8%, is variable and
therefore subject to the impact of fluctuations in interest rates.
Gain on sale of real estate
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months endedMarch 31, 2023 , we recognized a gain of$3.4 million on the sale of three properties, compared to a gain of$1.2 million on the sale of one property during the three months endedMarch 31, 2022 . Our proactive asset management strategy includes determining whether to sell any of our properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives.
Other income (expenses)
The decrease in other expenses during the three months endedMarch 31, 2023 was primarily due to a$0.01 million unrealized foreign exchange loss recognized on the quarterly remeasurement of our$100 million CAD revolver borrowings, compared to a$1.1 million unrealized foreign exchange loss recognized during the three months endedMarch 31, 2022 .
Net income and Net earnings per diluted share
For the Three Months Ended
March 31 , Increase/(Decrease)
(in thousands, except per share data) 2023 2022 $
%
Net income$41,374 $28,441 $12,933
45.5%
Net earnings per diluted share 0.21 0.16 0.05
31.3%
The increase in net income is primarily due to revenue growth of$25.2 million ,$2.2 million increase on gain on sale of real estate and a$1.1 million decrease in foreign exchange loss. These factors were partially offset by a$7.5 million increase in depreciation and amortization, a$4.2 million increase in interest expense, a$1.5 million increase in general and administrative expense, and a$1.5 million increase in impairment of investment in rental properties. GAAP net income includes items such as gain or loss on sale of real estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons. 33 --------------------------------------------------------------------------------
Liquidity and Capital Resources
General
We acquire real estate using a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on maximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our leverage profile and overall liquidity position. We believe our leverage strategy has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our current investment grade credit ratings of 'BBB' fromS&P Global Ratings ("S&P") and 'Baa2' fromMoody's Investors Service ("Moody's"). We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with lenders and with rating agencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As ofMarch 31, 2023 , we had total debt outstanding of$1.9 billion , Net Debt of$1.9 billion , and a Net Debt to Annualized Adjusted EBITDAre ratio of 5.1x. Net Debt and Annualized Adjusted EBITDAre are non-GAAP financial measures, and Annualized Adjusted EBITDAre is calculated based upon EBITDA, EBITDAre, and Adjusted EBITDAre, each of which is also a non-GAAP financial measure. Refer to Non-GAAP Measures below for further details concerning our calculation of non-GAAP measures and reconciliations to the comparable GAAP measure. 34 --------------------------------------------------------------------------------
Liquidity/REIT Requirements
Liquidity is a measure of our ability to meet potential cash requirements, including our ongoing commitments to repay debt, fund our operations, acquire properties, make distributions to our stockholders, and other general business needs. As a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gains, on an annual basis. As a result, it is unlikely that we will be able to retain substantial cash balances to meet our long-term liquidity needs, including repayment of debt and the acquisition of additional properties, from our annual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital.
Short-term Liquidity Requirements
Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including our general and administrative expenses and interest payments on our outstanding debt, to pay distributions, to fund our acquisitions that are under control or expected to close within a short time period, and to pay for commitments to fund tenant improvements and revenue generating capital expenditures. We do not currently anticipate making significant capital expenditures or incurring other significant property costs, including as a result of inflationary pressures in the current economic environment, because of the strong occupancy levels across our portfolio and the net lease nature of our leases. We expect to meet our short-term liquidity requirements primarily from cash and cash equivalents balances and net cash provided by operating activities, supplemented by borrowings under our Revolving Credit Facility. We intend to match fund our acquisitions with an appropriate mix of debt and equity capital. We use cash on hand and borrowings under our Revolving Credit Facility to initially fund acquisitions, which are subsequently repaid or replaced with proceeds from our equity and debt capital markets activities. As detailed in the contractual obligations table below, we have approximately$63.4 million of expected obligations due throughout the remainder of 2023, primarily consisting of$56.6 million of interest expense due and$6.8 million of mortgage maturities. We expect our cash provided by operating activities, as discussed below, will be sufficient to pay for our current obligations including interest expense on our borrowings. We expect to repay the maturing mortgage with available cash on hand generated from our results of operations or borrowings under our Revolving Credit Facility.
Long-term Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds necessary to repay debt and invest in additional revenue generating properties. We expect to source debt capital from unsecured term loans from commercial banks, revolving credit facilities, private placement senior unsecured notes, and public bond offerings. The source and mix of our debt capital in the future will be impacted by market conditions as well as our continued focus on lengthening our debt maturity profile to better align with our portfolio's long-term leases, staggering debt maturities to reduce the risk that a significant amount of debt will mature in any single year in the future, and managing our exposure to interest rate risk. As ofMarch 31, 2023 , we have$891.7 million of available capacity under our Revolving Credit Facility. We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our capital structure. 35 --------------------------------------------------------------------------------
Equity Capital Resources
Our equity capital is primarily provided through our at-the-market common equity
offering program ("ATM Program"), as well as follow-on equity offerings. Under
the terms of our ATM Program we may, from time to time, publicly offer and sell
shares of our common stock having an aggregate gross sales price of up to $400
million . The ATM Program provides for forward sale agreements, enabling us to
set the price of shares upon pricing the offering while delaying the issuance of
shares and the receipt of the net proceeds. We did not raise any equity on our
ATM Program during the quarter, and have approximately $145.4 million of
capacity remaining on the ATM Program as of March 31, 2023 .
Our public offerings have been used to repay debt, fund acquisitions, and for other general corporate purposes.
As we continue to invest in accretive real estate properties, we expect to balance our debt and equity capitalization, while maintaining a Net Debt to Annualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of follow-on equity offerings and the ATM Program.
Unsecured Indebtedness as of
The following table sets forth our outstanding revolving credit facility,
unsecured term loans and senior unsecured notes at
Outstanding Interest Maturity
(in thousands, except interest rates) Balance Rate
Date
Applicable reference
Unsecured revolving credit facility$ 108,330 rate + 0.85% (a) Mar. 2026 Unsecured term loans: 2026 Unsecured Term Loan 400,000 one-month LIBOR + 1.00% Feb. 2026 one-month adjusted SOFR 2027 Unsecured Term Loan 200,000 + 0.95% Aug. 2027 one-month adjusted SOFR 2029 Unsecured Term Loan 300,000 + 1.25% Aug. 2029 Total unsecured term loans 900,000 Unamortized debt issuance costs, net (4,994 ) Total unsecured term loans, net 895,006 Senior unsecured notes: 2027 Senior Unsecured Notes - Series A 150,000 4.84% Apr. 2027 2028 Senior Unsecured Notes - Series B 225,000 5.09% Jul. 2028 2030 Senior Unsecured Notes - Series C 100,000 5.19% Jul. 2030 2031 Senior Unsecured Public Notes 375,000 2.60% Sep. 2031 Total senior unsecured notes 850,000
Unamortized debt issuance costs and
original issuance discount, net (5,256 ) Total senior unsecured notes, net 844,744 Total unsecured debt, net$ 1,848,080
(a)
AtMarch 31, 2023 , a balance of$34.5 million was subject to the one-month SOFR of 4.80% plus a 0.10% adjustment. The remaining balance includes$100 million CAD borrowings remeasured to$73.8 million USD , which was subject to the one-month CDOR of 4.95%.
Debt Covenants
We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As ofMarch 31, 2023 , we believe we were in compliance with all of our covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification. Covenants Requirements Leverage Ratio ? 0.60 to 1.00 Secured Indebtedness Ratio ? 0.40 to 1.00 Unencumbered Coverage Ratio ? 1.75 to 1.00 Fixed Charge Coverage Ratio ? 1.50 to 1.00
Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value
? 0.60 to 1.00
Dividends and Other Restricted Payments Only applicable in
case
of default
Aggregate Debt Ratio ? 0.60 to 1.00
Consolidated Income Available for Debt to Annual Debt ? 1.50 to 1.00
Service Charge
Total Unencumbered Assets to Total Unsecured Debt ? 1.50 to 1.00
Secured Debt Ratio ? 0.40 to 1.00
36--------------------------------------------------------------------------------
Contractual Obligations
The following table provides information with respect to our contractual
commitments and obligations as of
Revolving
Year of Credit Senior Interest
Maturity Facility Mortgages Term Loans Notes Expense (a) Total
Remainder
of 2023 $- $6,820 $- $- $56,620 $63,440
2024 - 2,260 - - 74,944 77,204
2025 - 20,195 - - 77,162 97,357
2026 108,330 16,843 400,000 - 56,444 581,617
2027 - 1,597 200,000 150,000 42,483 394,080
Thereafter - 38,278 300,000 700,000 64,133 1,102,411
Total $108,330 $85,993 $900,000 $850,000 $371,786 $2,316,109
(a)
Interest expense is projected based on the outstanding borrowings and interest
rates in effect as of
At
Additionally, we are a party to two separate tax protection agreements with the contributing members of two distinct UPREIT transactions and we entered into a third tax protection agreement in connection with the internalization. The tax protection agreements require us to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the tax protection agreement entered into in connection with our internalization, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. Based on values as ofMarch 31, 2023 , taxable sales of the applicable properties would trigger liability under the three agreements of approximately$20.4 million . Based on information available, we do not believe that the events resulting in liability as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above. In the normal course of business, we enter into various types of commitments to purchase real estate properties. These commitments are generally subject to our customary due diligence process and, accordingly, a number of specific conditions must be met before we are obligated to purchase the properties.
Derivative Instruments and Hedging Activities
We are exposed to interest rate risk arising from changes in interest rates on the floating-rate borrowings under our unsecured credit facilities. Borrowings pursuant to our unsecured credit facilities bear interest at floating rates based on SOFR, LIBOR, or CDOR plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense, which will in turn, increase or decrease our net income and cash flow. We attempt to manage the interest rate risk on variable rate borrowings by entering into interest rate swaps. As ofMarch 31, 2023 , we had 32 interest rate swaps outstanding with an aggregate notional amount of$973.8 million . Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable-rate borrowings. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. In addition, we own investments inCanada , and as a result are subject to risk from the effects of exchange rate movements in the Canadian dollar, which may affect future costs and cash flows. We funded a significant portion of our Canadian investments through Canadian dollar borrowings under our Revolving Credit Facility, which is intended to act as a natural hedge against our Canadian dollar investments. The Canadian dollar revolving borrowings are remeasured each reporting period, with the unrealized foreign currency gains and losses flowing through earnings. These unrealized foreign currency gains and losses do not impact our cash flows from operations until settled, and are expected to directly offset the changes in the value of our net investments as a result of changes in the Canadian dollar. Our Canadian investments are recorded at their historical exchange rates, and therefore are not impacted by changes in the value of the Canadian dollar. 37 --------------------------------------------------------------------------------
Cash Flows
Cash and cash equivalents and restricted cash totaled$19.3 million and$65.5 million atMarch 31, 2023 andMarch 31, 2022 , respectively. The table below shows information concerning cash flows for the three months endedMarch 31, 2023 and 2022: For the Three Months Ended March 31, March 31, (In thousands) 2023 2022 Net cash provided by operating activities$74,376
Net cash provided by (used in) investing activities 29,633
(207,678)
Net cash (used in) provided by financing activities (144,739)
186,352
(Decrease) increase in cash and cash equivalents and restricted cash$(40,730) $37,778
The increase in net cash provided by operating activities during the three
months ended
The increase in cash provided by investing activities during the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 , was mainly due to decreased acquisition volume during the three months endedMarch 31, 2023 as well as increased disposition volume during the three months endedMarch 31, 2023 .
The increase in net cash used in financing activities during the three months
ended
Non-GAAP Measures
FFO, Core FFO, and AFFO
We compute Funds From Operations ("FFO") in accordance with the standards
established by the Board of Governors of Nareit, the worldwide representative
voice for REITs and publicly traded real estate companies with an interest in
the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income
or loss adjusted to exclude net gains (losses) from sales of certain depreciated
real estate assets, depreciation and amortization expense from real estate
assets, gains and losses from change in control, and impairment charges related
to certain previously depreciated real estate assets. FFO is used by management,
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 (losses)
on sales, which are based 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 Funds From Operations ("Core FFO") by adjusting FFO, as defined
by Nareit, to exclude certain GAAP income and expense amounts that we believe
are infrequently recurring, unusual in nature, or not related to its core real
estate operations, including write-offs or recoveries of accrued rental income,
lease termination fees, gain on insurance recoveries, cost of debt
extinguishments, unrealized and realized gains or losses on foreign currency
transactions, severance and executive transition costs, and other extraordinary
items. 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.
We compute Adjusted Funds From Operations ("AFFO"), by adjusting Core FFO for
certain non-cash revenues and expenses, including straight-line rents,
amortization of lease intangibles, amortization of debt issuance costs,
amortization of net mortgage premiums, (gain) loss on interest rate swaps and
other non-cash interest expense, stock-based compensation, and other specified
non-cash items. We believe that excluding such items assists management and
investors in distinguishing whether changes in our operations are due to growth
or decline of operations at our properties or from other factors. We use AFFO as
a measure of our performance when we formulate corporate goals, and is a factor
in determining management compensation. We believe that AFFO is a useful
supplemental measure for investors to consider because it will help them to
better assess our operating performance without the distortions created by
non-cash revenues or expenses.
38
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Specific to our adjustment for straight-line rents, our leases include cash
rents that increase over the term of the lease to compensate us for anticipated
increases in market rental rates over time. Our leases do not include
significant front-loading or back-loading of payments, or significant rent-free
periods. Therefore, we find it useful to evaluate rent on a contractual basis as
it allows for comparison of existing rental rates to market rental rates.
FFO, Core FFO, and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO, Core FFO, and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.
Neither theSEC nor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate Core FFO and AFFO. In the future, theSEC , Nareit or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of Core FFO and AFFO accordingly.
The following table reconciles net income (which is the most comparable GAAP measure) to FFO, Core FFO, and AFFO:
For the Three Months Ended
March 31, December 31, March 31,
(in thousands, except per share data) 2023 2022 2022
Net income$41,374 $36,773
Real property depreciation and amortization 41,745 45,570
34,259
Gain on sale of real estate (3,415) (10,625)
(1,196)
Provision for impairment on investment in 1,473 -
-
rental properties FFO$81,177 $71,718
Net write-offs of accrued rental income 297 - 1,326 Lease termination fees (7,500) (1,678) - Gain on insurance recoveries - (341) - Cost of debt extinguishment - 77 - Severance and executive transition costs (a) 481 - 120 Other expenses (b) 18 751 1,126 Core FFO$74,473 $70,527 $64,076 Straight-line rent adjustment (7,271) (6,826)
(4,934)
Amortization of debt issuance costs 986 988
856
Amortization of net mortgage premiums (26) (26)
(27)
Loss on interest rate swaps and other non-cash interest 522 522
659
expense
Amortization of lease intangibles (2,691) (1,308) (1,158) Stock-based compensation 1,492 1,503 929 Deferred taxes - 204 - AFFO$67,485 $65,584 $60,401 (a) Amount includes$0.4 million of accelerated stock-based compensation and$0.1 million of executive transition costs during the three months endedMarch 31, 2023 , related to the departure of our previous chief executive officer. (b) Amount includes$18 thousand ,$0.8 million , and$1.1 million of unrealized and realized foreign exchange loss during the three months endedMarch 31, 2023 ,December 31, 2022 , andMarch 31, 2022 , respectively.
EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre
We compute EBITDA as earnings before interest, income taxes and depreciation and
amortization. EBITDA is a measure commonly used in our industry. We believe that
this ratio provides investors and analysts with a measure of our performance
that includes our operating results unaffected by the differences in capital
structures, capital investment cycles and useful life of related assets compared
to other companies in our industry. We compute EBITDAre in accordance with the
definition adopted by Nareit, as EBITDA excluding gains (losses) from the sales
of depreciable property and provisions for impairment on investment in real
estate. We believe EBITDA and EBITDAre are useful to investors and analysts
because they provide important supplemental information about our operating
performance exclusive of certain non-cash and other costs. EBITDA and EBITDAre
are not measures of financial performance under GAAP, and our EBITDA and
EBITDAre may not be comparable to similarly titled measures of other companies.
You should not consider our EBITDA and EBITDAre as alternatives to net income or
cash flows from operating activities determined in accordance with GAAP.
39
--------------------------------------------------------------------------------
We are focused on a disciplined and targeted acquisition strategy, together with
active asset management that includes selective sales of properties. We manage
our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre,
each discussed further below, which we believe is a useful measure of our
ability to repay debt and a relative measure of leverage, and is used in
communications with our lenders and rating agencies regarding our credit rating.
As we fund new acquisitions using our unsecured Revolving Credit Facility, our
leverage profile and Net Debt will be immediately impacted by current quarter
acquisitions. However, the full benefit of EBITDAre from newly acquired
properties will not be received in the same quarter in which the properties are
acquired. Additionally, EBITDAre for the quarter includes amounts generated by
properties that have been sold during the quarter. Accordingly, the variability
in EBITDAre caused by the timing of our acquisitions and dispositions can
temporarily distort our leverage ratios. We adjust EBITDAre ("Adjusted
EBITDAre") for the most recently completed quarter (i) to recalculate as if all
acquisitions and dispositions had occurred at the beginning of the quarter, (ii)
to exclude certain GAAP income and expense amounts that are either non-cash,
such as cost of debt extinguishments, realized or unrealized gains and losses on
foreign currency transactions, or gains on insurance recoveries, or that we
believe are one time, or unusual in nature because they relate to unique
circumstances or transactions that had not previously occurred and which we do
not anticipate occurring in the future, and (iii) to eliminate the impact of
lease termination fees and other items that are not a result of normal
operations. We then annualize quarterly Adjusted EBITDAre by multiplying it by
four ("Annualized Adjusted EBITDAre"). 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
different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and
Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and
our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to
similarly titled measures of other companies. You should not consider our
Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income
or cash flows from operating activities determined in accordance with GAAP.
The following table reconciles net income (which is the most comparable GAAP
measure) to EBITDA, EBITDAre, and Adjusted EBITDAre. Information is also
presented with respect to Annualized EBITDAre and Annualized Adjusted EBITDAre:
For the Three Months Ended
March 31, December 31, March 31,
(in thousands) 2023 2022 2022
Net income $41,374 $36,773 $28,441
Depreciation and amortization 41,784 45,606 34,290
Interest expense 21,139 23,773 16,896
Income taxes 479 105 412
EBITDA $104,776 $106,257 $80,039
Provision for impairment of investment in
rental properties 1,473 - -
Gain on sale of real estate (3,415) (10,625) (1,196)
EBITDAre $102,834 $95,632 $78,843
Adjustment for current quarter acquisition
activity (a) 406 1,283 3,225
Adjustment for current quarter disposition activity (b) (365) (440)
(79)
Adjustment to exclude non-recurring and other expenses (c) (1,023) -
-
Adjustment to exclude gain on insurance recoveries - (341)
-
Adjustment excludes net write-offs of accrued rental income 297 -
1,326
Adjustment to exclude realized / unrealized foreign exchange (gain) loss 18 796
1,125
Adjustment to exclude cost of debt extinguishments - 77
-
Adjustment to exclude lease termination fees (7,500) (1,678)
-
Adjusted EBITDAre $94,667 $95,329 $84,440
Annualized EBITDAre $411,336 $382,528 $315,375
Annualized Adjusted EBITDAre $378,668 $381,315 $337,759
(a)
Reflects an adjustment to give effect to all acquisitions during the quarter as
if they had been acquired as of the beginning of the quarter.
(b)
Reflects an adjustment to give effect to all dispositions during the quarter as
if they had been sold as of the beginning of the quarter.
(c)
Amounts include $0.1 million of executive transition costs and $0.4 million of
accelerated stock-based compensation associated with the departure of executive
officers, and ($1.5) million of accelerated amortization of lease intangibles
during the three months ended March 31, 2023 .
40
--------------------------------------------------------------------------------Net Debt, Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre
We define Net Debt as gross debt (total reported debt plus debt issuance costs)
less cash and cash equivalents and restricted cash. We believe that the
presentation of Net Debt to Annualized EBITDAre and Net Debt to Annualized
Adjusted EBITDAre is useful to investors and analysts because these ratios
provide information about gross debt less cash and cash equivalents, which could
be used to repay debt, compared to our performance as measured using EBITDAre,
and is used in communications with lenders and rating agencies regarding our
credit rating. The following table reconciles total debt (which is the most
comparable GAAP measure) to Net Debt, and presents the ratio of Net Debt to
Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre, respectively:
March 31, December 31, March 31,
(in thousands) 2023 2022 2022
Debt
Unsecured revolving credit facility $108,330 $197,322 $266,118
Unsecured term loans, net 895,006 894,692 586,884
Senior unsecured notes, net 844,744 844,555 843,990
Mortgages, net 85,853 86,602 96,141
Debt issuance costs 10,390 10,905 9,419
Gross Debt 1,944,323 2,034,076 1,802,552
Cash and cash equivalents (15,412) (21,789) (54,103)
Restricted cash (3,898) (38,251) (11,444)
Net Debt $1,925,013 $1,974,036 $1,737,005
Net Debt to Annualized EBITDAre 4.7x 5.2x 5.5x
Net Debt to Annualized Adjusted EBITDAre 5.1x 5.2x
5.1x
Critical Accounting Policies and Estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as other disclosures in the financial statements. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, "Summary of Significant Accounting Policies," in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We believe there have been no significant changes during the three months endedMarch 31, 2023 , to the items that we disclosed as our critical accounting policies and estimates in our 2022 Annual Report on Form 10-K.
Impact of Recent Accounting Pronouncements
For information on the impact of recent accounting pronouncements on our business, see Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
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